-----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, VSVGsbU+fdAAyF0kP5oiyysuPZAG40fReQqW88wR4OoRjuf1nR0yoeEbL7gv1Rkg r7BgXwDTAEHHblA391+UwA== 0000002024-99-000003.txt : 19990316 0000002024-99-000003.hdr.sgml : 19990316 ACCESSION NUMBER: 0000002024-99-000003 CONFORMED SUBMISSION TYPE: POS AM PUBLIC DOCUMENT COUNT: 11 FILED AS OF DATE: 19990315 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: SEC FILE NUMBER: 033-58191 FILM NUMBER: 99565162 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 As filed with the Securities and Exchange Commission-subject to change. Registration No. 33-58191 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Post-Effective Amendment No. 4 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 60523 (630) 990-6600 (Address and telephone number of registrant's principal executive offices) David W. League Vice President, General Counsel and Secretary Ace Hardware Corporation 2200 Kensington Court Oak Brook, Illinois 60523 (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 Inside Front and Outside of Prospectus 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 60523 (630) 990-6600 904 Shares Class A (Voting) Stock, $1,000 par value 31,289 Shares Class C (Non-Voting) Stock, $100 par value We only offer Class A Voting Stock together with Class C Non-voting Stock to hardware retailers for their initial membership in our cooperative. We offer Class C Non-voting Stock without any Class A Voting Stock to our existing members when they have additional store locations that also become members of our cooperative. (See "Distribution Plan and Offering Terms") There is no existing market for the Capital Stock that is being offered in this Prospectus, and we do not expect any market to 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(4) Company ----------- -------------- ----------- Class A Stock Per Share(1)(2) $ 1,000 None $ 1,000 Total $ 904,000 None $ 904,000 ----------- -------------- ----------- Class C Stock Per Share(1)(3)(4)(6) $ 100 None $ 100 Total $ 3,128,900 None $ 3,128,900 (1) The shares are offered in a unit of $5,000 to each hardware retailer. Class A Stock is included only if the hardware retailer does not have a store location that is already a member of our cooperative. (2) 1 share of Class A Stock and 40 shares of Class C Stock are offered to each hardware retailer for the first store location that becomes a member of our cooperative. (3) 50 shares of Class C Stock are offered to each existing member who has another store location that also becomes a member of our cooperative. (4) There are no underwriters. We sell this stock directly to our members. An applicant must pay a $400 fee to have a membership application processed. If all of the stock in this offering is sold, the total proceeds will be the amount shown above before deducting estimated expenses of approximately $28,000. (5) All of the shares of Class C Stock included in this offering can be purchased for cash, but the purchaser can also choose to pay for the stock in bi-weekly installments. We also plan to issue additional shares of Class C Stock to our members as a part of their patronage dividends for business that they do with our cooperative. This offering is exempt from the registration provisions of the New York Franchise/Disclosure Statute. Our agent for service of process in New York is C T Corporation, 1633 Broadway, New York, New York 10019. (See back cover page regarding the special revocation rights that Florida purchasers have.) No state securities commission has passed upon the accuracy of this Prospectus. PLEASE REFER TO THE "FACTORS TO BE CONSIDERED" ON PAGE 2 OF THIS PROSPECTUS. This is a continuous offering that terminates no later than April 30, 2000. The date of this Prospectus is __________ __, 1999 AVAILABLE INFORMATION The terms "Ace," "Company," "cooperative," "we," "us," "our" and similar words refer to Ace Hardware Corporation. The terms "member," "retailer," "dealer," "you," "your" and similar words refer to someone who purchases our stock. We are subject to the informational requirements of Section 15(d) of the Securities Exchange Act of 1934. Therefore, we file annual reports, quarterly reports, and other information with the Securities and Exchange Commission. You may read and copy these materials at the SEC's Public Reference Room at 450 5th Street, N.W., Washington, D. C. 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC has an Internet site that contains reports, proxy and information statements and other information about issuers that file electronically with the SEC. The address of that Internet site is http://www.sec.gov. We also have an Internet site whose address is http://www.acehardware.com. REPORTS TO SECURITY HOLDERS After the end of each fiscal year, we furnish our stockholders with an annual report. This report contains financial information that has been examined and reported upon by a certified public accounting firm, which issues a formal opinion on it. DOCUMENTS INCORPORATED BY REFERENCE We file an Annual Report on Form 10-K for our 1998 fiscal year ending January 2, 1999 under Section 15(d) of the Exchange Act. That Form 10-K Annual Report is incorporated by reference into this Registration Statement. Someone to whom we deliver a Prospectus can request (in writing or verbally) a free copy of the documents that we have incorporated by reference into this Registration Statement. If those documents also have exhibits, we will not include copies of the exhibits unless they are also expressly incorporated by reference into the documents being copied. To request these copies, please contact David League, Vice President-General Counsel and Secretary, Ace Hardware Corporation, 2200 Kensington Court, Oak Brook, Illinois 60523, (630) 990-6600. FACTORS TO BE CONSIDERED Limitations on Value and Marketability of Stock Although we pay "patronage dividends" or "patronage rebates" to our stockholders on the basis of the quantity or value of business that we do with them, our corporate charter prohibits us from declaring dividends on shares of our capital stock. Your ability to transfer these shares is limited and there is no trading market for them. If you have a store location that is a member of our cooperative and it closes down or if your Ace membership is terminated, you can only sell your shares to another hardware dealer whom we approve as a member for a particular store location. If you do not sell the shares in this way, then we must repurchase them. (See the heading "Description of Capital Stock".) We do not expressly set aside any funds to repurchase these shares, 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".) Therefore, except for the voting rights which the Class A Stock has, our stock has value to you only if your membership terminates or if our Company is liquidated. Income Tax Liability Incidental to Patronage Dividends If you purchase shares, you must report the total amount of your patronage dividends from us as gross income on your federal income tax return. Therefore, your gross income will include any shares of Class C Stock that we distribute to you as patronage dividends, as well as patronage refund certificates that you may receive in the form of written notices of allocation. These patronage refund certificates are non-negotiable. They have a maturity date and pay annual interest at a rate that is determined by our Board of Directors before the certificates are issued. A minimum of 20% of your total annual patronage dividends must be paid in cash, unless this cash portion has been applied against your indebtedness to us. The cash portion would be applied against your indebtedness if your membership had terminated and you had not requested payment of the 20% minimum in cash. Depending on your income tax bracket, this cash portion may not be enough to pay all of your federal income tax liability on your patronage dividend distributions. (See the heading "The Company's Business", subheading "Federal Income Tax Treatment of Patronage Dividends".) Sale of All Shares Offered Not Assured Since only hardware retailers for particular store locations that have memberships approved can purchase our stock, it is not certain that all of the shares of stock in this offering will be sold. Company's First Lien Rights on Shares All of your shares of our stock, including any Class C shares that we distribute to you as patronage dividends and any patronage refund certificates, are subject to our first lien rights to ensure that you pay your debts to us. (See the heading "Description of Capital Stock", subheading "Other Restrictions and Rights" and the heading "The Company's Business", subheading "Forms of Patronage Dividend Distributions".) Full Payment Required for Issuance of Shares You may pay for your shares of stock in full in advance, or you may pay for them over time by having charges billed to your regular bi-weekly statement from us. You will not receive your stock certificate(s) until the purchase price for the share(s) of a particular class has been paid in full. (See the heading "Distribution Plan and Offering Terms".) By-law Provisions Constitute a Legal Contract with the Company Our By-laws state that they are a legal contract between the Company and its stockholders. (See Article XXVI of the By-laws.) A full copy of these By-laws, amended as of August 19, 1997, is printed in this Prospectus as Appendix A.) We particularly encourage you to review: 1) Article XVI, Sections 5 through 12, which limit transfers of our stock and govern our repurchase of shares; 2) Article XXIV titled "Members' Patronage Dividends"; and 3) Article XXV, which addresses a member's rights and obligations. Documents Accompanying Prospectus Our most recent annual report to shareholders and the current standard form of our 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 our main executive offices are: 2200 Kensington Court, Oak Brook, Illinois 60523, (630) 990-6600. We are a wholesaler of hardware and related products. We also manufacture paint products. We sell products mainly to retail hardware dealers who have Membership Agreements with us. These Membership Agreements entitle our dealers to purchase merchandise and services from us and grant a license to use some of our trademarks. (See the heading "The Company's Business," subheading "Membership Agreement.") Our dealers are subject to "Member Operational Requirements" and other important requirements. The number of hardware store locations that had Membership Agreements with us as of the end of our 1998 fiscal year on January 2, 1999 were 5,039. (See the heading "The Company's Business.") Basic Distinctions Between Classes of Stock Our capital stock is divided into three classes, Class A, Class B, and Class C. Class A Stock is the only class of stock that has voting rights for the election of directors and most other matters. Class B Stock was previously offered for memberships that we granted on or before February 20, 1974, but Class B Stock has not been offered since March 31, 1979. Our Board of Directors has the right to redeem some or all of the outstanding shares of Class B Stock. The Board can also redeem any outstanding shares of Class C Stock that we issued for patronage dividends distributions. If our Company is ever liquidated, 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 our net assets. This priority only extends up to the amount we would have to pay to purchase or redeem all of our outstanding shares of Class B Stock and Class C Stock. If our net assets exceeded the total amount which we would have been required to pay for that redemption, then the excess would be distributed in equal portions to the Class A Stockholders (up to the $1,000 par value of the Class A Stock). After that, any net assets left over would be proportionately distributed among the stockholders of all three classes of our stock. A Class A Stockholder would participate in this distribution based on the proportion which the par value of his share of Class A Stock bears to the sum of the total par value of all outstanding shares of Class A Stock and the total amount which we would have been required to pay to purchase or redeem all of the outstanding shares of Class B Stock and Class C Stock. Each share of Class B Stock and Class C Stock would participate in the distribution in the proportion which the applicable purchase or redemption prices of these types of stock would bear to the same sum. (See the heading "Description of Capital Stock", subheadings "Voting Rights," "Liquidation Rights," and "Redemption Provisions.") The declaring of dividends on any shares of our stock in any class is expressly prohibited by our Certificate of Incorporation and By-laws (See the heading "Description of Capital Stock", subheading "Dividend Rights.") Basic Features of Offering This offering is being made only to approved retailers of hardware and related products who apply for membership in Ace Hardware Corporation. 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. Our Company operates as a retailer-owned cooperative. This offering enables retailers to obtain membership in our Company. Membership entitles our dealers to use certain trademarks that we own, to purchase merchandise from us, and also to receive patronage dividends on an equitable basis. For an initial membership, you must subscribe for 1 share of Class A Stock plus 40 shares of Class C Stock. If you apply for membership for an additional store location that you own or control, then you must subscribe for 50 shares of Class C Stock for that location. You must also pay us a $400 charge for processing your application. If you do not pay for your shares in advance, then we bill you for them on the bi-weekly billing statement that we send you for your purchases of merchandise and services from us. You can prepay the purchase price of your shares at any time. For a more detailed explanation of this offering, please see the information under the heading "Distribution Plan and Offering Terms". Repurchase of Shares by Company If your membership for a store location terminates, then all of your shares for that location must be sold back to us unless the shares are transferred to another party whom we agree to accept as a member for that location. If we repurchase your shares, we must do so at the following prices: 1) $1,000 par value for Class A Stock, 2) not less than twice the $1,000 par value for Class B Stock, and 3) not less than the $100 par value for Class C Stock. [(See the heading "Description of Capital Stock", subheading "Other Restrictions and Rights", paragraph (g).)] We pay some of the repurchase price by issuing you an interest-bearing 4-year installment note if your membership terminates in either of two basic types of situations. (See the heading "Description of Capital Stock", subheading "Other Restrictions and Rights", paragraph (h), of this Prospectus and Section 12 of Article XVI of the By-laws, in Appendix A of this Prospectus, for further details concerning those situations.) As of the end of our 1998 fiscal year on January 2, 1999, the number of outstanding shares of our stock was as follows: Class A Stock 3,846 shares, Class B Stock 2,592 shares, and Class C Stock 2,265,718 shares. At the completion of this offering, assuming that all Class A stock is sold, the number of outstanding shares of our stock would be as follows: Class A stock 4,751 shares, Class B stock 2,576 shares, and Class C stock 2,286,496 shares. Under Delaware corporate law, we are not allowed to repurchase any of our shares if our assets are less than the amount of our aggregate outstanding shares of capital stock or if our assets would be reduced below that amount because of the repurchase. The number of shares of stock that we repurchased and the price per share that we paid during each of our past three fiscal years is summarized in the table below. Class of Stock -------------- A B C --- --- --- No. of Purchase No. of Purchase No. of Purchase Aggregate Shares Price Shares Price Shares Price Cost ----- -------- ------ -------- ------ -------- --------- 1998 Fiscal Year ended January 2, 1999 243 $1,000 124 $2,000 105,639 $100 $11,054,900 1997 Fiscal Year ended December 31, 1997 299 $1,000 180 $2,000 123,964 $100 $13,055,400 1996 Fiscal Year ended December 31, 1996 236 $1,000 132 $2,000 199,290 $100 $10,429,000 Patronage Dividends and Income Tax Treatment We operate on a cooperative basis for purchases of merchandise that our shareholders and subscribers for shares make from us. We distribute annual patronage dividends to these shareholders and subscribers on an equitable basis. Please see the table under the heading "The Company's Business," subheading "Distribution of Patronage Dividends" for information about the percentages of sales of merchandise we made during the fiscal years 1996 through 1998 that we distributed as patronage dividends. Under our current plan, a portion of patronage dividends (which can never be less than 20% nor more than 45% of the total annual patronage dividends we distribute to each dealer) are paid in cash except to terminated dealers. The cash portion of any patronage dividends which would have been paid to a terminated dealer is applied against that dealer's indebtedness to us unless the terminated dealer makes a timely request for the payment of the minimum 20% in cash. Shares of Class C Stock or non-negotiable patronage refund certificates, or a combination of them are used to pay the entire remaining portion of patronage dividends. Dealers whose volume of purchases entitles them to larger total annual patronage dividend distributions 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 shown in Note (B) to Selected Financial Data. The cash payments and dollar amounts of Class C Stock and patronage refund certificates that we distribute as patronage dividends must be taken into your gross income for federal income tax purposes. (See the heading "The Company's Business", subheading "Federal Income Tax Treatment of Patronage Dividends.") Members whose businesses are located in foreign countries or Puerto Rico (except for unincorporated Puerto Rico dealers owned by individuals with U.S. citizenship) can be subject to a 30% U.S. withholding tax imposed on nonresident alien individuals and foreign corporations (except for some Guam, American Samoa, Northern Mariana Islands, or U.S. Virgin Islands corporations). These dealers have a minimum 30% portion of their annual patronage dividends distributed in cash, and we withhold that amount for the payment of U.S. income tax. (See the heading "The Company's Business", subheadings "Forms of Patronage Dividend Distributions", and "Federal Income Tax Treatment of Patronage Dividends.") USE OF PROCEEDS We use the proceeds that we receive from this stock offering mainly for general working capital purposes (including purchasing the merchandise that we resell and maintaining adequate inventories of this merchandise) and also for the capital expenditures that we make in order to serve our business. We currently have no other specific plan for these proceeds. We also have no plan if less than all the shares in this offering are sold as the main reason for the offering is to enable us to accept new members in accordance with our By-laws. (See the heading "The Company's Business," subheadings "Patronage Dividend Determinations and Allocations" and "Forms of Patronage Dividend Distributions", for a discussion of how we plan to obtain most of the balance of our 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 Our officers make all of the sales of stock under this offering. We employ approximately 229 field sales personnel including retail consultants, management and retail development personnel. Their duties include contacting retail dealers and promoting our business and programs. Among these field sales personnel are Market Development Managers, New Business Sales Managers and Retail Sales Managers whose duties include initial contact with potential members. Our field sales personnel, however, are not allowed to accept new members, and they are not authorized to make sales of any shares of our stock. Also, we do not pay any commission, bonus or other separate compensation to any officers, field sales personnel, or other employees in connection with the sale of our stock. Limitation of Offering to Applicants for Ace Dealer Memberships This offering is limited to dealers in hardware or similar merchandise who submit membership applications to us for designated retail outlets that we choose to accept. Applicants for membership must submit the following for each store location that desires to become a member: 1. A signed Membership Agreement in acceptable form; 2. A check for the $400 application processing fee; and 3. A signed Subscription Agreement for the purchase of shares of our stock. Offering Price and Terms of Payment Each applicant for membership must subscribe for shares of our stock having a total purchase price of $5,000 per member store. If a dealer does not already have a Membership Agreement with us for any store location, the subscription for shares for the first store location includes 1 share of Class A Voting Stock at a price of $1,000 per share plus 40 shares of Class C Nonvoting Stock at a price of $100 per share. The subscription for shares for each additional store location owned or controlled by the same dealer consists entirely of 50 shares of Class C Nonvoting Stock at a price of $100 per share. Unless you prepay your stock subscription, you pay for your shares through a series of charges that we add to your bi-weekly billing statement from us. The amount of each of these charges is the larger of $40 or 2% of the purchase price of the merchandise and services you purchase from us during each bi- weekly period. These charges continue until the stock subscription for your store location is paid for in full. We do not add any interest or other finance charges to the unpaid balance of your stock subscription so long as all of your payments are made by the due date of the billing statement. If we accept the Membership Agreement and Stock Subscription Agreement for your store location, you are entitled to participate in our patronage dividend distributions even though you have not finished paying the full purchase price for that store's shares of stock. Right of Prepayment If you subscribe for shares of our stock, you have the right at any time to prepay some or the entire purchase price as discussed in the section above. Time of Issuance of Stock Certificates Immediately upon your full payment of the $1,000 purchase price for your 1 share of Class A Voting Stock, we issue you a certificate for that share. If your stock subscription includes a share of Class A stock, all of your payments are first applied to the purchase price for this share. You do not have any voting rights until you are issued a share of Class A Voting Stock. We issue certificates for your shares of Class C Nonvoting Stock only when you have paid the full purchase price for all of your Class C shares for your particular store location. If the membership for your store location terminates before its shares have been fully paid for and issued, then we give you a refund for the amount that you previously paid toward the purchase of these shares. Termination of Membership Upon Transfer or Repurchase of Shares Unless we expressly consent to the continuation of your membership, it will automatically terminate when any of your shares of our stock (whether you purchased them or whether you received them as patronage dividends) are transferred to another eligible shareholder or we repurchase them. Federal Income Tax Status of Class A and Class C Shares (See the Heading "Opinions of Experts"). If your membership terminates for all of your member store locations and we repurchase your shares of Ace stock, that repurchase would include your one share of Class A Voting Stock. Since we must repurchase the share of Class A Stock at its $1,000 par value, you would not realize taxable income from our repurchase of that share. If we repurchase your shares of Class C stock, you could realize taxable income under the U.S. Internal Revenue Code if the price we had to pay for the shares to redeem them exceeded the $100 par value that you originally paid for them under this offering. This could occur if our Board of Directors set a higher offering price for Class C shares at some future date. In this example, unless you still owned our stock for other store locations that remained members, the taxable income you realized at the time of our repurchase of your Class C shares might qualify for capital gains treatment. If you still continued to own shares of our stock for other store locations after we repurchased your shares for one or more of your locations, then the entire amount we would pay you for the repurchased shares might be treated under the Internal Revenue Code as a dividend and be taxed to you as ordinary income. In that case, the income tax basis of the shares of our stock that you still held might be increased by an amount equal to the original basis of the shares you purchased from us. Section 483 of the U.S. Internal Revenue Code may apply if you pay for your shares in periodic installments extending for more than 1 year from the date of the sale. In that case, all payments that are due more than 6 months after the date of the sale may be deemed to include "unstated interest." Although you might deduct this interest, it could also reduce the cost basis of your shares. "Unstated interest" that is taxable income to you can also occur under Section 483 of the U.S. Internal Revenue Code if your membership is terminated and you receive a 4-year installment note from us in partial payment for your stock. [(See the heading "Description of Capital Stock," subheading "Other Restrictions and Rights," subparagraph (h))]. This could happen if the sum of the total payments to be made to you for the repurchase of stock exceeded the sum of the present values of those payments plus the present values of any interest payments due under the note. The present value of a payment is figured using a discount rate that is equal to the applicable Federal rate in effect as of the date of the note, compounded twice a year. DESCRIPTION OF CAPITAL STOCK Dividend Rights Our Certificate of Incorporation and By-laws prohibit us from declaring dividends on any shares of any class of our stock. However, we may distribute shares of Class C Stock to you as a part of your annual patronage dividends. (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 Our Class A Stock is voting stock, but Class B Stock and Class C Stock can vote separately by class upon any increase or decrease in the number of authorized shares of their classes, any change in the par value of those shares, or anything that would change the power, preferences or special rights of one of those classes to adversely affect its shares. Any class of stock that has the right to vote has one vote per share. Cumulative voting of shares for the election of directors or other reasons is not allowed. Liquidation Rights If our Company voluntarily or involuntarily liquidates or goes out of business, our net assets will be distributed among the shareholders of all classes of our issued and outstanding stock. In that case, our Class B and Class C shareholders would first receive the total amounts which we would have had to pay them to repurchase all of their outstanding shares of those classes at the prices previously set by our Board of Directors. However, if we did not have enough net assets to pay that amount, then each outstanding share of Class B Stock and each outstanding share of Class C Stock would share in the distribution of our net assets in the proportion which its purchase or redemption price would bear to the total available for payment. (See the subheading "Redemption Provisions" below). If our net assets were more than that, the excess would be distributed equally to each Class A stockholder up to the Class A stock par value of $1,000 per share. Any net assets that were left would be distributed among the shareholders of all classes of stock as follows: (a) first, we would take the amount of the total $1,000 par value for all of the outstanding shares of Class A Stock and we would add this to the total amount we would have been required to pay to purchase or redeem all of our outstanding shares of Class B Stock and Class C Stock at the prices previously set by our Board of Directors. The sum of these two figures would be used in the steps below; (b) next, each outstanding share of Class A Stock would receive part of the remaining net assets in the proportion which its $1,000 par value bears to the sum determined in (a) above; and (c) each outstanding share of Class B Stock and each outstanding share of Class C Stock would share in the remaining net assets in the proportion which its price, as previously set by our Board of Directors, bears to the sum determined in (a) above. Preemptive Rights No stockholder has any special right or preference to purchase any present or future shares of our stock, notes, debentures, bonds or other securities, including any convertible stock, options or warrants. Redemption Provisions Redemption provisions do not apply to any shares of Class A Stock, and they only apply to the shares of our Class B Stock and our Class C Stock that have been issued as annual patronage dividends. These redemptions may be made at any time as determined by our Board of Directors. The redemption price would also be determined by our Board of Directors, but the redemption price to be paid for Class C Stock cannot be less than its $100 par value per share and the redemption price to be paid for Class B Stock cannot be less than twice its $1,000 par value per share. (The redemption price for Class B Stock, has to be equal to twenty times the per share price that our Board of Directors establishes for purchases or redemptions of our Class C Stock.) If we decided to redeem our stock as discussed above, we would have to mail notice to each stockholder of that class at least 30 days before the redemption date. If not all of the outstanding Class B or C shares were being redeemed, then the number of shares and the method of redemption, whether by lot or prorata or some other way, would be determined by our Board of Directors. Other Restrictions and Rights (a) We do not have any conversion rights, sinking fund provisions, or liability to further calls or assessments for any shares of our stock. (b) As security for your indebtedness to us, we retain a first lien upon all your shares of Ace stock and all amounts that you pay us under your Stock Subscription Agreement before your shares are issued. Your interest in your Ace stock and the amounts you pay us under your Stock Subscription Agreement are always offset by the amount of any indebtedness that you owe us. We will not transfer any of your shares or any funds in your stock subscription account unless you are free from all indebtedness to us. If we would issue an installment note to partially pay for the stock that we are buying back from a terminated dealer in one of the situations described in section (h) below, then the cash portion we would normally pay toward those shares would first be applied toward any indebtedness which that terminated member owed to us. The portion of the purchase price of those shares that we would normally pay with an installment note would then be applied toward any indebtedness that still remained. (c) Since we first issued shares of our stock to members and continuing to the present time, the ownership of all classes of our stock has been limited to approved dealers in hardware and related products who have Membership Agreements with us. Ownership of Class B Stock has been limited to dealers whose Membership Agreements with us began on February 20, 1974 or earlier. You are not allowed to transfer your shares of our stock or to sell, assign or pledge them, or to post them as collateral or give lien rights in them to anyone other than Ace without the prior consent of our Board of Directors. If our Board of Directors refuses to consent to a transfer or assignment of your stock certificates to another retail hardware dealer, then we have to purchase that stock back from you as described in section (g) below. You are not entitled to make a transfer or assignment to anyone who is ineligible to become a member of our Company. In other words, approved transfers can only be made to other dealers who either have Membership Agreements with us or whom we are willing to accept as members. Where you propose to transfer the ownership of your member store location to another member, (or to someone whom we are willing to accept as a member), then you have the option of either (i) selling or transferring to that person the same number of shares that we would have been required to offer him as a member for that store location, or (ii) selling those shares back to us. However, there are certain types of transfers of your business where you do not have the option of selling those shares back to us. These situations involve (i) any transfer which is not complete, unconditional and irrevocable; (ii) any transfer to an entity in which you retain an ownership interest; or (iii) any transfer to your spouse. (d) If your membership terminates for your store location, then we must repurchase your shares of Ace stock. Our repurchase obligation is subject to our first lien and our right to set off your indebtedness to us as described in section (b) above. (If your stock has not yet been paid for and your shares have not yet been issued, we would instead refund the amounts that you paid under your Stock Subscription Agreement, again subject to our first lien and offset rights described in section (b) above). Your membership can be terminated by a formal notice of termination, and it can also be terminated automatically under our By-laws in each of the following three situations without a formal notice: (i) If your store closes down or ceases business unless your store is moved, with our consent and approval, to another location, or unless your store is being acquired by another dealer whom we are willing to accept as a member for operation under the same membership at another location; (ii) If an individual holder of our shares or a member of a partnership that is a holder of our shares dies, except where the store location having the Ace membership continues, with our approval (which we will not unreasonably refuse to give), to be operated by the deceased person's estate, heirs or partnership successors. Changes in the legal form of ownership of the member store from an individual proprietorship or partnership to a corporation or from a partnership to an individual proprietorship are not considered significant in these cases; (iii) If a court or other official body rules that a member is insolvent, or the member assigns the business to be operated for the benefit of creditors, or a voluntary or involuntary bankruptcy or similar petition is filed under the U.S. Bankruptcy Code regarding the dealer or the store or business unit for which our shares of stock are held. (e) Our Board of Directors does not need to consent to a transfer of shares of Ace stock that occurs when the shares are held jointly with others and the ownership of the shares automatically passes under law to the survivor(s), nor are we obligated to repurchase the shares in that case unless the store location either (i) closes down, or (ii) stops being operated as a member of our Company. (f) If you hold your Ace membership in the form of a corporation (the "member corporation"), you must give us written notice of any proposal where the holders of 50% or more of the voting stock of the member corporation proposes to sell or transfer all of their shares of capital stock (both voting and non-voting) of that member corporation. If there is a member corporation but another corporation (the "controlling company") holds 80% or more of the voting stock of the member corporation, then you must also give us written notice if the holders of 50% or more of the voting stock of the controlling company propose to sell or transfer all of their shares of capital stock (both voting and non-voting) in the controlling company. In these cases, when the sale or transfer occurs, the corporation whose shares were sold or transferred can either keep all the shares of Ace stock that it owns for the member corporation or sell all of those shares of Ace stock back to us. If it chooses to sell all of the shares of Ace stock back to us, then the memberships for all of the store locations represented by that stock are considered terminated by the member's voluntary action. Once terminated in this way, any store location that wishes to continue being a member must submit a new application for our acceptance. However, there are certain types of transfers of their own company stock by the shareholders of member corporations that do not result in the option of selling any Ace shares back to us. These situations involve (i) any transfer which is not complete, unconditional and irrevocable; (ii) any transfer to an entity in which the person making the transfer retains an ownership interest; or (iii) any transfer to the spouse of the person making the transfer. (g) The price that we pay when we repurchase shares of Ace stock is as follows: (i) For Class A Stock, the $1,000 par value of the shares; (ii) For Class B Stock, the per share price last set by our Board of Directors, currently $2,000 per share. This price cannot be less than twice the $1,000 par value of the Class B Stock and must be equal to twenty times the per share repurchase price set by our Board of Directors for repurchases of our Class C Stock; (iii) For Class C Stock, the per share price last set by our Board of Directors, currently $100 per share. This price may not be less than the $100 par value of each of these shares. There is no market for the sale or trading of our stock, and the redemption prices last established by our Board of Directors have not been adjusted since 1974 when the Company first became a cooperative. (h) When we repurchase our stock from a terminated member in either of the two situations described below, we issue an installment note for part of the purchase price. That note is payable in four equal annual installments plus accrued interest. The situations where we use an installment note are where: (i) the dealer voluntarily terminates his Ace membership, but continues basically the same business at the store location, and the store continues being controlled (more than 50%) by the same person, partnership or corporation; or (ii) we terminate the dealer's Ace membership for being delinquent in payment to us or because of some other default under the Membership Agreement. Even in the above situations, though, the amount originally paid in by the dealer under the Stock Subscription Agreement is subject to being refunded in cash. We also pay cash when the entire remaining portion of the purchase price is less that $5,000. Where the remaining portion is $5,000 or more in these cases, however, we only pay cash for the amount originally paid in by the dealer under the Stock Subscription Agreement, and we pay the rest by an installment note as described above. The interest rate on this installment note is the rate established by our Board of Directors at the time the note is issued. This interest rate is a minimum of 6% per annum, and is at least as high as the interest rate that applies to the patronage refund certificates that are issued as a part of our annual patronage dividends. Our Board of Directors may authorize higher levels of cash payments for dealer hardship situations, but this depends on our financial condition and requirements at the time. (i) There is no restriction on our repurchase or redemption of any shares of our stock if we fall behind in making any sinking fund installment payments which we may become obliged to make in the future. Since we are prohibited from declaring dividends on any shares of our stock, there can be no past due situation in the payment of dividends that could impose any restriction on our repurchase or redemption of our stock. Under the General Corporation Law of Delaware, we are not allowed to repurchase any of our shares if our assets are less than the amount of the aggregate outstanding shares of our capital stock or would be reduced below that amount after the repurchase. OPINIONS OF EXPERTS The shares of our stock in this offering are valid shares in the opinion of our Vice President, General Counsel and Secretary, David W. League. He has also issued his opinion to the effect that if our Company had an involuntary liquidation, the shares of our Class B Stock would have a preference greater than their par value in the distribution of our net assets. 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. The consolidated financial statements of Ace Hardware Corporation and subsidiaries as of January 2, 1999 and December 31, 1997 and for each of the years in the three-year period ended January 2, 1999, have been included herein and in the Registration Statement in reliance upon the report of KPMG 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, as the result of a corporate merger, it became the successor of Ace Hardware Corporation, an Illinois corporation that was organized in 1928. Until 1973, the Illinois corporation conducted the business now being engaged in by our Company. Our main executive offices are located at 2200 Kensington Court, Oak Brook, Illinois 60523. Our main telephone number is (630) 990-6600. We operate primarily as a wholesaler of hardware and related products, and we also manufacture paint products. We mainly sell our products to hardware dealers who have Membership Agreements with us. These Membership Agreements allow the hardware dealers to purchase merchandise and services from us and to license some of our marks, such as "Ace" and "Ace Hardware." (See the heading "Factors To Be Considered," subheading "Documents Accompanying Prospectus," and the heading "The Company's Business" subheading "Membership Agreement"). We operate on a cooperative basis and distribute patronage dividends to our eligible member dealers each year on the basis of quantity or value of business that we do with them. (See the subheading "Distribution of Patronage Dividends"). As of the end of our 1998 fiscal year on January 2, 1999, there were 5,039 stores having Membership Agreements with us. The States with the largest concentration of members are California (approximately 9%), Texas (approximately 7%), Illinois (approximately 6%), Florida (approximately 5%), and Michigan and Georgia (approximately 4% each). The States where we shipped the largest percentages of merchandise in fiscal year 1998 are California (approximately 11%), Illinois (approximately 7%), Florida (approximately 6%), Texas (approximately 5%), and Michigan and Georgia (approximately 4% each). Approximately 7% of our sales are made to locations outside of the United States and its territories. The number of member locations that we had during each of our past three fiscal years is summarized in the following table: 1998 1997 1996 ----- ----- ----- Member outlets at beginning of period 5,032 5,067 5,007 New member outlets 231 208 272 Member outlets terminated 224 243 212 ----- ----- ----- Member outlets at end of period 5,039 5,032 5,067 ===== ===== ===== Dealers having one or more member outlets at end of period 3,963 4,022 4,084 We service our dealers by buying merchandise in quantity lots, mainly from manufacturers. We then warehouse large quantities of this merchandise and sell it in smaller lots to our dealers. Most of the products that we distribute to our members from our warehouses are sold at a price that we establish ("dealer cost"), to which a 10% adder ("handling charge") is generally added. In fiscal year 1998, warehouse sales were 61% of our total sales and bulletin sales were 3% of our total sales with the balance of 36% being direct shipment sales, including lumber and building materials. The following is a breakdown of our total warehouse sales among various general classes of merchandise for each of the past three fiscal years: Class of Merchandise 1998 1997 1996 -------------------- ---- ---- ---- Paint, cleaning and related supplies 20% 21% 20% Plumbing and heating supplies 15% 15% 16% Hand and power tools 14% 14% 14% Garden, rural equipment and related supplies 13% 13% 13% Electrical supplies 13% 12% 12% General hardware 12% 12% 12% Sundry 7% 7% 7% Housewares and appliances 6% 6% 6% We sponsor two major hardware conventions each year at various locations, as well as one lumber convention. We invite dealers and vendors to attend, and dealers generally place orders that are delivered before the next convention. During the convention, there are exhibits of regular merchandise, new merchandise and seasonal merchandise. Lawn and garden supplies, building materials and exterior paints are seasonal merchandise in many parts of the country. Some types of goods such as holiday decorations are also seasonal. Warehouse sales involve the sale of merchandise that we inventory at our warehouses. Direct shipment sales involve sales where the merchandise is shipped directly to dealers by vendors. Bulletin sales involve our special bulletin offers where we order specific merchandise after dealers sign up to buy particular quantities of it. Dealers place direct shipment orders with our vendors using special purchase orders. The vendors then bill us for these orders, which are shipped directly to dealers. We, in turn, bill the ordering dealers with an adder ("handling charge") that varies according to the following schedule (except for sales under the LTL Plus program discussed below): Invoice Amount Adder (Handling Charge) -------------- ----------------------- $ 0.00 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% We make bulletin sales based upon notices from dealers that they wish to participate in one of the special bulletins offer. Generally, we notify dealers of our intention to purchase certain products for bulletin shipment. We then purchase these products in the quantities that the dealers order. When the bulletin shipment arrives, we do not place it into warehouse inventory. Rather, we break it up into smaller quantities and deliver it to the dealers who ordered it. We generally apply a 6% adder ("handling charge") to this category of sales. We typically apply an additional adder of 3% to merchandise that is exported outside of the United States, its territories and possessions. Ace dealers located outside of the United States, its territories and possessions who are not subject to the additional 3% adder are assessed a flat 2% adder on all direct shipment sales. We maintain inventories to meet only normal resupply orders. Resupply orders help keep our inventories at normal levels. Usually these resupply orders are filled within one day of receipt. Bulletin orders are somewhat similar to resupply orders, but can be for future delivery. We do not backlog normal resupply orders and therefore, no significant backlog exists at any point in time. We have also created special sales programs for lumber and building materials products, for products that we periodically assign to an "extreme competitive price sales" classification, and for products from specified vendors for delivery to our dealers on a direct shipment basis (LTL Plus Program). Under our lumber and building materials ("LBM") program, we do not impose any adder or national advertising assessment on direct shipment orders for these products. Our LBM program enables our dealers to realize important savings from our closely monitored lumber and building materials purchasing procedures. Also, our LBM program offers our 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 we have with certain major vendors. Our Store Traffic Opportunity Program ("STOP") is a program where we offer our dealers specific products that we assign to a "competitive price sales" classification. These products are delivered from our warehouses without the addition of freight charges and with an adder (if any) of up to 5%, determined on an item by item basis. Our officers have the authority to add and withdraw items from the STOP program, and to establish reasonable minimum or multiple item purchase requirements for this program. We do not make any patronage dividend distributions for purchases under the STOP program. We do, however, consider STOP purchases to be either warehouse purchases or bulletin purchases, as applicable, in determining the forms of patronage dividend distributions. (See the heading "The Company's Business" subheading, "Forms of Patronage Dividend Distributions.") Our LTL Plus Program allows dealers to purchase full or partial truckloads of products from specific vendors for direct shipment delivery. No adder or national advertising assessment applies to these purchases. The current maximum amount of patronage dividends for products in the LTL Plus category is .5% of these sales. (See heading "The Company's Business," subheading "Patronage Dividend Determinations and Allocations.") In addition to hosting conventions as well as other shows and product exhibits for our dealers, we also provide many special services. We offer these services at established charges. These services include inventory control systems, as well as price and bin ticketing. We also provide dealers with a checklist service so that they can have current information about the merchandise that we offer. We also provide a choice of ongoing educational and training programs for dealers. (See the heading "The Company's Business," subheading "Special Charges and Assessments.") Our wholly owned subsidiary, Ace Insurance Agency, Inc., offers a Group Dealer Insurance Program so that dealers can purchase different types of insurance coverage. This program offers "all risk" property insurance and business interruption, crime, liability and workers' compensation insurance, in addition to medical insurance for store employees. AHC Realty Corporation, another wholly owned subsidiary, offers broker services to dealers who want to buy or sell stores. Loss Prevention Services, Inc., another wholly owned subsidiary, offers security training and other loss prevention services to dealers. During 1996, our wholly owned subsidiary, Ace Hardware Canada, Limited, began operations as a wholesaler of hardware and related merchandise in Canada. It has two distribution facilities located in Calgary, Alberta and Brantford, Ontario. Ace Hardware Canada, Limited generated less than three percent (3%) of our consolidated revenue during fiscal year 1998. We operate our Company-owned retail hardware stores though our wholly owned subsidiaries A.H.C. Store Development Corp. and Ace Corporate Stores, Inc. For further information about these stores, please see the heading "Properties" which appears later in this Prospectus. We manufacture paint and similar coating products at our factories in Matteson and Chicago Heights, Illinois. These factories are the main source of the paint products that we offer for sale. We operate our paint manufacturing business as a separate Division of our Company for accounting purposes. We purchase all our raw materials for paint manufacturing from outside sources. We have had adequate sources of raw materials in the past, and we do not currently expect any shortages of raw materials that would have a major impact on our paint operations. Paint manufacturing is seasonal in the sense that greater paint sales occur from April through September. Historically, our need to comply with environmental laws and regulations has not had a major effect on our ability to conduct our paint manufacturing operations. Our business, both hardware wholesaling and paint manufacturing, is not dependent on any major suppliers and we feel that any seasonal fluctuations do not have a major effect on our operations. For more discussion of our business, see "Management's Discussion and Analysis of Financial Condition and Results of Operations," which appears after the "Notes to Financial Statements." We also offer services to members that relate to the operation of their retail businesses. We provide these services (such as advertising, merchandising and training programs) to assist our members and in some cases, to maximize our centralized buying power. Strategic Planning We have a strategic planning process that results in goals, objectives and programs that we want to develop in the future for our Company and our members. Because strategic plans deal with the future, this discussion of them contains "forward looking statements," which are based on our current expectations. The actual results of our efforts can differ greatly from the results that we might desire. We believe that we have the facilities, the employees and the resources for ongoing success as we implement our plans and programs, but the future is difficult to forecast, especially things like revenues, costs, margins and profits which are influenced by many factors. Some of these factors are discussed below. The effects of future growth in the hardware and hardlines-related industries, are uncertain. By "hardlines-related industries" we mean lumber/building materials, home center, do-it-yourself, rental and commercial/industrial categories. The future condition of the economy is also uncertain, when viewed domestically, internationally or in specific geographical regions. Some other uncertainties that could affect our plans include possible future changes in merchandise and inventory prices, and the effect of increasingly intense competition. There could be potential shifts in market demand for some products. Future lawsuits and laws, especially laws dealing with franchising, licensing and environmental matters could affect our business. We cannot predict whether these uncertainties might cause future costs or liabilities or have some other effect on our future ability to achieve our plans. Through our ongoing strategic planning process we have focused our plans around four cornerstones for future growth and success in our competitive industry. These four cornerstones are: Retail Success (store operations), Wholesale Success (distribution), International growth and new member growth. Retail success for our dealers is a primary objective because, in our opinion, it drives both their retail performance and our wholesale growth. We have therefore increased our efforts to assist members in our "retail success initiatives," which are designed to improve their retail performance and competitiveness. These retail success initiatives include retail goals that we urge dealers to strive for within their stores and in locally competitive markets. These goals do not, however, impose major restrictions or requirements on members. Our minimum requirements for the acceptance of new members are outlined in the current Membership Agreement and in the Member Operational Requirements that apply under that Agreement. The Operational Requirements do require that, within one year the member must make us the primary source of supply and terminate any previous participation in the program of any other major hardware wholesaler. There are currently no general requirements (apart from special voluntary programs) where members have to make particular percentages of purchases from us or have to achieve minimum retail performance levels, such as sales dollars per square foot. The four cornerstones described above also include our strategic plans to focus on the consumer through research, target marketing and the development of a suitable long-term advertising strategy. They also include our review of merger and acquisition opportunities and our development of international and domestic nonshareholder programs. The term "Encore Growth" refers to an extension of our earlier efforts which we called "The New Retail Age of Ace," "The New Age of Ace" and "Ace 2000." Our present strategy is a further development of these earlier efforts and is not in conflict with them. Special Charges and Assessments We sponsor a national advertising program. To pay for this program, we assess dealers an amount equal to 1.3% of their purchases (except purchases of lumber, LTL, LTL Plus, building materials products and certain computer systems), with minimum and maximum yearly assessments for each store location. Through December 31, 1998, the minimum assessment was $1,622.40 and the maximum assessment was $5,500.00 for each store location. Effective January 1, 1999, the minimum assessment is $1,825.20 and the maximum assessment is $6,500.00 for each store location. We grant exemptions from these assessments and make various adjustments to them for stores located outside the continental United States. These exemptions and adjustments are based on our management's evaluation of the number and types of television broadcasts that are received in these areas. The amount of our national advertising assessment can be changed from time to time by our Board of Directors. We can also impose assessments for regional advertising of up to 2% of a dealer's annual purchases. Regional advertising assessments are subject to the same minimum and maximum amounts as the National Advertising assessment. Every two weeks, we bill your member store for a special low volume account service charge of $50 if your annual purchases from us (except for lumber and LTL purchases) are less than $50,000. Effective January 1, 1999, every two weeks, we will bill your store for a special low volume account service charge of $30 if your annual purchases from us are between $50,000 and $140,400. (Through December 31, 1998, we billed your store for this charge if your annual purchases from us were between $50,000 and $124,800.) The low volume service charges that we bill to your store in a specific year are automatically refunded if that store's total purchases (not including lumber and LTL purchases) increase to over $140,400 during the year. (This limit was $124,800 through December 31, 1998). Your store is excused from this low volume account service charge during the first 12 months that it is a member. There are some exceptions to our low volume account service charges that are described below: 1. If you purchase $140,400 of merchandise from us (not counting carload lumber purchases) during the year (or $124,800 through December 31,1998), we give you credit on your next billing statement for any low volume charges which we billed to you earlier in the year. We then stop billing you for low volume account service charges for the rest of the year, even if your current purchases on a billing statement are less than $5,400 (or $4,800 through December 31, 1998); and 2. We do not bill low volume account service charges every two weeks if your store's sales volume with us the year before was at our minimum ($140,400 effective January 1, 1999 and $124,800 through December 31, 1998), but we will bill these charges in a lump sum to your last statement of the year if you do not reach our applicable minimum by that time. An Ace store that falls below our minimum purchase levels can also be subject to termination. We add a late payment service charge on any past due balance that you owe us for merchandise, services, or your stock subscription. The current rate for the late payment service charge is .77% per biweekly statement period, except in Texas where the charge is .384% and Georgia where the charge is .692%. We consider a past due balance to exist whenever we do not receive payment of the amount shown as due on your billing statement within 10 days after the date of that statement. We can change the rate of our late payment service charge from time to time. Our retail training program called the "S.T.A.R. Program" was in effect through June 30, 1998. Under this program, our members were required to subscribe to video training tapes and related course materials if their stores were located in the United States or U.S. Territories. The initial monthly charge for this program was $16 for a single store or parent store and $11 for each branch store. A single store or parent store is one that has a share of our Class A voting stock (or one that involves a stock subscription for a share of our Class A stock.) A branch store is one whose membership involves only shares (or a subscription for shares) of our nonvoting Class C Stock. (See Article XXV, Section 2 of our By-laws which are reprinted in Appendix A of this Prospectus.) Branch stores could request an exemption from this monthly charge. The "S.T.A.R. Program" was replaced by a new retail training program called the "Ace Training Network" effective July 1,1998. This new program, like the "S.T.A.R. Program" is required for all member stores in the United States and U.S. Territories. Under the "Ace Training Network," we will bill you a monthly fee which we call a "monthly training assessment." This assessment is $16 per month for each single store or parent store and $11 for each branch store. A single store or parent store is one that has a share of our Class A voting stock (or one that involves a stock subscription for a share of our Class A Stock.) A branch store is one whose membership involves only shares (or a subscription for shares) of our nonvoting Class C Stock. (See Article XXV, Section 2 of our By-laws which are reprinted in Appendix A.) Branch stores can request an exemption from the monthly training assessment. With the Ace Training Network, you have the option of choosing how your monthly training assessment dollars will be spent. Under this program, you are initially issued 200 points, and one point equals one dollar in your training account. We credit you with another point for each dollar you pay for your monthly training assessment. Thus, a single store or parent store can earn 16 points per month and a branch store can earn 11 points per month. You may use your points at any time to buy one of the training programs that we offer. If you do not have enough points for the program that you want, you can use the points that you have and we will bill you for the difference. Multiple stores and member groups can pool their points together to purchase our training programs. As of July 1, 1998, there were over 10 of these training programs available at a variety of prices. We also have a mandatory subscription service for Material Safety Data Sheet information for all member stores located in the United States. As of the date of this filing, the initial yearly assessment for these 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 members and ourselves in the promotion, advertising and marketing of products and services that we sell. We have had the following Trademark and Service Mark Registrations issued by the U.S. Patent and Trademark Office for our marks: Registration Description of Mark Type of Mark Number Expiration Date ------------------- ------------ ------------ --------------- "ACE HARDWARE" with winged emblem design Service Mark 840,176 December 5, 2007 "ACE HARDWARE" with winged emblem design Trademark 898,070 September 8, 2000 "THE PAINTIN' PLACE" Service Mark 1,138,654 August 12, 2000 "HARDWARE UNIVERSITY" with design Service Mark 1,180,539 December 1, 2001 Registration Description of Mark Type of Mark Number Expiration Date ------------------- ------------ ------------ --------------- "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 "LUBE" 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 "ENVIROCHOICE" 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 "WOODROYAL" Trademark 2,065,927 May 27, 2007 "ROYAL SHIELD" Trademark 2,070,848 June 10, 2007 "ROYAL TOUCH" Trademark 2,070,849 June 10, 2007 Registration Description of Mark Type of Mark Number Expiration Date ------------------- ------------ ------------ --------------- "QUALITY SHIELD" Trademark 2,102,305 September 30, 2007 "QUALITY TOUCH" Trademark 2,102,306 September 30, 2007 "STAINHALT" Trademark 2,122,418 December 16, 2007 "ACE CONTRACTOR CENTER" Service Mark 2,158,681 May 19, 2008 "NHS NATIONAL HARDLINES SUPPLY" Service Mark 2,171,775 July 7, 2008 "ACE COMMERCIAL & INDUSTRIAL SUPPLY" Service Mark 2,186,394 September 1, 2008 "THE OAKBROOK COLLECTION" Trademark 2,187,586 September 8, 2008 As of the date of this filing, we also have the following applications for new registrations pending in the U.S. Patent and Trademark Office: Mark Type of goods/services - ---- ---------------------- "ACE ROYAL" interior and exterior paint "ACE CONTRACTOR PRO" paints, primers and varnishes "ACE DRY GUARD" waterproofing paint "HEALTHY HOME" interior and exterior paint "HELPFUL HARDWARE CLUB" promoting the goods and services of others through various incentive programs offered to preferred customers "ACE GARDEN PLACE" retail store services in the field of hardware, garden products and building materials "SEE THE FOLKS IN THE RED VEST" retail store services in the field of hardware and related goods "ACE SOLUTIONS PLACE" retail store services in the field of hardware and related goods "YOUR NEIGHBORHOOD SOLUTIONS PLACE" retail store services in the field of hardware and related goods "ACE" with accent design retail store services in the field of hardware and related goods Competition Competitive conditions in the wholesale hardware industry are intense and increasing. Independent hardware retailers must remain competitive with discount stores and chain stores, such as WalMart, Home Depot, Menard's, Sears, and Lowe's, and with other mass merchandisers. Retail hardware stores have been slowly shifting their locations to high rent shopping centers. There has also been a trend toward longer store hours. There is intense pressure on hardware retailers to obtain low cost wholesale supply sources. In several markets in the United States, we also compete directly with other dealer-owned wholesalers such as TruServ Corporation, Do it Best Corporation, and United Hardware Distributing Co. Employees We have 4,672 full-time employees, of which 1,399 are salaried employees. We also have union contracts covering one (1) truck drivers' bargaining unit(s) and three (3) warehouse bargaining unit(s). We consider our employee relations with both union and non-union employees to be good, and we have had no strikes in the past five years. In general, our employees are covered by either negotiated or nonnegotiated benefit plans that include hospitalization, death benefits and, with few exceptions, retirement benefits. Limitations on Ownership of Stock Our members own all of our outstanding shares of capital stock. Membership in our Company is limited to approved dealers in hardware and related products who have Membership Agreements with us. These are the only ones eligible to own or purchase shares of any class of our stock. No dealer is allowed to own more than 1 share of our Class A voting stock, no matter how many store locations that dealer owns or controls. This ensures that each stockholder in our cooperative has equal voting power no matter how many member store locations the stockholder owns or controls. We treat an unincorporated member or a partnership member as being controlled by someone else if 50% or more of the assets or profit shares of that member are owned by (i) another person, partnership or corporation; or (ii) the owner(s) of 50% or more of the assets or profit shares of another unincorporated business firm or (iii) the owner(s) of at least 50% of the capital stock of a corporation. We treat a member that is a corporation as being controlled by someone else if at least 50% of the capital stock of that member is owned by (i) another person, partnership or corporation; or (ii) the owner(s) of at least 50% of the capital stock of another corporation; or (iii) the owner(s) of at least 50% of the assets or profit shares of another unincorporated business. Distribution of Patronage Dividends We operate on a cooperative basis for purchases of merchandise from us that are made by dealers who have become members of our Company. We also operate on a cooperative basis with dealers who have subscribed for shares of our stock but who have not yet actually become "members" because they have not yet fully paid for their $1,000 par value shares of our Class A voting stock. The dealers in either of these two categories are entitled to receive patronage dividends once a year on an equitable basis. We made patronage dividend distributions at the following percentages of our sales in the warehouse, bulletin and direct shipment categories and on the total sales of products manufactured by our Paint Division during the past three fiscal years: 1998 1997 1996 ---- ---- ---- Warehouse Sales 4.78251% 4.32753% 4.53912% Bulletin Sales 2.0% 2.0% 2.0% Direct Shipment Sales 1.0% 1.0% 1.0% Paint Sales 9.1653% 10.3088% 7.9773% There are other patronage dividends that are calculated separately for distribution on sales of lumber products, building material and millwork products and less-than-truckload (LTL) sales of lumber and building material products. We distributed patronage dividends equal to .4668%, .4593%, and .4328% of the total sales of these categories (calculated separately by category) to our members who purchased these products in fiscal years 1998, 1997, and 1996. Under our LTL Plus Program, we also calculate patronage dividends separately on sales of full or partial truckloads of products purchased by eligible dealers from certain vendors (see discussion of LTL Plus Program under the heading "The Company's Business.") The amount of patronage dividends that we currently allocate to LTL Plus sales is .5% of these sales. The LTL Plus Program patronage dividend was .5% of these sales for fiscal year 1998, 1997, and 1996. Patronage Dividend Determinations and Allocations The amounts that we distribute as patronage dividends consist of our gross profits on business that we do with dealers who qualify for patronage dividend distributions, less a proportionate share of our expenses for administration and operations. Our gross profits consist of the difference between our selling price for the merchandise that these dealers buy from us and our purchase price for that merchandise. Our computation of patronage dividends excludes all of our income and expenses from activities that are not directly related to patronage transactions. The excluded items primarily consist of profits on business that we do with dealers who do not qualify for patronage dividend distributions and any income or loss that we realize from the disposition of property and equipment. If that occurred, then the income we would derive from this type of recapture would be included in computing patronage dividends. Our By-laws provide that, by virtue of dealers being "members" of our Company (that is, by owning shares of our Class A voting stock), they consent to include in their gross income for federal income tax purposes all patronage dividends that we distribute to them. These distributions must be included in gross income for taxable year in which the dealer receives them. Dealers who have not yet fully paid the $1,000 purchase price for their shares of our Class A voting stock are also required to include all patronage dividends we distribute to them in their gross income as explained above. Under our Stock Subscription Agreement, dealers must expressly consent to take these patronage dividend distributions into their gross incomes. The amount of the patronage dividends which dealers must include in their gross incomes includes both the cash portion of patronage dividends and any portion of patronage dividends that we apply against any indebtedness the dealer owes to us in accordance with Section 7 of Article XXIV of our By-laws. It also includes any portion of patronage dividends that they receive in shares of our Class C non-voting stock and in patronage refund certificates. Under our present program, patronage dividends on each of our three basic categories of sales (warehouse sales, bulletin sales and direct shipment sales) are allocated separately, as are patronage dividends under our LTL Plus Program. Dividend percentage calculations are made with reference to the net earnings derived from each of the respective categories. The 1998 patronage dividend rate for the LTL Plus Program is currently .5% of our LTL Plus sales. The 1998 dividend rates for direct shipment and bulletin sales are 1% and 2%, respectively, while the current warehouse dividend rate is 4.78%. We do not include sales of lumber and building materials products as part of warehouse sales, bulletin sales, or direct shipment sales for patronage dividend purposes. Patronage dividends for lumber and building materials are calculated separately for 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 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 products manufactured by our Paint Division is allocated and distributed as patronage dividends to eligible dealers in proportion to their respective annual dollar purchases of paint and related products from that division. The earnings we realize on wholesale sales of the Paint Division's products to our eligible dealers are currently distributed as patronage dividends to them as part of the patronage dividends which they receive each year in the basic patronage dividend categories of warehouse sales, bulletin sales, and direct shipment sales. Under Section 8 of Article XXIV of our By-laws, if the Paint Division's manufacturing operations for any year result in a net loss instead of a profit to the Paint Division, this loss would be netted against the earnings we realized from our other activities during the year, so that the earnings available for distribution as patronage dividends from these other activities would be reduced for the year. Forms of Patronage Dividend Distributions We make patronage dividend distributions to our eligible dealers in cash, shares of our Class C Stock and patronage refund certificates according to a specific plan that has been adopted by our Board of Directors. This plan can be changed from time to time by the Board as they deem fit depending on business conditions and our Company's needs. This plan is summarized below for the purchases that our eligible dealers make from us on or after January 1, 1998. 1. For each of your eligible stores, we initially calculate the minimum cash patronage dividend distribution as follows: (a) 20% of the first $5,000 of the total patronage dividends allocated for distribution each year to you based on the purchases made for the eligible store; (b) 25% of the portion of the total patronage dividends allocated for that store which exceed $5,000 but do not exceed $7,500; (c) 30% of the portion of the total patronage dividends allocated for that store which exceed $7,500 but do not exceed $10,000; (d) 35% of the portion of the total patronage dividends allocated for that store which exceed $10,000 but do not exceed $12,500; (e) 40% of the portion of the total patronage dividends allocated for that store which exceed $12,500. 2. We distribute the portion of patronage dividends in excess of the cash amount above in the form of shares of our Class C Non-voting Stock (par value $100 per share) until the total par value of all shares of all classes of our capital stock that you hold for the eligible store equals the greater of: (a) $20,000; or (b) the sum of purchases in the following categories that you made for the eligible store during the most recent calendar year: (i) 15% of the volume of Ace manufactured paint and related products purchases, plus (ii) 3% of the volume of drop-shipment or direct purchases (excluding Ace manufactured paint and related products), plus (iii) 15% of the volume of warehouse and bulletin purchases (including Stop and excluding Ace manufactured paint and related products), plus (iv) 3% of the volume of lumber and building material (excluding LTL) purchases, subject to a maximum lumber and building material capital stock requirement of $25,000, plus (v) 4% of the volume of LTL Plus purchases. Please note, however, that we do not issue fractional shares of Class C Stock. We take any amount that would result in a fractional share of stock and distribute it in cash or patronage refund certificates instead. 3. The portion of your total patronage dividends for each of your eligible stores which exceeds the sum of: (a) the cash amount determined under Paragraph 1 above and (b) the amount of Class C Stock determined under Paragraph 2 above is distributed to you in cash up to certain limits. The total amount that you receive in cash for an eligible store cannot exceed 45% of that store's total patronage dividends for the year. If a store's total cash distribution would exceed this 45% limit, then the distribution over that amount is made instead in the form of a non-negotiable patronage refund certificate. Our Board of Directors determines the maturity dates and interest rates of these patronage refund certificates before they are issued. These certificates include provisions that give us a first lien on the amount of any indebtedness that you owe us. The certificates also contain language subordinating them to all the rights and claims of our secured creditors, general creditors and our bank creditors. Historically, these patronage refund certificates have matured within five years from the date we issued them. With some modifications, the plan described above is applied separately in determining patronage dividends on our sales of lumber and building materials. The combined patronage dividends allocated annually to a store from: * sales of lumber products (other than LTL sales), * sales of building materials (other than LTL sales), * sales of millwork product, and * LTL sales to the store are used to calculate the minimum cash distribution percentages that we apply under Paragraph 1 above. A store's patronage dividends from any other sales category are not taken into account in determining either the minimum portion or any additional portion of the store's patronage dividends from its purchases of lumber and building materials products that are distributed in cash. Also, Paragraphs 2 and 3 above are applied separately for patronage dividends on lumber and building materials. We do not consider the requirements of Paragraph 2 to be satisfied in the cases of: * purchases of lumber products (other than LTL purchases) * purchases of building materials products (other than LTL purchases), or * purchases of millwork product until the store's holdings of our Class C Stock from patronage dividends or our sales to that store from other eligible categories equal 3% of the store's purchases within the category during the most recent calendar year. This is subject to a maximum of lumber and building materials capital stock requirement of $25,000 under the 1998 plan. No similar special Class C Stock requirement applies to patronage dividends accrued on LTL purchases, however. Article XXIV, Section 7 of our By-laws requires the cash portion of any patronage dividends to be applied against any indebtedness a member owes us where the membership for his store is terminated before the distribution of patronage dividends. Despite this, however, 20% of a terminated store's total annual patronage dividends will be paid in cash if we receive a timely request for this form of payment. Because of the requirement of the U. S. Internal Revenue Code that we withhold 30% of the annual patronage dividends distributed to eligible dealers whose places of business are located in foreign countries or Puerto Rico, the cash portion of patronage dividends to these dealers is a minimum of 30%. There are exceptions to this 30% cash payment in the case of 1) unincorporated Puerto Rico dealers owned by individuals who are U.S. citizens, and 2) certain dealers incorporated in Guam, American Samoa, the Northern Mariana Islands, or the U.S. Virgin Islands. These exceptions apply if less than 25% of the stock of these dealers is owned by foreign persons, and at least 65% of their gross income for the last three years has been sufficiently connected with a trade or business in one of these locations or in the United States. We also have certain loan programs that allow dealers to pay us back with part of their patronage dividend distributions. For example, to help members buy standardized exterior signs identifying their stores, our Board of Directors has authorized a loan program. Under this program, a dealer may apply to borrow between $100 to $20,000 per location from us for this purpose. If you obtain a loan under this program, you may either repay it in twelve payments billed on your regular bi-weekly billing statement, or you may apply the non-cash portion of your annual patronage dividends (for up to the next three annual patronage dividend distributions) toward payment of your loan. Our Board of Directors has also authorized finance programs to help qualified dealers buy certain computer systems from us and to finance capital improvements with patronage dividends. The amount financed cannot exceed 80% of the cost of any system. For PAINTMAKER computers, members have applied to borrow between $1,000 to $15,000 per location repayable over a period of three (3) years. For PACE computers, members have applied to borrow between $5,000 to $50,000 per location repayable over a period of five (5) years. For capital improvements, members have applied to borrow up to $2.00 per square foot of retail space repayable over a period of three (3) years. Under these programs, members have directed us to first apply the patronage refund certificate portion of their patronage dividend distributions toward the balance owed on these financed items and next to apply patronage dividends which would otherwise be payable for the same year in the form of our class C stock. These signage, computer financing and store retrofit programs may be revised or discontinued by our Board at any time. Federal Income Tax Treatment of Patronage Dividends (See Previous Heading "Opinions of the Experts") Both the shares of Class C nonvoting Stock and the patronage refund certificates that we use to pay patronage dividends are "qualified written notices of allocation" within the meaning of Sections 1381 through 1388 of the U.S. Internal Revenue Code. These Sections of the Internal Revenue Code deal with the income tax treatment of cooperatives and their patrons, and have been in effect since 1963. The dollar amount stated on a qualified written notice of allocation must be taken into the gross income of the person to whom the notice is issued, even though the dollar amount may not actually be paid to the person in the same year as it is taxed. In order for us to receive a deduction from our gross income for federal income tax purposes for the amount of any patronage dividends that we pay to a patron (that is, to one of our eligible and qualifying dealers) in the form of qualified written notices of allocation, we have to pay (or apply against any indebtedness that the patron owes us in accordance with Section 7 of Article XXIV of our By-laws) not less than 20% of each patron's total patronage dividend distribution in cash and the patron also has to consent to having the written notices of allocation, at their stated dollar amounts, included in his gross income for the taxable year in which he receives them. The Internal Revenue Code also requires that any patronage dividend distributions that we deduct on our federal income tax return for business we do with patrons must be paid to those patrons within 8 months after the end of that taxable year. If you become one of our "members" by owning 1 share of Class A Voting Stock, you are deemed under the U.S. Internal Revenue Code to have consented to take the written notices of allocation that we distribute to you into your gross income. Your consent is deemed because of 1) your act of obtaining or retaining membership in our Company and 2) because our By-laws provide that your membership constitutes this consent, and we give you written notification of that By-law provision. Under another provision of the Internal Revenue Code, dealers who have subscribed for shares of our stock are also deemed to have consented to take the dollar amounts of their written notices of allocation into their gross incomes. This occurs because of the consent provisions included in the Subscription Agreement for our stock. If you receive a patronage refund certificate as part of your patronage dividends (see the subheading "Forms of Patronage Dividend Distributions"), you may be deemed to have received interest income. This interest would arise in the form of an original issue discount to the extent that the face amount of the certificate exceeds the present value of the stated principal and interest payments that we have to pay you under the terms of the certificate. This interest income would be taxable to you "ratably" over the term of the certificate under Section 7872(b) (2) of the U.S. Internal Revenue Code. Present value for this purpose is determined by using a discount rate equal to the applicable Federal rate in effect as of the day of issuance of the certificate, compounded twice a year. We are required to withhold for federal income tax on the total patronage dividend distribution we make to anyone who has not furnished us with a correct taxpayer identification number. We can also be required to withhold federal taxes on the cash portion of each patronage dividend distribution made to someone who fails to certify to us that he is not subject to backup withholding. This withholding obligation based on a failure to certify may not be applicable, however, unless 50% or more of the total distribution is made in cash. Since we distribute all of our patronage dividends for a given year at the same time and since our current patronage dividend plan (see the subheading "Forms of Patronage Dividend Distributions") does not permit any member store to receive more than 45% of its patronage dividends for the year in cash, we believe that a certification failure like this should not ordinarily have any effect on our Company or any of its dealers. Patronage dividends that we distribute to patrons who are located in foreign countries or certain U.S. possessions (including those who are incorporated in Puerto Rico or who reside in Puerto Rico but have not become citizens of the United States) have been held to be "fixed or determinable annual or periodic income." Patrons who receive this type of income are currently required to pay a tax of 30% of the amount received under Sections 871(a)(1)(A) and 881(a)(1) of the Internal Revenue Code. When dealers are subject to this 30% tax, we must withhold it from their patronage dividends and pay it over to the U.S. Internal Revenue Service. The above does not apply to a corporation organized in Guam, American Samoa, the Northern Mariana Islands, or the U. S. Virgin Islands if less than 25% of its stock is owned by foreign persons and at least 65% of its gross income for the last three years has been effectively connected with the conduct of a trade or business in that location or in the United States. The 20% minimum portion of the patronage dividends that must be paid in cash to patrons other than those discussed above may not be enough, depending upon the patron's income tax bracket, to pay all of the patron's federal income tax on his annual patronage dividend distributions. In our management's opinion, the payment of a minimum of 20% of total patronage dividends in cash each year will not have a material adverse affect on our operations or on our ability to obtain sufficient working capital for the normal requirements of our business. Membership Agreement If you apply to become an Ace member, you must sign a Subscription Agreement to purchase our stock. You must also sign our customary Membership Agreement. You must submit a payment of $400 with your signed Membership Agreement. We use the $400 fee toward our estimated costs of processing your membership application. If you submit a membership application and we accept it, we sign both your Membership Agreement and Stock Subscription Agreement and send them back to you for your records. Your membership may generally be terminated upon various notice periods and for various reasons (including voluntary termination by either of us). The details of these reasons and notice periods are in the Membership Agreement. These reasons for termination and notice periods apply except where special laws or regulations in certain locations limit our right to terminate memberships, or require longer notice periods. Non-Shareholder Programs In 1989, our Board of Directors first authorized us to affiliate non-shareholder international dealers who operate retail businesses outside the United States, its territories and possessions. These international dealers sign agreements that differ from our regular Membership Agreement. They may be granted a license to use certain of our trademarks and service marks, but they do not sign stock subscription agreements or become shareholders, nor do they receive patronage dividends. In 1995, our Board of Directors first authorized us to affiliate non-shareholder retail accounts other than international dealers. These accounts, which are generally served through our subsidiary National Hardlines Supply, Inc. ("NHS"), are not granted an ongoing license to use our trademarks and service marks. They can purchase selected types of products from us for resale. They are not members of our cooperative, and therefore do not own our stock or receive patronage dividends. In 1996, we established a license program for international non-shareholder dealers. These international licensees typically receive the exclusive right to use our trademarks and service marks, as well as exclusive rights to distribute the merchandise they purchase from us in their home countries. International licensees pay us a negotiated license fee and ongoing royalties on their retail sales in exchange for these rights, and for our ongoing training and support. In 1996, we also began operations through our subsidiary Ace Hardware Canada, Limited ("Ace Canada"). The majority of Ace Canada's customers are non-shareholders who do not receive patronage dividends from us, and who are not licensed to use our trademarks and service marks. In 1998, we also established a domestic franchise program whose franchisees will not be shareholders of our cooperative, and will not therefore receive patronage dividends. These franchisees will pay us a franchise fee and ongoing royalties on their retail sales. In turn, they receive exclusive rights to a designated area, a license to use our trademarks and service marks, and various initial and ongoing training and support. In October, 1998, we entered into a joint venture with one of our dealers. The joint venture will operate approximately 12 leased stores in Massachusetts, New Hampshire and Rhode Island. In January, 1999, we announced that we had entered into another joint venture with another Ace dealer. This joint venture plans to open approximately 10 stores in southwest Florida over the next eight years, and plans to open the first 3 of them within the next two years. In the future, we will explore other joint venture opportunities with our dealers; however, we consider each situation unique and we evaluate each opportunity on its own merits. As of the end of fiscal years 1998, 1997 and 1996, sales to international non-shareholder dealers accounted for approximately 7% of our total sales for fiscal years 1998 and 1997, and less than 5% of our total sales for fiscal year 1996. As of the end of fiscal years 1998, 1997 and 1996, sales to domestic non-shareholder locations accounted for less than 1% of our total sales in each year. (See Appendix A, Article XXV, Sections 3 and 4 of our By-laws regarding International Retail Merchants and non-member accounts.) Year 2000 A detailed plan has been established to identify and track progress on the identification of systems, changing of non-compliant systems and testing of those systems for Year 2000 compliance. Project completion is planned for the middle of 1999. In addition, a plan has been developed for all devices (time clocks, power systems, etc.) within the Company. The Company is approximately 60% complete with the project as of January 2, 1999. The remaining 40% will be dedicated to the Enterprise testing in the first half of 1999. The Company expects its Year 2000 date conversion project to be completed on a timely basis. The Company expects to incur internal staff costs as well as incremental consulting and other expenses related to infrastructure and facilities enhancements necessary to prepare the systems for the Year 2000. A significant portion of these costs will represent the re-deployment of existing information technology resources. Based upon current estimates, such operating costs could range between $5.0 million and $6.5 million. The Company has expended approximately $3.7 million through January 2, 1999 which was primarily incurred in 1998. To date, correspondence has been received from the Company's primary vendors that plans are being developed to address processing of transactions in the Year 2000. However, there can be no assurance that the systems of other companies on which the Company's system rely will be converted timely or that any such failure to convert by another company would not have an adverse affect on the Company's systems. The Company is in the process of identifying specific business risks as they relate to Year 2000 and is developing a Contingency Plan. It is anticipated that the Contingency Plan will be completed in the first half of 1999. PROPERTIES Our general offices are located at 2200 Kensington Court, Oak Brook, Illinois 60523. Information about our main properties appears below: Square Feet Owned Lease of Facility or Expiration Location (Land in Acres) Leased Date -------- --------------- ------ ---------- General Offices: Oak Brook, Illinois 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 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, 1999 Hanover, Maryland 57,500 Leased June 26, 2003 Colorado Springs, Colorado 493,000 Owned Wilton, New York 795,000 Leased September 1, 2007 Brantford, Ontario, Canada(4) 434,000 Leased March 31, 2006 Calgary, Alberta, Canada (4) 240,000 Leased December 31, 2001 Print Shop Facility: Downers Grove, Illinois 41,000 Leased April 30, 2002 Paint Manufacturing Facilities: Matteson, Illinois 356,000 Owned Chicago Heights, Illinois 194,000 Owned Other Property: Aurora, Illinois 72 acres Owned LaCrosse, Wisconsin (5) 3 acres Owned - ------- (1) This property is leased by our subsidiary Ace Hardware Canada, Limited for its corporate office. (2) We leased this property in October, 1994, for our bulk merchandise redistribution center. (3) We leased this property in June, 1994 for our freight consolidation center. (4) Our subsidiary, Ace Hardware Canada, Limited leases this property for a distribution warehouse. The Brantford property includes 80,000 square feet leased for a two-year period from January 1, 1998-December 31, 2000. (5) This land is next to our LaCrosse, Wisconsin warehouse. In addition to the above, we or our subsidiaries, A.H.C. Store Development Corp. and Ace Corporate Stores, Inc. lease other property for retail hardware stores ranging from approximately 13,000 to 20,000 square feet in size. The numbers and locations of these leased retail stores as of the date of this filing are summarized in the table below: Number of State Retail Store Leases ----- ------------------- Georgia 6 Illinois 3 Washington 3 Wisconsin 1 We also lease a fleet of trucks and equipment for the main purpose of delivering merchandise from our warehouses to our dealers. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page ---- Independent Auditors' Report 30 Consolidated Balance Sheets as of January 2, 1999 and December 31, 1997 31 Consolidated Statements of Earnings and Consolidated Statements of Comprehensive Income for each of the years in the three-year period ended January 2, 1999 33 Consolidated Statements of Member Dealers' Equity for each of the years in the three-year period ended January 2, 1999 34 Consolidated Statements of Cash Flows for each of the years in the three-year period ended January 2, 1999 35 Notes to Consolidated Financial Statements 36 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 January 2, 1999 and December 31, 1997, and the related consolidated statements of earnings, comprehensive income, member dealers' equity and cash flows for each of the years in the three-year period ended January 2, 1999. 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 January 2, 1999 and December 31, 1997, and the results of their operations and their cash flows for each of the years in the three-year period ended January 2, 1999 in conformity with generally accepted accounting principles. KPMG LLP Chicago, Illinois January 27, 1999 ACE HARDWARE CORPORATION ---------- CONSOLIDATED BALANCE SHEETS January 2, 1999 and December 31, 1997 ASSETS January 2, December 31, 1999 1997 ---------- ------------ (000's omitted) Current assets: Cash and cash equivalents $ 53,901 $ 14,171 Receivables: Trade 345,328 320,166 Other 54,517 45,719 ----------- ----------- 399,845 365,885 Less allowance for doubtful receivables (2,725) (2,086) ----------- ----------- Net receivables 397,120 363,799 Inventories (Note 2) 334,405 338,509 Prepaid expenses and other current assets 15,146 13,615 ----------- ----------- Total current assets 800,572 730,094 ----------- ----------- Property and equipment (Note 10): Land 16,952 17,480 Buildings and improvements 180,850 188,967 Warehouse equipment 70,315 66,330 Office equipment 74,567 71,578 Manufacturing equipment 13,817 13,686 Transportation equipment 16,076 15,312 Leasehold improvements 18,049 16,110 Construction in progress 12,395 6,686 ----------- ----------- 403,021 396,149 Less accumulated depreciation and amortization (163,176) (153,170) ----------- ----------- Net property and equipment 239,845 242,979 Other assets 7,309 4,405 ----------- ----------- $1,047,726 $ 977,478 =========== =========== See accompanying notes to consolidated financial statements. ACE HARDWARE CORPORATION ---------- CONSOLIDATED BALANCE SHEETS January 2, 1999 and December 31, 1997 LIABILITIES AND MEMBER DEALERS' EQUITY January 2, December 31, 1999 1997 ------------ ------------ (000's omitted) Current liabilities: Current installments of long-term debt (Note 4) $ 7,433 $ 7,515 Short-term borrowings (Note 3) 25,000 42,000 Accounts payable 466,008 423,762 Patronage dividends payable in cash (Note 5) 34,826 29,943 Patronage refund certificates payable (Note 5) 20,655 13,636 Accrued expenses 54,724 54,562 ------------ ------------ Total current liabilities 608,646 571,418 Long-term debt (Note 4) 115,421 96,815 Patronage refund certificates payable (Note 5) 43,465 49,044 Other long-term liabilities 18,682 14,722 ------------ ------------ Total liabilities 786,214 731,999 ------------ ------------ Member dealers' equity (Notes 5 and 8): Class A Stock of $1,000 par value 3,846 3,874 Class B Stock of $1,000 par value 6,499 6,499 Class C Stock of $100 par value 226,571 213,609 Class C Stock of $100 par value, issuable to dealers for patronage dividends 26,170 22,366 Additional stock subscribed, net 471 383 Retained earnings 3,292 3,354 Contributed capital 3,295 3,295 Accumulated other comprehensive income (818) (335) ------------ ------------ 269,326 253,045 Less: Treasury stock, at cost (7,814) (7,566) ------------ ------------ Total member dealers' equity 261,512 245,479 Commitments (Notes 6 and 10) ------------ ------------ $1,047,726 $ 977,478 ============ ============ See accompanying notes to consolidated financial statements. ACE HARDWARE CORPORATION ---------- CONSOLIDATED STATEMENTS OF EARNINGS Year Ended ------------------------------------------- January 2, December 31, December 31, 1999 1997 1996 ---------- ------------ ------------ (000's omitted) Net sales $3,120,380 $2,907,259 $2,742,451 Cost of sales 2,868,974 2,682,863 2,535,014 ------------ ------------ ------------ Gross profit 251,406 224,396 207,437 ------------ ------------ ------------ Operating expenses: Warehouse and distribution 38,289 39,292 36,658 Selling, general, and administrative 79,650 72,218 67,661 Retail success and development 32,907 25,573 21,644 ------------ ------------ ------------- Total operating expenses 150,846 137,083 125,963 ------------ ------------ ------------- Operating income 100,560 87,313 81,474 Interest expense (Note 12) (17,161) (14,751) (11,855) Other income, net 6,297 5,735 3,806 Income taxes (Note 7) (1,736) (1,910) (1,118) ----------- ------------ ------------- Net earnings $ 87,960 $ 76,387 $ 72,307 =========== ============ ============= Retained earnings at beginning of year $ 3,354 $ 3,120 $ 4,650 Net earnings 87,960 76,387 72,307 Patronage dividends (Notes 5 and 8) (88,022) (76,153) (73,837) ----------- ------------ ------------- Retained earnings at end of year $ 3,292 $ 3,354 $ 3,120 =========== ============ ============= CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME Year Ended ---------------------------------------------- January 2, December 31, December 31, 1999 1997 1996 ---------- ------------ ------------ (000's omitted) Net earnings $ 87,960 $ 76,387 $ 72,307 Foreign currency translation, net (483) (285) (50) ----------- ----------- ----------- Comprehensive income $ 87,477 $ 76,102 $ 72,257 =========== =========== =========== See accompanying notes to consolidated financial statements. ACE HARDWARE CORPORATION ---------- CONSOLIDATED STATEMENTS OF MEMBER DEALERS' EQUITY Three Years Ended January 2, 1999 (000's omitted) Class C Stock Issuable to Accumulated Dealers for Additional Other Class A Class B Class C Patronage Stock Retained Contributed Comprehensive Treasury Stock Stock Stock Dividends Subscribed* Earnings Capital Income Stock Total ----- ----- ----- --------- ----------- -------- ------------ ------ ----- ----- Balance at December 31, 1995 $3,905 $6,499 $177,817 $27,506 $ 515 $4,650 $3,295 -- $(6,942) $217,245 Net earnings -- -- -- -- -- 72,307 -- -- -- 72,307 Net payments on subscriptions -- -- -- -- 1,603 -- -- -- -- 1,603 Patronage financing deductions -- -- -- (43) -- -- -- -- -- (43) Stock issued 268 -- 28,854 (27,463) (1,616) -- -- -- -- 43 Stock repurchased -- -- -- -- -- -- -- -- (10,429) (10,429) Stock retired (236) -- (9,929) -- -- -- -- -- 10,165 -- Stock issuable as patronage dividends -- -- -- 26,474 -- -- -- -- -- 26,474 Patronage dividends payable -- -- -- -- -- (73,837) -- -- -- (73,837) Accumulated other comprehensive income -- -- -- -- -- -- -- (50) -- (50) ------ ------ -------- ------- ---- ------ ------ ------- ------- -------- Balance at December 31, 1996 $3,937 $6,499 $196,742 $26,474 $502 $3,120 $3,295 $(50) $(7,206) $233,313 Net earnings -- -- -- -- -- 76,387 -- -- -- 76,387 Net payments on subscriptions -- -- -- -- 2,906 -- -- -- -- 2,906 Patronage financing deductions -- -- -- (119) -- -- -- -- -- (119) Stock issued 236 -- 29,263 (26,355) (3,025) -- -- -- -- 119 Stock repurchased -- -- -- -- -- -- -- -- (13,055) (13,055) Stock retired (299) -- (12,396) -- -- -- -- -- 12,695 -- Stock issuable as patronage dividends -- -- -- 22,366 -- -- -- -- -- 22,366 Patronage dividends payable -- -- -- -- -- (76,153) -- -- -- (76,153) Accumulated other comprehensive income -- -- -- -- -- -- -- (285) -- (285) ------- ------ ------ ------ ----- ------- ----- ------ ------- --------- Balance at December 31, 1997 $3,874 $6,499 $213,609 $22,366 $383 $3,354 $3,295 $(335) $(7,566) $245,479 Net earnings -- -- -- -- -- 87,960 -- -- -- 87,960 Net payments on subscriptions -- -- -- -- 1,463 -- -- -- -- 1,463 Patronage financing deductions -- -- -- (485) -- -- -- -- -- (485) Stock issued 215 -- 23,526 (21,881) (1,375) -- -- -- -- 485 Stock repurchased -- -- -- -- -- -- -- -- (11,055) (11,055) Stock retired (243) -- (10,564) -- -- -- -- -- 10,807 -- Stock issuable as patronage dividends -- -- -- 26,170 -- -- -- -- -- 26,170 Patronage dividends payable -- -- -- -- -- (88,022) -- -- -- (88,022) Accumulated other comprehensive income -- -- -- -- -- -- -- (483) -- (483) ------ ------ -------- ------- ---- ------ ------ ------ -------- ------- Balance at January 2, 1999 $3,846 $6,499 $226,571 $26,170 $471 $3,292 $3,295 $(818) $(7,814) $261,512 ====== ====== ======== ======= ==== ====== ====== ====== ======== ======== *Additional stock subscribed is comprised of the following amounts at December 31, 1996, 1997 and January 2, 1999: 1996 1997 1998 ---- ---- ---- Class A Stock $139 $ 86 $ 60 Class B Stock -- -- -- Class C Stock 1,653 1,085 955 ----- ----- ----- 1,792 1,171 1,015 Less unpaid portion 1,290 788 544 ----- ----- ----- $ 502 $ 383 $ 471 ===== ===== ===== See accompanying notes to consolidated financial statements.
ACE HARDWARE CORPORATION ---------- CONSOLIDATED STATEMENTS OF CASH FLOWS Year Ended -------------------------------------------- January 2, December 31, December 31, 1999 1997 1996 ---------- ------------ ------------ (000's omitted) Operating Activities: Net Earnings $87,960 $76,387 $72,307 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation 21,536 19,494 17,517 Loss on sale of property and equipment 425 285 712 Increase in accounts receivable, net (32,207) (15,835) (60,170) Decrease (Increase) in inventories 2,713 (12,067) (72,694) Increase in prepaid expenses and other current assets (1,531) (1,735) (2,556) Increase in accounts payable and accrued expenses 42,204 46,000 64,616 Increase in other long-term liabilities 3,960 5,205 4,066 -------- -------- -------- Net Cash Provided by Operating Activities 125,060 117,734 23,798 -------- -------- -------- Investing Activities: Purchase of property and equipment (26,975) (49,373) (40,379) Proceeds from sale of property and equipment 8,148 149 120 Decrease(Increase) in other assets (2,904) (494) 12 --------- --------- --------- Net Cash Used in Investing Activities (21,731) (49,718) (40,247) --------- --------- --------- Financing Activities: Proceeds (payments) of short-term borrowings (17,000) (29,000) 58,000 Proceeds from notes payable 26,117 32,994 20,853 Payments on long-term debt (7,593) (7,228) (7,462) Payment of cash portion of patronage dividend (29,943) (28,178) (23,522) Payments of patronage refund certificates and patronage financing deductions (25,588) (24,941) (22,790) Proceeds from sale of common stock 1,463 2,906 1,603 Repurchase of common stock (11,055) (13,055) (10,429) --------- --------- --------- Net Cash Provided by (Used in) Financing Activities (63,599) (66,502) 16,253 --------- --------- --------- Increase (Decrease) in Cash and Cash Equivalents 39,730 1,514 (196) Cash and Cash Equivalents at beginning of year 14,171 12,657 12,853 --------- --------- --------- Cash and Cash Equivalents at end of year $53,901 $14,171 $12,657 ========= ========= ========= 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 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 primarily using the last-in, first-out method. (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, net of gains on foreign exchange contracts, are reflected in the accompanying Consolidated Statement of Comprehensive Income for 1998, 1997 and 1996. ACE HARDWARE CORPORATION ---------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) (g) Financial Instruments The carrying value of assets and liabilities that meet the definition of a financial instrument included in the accompanying Consolidated Balance Sheets approximate fair value. (h) 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. (i) 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. (j) Fiscal Year Effective January 1, 1998 the company changed its fiscal year from December 31st to the Saturday nearest December 31st. Accordingly, 1998 ended on January 2, 1999. (k) Reclassifications Certain financial statement reclassifications have been made to prior year amounts to conform to comparable classifications followed in 1998. (2) Inventories Inventories consist primarily of merchandise inventories. Substantially all of the Company's domestic inventories are valued on the last-in, first-out (LIFO) method; the excess of replacement cost over the LIFO value of inventory was approximately $62,093,000 and $67,151,000 at January 2, 1999 and December 31, 1997, 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 1998 and 1997. The maximum amount outstanding at any month-end during the period was $67.0 million in 1998 and $113.0 million in 1997. The weighted average interest rate effective as of January 2, 1999 and December 31, 1997 was 5.03% and 6.60%, respectively. Short-term borrowings outstanding as of January 2, 1999 and December 31, 1997 were $25.0 million and $42.0 million, respectively. At January 2, 1999 the Company has available a revolving credit facility with a group of banks providing for $125 million in committed lines and also has available $65 million in uncommitted lines. The aggregate unused line of credit available at January 2, 1999 and December 31, 1997 was $165 million and $133 million, respectively. At January 2, 1999 the Company had no compensating balance requirements. ACE HARDWARE CORPORATION ---------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) (4) Long-Term Debt Long-term debt is comprised of the following: January 2, December 31, 1999 1997 ---------- ------------ (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% $10,270 $12,432 $20,000,000 due in quarterly installments of $952,400 with interest payable quarterly at a fixed rate of 6.89% 4,762 8,571 $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 $714,300 commencing September 15, 2004 with interest payable quarterly at a fixed rate of 7.49% 20,000 20,000 $30,000,000 due in annual installments of $6,000,000 commencing March 25, 2005 with interest payable quarterly at a fixed rate of 7.55% 30,000 30,000 $25,000,000 due in annual installments of $5,000,000 commencing February 9, 2006 with interest payable quarterly at a fixed rate of 6.61% 25,000 -- Liability under capitalized leases (see Note 10) 1,370 2,171 Installment notes with maturities through 2002 with various interest rates 1,452 1,156 -------- -------- 122,854 104,330 Less current installments 7,433 7,515 --------- -------- $115,421 $96,815 ========= ======== Aggregate maturities of long-term debt are $7,433,000, $3,923,000, $6,526,000, $6,350,000 and $5,622,000 in 1999 through 2003, respectively, and $93,000,000 thereafter. (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. ACE HARDWARE CORPORATION ---------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) The patronage dividend composition for 1998, 1997 and 1996 follows: Subordinated Class Patronage Total Cash Refund C Financing Patronage Portion Certificates Stock Deductions Dividend ------- ------------ ----- ---------- --------- (000's omitted) 1998 $34,826 $15,720 $26,170 $11,306 $88,022 1997 29,943 13,726 22,366 10,118 76,153 1996 28,178 9,500 26,474 9,685 73,837 Patronage dividends are allocated on a fiscal year basis with issuance in the following year. The patronage refund certificates outstanding or issuable at January 2, 1999 are payable as follows: Interest Amount Rate ------ -------- (000's omitted) 1999 $11,460 6.00% 2000 9,195 7.00 2001 4,930 6.00 2002 9,272 6.25 2003 13,543 6.00 2004 15,720 6.00 A portion of the patronage refund certificates payable on January 1, 2000 will be prepaid, and accordingly, is classified as current liabilities in the accompanying January 2, 1999 Consolidated Balance Sheet. (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 January 2, 1999 plan assets were held primarily in equities, mutual funds and group annuity contracts. Pension expense for the years included the following components: January 2, December 31, December 31, 1999 1997 1996 ---------- ------------ ------------ (000's omitted) Service cost - benefits earned during the period $ 293 $ 358 $ 144 Interest cost on projected benefit obligation 428 351 558 Expected return on plan assets (710) (630) (867) Net amortization and deferral 87 53 229 -------- -------- --------- Net periodic pension expense $ 98 $ 132 $ 64 ======== ======== ========= In 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 in 1996 related to this settlement. ACE HARDWARE CORPORATION ----------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) The following table sets forth the funded status of the plans and amounts recognized in the Company's Consolidated Balance Sheets at January 2, 1999 and 1997 (December 31st measurement date): January 2, December 31, 1999 1997 ---------- ------------ (000's omitted) Change in benefit obligation: Benefit obligation at beginning of year $5,041 $4,813 Service cost 293 358 Interest cost 428 351 Actuarial losses 325 181 Benefits paid (746) (662) ---------- ------------ Benefit obligation at end of year 5,341 5,041 ---------- ------------ Change in plan assets: Fair value of plan assets at beginning of year 9,122 7,964 Actual return on plan assets 1,001 1,820 Employer contribution 71 - Benefits paid (746) (662) ---------- ------------ Fair value of plan assets at end of year 9,448 9,122 ---------- ------------ Funded status 4,107 4,081 Unrecognized transition asset (91) (104) Unamortized prior service cost (631) (680) Unrecognized net actuarial gains (2,776) (2,661) ---------- ------------ Prepaid pension cost included in other assets $ 609 $ 636 ========== ============ The weighted average discount rate used in determining the actuarial present value of the projected benefit obligation was 7.0% in 1998 and 7.25% in 1997. The related expected long-term rate of return was 8.0% in 1998 and 1997. The rate of increase in future compensation was projected using actuarial salary tables plus 1.0% in 1998 and 1997. The Company also participates in several multi-employer plans covering union employees. Amounts charged to expense and contributed to the plans totaled approximately $216,000, $225,000 and $265,000 in 1998, 1997 and 1996, respectively. The Company's profit sharing plan contribution for 1998, 1997 and 1996 was approximately $13,746,000, $12,240,000 and $11,357,000, 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 1998, 1997 and 1996 provisions for federal income taxes were $1,105,000, $1,501,000 and $860,000, respectively, and for state income taxes were $631,000, $409,000 and $258,000, respectively. The Company made tax payments of $1,374,000, $2,807,000 and $1,524,000 during 1998, 1997 and 1996, respectively. ACE HARDWARE CORPORATION ---------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) (8) Member Dealers' Equity The Company's classes of stock are described below: Number of Shares at ------------------- January 2, December 31, 1999 1997 ---------- ------------ Class A Stock, voting, redeemable at par value - Authorized 10,000 10,000 Issued and outstanding 3,846 3,874 Class B Stock, nonvoting, redeemable at not less than twice par value- Authorized 6,500 6,500 Issued 6,499 6,499 Outstanding 2,592 2,716 Treasury stock 3,907 3,783 Class C Stock, nonvoting, redeemable at not less than par value - Authorized 4,000,000 4,000,000 Issued and outstanding 2,265,718 2,136,085 Issuable as patronage dividends 261,700 223,660 Additional Stock Subscribed: Class A Stock 60 86 Class B Stock - - Class C Stock 9,550 10,850 At January 2, 1999 and December 31, 1997 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. ACE HARDWARE CORPORATION ---------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) A Class A share is issued to a member dealer only when the share subscribed has been fully paid. Class B and Class C shares are only issued when all such shares subscribed with respect to a retail outlet have been fully paid. Additional Stock Subscribed in the accompanying statements represents the par value of shares subscribed, reduced by the unpaid portion. All shares of stock are currently issued and repurchased at par value, except for Class B Stock which is repurchased at twice its par value, or $2,000 per share. Upon retirement of Class B shares held in treasury, the excess of redemption price over par is allocated equally between contributed capital and retained earnings. Transactions during 1996, 1997 and 1998 affecting treasury shares follow: Shares Held in Treasury ----------------------- Class A Class B Class C ------- ------- ------- 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 -- Stock issued -- -- -- Stock repurchased 299 180 123,964 Stock retired (299) -- (123,964) -------- -------- -------- Balance at December 31, 1997 -- 3,783 -- Stock issued -- -- -- Stock repurchased 243 124 105,639 Stock retired (243) -- (105,639) -------- -------- -------- Balance at January 2, 1999 -- 3,907 -- ======== ======== ======== (9) Segments The Company is principally engaged as a wholesaler of hardware and related products and manufactures paint products. In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard No. 131, Disclosures about Segments of an Enterprise and Related Information, which the Company has adopted in the current year. The Company identifies segments based on management responsibility and the nature of the business activities of each component of the Company. The Company measures segment earnings as operating earnings including an allocation for interest expense and income taxes. Information regarding the identified segments and the related reconciliation to consolidated information are as follows: ACE HARDWARE CORPORATION ---------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) January 2, 1999 --------------- (000's omitted) Elimination of Paint Intersegment Wholesale Manufacturing Other Activities Consolidated --------- ------------- ----- -------------- ------------ Net sales from external customers $3,086,913 $20,798 $12,669 -- $3,120,380 Intersegment sales 13,701 93,536 -- (107,237) -- Interest expense 17,161 1,464 244 (1,708) 17,161 Depreciation 19,808 1,392 336 -- 21,536 Segment earnings (loss) 78,442 10,364 (382) (464) 87,960 Identifiable segment assets 987,832 29,883 39,030 (9,019) 1,047,726 Expenditures for long-lived assets 22,270 937 3,768 -- 26,975 December 31, 1997 ----------------- (000's omitted) Elimination of Paint Intersegment Wholesale Manufacturing Other Activities Consolidated --------- ------------- ----- -------------- ------------ Net sales from external customers $2,882,457 $18,788 $6,014 -- $2,907,259 Intersegment sales 4,377 89,490 -- (93,867) -- Interest expense 14,751 1,005 88 (1,093) 14,751 Depreciation 17,977 1,371 146 -- 19,494 Segment earnings (loss) 64,844 11,306 432 (195) 76,387 Identifiable segment assets 928,401 28,957 24,206 (4,086) 977,478 Expenditures for long-lived assets 47,312 806 1,255 -- 49,373 December 31, 1996 ----------------- (000's omitted) Elimination of Paint Intersegment Wholesale Manufacturing Other Activities Consolidated --------- ------------- ----- -------------- ------------ Net sales from external customers $2,721,531 $19,080 $1,840 -- $2,742,451 Intersegment sales 1,119 83,992 -- (85,111) -- Interest expense 11,855 1,003 33 (1,036) 11,855 Depreciation 16,030 1,439 48 -- 17,517 Segment earnings (loss) 63,925 8,281 176 (75) 72,307 Identifiable segment assets 874,215 28,036 16,266 (2,142) 916,375 Expenditures for long-lived assets 39,056 968 355 -- 40,379 Net sales and long-lived assets by geographic region based upon customer location for 1998, 1997 and 1996 were as follows: January 2, 1999 December 31, 1997 December 31, 1996 --------------- ----------------- ----------------- (000's omitted) Net sales: United States $2,903,906 $2,717,881 $2,610,573 Foreign countries 216,474 189,378 131,878 ---------- ---------- ---------- Total $3,120,380 $2,907,259 $2,742,451 ========== ========== ========== Long-lived assets, net: United States $234,539 $236,488 $206,184 Foreign countries 5,306 6,491 7,350 ---------- ---------- ---------- Total $239,845 $242,979 $213,534 ========== ========== ========== ACE HARDWARE CORPORATION ---------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) (10) Commitments Leased property under capital leases is included as "Property and Equipment" in the Consolidated Balance Sheets as follows: January 2, December 31, 1999 1997 ---------- ------------ (000's omitted) Data processing equipment $3,600 $3,633 Less: accumulated depreciation and amortization (1,905) (1,506) ---------- ------------ $1,695 $2,127 ========== ============ The Company rents buildings and warehouse, office and certain other equipment under capital and operating leases. At January 2, 1999 annual minimum rental commitments under leases that have initial or remaining noncancelable terms in excess of one year are as follows: Year Ending, Capital Operating - ------------ ------- --------- (000's omitted) 1999 $ 963 $18,905 2000 413 16,110 2001 76 12,520 2002 -- 8,613 2003 -- 6,636 Thereafter -- 22,984 ------- --------- Total minimum lease payments 1,452 $85,768 ========= Less amount representing interest 82 ------- Present value of total minimum lease payments $ 1,370 ======= All leases expire prior to 2013. 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 $37,023,000, $33,343,000 and $29,747,000 in 1998, 1997 and 1996, respectively. Rent expense includes $6,004,000, $5,956,000 and $5,503,000 in contingent rentals paid in 1998, 1997 and 1996, respectively, primarily for transportation equipment mileage. (11) 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 $70,254,000, $65,013,000 and $64,551,000 was charged to operations in 1998, 1997 and 1996, respectively. (12) Interest Expense Interest paid was $16,553,000, $15,281,000 and $12,481,000 in 1998, 1997 and 1996, respectively, net of capitalized interest of $1,022,000 and $523,000 in 1997 and 1996. ACE HARDWARE CORPORATION ---------- SELECTED FINANCIAL DATA Income Statement Data: January 2, December 31, December 31, December 31, December 31, 1999 1997 1996 1995 1994 ---------- ------------ ------------ ------------ ------------ (000's omitted) Net sales $3,120,380 $2,907,259 $2,742,451 $2,436,012 $2,326,115 Cost of sales 2,868,974 2,682,863 2,535,014 2,253,430 2,152,322 ---------- ------------ ------------ ------------ ------------ Gross profit 251,406 224,396 207,437 182,582 173,793 Total expenses 163,446 148,009 135,130 118,840 109,271 ---------- ------------ ------------ ------------ ------------ Net earnings $ 87,960 $ 76,387 $ 72,307 $ 63,742 $ 64,522 ========== ============ ============ ============ ============ Patronage divi- dends (Notes A, B,5 and 8) $ 88,022 $ 76,153 $ 73,837 $ 64,716 $ 64,520 Balance Sheet Data: January 2, December 31, December 31, December 31, December 31, 1999 1997 1996 1995 1994 ---------- ------------ ------------ ------------ ------------ (000's omitted) Total assets $1,047,726 $977,478 $916,375 $759,133 $723,610 Working capital 191,926 158,676 146,862 139,805 150,514 Long-term debt 115,421 96,815 71,837 57,795 64,287 Patronage refund certificates payable, long-term 43,465 49,044 49,639 54,741 63,666 Member dealers' equity 261,512 245,479 233,314 217,245 199,827 (A) The Company operates as a cooperative organization, and pays patronage dividends to member dealers on earnings derived from business done with such dealers. It is the practice of the Company to distribute substantially all patronage sourced earnings in the form of patronage dividends. (B) The form in which patronage dividends are to be distributed can only be determined at the end of each year when the amount distributable to each of the member dealers is known. Patronage dividends were payable as follows: January 2, December 31, December 31, December 31, December 31, 1999 1997 1996 1995 1994 ---------- ------------ ------------ ------------ ------------ (000's omitted) In cash $ 34,826 $ 29,943 $ 28,178 $ 23,522 $ 27,302 In patronage refund certificates payable 15,720 13,726 9,500 5,032 9,920 In Class C Stock 26,170 22,366 26,474 27,506 21,766 In patronage financing deductions 11,306 10,118 9,685 8,656 5,532 Total patronage ---------- ---------- ---------- ---------- ---------- dividends $ 88,022 $ 76,153 $ 73,837 $ 64,716 $ 64,520 ========== ========== ========== ========== ========== (C) Numbered notes refer to Notes to Consolidated Financial Statements, beginning on page 36. (5) & (8) Refers to Notes 5 and 8 of the Consolidated Financial Statements beginning on page 36 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 financing. The Company has an established, unsecured revolving credit facility with a group of banks. The Company has unsecured lines of credit of $190 million of which $165 million was available at January 2, 1999. Any borrowings under these lines of credit would bear interest at the prime rate or less. Long-term financing is 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. Capital expenditures for new and improved facilities were $27.0, $49.4 and $40.4 million in 1998, 1997, and 1996, respectively. During 1998, the Company financed the $27.0 million of capital expenditures out of current and accumulated internally generated funds, short-term borrowings and long-term borrowings. 1999 capital expenditures are anticipated to be approximately $49.3 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. The Company expects that existing and new internally generated funds, along with established lines of credit and long-term financing, will continue to be sufficient to finance the Company's working capital requirements and patronage dividend and capital expenditures programs. Operations-1998 Compared to 1997 Net sales increased 7.3% due to increases in existing retailer volume, targeted efforts on new store development and conversions. Sales of basic hardware and paint merchandise (including warehouse, bulletin and direct shipments) increased 8.1% while lumber and building material sales increased 4.2%. Lumber sales were negatively impacted by price deflation. Excluding Canada, international sales increased 22.2% primarily due to new international store development. Net dealer outlets increased in 1998 due to targeted sales efforts on new store development and conversions to the Ace program and continued emphasis on retail success. Gross profit increased $27.0 million or 12.0% and increased as a percent of sales to 8.06% vs. 7.72% in 1997. Domestic gross profit increased as a percent of sales due to increased handling charges from sales mix shifts, increased vendor rebates and lower warehouse costs absorbed into inventory. Gross profit from additional company-owned stores also contributed to the increase. Warehouse and distribution expenses decreased $1.0 million and decreased as a percent of sales from 1.35% in 1997 to 1.23% in 1998. The decrease was due to increased logistic revenues, non-recurring start-up facility costs in 1997 and improved warehouse productivity. Selling, general and administrative expenses increased $7.4 million or 10.3% and increased slightly as a percent to sales due to increased information technology costs to support our year 2000 efforts and lower costs absorbed into inventory. Retail success and development expenses increased $7.3 million or 28.7% due to costs associated with additional company-owned stores, costs to support retail initiatives and new business development costs. 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 5.6% to $114.3 million. As a separate division of the Company, the Paint Division produced net manufacturing profits of $10.4 million in 1998 vs. $11.3 million in 1997. The decrease in net manufacturing profit is due to unfavorable production variances incurred in 1998. Paint is the only product manufactured by the Company. As discussed on page 8, patronage dividends are calculated separately for paint sales and decreased to 9.17% in 1998 vs. 10.31% in 1997 as a result of the decreased net profit. Interest expense increased $2.4 million or 16.3% due to increased dealer dating programs and long-term debt issued during 1998 to fund the replacement of a facility. Operations-1997 Compared to 1996 Net sales increased 6% due to increases in existing retailer volume, targeted efforts on new store development and conversions, and a full year of Canadian operations. Sales of basic hardware and paint merchandise (including warehouse, bulletin and direct shipments) increased 5.1% while lumber and building material sales increased 10.3% due to accelerated sales efforts. Excluding Canadian operations, international sales increased 27.5% primarily due to new international store development. Gross profit increased $17.0 million or 8.2% and increased as a percent of sales to 7.72% vs. 7.56% in 1996. Domestic gross profit as a percent of sales increased over 1996 due to increased manufacturing gross profit and additional company-owned stores. Canadian operations also contributed to the increased gross profit due to a full year of operation. Warehouse and distribution expenses increased $2.6 million or 7.2% due to the operation of one additional domestic facility and two Canadian facilities in 1997. The replacement of an existing facility also contributed to the increase, partially offset by increased logistic revenues. Selling, general and administrative expenses increased $4.6 million or 6.7% due to increased data processing costs and additional costs for a full year of Canadian operations. Excluding Canadian operations, selling, general and administrative expenses increased 4.8% and decreased slightly as a percent of sales resulting from continued cost containment and re-engineering efforts. Retail success and development expenses increased $3.9 million or 18.2% due to increased new business development costs, reduced retail systems income and costs associated with additional company-owned stores. Increases in this category are directly related to retail support of the Ace retailer as the Company continues to make investments in our dealer base. Paint Division sales increased 5.0% to $108.3 million. As a separate division of the Company, the Paint Division produced net manufacturing profits of $11.3 million in 1997 vs. $8.3 million in 1996. The increased net manufacturing profit results from the 5.0% sales increase and resulting gross margin and improved utilization of the Company's second facility. Paint is the only product manufactured by the Company. As discussed on page 9, patronage dividends are calculated separately for paint sales and increased to 10.31% in 1997 vs. 7.98% in 1996. Interest expense increased $2.9 million due to increased borrowings for the addition of a new facility in 1996 and 1997 and additional dealer dating programs. Other income increased due to increased past due service charges and reduced losses from the sale of property and equipment. Income taxes increased $792,000 due to improved profitability of the Company's non-patronage operations. Impact of New Accounting Standards In June, 1998, the FASB issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities," which establishes accounting and reporting for derivative instruments and hedging activities. The Company is required to comply with SFAS No. 133 in fiscal year 2000. The Company has not evaluated the impact of SFAS No. 133 on the consolidated financial statements. 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 Our directors and executive officers are: Position(s) Currently Held and Business Experience Name Age (for the past 5 years) ---- --- -------------------------- Jennifer C. Anderson 48 Director since June 6, 1994; term expires 2000; President of Davis Lumber and Ace Hardware, Inc., Davis, California since November, 1985. Eric R. Bibens II 42 Director since June 2, 1997; term expires 2000; President of Bibens Home Center, Inc., Springfield, Vermont since 1983. Michael C. Bodzewski 48 Vice President - Sales and Marketing effective October, 1998; Vice President - Merchandising effective June, 1990. Lori L. Bossmann 38 Vice President-Controller effective September, 1997; Controller effective January, 1994. Lawrence R. Bowman 52 Director since February 4, 1991; term expires 2001; President of Owenhouse Hardware Co., Inc., Bozeman, Montana since February, 1996 and Vice President of that company from March, 1988 until February, 1996. James T. Glenn 39 Director since June 3, 1996; term expires 1999; President of Ace Hardware of Chattanooga, Chattanooga, Tennessee since January, 1990. Ray A. Griffith 45 Vice President, Merchandising effective October, 1998; Vice President - Retail Development and Marketing effective September, 1997; Director - Retail Operations, Western Division effective September, 1994; from July, 1993-April, 1994, President and Chief Executive Officer of Servistar/Coast to Coast Corporation. Daniel L. Gust 49 Director since June 1, 1998; term expires 2001; President of Garden Acres Ace Hardware, Longmont, Colorado since January, 1991. Position(s) Currently Held and Business Experience Name Age (for the past 5 years) ---- --- -------------------------- D. William Hagan 41 Director since June 2, 1997; term expires 2000; President of Hagan Ace Hardware, Orange Park, Florida since February, 1980. David F. Hodnik 51 President and Chief Executive Officer effective January 1, 1996; President and Chief Operating Officer effective January 1, 1995; Executive Vice President and Chief Operating Officer effective January, 1994. Paul M. Ingevaldson 53 Senior Vice President - International and Technology effective September, 1997; Vice President - Corporate Strategy and International Business effective September, 1992. Mark Jeronimus 50 Director since June 3, 1991; term expires 2000; President of Duluth Hardware, Inc., Duluth, Minnesota since February, 1984. Howard J. Jung 51 Chairman of the Board and Director since June, 1998; term expires 2001; Vice President of Ace Hardware Stores, Inc., Raleigh, North Carolina since June, 1997. Rita D. Kahle 42 Senior Vice President - Wholesale effective September, 1997; Vice President - Finance effective January, 1994. John E. Kingrey 55 Director since May 17, 1992; term expires 1999; President of WK&K Corp., Wimberley, Texas since May, 1972. David W. League 59 Vice President-General Counsel and Secretary effective June, 1990. William A. Loftus 60 Executive Vice President - Retail effective September, 1997; Senior Vice President - Retail Operations and Marketing effective October, 1994; Senior Vice President - Marketing and Advertising effective September, 1992. David F. Myer 53 Vice President - Retail Support effective September, 1997; Vice President - Retail Support and New Business effective October, 1994; Vice President - Retail Support effective August, 1992. Fred J. Neer 59 Vice President - Human Resources effective April, 1989. Mario R. Nathusius 55 Director since June 1, 1998; term expires 2001; President of Cemaco S.A. Guatemala City, Guatemala since March, 1978. Roger E. Peterson 61 Director since June 5, 1995; term expires 2001; Chief Executive Officer effective January 1, 1995. Donald L. Schuman 60 Vice President - Information Technology effective June, 1990. Position(s) Currently Held and Business Experience Name Age (for the past 5 years) ---- --- -------------------------- Jon R. Weiss 63 Director since June 4, 1990; term expires 1999; President of Jon W. Weiss Hardware Company, Glenview, Illinois since June, 1956. Our By-laws provide that our Board shall have between 9 and 12 directors. A minimum of 9 directors must be dealer directors. A maximum of two directors may be non-dealer directors. Non-dealer directors cannot exceed 25% of the total number of directors in office at any one time. Non-dealer directors may (but do not have to be) shareholders of ours who are in the retail hardware business. Our By-laws provide for three classes of directors who are to be elected for staggered 3-year terms. Our By-laws also provide that no one can serve as a dealer director unless that person is an owner, executive officer, general partner or general manager of a retail business organization that is a shareholder of ours. Regional dealer directors are elected from geographic regions of the United States. The Board under Article IV, Section 1 of our By-laws, determines these regions. (See Appendix A). If the Board finds that regional dealer directors represent all regions, then dealer directors at large may be elected, so long as the maximum number of directors allowed under our By-laws is not exceeded. A geographic breakdown of our current regions for the election of directors at our 1999 annual stockholders meeting to be held on June 7, 1999 appears below: Region 1 - Maine, New Hampshire, Vermont, Massachusetts, Connecticut, Rhode Island, New York, Pennsylvania, New Jersey; Region 2 - Delaware, Maryland, Virginia, West Virginia, Kentucky, Tennessee, North Carolina, South Carolina, District of Columbia, Ohio; Region 3 - Alabama, Mississippi, Georgia, Florida; Region 4 - Indiana, Illinois, Michigan, Wisconsin; Region 5 - Colorado, Idaho, Iowa, Kansas, Minnesota, Missouri, Montana, Nebraska, North Dakota, South Dakota, Utah, Wyoming; Region 6 - Arkansas, Louisiana, Oklahoma, Texas, New Mexico, Arizona; Region 7 - Hawaii, California, Nevada, Oregon, Washington, Alaska Under the procedure required by our By-laws, the following director has been selected as a nominee for reelection as a dealer director at the 1999 annual stockholders meeting: Nominee Age Class Region Term - ------- --- ----- ------ ---- James T. Glenn 39 Second 2 3 years Jon Weiss and John Kingrey are not eligible for reelection as directors beginning in 1999. The persons named below have been selected as nominees for election to the Board for the first time at the 1999 annual meeting as a dealer director of the class, from the region and for the term indicated: Nominee Age Class Region Term - ------- --- ----- ------ ---- Richard F. Baalmann, Jr. 39 Second 4 3 years Richard W. Stine 54 Second 6 3 years Non-dealer directors and dealer directors at large are not elected from particular geographic regions. Article IV of our By-laws has information about the qualifications for membership on the Board of Directors, the terms of directors, the limitations on the total period of time that a director may hold office, the procedure for Nominating Committees to select candidates and nominees for election to the Board of Directors, and the procedure for filling vacancies on the Board if one occurs during an unexpired term. INDEMNIFICATION OBLIGATIONS OF COMPANY AND S.E.C. POSITION ON SECURITIES ACT INDEMNIFICATION Under Article EIGHTH (b) of our restated Certificate of Incorporation, and Article XV, Section 1 of our By-laws, we must indemnify people who serve as our directors, officers, employees or agents 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] that they reasonably incur or suffer in connection with any action, suit or proceeding (whether civil, criminal, administrative or investigative) that is brought or threatened against them because of their service in any of these capacities on our behalf or at our request. The same section of our restated Certificate of Incorporation also permits litigation expenses to be advanced to these people without the specific approval of the Board of Directors under certain circumstances. Also, Article EIGHTH (a) of our restated Certificate of Incorporation provides that a person who serves as our director will not be personally liable either to us or to our stockholders for money damages arising solely out of that person'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. This indemnification would cover proceedings under the federal Securities Act of 1933. However, we have been advised that in the opinion of the Securities and Exchange Commission this type of indemnification is against public policy as expressed in the federal Securities Act of 1933 and is therefore unenforceable. If a claim for indemnification (other than for our payment of expenses of a director, officer or controlling person in the successful defense of any action, suit or proceeding) is made by a director, officer or controlling person in connection with the securities being offered by this Prospectus, (unless in the opinion of our legal counsel the matter has been settled by controlling precedent), we will submit the question of whether our indemnification would be against public policy under the Act to an appropriate court so that the issue can be finally determined. We have not authorized any dealer, salesman, or any other person to give ACE HARDWARE CORPORATION any information or make any representations other than those contained in this Prospectus in connection with this offering. This Prospectus is not an offer to sell, or a solicitation of an offer to buy, to any person in any state where it is unlawful to make that type of -------Shares of Class A solicitation. The delivery of this (Voting) Stock Prospectus at any time does not imply $1,000 par value that there has been no change in our Company's affairs afterward. In Florida the securities covered by -------Shares of Class C this Prospectus are being offered under (Non-voting) Stock a limited offering exemption which $100 par value allows Florida purchasers to cancel their purchases of this stock within 3 days after making any payment on account of the purchase price. TABLE OF CONTENTS ---------- Item Page Prospectus ---- ---- ---------- Available Information 2 Reports to Security Holders 2 Factors to be Considered 2 Summary 3 Use of Proceeds 6 Distribution Plan and Offering Terms 6 Dated: Description of Capital Stock 8 Opinions of Experts 12 The Company's Business 12 Properties 27 Index to Consolidated Financial Statements 29 Independant Auditors' Report 30 Consolidated Financial Statements 31 Notes to Consolidated Financial Statements 36 Management's Discussion and Analysis of Financial Condition and Results of Operations 46 Management 48 Indemnification Obligations of Company and S.E.C. Position on Securities Act Indemnification 51 Appendix A--By-laws of Ace Hardware Corporation A-1 APPENDIX A BY-LAWS OF ACE HARDWARE CORPORATION (As Amended through August 19, 1997) 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 thereat 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 and one non-dealer director elected for 3-year terms at the annual meeting of stockholders held in 1995, plus one non-dealer director position for a three-year term to be filled at the 1998 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. However, notwithstanding the foregoing provisions one director and one former director who would not otherwise be eligible for election in 1998 may be elected at the annual meeting of stockholders to be held in 1998, each for one additional three-year term. 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 the 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 anycase 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 per cent (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 per cent (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 per cent (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 per cent (50%) or more of its capital stock (if incorporated) or fifty per cent (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 ) 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 per cent (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 per cent (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 per cent (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. Under Section 145 of the General Corporation Law of the State of Delaware, where we are incorporated, Article XV of our By-Laws (see Appendix A to the Prospectus which is a part of this Registration Statement and is included by reference) provides for us to indemnify our directors, officers, employees or agents. The main provisions of this By-law obligate us to indemnify these persons against expenses (including attorneys' fees) that they actually and reasonably incur in connection with their successful defense of certain proceedings. These proceedings include any action, suit or proceeding (whether civil, criminal, administrative or investigative) that are instituted against them because they are (or were) one of our officers, directors, employees or agents. This By-law also authorizes us to indemnify these people for the amount of any judgment, fine or settlement payments they incur, along with expenses and attorneyss fees, in connection the proceedings described above if certain circumstances occur. These circumstances are that a majority of disinterested directors on our Board of Directors must vote to find that the person being indemnified acted in good faith and in a manner he reasonably believed to be in our best interest. Richard Kaup, the late Virgil Poss, and Antone Salel, were the Trustees of the Ace Dealers' Perpetuation Fund. This fund was terminated on November 30, 1976. As of that date, all of the assets of that fund were transferred to us and we then became responsible for all obligations and liabilities of the Trustees of that fund. We also agreed to indemnify the Trustees named above for any of their activities as Trustees under the terms stated below. These terms were included in the following resolution adopted by the unanimous vote of our Board of Directors 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". However, we have been advised that in the opinion of the Securities and Exchange Commission this type of indemnification is against public policy as expressed in the federal Securities Act of 1933 and is, therefore, unenforceable. If a claim for indemnification (other than for our payment of expenses of a director, officer or controlling person in the successful defense of any action, suit or proceeding) is made by a director, officer or controlling person in connection with the securities being offered by this Prospectus, (unless in the opinion of our legal counsel the matter has been settled by controlling precedent), we will submit the question of whether our indemnification would be against public policy under the Act to an appropriate court so that the issue can be finally determined. We also maintain Directors and Officers Liability coverage for limits which we believe are reasonable and appropriate for our exposure. Coverage is placed with insurers who are rated "A" by A.M. Best's rating service. The coverage is periodically reviewed by our broker regarding the adequacy of our limits and coverage. Item 16. Exhibits (a) Exhibits: Exhibit No. Exhibit --- ------- 1 No exhibit. 2 No exhibit. 3-A Copy of 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 (Reg-istration No. 2-55860) on March 30, 1976 and incorporated herein by reference. 3-B By-laws of the Registrant as amended through August 19, 1997 (included as Appendix A to the Prospectus constituting a part of this Post-Effective Amendment No. 4 to the Registrant's Form S-2 Registration Statement). 3-C Copy of Certificate of Amendment to the restated Certificate of Incorporation of the Registrant dated May 19, 1976 filed as Exhibit 3-D to Amendment No. 1 to the Registrant's Form S-1 Registration Statement (Registration No. 2-55860) on June 10, 1976 and incorporated herein by reference. 3-D Copy of Certificate of Amendment to the restated Certificate of Incorporation of the Registrant dated May 21, 1979 filed as Exhibit 3-F to Amendment No. 1 to the Registrant's Form S-1 Registration Statement (Registration No. 2-63880) on May 23, 1979 and incorporated herein by reference. 3-E Copy of Certificate of Amendment to the restated Certificate of Incorporation of the Registrant dated June 7, 1982 filed as Exhibit 3-G to the Registrant's Form S-1 Registration Statement (Registration No. 2-82460) on March 16, 1983 and incorporated herein by reference. 3-F Copy of 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 herein by reference. 3-G Copy of 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. 3-H Copy of Certificate of Amendment to the Restated Certificate of Incorporation of the Registrant dated June 3, 1996, filed as Exhibit 4-H to the Post-Effective Amendment No. 2 to the Registrant's Form S-2 Registration Statement (Registration No. 33-58191) on or about March 12, 1997 and incorporated herein by reference. 4-A Specimen copy of Class B stock certificate as revised as of November, 1984, filed as Exhibit 4-A to Post-Effective Amendment No. 2 to the Registrant's Form S-1 Registration Statement (Registration No. 2-82460) on March 15, 1985 and incorporated herein by reference. 4-B Specimen copy of Patronage Refund Certificate as revised in 1988 filed as Exhibit 4-B to Post-Effective Amendment No. 2 to the Registrant's Form S-1 Registration Statement (Registration No. 33-4299) on March 29, 1988 and incorporated herein by reference. Exhibit No. Exhibit --- ------- 4-C Specimen copy of Class A stock certificate as revised in 1987 filed as Exhibit 4-C to Post-Effective Amendment No. 2 to the Registrant's Form S-1 Registration Statement (Registration No. 33-4299) on March 29, 1988 and incorporated herein by reference. 4-D Specimen copy of Class C stock certificate filed as Exhibit 4-I to the Registrant's Form S-1 Registration Statement (Registration No. 2-82460) on March 16, 1983 and incorporated herein by reference. 4-E Copy of current standard form of Subscription for Capital Stock Agreement to be used for dealers to subscribe for shares of the Registrant's stock in conjunction with new membership agreements submitted to the Registrant filed as Exhibit 4-L to Post-Effective Amendment No. 2 to the Registrant's Form S-2 Registration Statement (Registration No. 33-46449) on March 23, 1994 and incorporated herein by reference. 4-F Copy of plan for the distribution of patronage dividends with respect to purchases of merchandise made from the Registrant on and after January 1, 1998, adopted by the Board of Directors of the Registrant. 5 (a) Opinion of David W. League, Vice President, General Counsel of the Registrant, as to legality of securities being registered. (b) 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(a) 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 attributted to him under the sub-heading "Federal Income Tax Status of Class A and Class C Shares" and sub-heading "Federal Income Tax Treatment of Patronage Dividends" in the Prospectus constituting a part of this Post-Effective Amendment No. 4 to the Registrant's Form S-2 Registration Statement. 9 No Exhibit. 10-A Copy of Ace Hardware Corporation Retirement Benefits Replacement Plan Restated and Adopted December 7, 1993 filed as Exhibit 10-A to Post-Effective Amendment No. 3 to the Registrantis Form S-2 Registration Statement (Registration No. 33-58191) on or about March 18, 1998 and incorporated herein by reference. 10-B Copy of First Amendment to Restated Ace Hardware Corporation Retirement Benefits Replacement Plan adopted on August 19, 1997 filed as Exhibit 10-B to Post-Effective Amendment No. 3 to the Registrant's Form S-2 Registration Statement (Registration No. 33-58191) on or about March 18, 1998 and incorporated herein by reference. 10-C Copy of First Amendment to Ace Hardware Corporation Deferred Compensation Plan adopted on August 19, 1997 filed as Exhibit 10-C to Post-Effective Amendment No. 3 to the Registrant's Form S-2 Registration Statement (Registration No. 33-58191) on or about March 18, 1998 and incorporated herein by reference. Exhibit No. Exhibit --- ------- 10-D Copy of Restated PREP Plan (formerly known as Executive Supplemental Benefit Plans) adopted August 19, 1997 filed as Exhibit 10-D to Post-Effective Amendment No. 3 to the Registrant's Form S-2 Registration Statement (Registration No. 33-58191) on or about March 18, 1998 and incorporated herein by reference. 10-E Copy of the Ace Hardware Corporation Restated Officer Incentive Plan effective January 1, 1999. 10-F Copy of Second Modification of Amended and Restated Note Purchase and Private Shelf Agreement dated as of August 23, 1996, as amended by the First Modification of Amended and Restated Purchase and Private Shelf Agreement dated as of April 2, 1997, with The Prudential Insurance Company of America filed as Exhibit 10-F to Post-Effective Amendment No. 3 to the Registrant's Form S-2 Registration Statement (Registration No. 33-58191) on or about March 18, 1998 and incorporated herein by reference. 10-G Copy of Participation Agreement with PNC Commercial Corp. dated December 17, 1997 establishing a $10,000,000 discretionary leasing facility for the purchase of land and construction of retail hardware stores filed as Exhibit 10-G to Post-Effective Amendment No. 3 to the Registrant's Form S-2 Registration Statement (Registration No. 33-58191) on or about March 18, 1998 and incorporated herein by reference. 10-H Copy of Form of Executive Officer Employment Agreement effective January 1, 1996, filed as Exhibit 10-a-17 to Post-Effective Amendment No. 1 to the Registrant's Form S-2 Registration Statement (Registration No. 33-58191) on or about March 11, 1996 and incorporated herein by reference. 10-I Copy of Note Purchase and Private Shelf Agreement with The Prudential Insurance Company of America dated September 27, 1991 securing 8.74% Senior Series A Notes in the principal sum of $20,000,000 with a maturity date of July 1, 2003 filed as Exhibit 10-A-q to the Registrant's Form S-2 Registration Statement (Registration No. 33-46449) on March 23, 1992 and incorporated herein by reference. 10-J Copy of current standard form of Ace Hardware Corporation International Franchise Agreement. 10-K Copy of current standard form of Ace Hardware Membership Agreement filed as Exhibit 10-P to Pre-Effective Amendment No. 2 to the Registrant's Form S-2 Registration Statement (Registration No. 33-58191) on or about April 26, 1995 and incorporated herein by reference. 10-L Copy of 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. Exhibit No. Exhibit --- ------- 10-M Copy of 6.47% Senior Series A notes in the aggregate principal sum of $30,000,000 issued September 22, 1993 with a maturity date of June 22, 2008, and $20,000,000 Private Shelf Facility, pursuant to Note Purchase and Private Shelf Agreement with the Prudential Insurance Company of America dated as of September 22, 1993 filed as Exhibit 10-R to Post-Effective Amendment No. 2 to the Registrant's Form S-2 Registration Statement (Registration No. 33-46449) on March 23, 1994 and incorporated herein by reference. 10-N Copy of Lease dated March 24, 1997 for print shop facility of Registrant in Downers Grove, Illinois filed as Exhibit 10-N to Post-Effective Amendment No. 3 to the Registrant's Form S-2 Registration Statement (Registration No. 33-58191) on or about March 18, 1998 and incorporated herein by reference. 10-O Copy of Lease dated September 30, 1992 for general offices of the Registrant in Oak Brook, Illinois filed as Exhibit 10-a-u to the Post-Effective Amendment No.1 to the Registrant's Form S-2 Registration Statement (Registration No. 33-46449) on March 22, 1993 and incorporated herein by reference. 10-P Copy of Deed of Lease with Arundel II L.L.C. dated as of January 30, 1998 for the Registrant's redistribution center in Hanover, Maryland. 10-Q Copy of Ace Hardware Corporation Deferred Compensation Plan effective January 1, 1994 filed as Exhibit 10-X to Post-Effective Amendment No. 2 to the Registrant's Form S-2 Registration Statement (Registration No. 33-46449) on March 23, 1994 and incorporated herein by reference. 10-R 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-S Copy of Lease dated May 4, 1994 for freight consolidation center of the Registrant in Chicago, Illinois filed as Exhibit 10-Z to the Registrant's Form S-2 Registration Statement (Registration No. 33-58191) on or about March 23, 1995 and incorporated herein by reference. 10-T Copy of Long-Term Incentive Compensation Deferral Option Plan of the Registrant effective January 1, 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-U Copy of Ace Hardware Corporation Directors' Deferral Option Plan Amended and Restated as of January 1, 1997. 10-V 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-W Copy of Lease dated July 28, 1995 between A.H.C. Store Development Corp. and Tri-R Corporation for retail hardware store premises located in Yorkville, Illinois, filed as Exhibit 10-a-11 to Post-Effective Amendment No. 1 to the Registrant's Form S-2 Registration Statement (Registration No. 33-58191) on or about March 11, 1996 and incorporated herein by reference. Exhibit No. Exhibit --- ------- 10-X Copy of Lease dated October 31, 1995 between Brant Trade & Industrial Park, Inc. and Ace Hardware Canada Limited for warehouse space in Brantford, Ontario, Canada, filed as Exhibit 10-a-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-Y Copy of Lease dated November 27, 1995 between 674573 Ontario Limited and Ace Hardware Canada Limited for general office space in Markham, Ontario, Canada, filed as Exhibit 10-a-13 to Post-Effective Amendment No. 1 to the Registrant's Form S-2 Registration Statement (Registration No. 33-58191) on or about March 11, 1996 and incorporated herein by reference. 10-Z Copy of Executive Healthcare Plan adopted by the Board of Directors of the Registrant on August 25, 1998. 10-a-1 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-2 Copy of Ace Hardware Corporation Executive Benefit Security Trust Agreement effective July 19, 1995, filed as Exhibit 10-a-18 to Post-Effective Amendment No. 1 to the Registrant's Form S-2 Registration Statement (Registration No.33-58191) on or about March 11, 1996 and incorporated herein by reference. 10-a-3 Copy of current standard form License Agreement for International Retail Merchants adopted in 1996 filed as Exhibit 10-a-12 to Post-Effective Amendment No. 2 to the Registrant's Form S-2 Registration Statement (Registration No. 33-58191) on or about March 12, 1997 and incorporated herein by reference. 10-a-4 Copy of Lease Agreement dated as of September 1, 1996 for the Registrant's project facility in Wilton, New York filed as Exhibit 10-a-13 to Post-Effective Amendment No. 2 to the Registrant's Form S-2 Registration Statement (Registration No. 33-58191) on or about March 12, 1997 and incorporated herein by reference. 10-a-5 Copy of 6.47% Series A Senior Notes in the aggregate principal amount of $30,000,000 issued August 23, 1996 with a maturity date of June 22, 2008, and $70,000,000 Private Shelf Facility, pursuant to Amended and Restated Note Purchase and Private Shelf Agreement with the Prudential Insurance Company dated August 23, 1996 filed as Exhibit 10-a-14 to Post-Effective Amendment No. 2 to the Registrant's Form S-2 Registration Statement (Registration No. 33-58191) on or about March 12, 1997 and incorporated herein by reference. 10-a-6 Copy of Second Amendment to the Restated Ace Hardware Corporation Retirement Benefits Replacement Plan adopted on December 8, 1998 and effective January 1, 1999. 11 No exhibit. 12 No exhibit. 13 No exhibit. 15 No exhibit. Exhibit No. Exhibit --- ------- 16 No exhibit. 23 (a) Consent of KPMG LLP, dated March 12, 1999. (b) Consent of Counsel, Legal Opinion Exhibit 5(a). 24 Powers of Attorney. 25 No exhibit. 26 No exhibit. 27 Financial Data Schedule. 99 No exhibit. Item 17. Undertakings. As the Registrant signing below, we undertake: (a) Subject to Section 15(d) of the Securities Exchange Act of 1934, to file with the Securities and Exchange Commission any supplementary or periodic information, documents and reports as any rule or regulation of the Commission that is adopted under the authority conferred in that section requires. (b) To file with the Securities and Exchange Commission, during any period in which offers or sales are being made under this registration, a post-effective amendment to this 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 its most recent post-effective amendment) which, individually or together, represent a fundamental change in the information set forth in the Registration Statement; (iii) to include any material information about the plan of distribution that was not previously disclosed in the Registration Statement or any material change to this information in the Registration Statement, including, for example, any addition or deletion of a managing underwriter. (c) That, for the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment to this Registration Statement shall be deemed to be a new Registration Statement relating to the securities being offered in it, and the offering of those securities at that time shall be deemed to be the initial bonafide offering of them; (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 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. 4 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 15, 1999. ACE HARDWARE CORPORATION By HOWARD J. JUNG ----------------------------- Howard J. Jung Chairman of the Board and Director Pursuant to the Securities 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 HOWARD J. JUNG Chairman of the Board March 15, 1999 - ------------------------------ Howard J. Jung and Director DAVID F. HODNIK President and Chief March 15, 1999 - ------------------------------ David F. Hodnik Executive Officer LORI L. BOSSMANN Vice President-Controller March 15, 1999 - ------------------------------ Lori L. Bossmann (Principal Financial and Accounting Officer) Jennifer C. Anderson, Eric R. Bibens Directors II, Lawrence R. Bowman, James T. Glenn, Daniel L. Gust, D. William Hagan, Mark Jeronimus, John E. Kingrey, Mario R. Nathusius, Roger E. Peterson, and Jon R. Weiss *By DAVID F. HODNIK ------------------------------- David F. Hodnik *By LORI L. BOSSMANN March 15, 1999 ------------------------------- Lori L. Bossmann *Attorneys-in-fact INDEX TO EXHIBITS FILED TO THE REGISTRATION STATEMENT ON FORM S-2 OF ACE HARDWARE CORPORATION Exhibit No. Exhibit --- ------- 3-B By-laws of the Registrant as amended through August 19, 1997 (included as Appendix A to the Prospectus constituting a part of this Post-Effective Amendment No. 4 to the Registrant's Form S-2 Registration Statement). 4-F Copy of plan for the distribution of patronage dividends with respect to purchases of merchandise made from the Registrant from January 1, 1998 adopted by the Board of Directors of the Registrant. 5 (a) Opinion of David W. League, Vice President and General Counsel of the Registrant as to legality of securities being registered. 10-E Copy of the Ace Hardware Corporation Restated Officer Incentive Plan effective January 1, 1999. 10-J Copy of current standard form of Ace Hardware Corporation International Franchise Agreement. 10-P Copy of Deed of Lease with Arundel II L.L.C. dated as of January 30, 1998 for the Registrant's redistribution center in Hanover, Maryland. 10-U Copy of Ace Hardware Corporation Directors' Deferral Option Plan Amended and Restated as of January 1, 1997. 10-Z Copy of Executive Healthcare Plan adopted by the Board of Directors of the Registrant on August 25, 1998. 10-a-6 Copy of Second Amendment to the Restated Ace Hardware Corporation Retirement Benefits Replacement Plan adopted on December 8, 1998 and effective January 1, 1999. 23 (a) Consent of KPMG LLP, dated March 12, 1999. (b) Consent of Counsel, Legal Opinion Exhibit 5(a). 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. 4 to the Form S-2 Registration Statement of Ace Hardware Corporation. EX-5 2 GENERAL COUNSEL OPINION LETTER March 15, 1999 To the Board of Directors Ace Hardware Corporation 2200 Kensington Court Oak Brook, Illinois 60521 Re: Total Shares Offered By Prospectus 904 Class A 31,289 Class C Gentlemen: This opinion relates to the legality of the 904 shares of Class A voting stock (par value $1,000 per share) and 31,289 shares of Class C nonvoting stock (par value $100 per share) of Ace Hardware Corporation (the "Company"), a Delaware corporation, to be registered with the Securities and Exchange Commission. Of the foregoing shares, 904 unsold shares of Class A stock and 31,289 of Class C stock were previously registered under Registration Statement No. 33-58191. 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 this Post-Effective Amendment No. 4 to the Form S-2 Registration Statement of Ace Hardware Corporation 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 Alabama, Arizona, Arkansas, California, Colorado, Connecticut, Florida, Georgia, Idaho, Illinois, Kentucky, Maryland, Mississippi, Missouri, Nebraska, New York, North Carolina, Ohio, Oregon, South Carolina, 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. 4 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 2,592 shares are presently issued and outstanding. I have examined the restated Certificate of Incorporation, as amended, 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 an 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), 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. 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 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 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 prices 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 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. Since Article Fourth (g) and Article Fourth (h) of the restated Certificate of Incorporation of the Company provide (i) 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 to 20 times the per share purchase or redemption price last established by the Board of Directors with respect to purchases or redemptions by the Company of its Class C Stock, (ii) that the purchase or redemption price to be paid by the Company for its Class C Stock cannot be less than the par value thereof, and (iii) that the purchase or redemption price to be paid by the Company for its Class B Stock shall in no event be less than 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 which provides, "The holders of the preferred or special stock of any class or of any series thereof shall be entitled to such rights upon the dissolution of, or upon the distribution of any assets of, the corporation as shall be stated in the Certificate of Incorporation or in the resolution or resolutions providing for the issue of such stock adopted by the Board of Directors as hereinabove provided." 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 no holders of any securities 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. 7-8 and "Federal Income Tax Treatment of Patronage Dividends," pp. 24-25 of the Prospectus that is part of the aforesaid Post-Effective Amendment No. 4 to Registration 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. 4 to Registration Statement No. 33-58191, and I consent to the filing of this opinion with said 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 above- referenced 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 3 RESTATED OFFICER INCENTIVE PLAN ACE HARDWARE CORPORATION RESTATED OFFICER INCENTIVE PLAN (Effective January 1, 1999) 1. ESTABLISHMENT AND PURPOSE The Officer Incentive Plan is hereby amended and restated effective January 1, 1999. Ace Hardware Corporation (the Corporation) has established this officer incentive program to provide officers and key employees with financial motivation to act in the best interests of the Corporation. The program consists of a Short-Term Incentive Plan (the ST Plan) and a Value Added Long-Term Incentive Plan (the VA Plan). More specifically, the goals of the program are to: * Provide award opportunities which balance short- and long-term performance orientations, * Provide a strong retention vehicle, * Provide significant compensation opportunities in return for outstanding performance, * Reward performance measured over both short- and long-term performance periods, * Measure the elements of value which participants can impact, and * Provide a performance component for capital accumulation through the long-term incentive compensation deferral option plan. 2. EFFECTIVE DATES The ST Plan is effective as of fiscal year 1999. The VA Plan is effective for the three-year period Fiscal Year 1997 through Fiscal Year 1999. It will continue in effect for each subsequent rolling three-year period until and unless terminated by the Board of Directors (the Board). 3. ELIGIBILITY AND PARTICIPATION Participants in the Program shall include those officers and key employees of the Corporation who meet the following eligibility criteria: * Have an impact on both short- and long-term results, * Are in positions with long-result cycle timeframes, and * Manage distinct functions or business units. Based on these characteristics, the Program will apply to all officers and key employees, as designated on Exhibit A. The President, may at any time recommend to the Board the addition or deletion of Plan Participants. The Board will have final authority to approve or disapprove such recommendations. Existing Participants' award opportunities will not be positively or negatively affected by the addition or deletion of Participants. EXHIBIT B 4. DEFINITIONS OF KEY TERMS The key terms of the Plan are defined in this section: a. "Participant" means any officer or key employee designated to participate in the Program. b. "Performance Period" means one fiscal year for the ST Plan and a period of three consecutive fiscal years for the VA Plan. c. "Base Salary" as relates to the ST Plan is the base salary of Participant's compensation, before any deferrals and excluding any amounts paid under the VA Plan. Base Salary as relates to the VA Plan is a cumulative base salary of Participant's compensation for a three-year Performance Period, before any deferrals and excluding any amounts paid pursuant to the ST Plan. d. "Total Actual Gross Patronage Dividend" is a dividend dollar amount derived from actual Retail Support Center (RSC) sales combined with actual Lumber and Building Material (LBM) sales including Ace Canada RSC sales and LBM sales. It specifically includes the following components: - Total Patronage Dividend, - International or Other Non-Patronage Income or Loss, - Paint International Non-Patronage Income or Loss, - Stop Handling Charge Subsidy, - Stop Freight Subsidy, - LTL Plus HC Subsidy, - All Non-Patronage Business Income or Loss, - Other Significant Nonrecurring Items. e. "Total Gross Patronage Dividend Threshold" is the minimum acceptable dividend dollar amount derived from actual RSC sales and actual LBM sales (i.e., actual dividends below this level do not warrant a VA Plan payout). f. "Permanent Sharing Ratio" is a constant percent to be applied to the difference between the Total Actual Gross Patronage Dividend and the Total Gross Patronage Dividend Threshold for purposes of determining the annual contribution/deduction to the VA Plan dollar pool. g. "Participant Sharing Ratio" is a unique percent assigned to each Participant which indicates how the total VA Plan dollar pool will be distributed. Each Participant's ratio will be determined by his/her Base Salary divided by the sum of all Base Salaries. All individual Participant Sharing Ratios will total 100 percent for any given VA Plan Performance Period. 2 h. "Participant Account" is a record of the cumulative annual adjustments of awards under the VA Plan allocated to a Participant. i. "Retirement", for the purposes of this Pro ram only, shall be defined as the first day of the month following the conclusion of a Participant's active employment on or after the Participant attains either (1) age 55 with 10 years of service, (2) age 60 with 5 years of service or (3) age 65. j. "Disability" shall be defined as when a Participant becomes totally disabled as described in the Corporation's Long-term Disability Plan. 5. PROGRAM ADMINISTRATION Compensation and Human Resources Committee: The Board Compensation and Human Resources Committee (the Committee) shall be responsible for overall Plan administration. The Committee is authorized to interpret the Plan, to prescribe, amend, and rescind rules and regulations relating to the Plan, to provide for conditions and assurances deemed necessary or advisable to protect the interests of the Corporation, and to make all other determinations necessary or advisable for the administration of the Plan, but only to the extent not contrary to the express provisions of the Plan. The Committee may request the assistance of the Board in making any determination under the Plan or in carrying out its duties hereunder. The Committee may also delegate selected responsibilities to Corporation officers to facilitate day-to-day Plan administration. Determinations, interpretations, or other actions made or taken by the Committee pursuant to the provisions of the Plan shall be final, binding and conclusive for all purposes and upon all persons whomsoever. Amendment, Modification, and Termination of the Plan: The Board, or if designated the Committee, may at any time terminate, and from time to time may amend or modify the Plan to meet the best interests of the Corporation (e.g., to modify the incentive pool calculation formula inlight of a major acquisition or merger). Amendments to the Plan will only be made inlight of extraordinary events, under which a failure to amend would result in a performance award not consistent with the stated purpose of the Plan. 6. ST PLAN DESIGN Performance Measure: The President and/or the Reporting Officer will, on a periodic basis, develop individual and team business objectives for eligible participants. Once approved, these objectives will become the basis for assessing performance and assigning awards under the ST Plan. The President, at his discretion, may also consider other factors in assessing overall performance. Performance Period: The ST Plan is designed to operate with one-year Performance Periods. 3 Award Opportunities: The maximum award opportunity for any given Participant will be as set forth on Exhibit A. Exhibit B sets forth the multiplier matrix for the team portion of the short term goal. 7. VA PLAN DESIGN Performance Measure: Participants will share in a proportion of the value added to the Corporation over time. Each fiscal year an adjustment (contribution or deduction) will be made to an incentive fund for the VA Plan Participants based on the value added to the Corporation during the year. The value added is based on Actual Gross Patronage Dividend realized during the fiscal year over a Gross Patronage Dividend Threshold for the same fiscal year. Corporation performance (in terms of Gross Patronage Dividend) above the threshold level will result in an increase in the incentive fund based on the Permanent Sharing Ratio. Company performance below the threshold will result in a deduction from the incentive fund based on the Permanent Sharing Ratio. Following is a presentation of ratios in effect as of January 1, 1999 pertaining to the VA Plan. These ratios may be adjusted from time to time by the Board (as set forth on Exhibit A): * Gross Patronage Dividend Threshold for actual RSC sales is 5.4 percent * Gross Patronage Dividend Threshold for actual LBM sales is 0.45 percent * Permanent Sharing Ratio is 4.96 percent. A financial model which supports the VA Plan is presented in Exhibit C. Performance Period: The VA Plan is designed to operate with three-year Performance Periods, with a new Performance Period beginning each year. Award Opportunities: The Corporation's Compensation Strategy calls for a greater emphasis on rewarding long-term performance. With this in mind, the VA Plan calls for targeted award opportunities as set forth on Exhibit A. These targets are reflected in the present Permanent Sharing Ratio and will be considered in establishing Permanent Sharing Ratios for future Performance Periods. 8. ADJUSTMENTS TO THE PARTICIPANTS' VA PLAN ACCOUNTS Collectively: Adjustments to the value-added account of Participants will be made annually. The total performance adjustment for all Participants as a group will be calculated as follows: * If the Total Actual Gross Patronage Dividend exceeds the Total Gross Patronage Dividend Threshold, the total amount to be added is equal to the excess multiplied by the Permanent Sharing Ratio. 4 * If the Total Actual Gross Patronage Dividend is less than the Total Gross Patronage Dividend Threshold, the total amount to be subtracted is equal to the shortfall multiplied by the Permanent Sharing Ratio. The subtraction can either be applied to Participants' current Performance Period accounts or to their deferred nonvested award account (see Section 9). Individually: A Participant Sharing Ratio will be assigned to each VA Plan Participant based on his/her Base Salary as a percentage of the total Base Salaries for all Participants. The total funded award pool will be allocated to individual Participants based on their respective ratios. Individual accounts will be maintained on a yearly basis, and Participants will receive periodic statements detailing account value and the effect of recent financial results. 9. VA PLAN VESTING AND DISTRIBUTION Tier A Participants immediately vest in two-thirds of the calculated award at the end of each Performance Period. Of the vested amount, half will be paid in cash or deferred at employee's option within the first quarter of the subsequent Fiscal Year. The other half, at employee's option, may be invested in the Pacific Mutual or Metropolitan supplemental life insurance plans (if Participant is participating in such plans) or deferred (See Section 10). With regard to the remaining one-third award, it may be immediately deferred, but it becomes vested one year following the end of the Performance Period. For example, the non-vested award portion applicable for the 1997-1999 VA Plan will become vested as of the end of Fiscal Year 2000. Tier B Participants are immediately vested in their entire award which will be paid in cash within the first quarter of the subsequent Fiscal Year. 10. ST AND VA PLAN DEFERRAL ELECTION Prior to or during the Performance Period, a Participant may elect to defer to a future date any or all of his/her award that otherwise would be payable. Such decisions are subject to Deferral Plan provisions and shall be made prior such sums becoming earned and payable. 11. CHANGES IN EMPLOYMENT STATUS If a Plan Participant's employment terminates during a Performance Period because of death, retirement, or permanent disability, the Participant (or his/her Beneficiary) will be 100 percent vested in his/her (a) Participant's Account including any portion of an award subject to the one year deferral period for vesting, and (b) all sums accrued towards his/her Account for the next two year rolling periods. In the case of a voluntary or an involuntary termination, the Participant will forfeit (a) any portion of an award that is subject to the required one year deferral period and not vested, and (b) all sums accrued towards his/her Account for the next two year rolling periods. The Participant's Account shall be immediately payable unless otherwise deferred by the Participant (See Section 10). 5 12. CHANGES IN CONTROL Upon the occurrence of a Change in Control of the Corporation, Participants' awards for the Plans then in effect shall be calculated based on a pro rata application of the performance criteria as of the end of the date the Change of Control is effective. All awards then made, as well as any prior awards currently non-vested or in deferral, will become immediately vested with cash payments made within a 90 day period unless otherwise deferred by Participant (See Section 10). 13. WITHHOLDING PAYROLL TAXES To the extent required by the laws in effect at the time payments are made, the Corporation shall withhold from payments made hereunder any taxes required to be withheld for federal, state, or local governmental purposes. 14. MODE OF PAYMENT All payments under the Program shall be made by negotiable check or other cash equivalent. 15. BENEFICIARY DESIGNATION If a Participant dies before receiving all the distributions to which he/she is entitled, the remainder will be paid to such person as may be designated by an instrument in writing, and in a form acceptable to the Committee, executed by the Participant and delivered to the Committee during the Participant's lifetime, which designation the Participant may revoke or modify from time to time by an instrument in writing in a form acceptable to the Committee, executed by the Participant and delivered to the Committee during the Participant's lifetime. If no such designation is delivered to the Committee, or if no such designated Beneficiary is then living, then the remaining distributions shall be paid to the surviving spouse of the Participant, or in the event there is no such surviving spouse, to the estate of the Participant. 16. NON-ALIENATION A Participant shall have no fight to pledge, hypothecate, anticipate, or in any way create a lien upon any amounts payable under this Program, and no benefit payable hereunder shall be assignable in anticipation of payment either by voluntary or involuntary acts, or by operation of law. 17. NO EMPLOYMENT RIGHTS Nothing in this Program shall interfere with or limit in any way the right of the Corporation to terminate any Participant's employment at any time for any reason, nor confer upon any Participant any right to continue in the employ of the Corporation or its subsidiaries. 6 18. GOVERNING LAW This Program shall be construed in accordance with the laws of the State of Illinois. IN WITNESS WHEREOF, the Corporation has adopted this the amended and restated ACE HARDWARE CORPORATION OFFICER INCENTIVE PLAN as of December 8, 1998. ACE HARDWARE CORPORATION, A Delaware corporation By: Chairman of the Board of Directors and By: President and CEO 7 EXHIBIT A PARTICIPANTS Tier A-. David F. Hodnik (The VA Plan Only) William A. Loftus Paul M. Ingevaldson Rita D. Kahle Michael C. Bodzewski Lori L. Bossmann Ray A. Griffith David W. League David F. Myer Fred J. Neer Donald L. Schuman Tier B.- William J. Bauman (The VA Plan Only) Kenneth L. Nichols (The VA Plan Only) Daniel C. Prochaska (The VA Plan Only) Wayne E. Wiggleton (The VA Plan Only) Page 1 of 2 AWARD OPPORTUNITIES ST Plan Tiers and Participants Award Opportunities Individual Team Tier I 15% 25% Rita D. Kahle William A. Loftus Tier II 15% 20% Michael C. Bodzewski Paul M. Ingevaldson David F. Myer Tier III 15% 15% Lori L. Bossmann Ray A. Griffith David W. League Fred J. Neer Donald L. Schuman VA Plan Participant Target Award Opportunity David F. Hodnik 90% William A. Loftus 30% Paul M. Ingevaldson 30% Rita D. Kahle 30% Michael C. Bodzewski 30% Lori L. Bossmann 30% Ray A. Griffith 30% David W. League 30% David F. Myer 30% Fred J. Neer 30% Donald L. Schuman 30% New participants beginning January 1, 1999: William J. Bauman 10% Kenneth L. Nichols 10% Daniel C. Prochaska 10% Wayne E. Wiggleton 10% The VA Plan is a rolling 3 year plan. New participants beginning January 1, 1999 will have prorated payments in the first two years, a 33% payment at the end of 1999 and a 66% payment at the end of 2000. RATIOS * Gross Patronage Dividend Threshold for actual RSC sales is 5.4 percent * Gross Patronage Dividend Threshold for actual LBM sales is 0.45 percent * Permanent Sharing Ratio is 4.96 percent Page 2 of 2 EXECUTIVE SHORT-TERM INCENTIVE PLAN MULTIPLIER MATRIX - APPLIES TO TEAM PORTION OF SHORT TERM GOAL RETURN ON SALES** Wholesale 2.62% 2.67% 2.72% 2.77% 2.82% 2.87% 2.92% Sales Increase LT 4% 50% 60% 70% 100% 140% 170% 175% 6% 40% 70% 80% 110% 130% 160% 175% 8% 30% 60% 100% 120% 130% 160% 175% 10% 25% 50% 100% 125% 130% 150% 160% 12% 25% 40% 100% 130% 140% 150% 160% 14% 25% 30% 100% 140% 150% 150% 160% GT 15% 25% 25% 100% 150% 150% 150% 160% * For 1999, the target goal will be at 2.72% and for the year 2000, 2.74%. At the end of the year 2000, the plan and the return on sales goal will be re-evaluated. 1999 and 2000 BLP will be calculated Before the Paint Chip Rack subsidy. ** For return on sales component only - prorate between each goal based on actual results. No proration based on sales growth. (Proration occurs only if > 2.72% and payout would be higher with proration.) The matrix is capped at=/- a 75% payout. *** If retail sales growth is > wholesale sales growth, add 10% to subsequent year's payment. Retail sales growth % will be compiled from the Retail Profile report (from retail financial statements) run in August of each subsequent year. MULTIPLIER MATRIX CHART THAT WILL BE USED IN 1999 AND 2000 EXHIBIT B ACE HARDWARE CORPORATION 1999-2002 Long-Term Incentive Plan Review 1999-2002 Projections With New Staff Officer Participants 2000-02 1999-01 1998-00 1997-99 Cum Cum Cum Cum 2002 2001 2000 1999 1998 1997 Proj Proj Proj Proj Proj Proj Proj Proj Proj Actual Actual Total Income $ - bottom line 364,790 322,583 286,399 255,059 135,721 121,342 107,727 93,514 85,158 76,387 Total Income as a % of Sales 2.77% 2.73% 2.72% 2.68% 2.77% 2.77% 2.75% 2.66% 2.750% 2.697% % Increase in Total Income 13.1% 12.6% 12.3% 9.4% 11.85% 12.64% 15.20% 9.81% 11.5% 5.5% Total Patronage Dividend 340,530 307,347 279,246 252,842 125,077 112,891 102,562 91,894 84,790 76,158 % Increase in Patr. Div 10.8% 10.1% 10.4% 8.4% 10.8% 10.1% 11.6% 8.4% 11.3% 3.1% + Int'l Non-Patronage Income (loss) 4,164 3,115 2,825 2,713 1,797 1,351 1,016 748 1,061 904 + Ace Canada Non-Patronage Income (loss) 4,718 2,935 93 (1,745) 2,038 1,909 771 255 (933) (1,067) + Paint Int'l Non-Patronage Income (loss) 1,677 1,305 1,111 1,079 689 557 431 317 363 399 + Other Nonpatronage ** 13,701 7,881 3,124 582 6,120 4,634 2,947 300 (123) 405 + STOP Handling Charge Subsidy 90,725 82,329 74,707 69,890 32,830 30,161 27,734 24,434 22,539 22,917 + STOP / Bulletin Freight Subsidy (w/o BB) 88,871 81,561 74,974 69,352 32,144 29,543 27,184 24,834 22,956 21,562 + LTL Plus HC Subsidy 7,028 6,462 5,952 5,453 2,543 2,336 2,149 1,977 1,826 1,650 + Chip Rack Subsidy 2,112 = Total Gross Patronage Dividend (Shareholder Return) 551,414 492,935 442,032 400,166 203,238 183,382 164,794 146,871 132,479 122,928 Patronage Income on a Book basis (pretax) 551,414 492,935 442,032 400,166 203,238 183,382 164,794 146,871 132,479 122,928 % Increase in Gross Patronage Dividend 11.9% 11.5% 10.5% 8.6% 10.8% 11.3% 12.2% 10.9% 7.8% 5.7% Gross Div as a % of Total Sales Total Sales (include Ace Canada) 13,179,443 11,805,645 10,532,132 9,525,953 4,892,682 4,375,116 3,911,645 3,518,884 3,101,603 2,905,466 Total Sales (exclude Ace Canada) 12,855,199 11,516,141 10,278,733 9,295,932 4,772,148 4,267,496 3,815,555 3,433,090 3,030,088 2,832,754 % Increase in Total Sales 11.6% 12.1% 10.6% 14.8% 11.8% 11.8% 11.2% 13.5% 7.0% 4.9% RSC Sales (incl. Ace Canada) 7,725,113 7,094,885 6,488,897 5,964,986 2,083,088 2,567,919 2,354,106 2,172,860 1,961,931 1,830,195 LBM Sales (incl. Ace Canada) 2,519,748 2,165,644 1,836,721 1,613,573 973,919 832,923 712,906 619,815 504,000 489,758 Patronage Minimum (Threshold) - @ 5.40% of RSC Sales 424,881 390,219 356,889 328,074 151,367 138,668 127,122 117,334 105,944 98,831 - @ .45% of LBM Sales 11,339 9,745 8,265 7,261 4,383 3,748 3,208 2,789 2,268 2,204 Total Gross Div. Minimum 436,220 399,964 365,155 335,335 155,749 142,416 130,330 120,124 108,212 101,034 Value Added 115,194 92,971 76,877 64,831 47,489 40,966 34,464 26,747 24,267 21,894 Total Incentive - 4.96% of value added** 6,097 5,068 4,199 3,695 2,355.4 2,031.9 1,709.4 1,326.7 1,162.8 1,205.6 Incentive Earned as a % of Base Comp 39.42% 35.09% 31.95% 30.05% 42.78% 39.47% 35.53% 29.57% 29.20% 31.66% EXHIBIT C
EX-10 4 INTERNATIONAL FRANCHISE AGREEMENT Exhibit 10-J ACE HARDWARE CORPORATION INTERNATIONAL FRANCHISE AGREEMENT This Agreement is made and entered into by and between ACE HARDWARE CORPORATION, a Delaware corporation, having its general offices at 2200 Kensington Court, Oak Brook, Illinois 60521, U.S.A. (hereinafter referred to as "Company"), and: ___________________________________________________________________________ [Corporate or Partnership Name] an independent merchant having its general offices at: ___________________________________________________________________________ [Corporate or Partnership Address] (hereinafter referred to as "Franchisee") which operates a retail business outside the United States of America, its territories or possessions, at the location(s) set forth in the attached Exhibit A; WITNESSETH: In consideration of the respective undertakings and covenants herein contained, Company and Franchisee agree as follows: 1. In consideration of the franchise granted herein, Franchisee shall pay to Company a non-refundable license fee in United States Dollars of $25,000.00 upon execution of this Agreement for the first franchised store opened by Franchisee and $15,000 upon the opening of each additional franchised store opened by Franchisee. Company agrees to: (i) waive its store planning fees for Franchisee's first store; (ii) waive Ace Retail Management Institute fees for the two (2) of Franchisee's employees; (iii) provide the assistance of a Company representative to write the opening stock order for Franchisee's first store (iv) provide one (1) set of plan-o-gram manuals; and (v) assist in the preparation of a paint maket study and conduct ACE paint marketing training. 2. As of the date of acceptance by Company hereof, Company grants to Franchisee, upon and subject to the terms and conditions set forth herein, the right to purchase from Company for resale at retail only from Franchisee retail location(s) set forth on Exhibit A, such merchandise as Company regularly offers for sale, including merchandise under private labels containing the name "ACE" or "ACE Hardware". The minimum volume of merchandise that must be purchased by Franchisee from Company hereunder shall be, exclusive of all handling charges, U.S. $200,000 during the first year of this Agreement, $350,000 during the second year of this Agreement, and $500,000 during the third year of this Agreement and each year thereafter, based upon the anniversary date of this Agreement. 3. Franchisee shall pay to Company a Royalty Fee (" Royalty Fee") in an amount equal to one and one-half percent (1.5%) 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 Franchisee 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 Franchisee from customers and paid to any government authority in the Territory, which shall be the sole responsibility of Franchisee, 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, Franchisee shall be entitled to make payment in its local 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. 4. Franchisee agrees to pay all amounts shown as currently due on Company's billing statements for purchases of merchandise, supplies and services made by Franchisee with such promptness as shall enable Company to receive payment no later than the 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 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 Franchisee pursuant to Company's billing statements shall be payable in United States currency. Licensee also agrees to reimburse Company for any and all reasonable out-of-pocket expenses including, travel (at the business class rate), lodging and tax, meals, and laundry costs incurred by Company's employees in the performance of Company's obligations hereunder. 5. Franchisee 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 Franchisee from time to time. 6. All orders for merchandise, supplies and services placed by Franchisee shall be subject to acceptance or nonacceptance by Company at its corporate headquarters, now located in Oak Brook, Illinois, U.S.A. Company shall cause all items ordered by Franchisee to be shipped to International Retail Merchant's designated receiving terminal in the United States for shipment by Franchisee only to Franchisee location listed hereinabove. Title to all such merchandise and supplies shipped to Franchisee shall pass to Franchisee upon delivery to such receiving terminal. Franchisee shall be responsible for and agrees to pay to Company all costs and charges related to the delivery of such items to said terminal. 7. Franchisee 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 Franchisee by the United States Government or the government of the Country in which International Retail Merchant's place of business is located. Franchisee 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 International Retail Merchant's failure to do so. 8. At its sole discretion and notwithstanding the provisions of Paragraph 2 above, Company may limit, or restrict the quantities or types of merchandise sold to Franchisee hereunder. 9. International Retail Merchant's rights hereunder shall be non- exclusive, and Company reserves the right to sell in International Retail Merchant's Country and elsewhere such products as Company may, in its sole discretion, elect to sell, either directly or through any other distributors or dealers selected or appointed at any time by Company. Franchisee shall not be entitled to any compensation from Company by reason of, or with respect to sales made directly by Company or through any other distributor or dealer of Company. 10. Nothing herein shall be deemed in any way to limit the right of Franchisee to determine the prices or terms at which products purchased through Company shall be resold by Franchisee. It is expressly understood that Franchisee may resell such products at any prices determined by Franchisee, whether greater or lesser than any prices listed or suggested by Company. 11. Franchisee hereby agrees to comply with any and all laws, regulations and governmental orders of the United States of America, the several States, or the Country in which International Retail Merchant's business is located, which may be applicable to the sale and distribution of the products purchased by Franchisee from Company, or to the conduct of International Retail Merchant's business operations, as the case may be. Franchisee agrees to order only such merchandise as may lawfully be resold without alterations in labeling or otherwise in the Country in which International Retail Merchant'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. 12. Company shall supply Franchisee 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. 13. Franchisee shall not have authority to represent Company in International Retail Merchant's Country 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 Franchisee 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 Franchisee shall be for its own account, it being understood that Franchisee is an independent business reselling products which are purchased from Company. 14. Franchisee agrees to return no merchandise to Company without the written consent of Company first being obtained. 15. (a) Company hereby grants to Franchisee a non-exclusive license to use the service marks "ACE" and "ACE HARDWARE" (hereinafter "the Mark") in connection with the retail hardware services offered and performed by Franchisee at the location(s) set forth on Exhibit A only, and in connection with private label merchandise purchased from Company for resale from the said location(s). Such use of the Mark by Franchisee shall commence within one (1) year of the effective date of this Agreement by displaying a Company exterior store identification sign in compliance with the requirements set forth in the Company Identity Standards Manual. (b) Company does not guarantee, warrant or offer any patent or trademark protection to Franchisee on any of the products purchased by Franchisee from Company, and Company shall not be obligated or liable in any way to indemnify Franchisee 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 Franchisee or the exercise of any rights granted hereunder. (c) Franchisee agrees to use the Mark 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 Mark shall clearly and conspicuously disclose that the Mark is owned by, or used under license from Company. (d) The quality of the services in connection with which the Mark is 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. (e) In no event shall the license herein granted be construed as authorizing Franchisee to use any marks, trade names, slogans or logos of Company other than as specifically licensed hereunder. Franchisee 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. (f) Franchisee agrees not to adapt or vary the Mark 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. Franchisee also agrees to at no time use the Mark in association or conjunction with any trade name, trademark or service mark owned or registered by a competitor of Company. (g) Company expressly disclaims any and all liability to Franchisee or to any third party and Franchisee agrees to indemnify and to hold Company harmless from and against any claims, suits, losses, damages or expenses with respect to any actual or alleged invalidity of the Mark or in connection with International Retail Merchant's use of the Mark, or the use of the services furnished by Franchisee in connection therewith. (h) Franchisee acknowledges Company's ownership of the Mark, and agrees that it will not do or permit any act to be done which may impair such ownership. Franchisee agrees that all use of the Mark by it shall inure to the benefit of, and be on behalf of, Company. Franchisee agrees that it will never in any manner represent that it has an ownership interest in the Mark, or contest the ownership of the Mark by Company, or attack the validity of the license herein granted. Franchisee agrees to execute, upon request, such documents as Company may deem necessary or desirable to acknowledge Company's ownership of the Mark, or to register, retain, enforce or defend the Mark. (i) Franchisee agrees to notify Company of any unauthorized use of the Mark by others, as promptly as such use may come to International Retail Merchant's attention. Company shall have the sole and exclusive right, but not the obligation, to register or renew the Mark or to commence infringement, opposition or other proceedings with respect thereto. (j) Franchisee 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). 16. Franchisee agrees to keep in strict confidence all 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 International Retail Merchant's transactions with Company or for the purpose of promoting International Retail Merchant's business. Franchisee 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. 17. Upon the termination hereof, Franchisee agrees to immediately return to Company at International Retail Merchant's sole expense, all such documents and items and any equipment related thereto which have been provided by Company. Franchisee further agrees, upon the termination hereof, to immediately cease and desist from all use of the Mark in any way, to apply to the appropriate governmental authorities in the Country to cancel the recording, if any, of this Agreement, to remove all signage bearing the Mark, and to destroy all printed or visual materials of any sort bearing the Mark. 18. Franchisee agrees to 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 Franchisee 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 Franchisee to assist International Retail Merchant's customer in using a product purchased from Company, or to alter, install, repair or service any product purchased by Franchisee from Company. 19. Franchisee further agrees to 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 Franchisee or for merchandise shipped by another party at International Retail Merchant's request and (b) damages demanded from Company in connection with any occurrence concerning which it is alleged that Franchisee functioned as an agent of the Company. 20. Franchisee further agrees to indemnify Company and hold it harmless for the amount of all attorneys' fees and expenses reasonably incurred by it in: (a) enforcing compliance by Franchisee with the provisions of this Agreement or enforcing collection of any past due balances owing by Franchisee on Company's billing statements, (b) defending any claims asserted against Company which are based upon or arise out of any occurrence of the types described in Paragraphs 13, 18, 19, 20 and 21 hereof or in attempting to avoid or mitigate any losses to Company in connection therewith, and (c) in protecting any security interest of Company granted in any property of Franchisee in the event that Franchisee becomes a debtor in bankruptcy or insolvency proceedings. 21. Franchisee 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 Franchisee (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 International Retail Merchant'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 Franchisee is owned or the death of any stockholder owning 50% or more of the voting stock of Franchisee if Franchisee is incorporated, or (c) not less then 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 50% or more of the ownership interest(s) of Franchisee or of the business operated at the location of International Retail Merchant'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 50% or more of the outstanding voting stock of such corporation is owned by such holder(s). 22. Franchisee agrees to furnish Company with annual financial statement of its year end and such current financial statements and related information, including purchase and sales figures, concerning International Retail Merchant's business on a quarterly basis or as shall reasonably be requested from time to time by Company in order to confirm Franchisee's compliance with the terms of this Agreement. 23. If requested at any time by Company, Franchisee shall maintain at International Retail Merchant's sole expense with an insurance carrier or carriers approved by Company a policy or policies of liability insurance with a coverage limit of not less than U.S.$5,000,000.00 per occurrence 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 Franchisee functioned as an agent of Company, or that Franchisee, 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. 24. Franchisee shall, at International Retail Merchant's sole expense, take such steps as may be required in International Retail Merchant's Country to satisfy any laws or requirements with respect to declaring, notarizing, filing, recording, or otherwise rendering this Agreement valid. 25. This Agreement shall be for an initial term of three (3) year, commencing with the date of acceptance hereof by Company, and shall thereafter be automatically renewed for successive one (1) year periods unless written notice of termination is given by either party no later than thirty (30) days prior to the expiration of the then current term; provided, however, that if a longer period of advance notice is required by any applicable statute, rule, or regulation, then such notice shall comply with such requirement. Notwithstanding the foregoing, Company reserves the right to terminate this Agreement upon three (3) days' advance written notice to Franchisee in the event that any payment owing to Company for merchandise or services supplied to Franchisee is not received within fifteen (l5) days after the date on which such payment is due. Further, notwithstanding the foregoing, the closing down of the business operated at International Retail Merchant's location set forth hereinabove shall automatically cause this Agreement to be terminated unless such business is moved to another location to which Company consents. This Agreement shall also immediately terminate upon the giving of written notice by Company to Franchisee at any time after Franchisee becomes bankrupt, insolvent or makes an assignment for the benefit of creditors. This Agreement shall also immediately terminate upon written notice of termination by Company in the event that Franchisee is in breach of any provision hereof and fails to cure such breach following written notice of breach by Company and a reasonable period, which need not exceed thirty (30) days from the date of mailing of such notice, to cure such breach. 26. Notwithstanding anything herein to the contrary, if Franchisee is an individual sole proprietor, this Agreement shall automatically terminate upon the death of such individual. If Franchisee is a partnership, this Agreement shall automatically terminate upon the death of a member of such partnership. However, with Company's approval (which approval shall not be unreasonably withheld), such business may continue to be operated under this Agreement by the estate of such deceased individual sole proprietor or by the person(s) to whom ownership of said business is to be distributed by such deceased individual's estate or by the person(s) or partnership succeeding to the interest of such deceased member of a partnership owning the business. 27. If Franchisee is a corporation, 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 50% or more of its outstanding voting stock. 28. Any provision of this Agreement, with regard to which the right of Company to change the terms thereof has been reserved, shall be deemed to have been modified as of the effective date set forth in an advance written notice of such change given by Company to Franchisee. 29. If any amendment hereto is proposed by Company during the term hereof, then this Agreement shall be deemed to have been modified effective as of the date specified in a sixty (60) day advance written notice thereof given by Company to Franchisee in order to place the Agreement in conformity with such amendment. International Retail Merchant's act of continuing to do business with Company after the effective date of such amendment shall be deemed to constitute International Retail Merchant's consent to be bound thereby. If Franchisee does not consent to be bound by such amendment, then Franchisee may terminate this Agreement by written notice thereof to Company, which notice must be received by Company on or prior to the effective date of the proposed amendment. 30. The signing of this Agreement by Franchisee 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. All orders for merchandise, supplies and services placed by Franchisee pursuant to this Agreement shall be transmitted to Company at said office, and Franchisee 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, U.S.A.; and (b) any suit brought by Company against Franchisee to enforce any provision of this Agreement or seeking any relief in connection with or arising out of the relationship between Company and Franchisee may be instituted in an appropriate state or federal court in the State of Illinois and Franchisee hereby expressly submits to the jurisdiction of said court for purposes of the enforcement of this Agreement and all matters related to this Agreement. 31. Neither this Agreement nor any interest of Franchisee herein shall be assignable or subject to transfer or encumbrance by Franchisee at any time without Company's prior written consent. 32. 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 or airmailed or sent by telex or telefax 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 telefax. 33. 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. 34. 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. 35. 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. 36. 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. IN WITNESS WHEREOF, this Agreement has been executed on this _________ day of _________________________, 19_____, by the person(s) signing it for Franchisee, whose authority to sign shall be deemed to have been duly authorized by Franchisee. Franchisee: _______________________________________ [Corporate or Partnership Name] By:____________________________________ Printed Name:__________________________ Title:_________________________________ (If Franchisee is a corporation, the corporate name should be written hereon followed by the signature and title of an appropriate officer. If Franchisee is a partnership, the partnership name should be written hereon followed by the signatures of all partners.) ACCEPTED for Ace Hardware Corporation at Oak Brook, Illinois this _____ day of ________________, 19____. By:________________________ ________________________ (Title of Officer) ACE HARDWARE CORPORATION FRANCHISEE AGREEMENT EXHIBIT A The following is(are) the retail business location(s) applicable to the Franchisee Agreement: DATE OF NAME OF BUSINESS ADDRESS (LOCATION) AFFILIATION 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. Franchisee: _________________________________ [Corporate or Partnership Name] By:______________________________ Printed Name:____________________________ Title:___________________________ (If Franchisee is a corporation, the corporate name should be written hereon followed by the signature and title of an appropriate officer. If Franchisee is a partnership, the partnership name should be written hereon followed by the signatures of all partners.) ACCEPTED for Ace Hardware Corporation at Oak Brook, Illinois this ____ day of __________________, 19____. By:___________________________________ ___________________________________ (Title of Officer) EX-10 5 DEED OF LEASE WITH ARUNDEL II L.L.C. Exhibit 10-P DEED OF LEASE Arundel II L.L.C., Landlord Ace Hardware Corporation, Tenant Dated: January _30____, 1998 DEED OF LEASE THIS DEED OF LEASE ("Lease"), dated this ___30th______ day of January, 1998 by and between Arundel II L.L.C., a Delaware limited liability company, ("Landlord") and Ace Hardware Corporation, a _Delaware_______ corporation ("Tenant"). WITNESSETH: That Landlord, in consideration of the rents and mutual covenants hereinafter set forth, does hereby lease, demise and let unto Tenant, and Tenant does hereby hire and take from Landlord the "Premises" which consists of approximately 57,500 square feet of "net rentable area" (as defined in Section 16.31 below) of the building ("Building") located on that certain property known as Lot 14R, Arundel Crossing Business Park in Anne Arundel County, Maryland. The Premises are more particularly shown on the floor plan attached hereto as Exhibit D, and the Property is more particularly outlined in red on the Site Plan attached hereto as Exhibit A. The Building and the Property are sometimes hereafter referred to as the "Project". Tenant hereby accepts this Lease and the Premises upon the covenants and conditions set forth herein and subject to any encumbrances, covenants, conditions, restrictions and other matters of record as of the date hereof including, without limitation, the Declaration of Covenants, Conditions, Restrictions and of Certain Reciprocal Rights and Easements ("Declaration"). This Lease and the Premises are further subject to all applicable zoning, municipal, county, state and federal laws, ordinances and regulations governing and regulating the use of the Premises. TO HAVE AND TO HOLD THE SAME, for a "term" commencing on the earlier to occur of (i) Final Completion of the Premises (as defined in the Work Agreement), or (ii) use and occupancy by Tenant of any portion of the Premises, and continuing for a period of five (5) years and three (3) months after the "Commencement Date", unless sooner terminated in the manner provided hereinafter. The date on which the term of the Lease begins is sometimes hereinafter referred to as the "Commencement Date". The Commencement Date is anticipated to be on or about April 1, 1998. Following the Commencement Date, Landlord shall deliver to Tenant a Commencement Notice which shall contain the exact Commencement Date, the number of square feet of net rentable area contained in the Premises, and other reasonably pertinent data. Upon execution of the Commencement Notice by Landlord and Tenant, the Commencement Notice shall be conclusive and binding on Tenant as to all matters set forth therein. ARTICLE I BASE RENT Section 1.1 Base Rent. In consideration of the leasing aforesaid, Tenant agrees to pay to Landlord, at 6707 Democracy Boulevard, Suite 510, Bethesda, Maryland, 20817 or at such other place as Landlord from time to time may designate in writing, annual rental ("Base Rent") in an amount equal to the product of $3.80, and the number of square feet of net rentable area contained in the Premises. Base Rent shall begin accruing on the date which is ninety (90) days after the Commencement Date ("Rent Commencement Date") and shall be payable in equal monthly installments in advance, on the first day of each and every month thereafter for the next succeeding months during the balance of the term. If the Rent Commencement Date occurs on a date other than the first day of a calendar month, or if the term ends on a date other than the last day of a calendar month, monthly rent shall be prorated on a daily basis. The Rent Commencement Date is anticipated to be on or about July 1, 1998. Section 1.2 Escalations. On the first (1st) anniversary of the Rent Commencement Date of the term of this Lease, and on each anniversary date thereafter during the term (each of such dates being hereinafter referred to as an "Adjustment Date"), the monthly Base Rent payable pursuant to Section 1.1 above shall be increased by an amount equal to the product of (i) the monthly Base Rent in effect during the month immediately prior to the Adjustment Date then at hand (disregarding any rental abatement then in effect), and (ii) one and one-half percent (1 1/2%). The monthly Base Rent, as adjusted, shall be due and payable as of such Adjustment Date and on the first (1st) day of each month thereafter until the next Adjustment Date or the end of the term of this Lease, whichever is applicable. ARTICLE 2 ADDITIONAL RENT Section 2.1 Additional Rent. In addition to the Base Rent payable by Tenant under the provisions of Article 1 hereof, beginning on the Commencement Date Tenant shall pay to Landlord "Additional Rent" as hereinafter provided for in this Article 2. All sums under this Article and all other sums and charges required to be paid by Tenant under the Lease (except Base Rent), however denoted, shall be deemed to be "Additional Rent." If any such amounts or charges are not paid at the time provided in the Lease, they shall nevertheless be collectible as Additional Rent with the next installment of Base Rent falling due. Section 2.2 Definitions. The parties hereto agree upon the following Definitions: (a) "Lease Year" shall mean each twelve (12) month period commencing with and including the month during which the term of this Lease commences, and ending with the month during which the term of this Lease (including any extensions or renewals) terminates. (b) "Real Estate Taxes" shall mean and include all personal property taxes of Landlord relating to Landlord's personal property used in connection with the operation and maintenance of the Project (however, if the equipment is shared between the Project and other projects, only the proportionate share of taxes applicable to the Project shall be included), real estate taxes accruing against the Project, water rates and charges, sewer rates and charges, charges and fees for public utilities, street lighting, excise levies, licenses, permits, inspection fees, installments of special assessments, including interest thereon, relating to the Project, and all other governmental charges, general and special, ordinary and extraordinary, foreseen as well as unforeseen, of any kind and nature whatsoever, or other tax, however described, which is levied or assessed in substitution for any of the foregoing by the United States of America or the state in which the Project are located or any political subdivision thereof, against Landlord or all or any part of the Project as a result of Landlord's ownership thereof, and payable during the respective Lease Year. It shall not include any net income tax, estate tax, or inheritance tax. Tenant shall be solely responsible for its Pro Rata Share (as hereinafter defined) of all Real Estate Taxes. (c) "Operating Expenses" shall mean and include all expenses incurred by Landlord with respect to the maintenance and operation of the Project as determined by Landlord's accountant in accordance with generally accepted accounting principles consistently followed, including, but not limited to, liability and casualty insurance premiums, maintenance and repair costs, steam, electricity, water, sewer, gas and other utility charges, fuel, lighting, window washing, parking lot maintenance, trash and rubbish removal, snow and ice removal, security, landscaping, maintenance of rights-of-way contiguous to the Property, wages payable to employees of Landlord whose duties are connected with the operation and maintenance of the Project (but only for the portion of their time allocable to work related to the Project), amounts paid to contractors or subcontractors for work or services performed in connection with the operation and maintenance of the Project, repairs, replacements or other expenses for maintaining and operating the Project, reasonable attorneys' fees and costs in connection with appeal or contest of Real Estate Taxes or other taxes or levies, and such other expenses as may be ordinarily incurred in the operation and maintenance of a light industrial/office building in the Baltimore/Washington industrial corridor and not specifically set forth herein, including a reasonable administrative fee equal to ten percent (10%) of the sum of Real Estate Taxes and Operating Expenses. The term "Operating Expenses" shall also include capital improvements and replacements to the Project, provided the cost thereof shall be amortized on a straight-line basis over the useful life of the improvement or replacement, as determined in accordance with generally accepted accounting principles. Tenant shall be solely responsible for its Pro Rata Share of all Operating Expenses. The term "Operating Expenses" shall not include repairs, restoration or other work occasioned by fire, windstorm or other insured casualty, or occasioned by condemnation; leasing commissions; interest or principal payments on any mortgage or other indebtedness of Landlord; payment under any ground lease; compensation paid to any employee of Landlord above the grade of building superintendent; any depreciation allowance or expense; capital expenditures required by Landlord's failure to comply with Legal Requirements (as hereinafter defined); overtime expenses to Landlord due to Landlord's defaults hereunder; any cost representing an amount paid for first class services and/or materials to a related person, firm, or entity to the extent such amount exceeds the amount that would be paid for such first class services and/or materials at the then existing market rates to an unrelated person, firm or entity; costs directly resulting from the gross negligence or misconduct of Landlord, its employees, agents or contractors; costs and expenses incurred by Landlord in forming, operating or maintaining the ownership entity for the Project including legal fees incurred in connection therewith; or costs or expenses incurred by Landlord in financing, refinancing, pledging, selling, granting or otherwise transferring or encumbering ownership rights in the Project. Notwithstanding the foregoing provisions of this Section 2.2, prior to or on the Commencement Date, Tenant shall secure all utilities for the Premises in Tenant's name and for Tenant's account. During the term of this Lease, Tenant will pay, when due, all charges of every nature, kind or description for such utilities furnished to the Premises or chargeable against the Premises, including all charges for water, sewage, heat, gas, light, garbage, electricity, telephone, steam, power, or other public or private utility services. Prior to the Commencement Date, Tenant shall reimburse Landlord for all utilities or services at the Premises used directly and exclusively by Tenant or its agents, employees or contractors. In the event that any charge or fee is required after the Commencement Date by the state in which the Premises are located, or by any agency, subdivision, or instrumentality thereof, or by any utility company furnishing services or utilities to the Premises, as a condition precedent to furnishing or continuing to furnish utilities or services to the Premises, such charge or fee shall be deemed to be a utility charge payable by Tenant. The provisions of this Section 2.2 shall include, but not be limited to, any charges or fees for present or future water or sewer capacity to serve the Premises, any charges for the underground installation of gas or other utilities or services, and other charges relating to the extension of or change in the facilities necessary to provide the Premises with adequate utility services. In the event that Landlord has paid any such charge or fee after the date hereof, Tenant shall reimburse Landlord for such utility charge. The term "Tenant's Pro Rata Share" shall mean a fraction, the numerator of which is the net rentable area of the Premises, and the denominator of which is the net rentable area of the Building. Landlord anticipates Tenant's Pro Rata Share will be 16.75% (57,500/343,200). Section 2.3 Intentionally Deleted. Section 2.4 Intentionally Deleted. Section 2.5 Estimated Operating Expenses for Subsequent Year. As to each Lease Year, Landlord shall estimate for each such Lease Year the total amount of Tenant's Pro Rata Share of Operating Expenses. Said estimate shall be in writing and shall be delivered or mailed to Tenant at the Premises following the start of the Lease Year. Section 2.6 Payment of Additional Rent. Tenant shall pay, as Additional Rent, Tenant's Pro Rata Share of Operating Expenses for each Lease Year, so estimated, in equal monthly installments, in advance, on the first day of each month during each applicable Lease Year. If for any reason Landlord has not provided Tenant with Landlord's estimate of Operating Expenses prior to the commencement of any Lease Year, then, Tenant shall continue paying the amount due for the immediately preceding year until it receives Landlord's estimate of same. Within thirty (30) days of receipt of the Operating Expense estimate, Tenant shall pay to Landlord all amounts due for the then current Lease Year, and during the remainder of such Lease Year, Tenant shall pay to Landlord an amount equal to one-twelfth (1/12th) of the Operating Expenses as noted on Landlord's estimate. Section 2.7 Re-estimates of Operating Expenses. From time to time during any applicable Lease Year, Landlord may re-estimate the amount of Tenant's Pro Rata Share of Operating Expenses, and in such event Landlord shall notify Tenant, in writing, of such re-estimate in the manner above set forth and fix monthly installments for the then remaining balance of such Lease Year in an amount sufficient to pay the re-estimated amount over the balance of such Lease Year after giving credit for payments made by Tenant on the previous estimate. Section 2.8 Adjustment of Actual Operating Expenses. Upon completion of each Lease Year, Landlord shall cause its accountants to determine the actual amount of Operating Expenses for such Lease Year and deliver a written certification of the amounts thereof to Tenant. If Tenant has paid less than its Pro Rata Share of the actual Operating Expenses for any Lease Year, Tenant shall pay such deficiency within thirty (30) days after receipt of such statement. If Tenant has paid more than its Pro Rata Share of the actual Operating Expenses for any Lease Year, Landlord shall credit such excess against the most current monthly installment or installments due Landlord for its estimate of Operating Expenses for the next following Lease Year. A pro rata adjustment shall be made for a fractional Lease Year occurring during the term of this Lease or any renewal or extension thereof based upon the number of days of the term of this Lease during said Lease Year as compared to three hundred sixty-five (365) days and all additional sums payable by Tenant or credits due Tenant as a result of the provisions of this Article 2 shall be adjusted accordingly. Section 2.9 Intentionally Deleted. Section 2.10 Taxes and Other Additional Rent. Beginning on the Commencement Date and continuing throughout the Term of the Lease, Tenant shall be responsible for its Pro Rata Share of all Real Estate Taxes. Tenant shall pay all amounts due within thirty (30) days of receipt of written request and an invoice therefor, including a copy of the tax bill. If by law any special assessment is payable (without default) in installments (whether or not interest shall accrue on the unpaid balance of such special assessment), and if Landlord elects to pay same in installments, Tenant shall pay all amounts due in connection therewith, together with any interest accrued, in installments within thirty (30) days of receipt of Landlord's written request and invoice therefor. Landlord shall be responsible for all installments of special assessments (including interest accrued on the unpaid balance) which are payable prior to the Commencement Date and after the termination date of the term of this Lease. Further, Tenant shall pay, also as Additional Rent, all other sums and charges required to be paid by Tenant under this Lease, and any tax or excise on rents, gross receipts tax, or other tax, however described, which is levied or assessed by the United States of America or the state in which the Premises are located or any political subdivision thereof, against Landlord in respect to the Base Rent, Additional Rent, or other charges reserved under this Lease or as a result of Landlord's receipt of such rents or other charges accruing under this Lease but only to the extent such levy, tax, assessment or charge on rent shall be expressly in lieu of or in substitution for any existing Real Estate Taxes; provided, however, Tenant shall have no obligation to pay net income taxes of Landlord. Section 2.11 Contesting Real Estate Taxes. Landlord shall, upon written request of Tenant, contest by appropriate proceedings any Real Estate Taxes. The cost of such contest shall be borne by Tenant unless other occupants of the Building so direct Landlord to contest the Real Estate Taxes, in which event the cost shall be split between Tenant and such occupants on a pro-rata basis based on their respective net rentable areas. Tenant may defer or postpone payment of its Pro Rata Share of Real Estate Taxes until conclusion of the contest so long as (a) neither the Project nor any portion thereof would, by reason of such postponement or deferment, be in danger of being forfeited or lost, and (b) Tenant shall have deposited with Landlord cash or a letter of credit payable to Landlord issued by a national bank or federal savings and loan association in the amount of Tenant's Pro Rata Share of the Real Estate Taxes so contested and unpaid. If, during the continuance of such proceedings, Landlord shall, from time to time, reasonably deem the amount deposited, as aforesaid, insufficient, Tenant shall, upon demand of Landlord, make additional deposits of such additional sums of money or such additional certificates of deposit as Landlord may reasonably request. Upon failure of Tenant to make such additional deposits within thirty (30) days, the amount theretofore deposited may be applied by Landlord to the payment of Tenant's Pro Rata Share of Real Estate Taxes, and the interest, fines and penalties in connection therewith, and any reasonable costs, fees (including reasonable attorney's fees) and other liability (including costs incurred by Landlord, but excluding consequential or punitive damages) accruing in any such proceedings. Upon the termination of any such proceedings, Tenant shall pay Tenant's Pro Rata Share of Real Estate Taxes or part thereof, if any, as finally determined in such proceedings, the payment of which may have been deferred during the prosecution of such proceedings, together with any reasonable costs, fees (including reasonable attorney's fees), interest, penalties, fines and other liability in connection therewith, and upon such payment Landlord shall return all amounts deposited with it with respect to the contest of such Real Estate Taxes, as aforesaid, or, at the written direction of Tenant, Landlord shall make such payment out of the funds on deposit with Landlord and the balance, if any, shall be returned to Tenant. Tenant shall be entitled to the refund of any Real Estate Taxes, penalties, fines and interest thereon received by Landlord which has been paid by Tenant or which has been paid by Landlord but for which Landlord has been previously reimbursed in full by Tenant. Landlord shall not be required to join in any proceedings referred to in this Section 2.11 unless the provisions of any law, rule or regulation at the time in effect shall require that such proceedings be brought by or in the name of Landlord, in which event Landlord shall join in such proceedings or permit the same to be brought in Landlord's name upon compliance with such conditions as Landlord may reasonably require. Landlord shall not ultimately be subject to any liability for the payment of any fees, including attorney's fees, costs and expenses in connection with such proceedings. Tenant agrees to pay all such fees (including reasonable attorney's fees), costs and expenses or, on demand, to make reimbursement to Landlord for such payment. During the time when any such amount is on deposit with Landlord, and prior to the time when the same is returned to Tenant or applied against the payment, removal or discharge of Tenant's Pro Rata Share of Real Estate Taxes, as above provided, Tenant shall be entitled to receive all interest paid thereon, if any. Landlord agrees to cooperate with Tenant's efforts in connection with this Section 2.11, at no cost or expense to Landlord. Section 2.12 Landlord's Right to Contest Real Estate Taxes. In addition to the right of Tenant under Section 2.11 to request that Landlord contest the amount or validity of Real Estate Taxes, Landlord shall also have the right to initiate a contest of same. Landlord shall not be obligated to contest Real Estate Taxes, and any such contest shall be by appropriate proceedings conducted in the name of Landlord. Section 2.13 Evidence of Payment. Landlord covenants to furnish Tenant written evidence of the payment of any Real Estate Taxes (i.e. paid tax bills) for which Tenant has already paid Landlord its Pro Rata Share upon receipt of Tenant's written request therefor. Section 2.14 Escrow for Taxes and Assessments. At Landlord's written demand after any Event of Default, Tenant shall pay to Landlord Tenant's Pro Rata Share of Real Estate Taxes in estimated monthly payments in advance. If the total monthly payments made by Tenant pursuant to this Section 2.14 shall exceed the amount of payments due from Tenant, such excess shall be credited on subsequent monthly payments of the same nature or, at Tenant's option, promptly refunded, but if the total of such monthly payments so made under this paragraph shall be insufficient to pay Tenant's Pro Rata Share of Real Estate Taxes when due, then Tenant shall pay to Landlord such amount as may be necessary to make up the deficiency. ARTICLE 3 BASE AND ADDITIONAL RENT Section 3.1 Interest and Late Fee on Past Due Obligations. Any installment of Base Rent, Additional Rent, or other charges to be paid by Tenant accruing under the provisions of this Lease which shall not be paid within ten (10) days of its due date shall bear interest at the "Default Rate" from the date when the same is due until the same shall be paid. The Default Rate shall be equal to three (3) percentage points over the prime rate of interest published in the Wall Street Journal, but if such rate exceeds the maximum interest rate permitted by law, such rate shall be reduced to the highest rate allowed by law under the circumstances. In addition, any installment of Base Rent or Additional Rent or any other charges payable by Tenant under the provisions hereof which shall not be paid when due and which remains unpaid five (5) days after its due date shall be subject to a late payment fee of five percent (5%) of the unpaid amount. Section 3.2 Rent Independent. Tenant's covenants to pay the Base Rent and the Additional Rent are independent of any other covenant, condition, provision or agreement herein contained, and nothing herein contained shall be deemed to suspend or delay the payment of any amount of money or charge at the time the same becomes due and payable hereunder, or limit any other remedy of Landlord. Base Rent and Additional Rent are sometimes collectively referred to as "Rent." Rent shall be payable without recoupment, deduction, offset, prior notice or demand, in lawful money of the United States. Section 3.3 Security Deposit. Intentionally Deleted. ARTICLE 4 POSSESSION OF PREMISES; ENVIRONMENTAL LAWS Section 4.1 Earlier Entry. Subject to Legal Requirements, Tenant shall have access to the Premises prior to the Commencement Date to install racking, furniture, fixtures, equipment, files and business records at such time as may be mutually agreed upon by the Landlord, the Contractor (as hereinafter defined) and the Tenant. Landlord anticipates that such early entry will be available to Tenant on or about March 1, 1998. Notwithstanding the foregoing, (i) such access shall not interfere in any manner with the work being undertaken by the Landlord or the Contractor in the Premises or the Building and shall not give rise to any labor disputes; (ii) early entry shall be at Tenant's sole risk and Tenant shall indemnify and hold harmless Landlord from and against all losses, damages, costs, liabilities and claims arising out of or in connection with early access being provided to Tenant, its employees and agents, and Tenant shall maintain the liability insurance coverage required by the Lease, and such insurance shall be "primary" during Tenant's early access; (iii) such moving of furniture, fixtures and equipment into the Premises shall not impede, hinder or delay in any manner obtaining a certificate of occupancy (or like permit) for the Premises; and (iv) the terms of the Lease shall apply to the extent applicable to such early entry (expressly excluding the payment of Rent), but specifically including Tenant's obligation to comply with all Legal Requirements during periods of early entry. In the event that the Landlord should determine that Tenant's early access interferes with the work being undertaken by the Landlord or the Contractor or impedes, hinders or delays in any manner obtaining a certificate of occupancy (or like permit), Tenant shall cease such activity immediately. As used in this Lease and the Work Agreement, the term "Legal Requirements" shall mean any laws, ordinances, codes (including building codes, and electrical, plumbing, mechanical and other similar codes), regulations, requirements and orders of the United States of America, the County of Anne Arundel, State of Maryland and/or any other governmental authority with jurisdiction over the Premises or the construction of the Tenant Improvements. Section 4.2 Intentionally Deleted. Section 4.3 Permitted Use. The Premises shall be occupied and used by Tenant for a dry goods warehouse/distribution/storage/office facility. Tenant shall not use or permit the Premises to be used for any other purpose without the prior written consent of Landlord. Section 4.4 Tenant's Compliance With Environmental Laws. Tenant shall at all times and in all respects comply with all federal, state and local laws, ordinances and regulations ("Hazardous Materials Laws") relating to the industrial hygiene, environmental protection or the use, analysis, generation, manufacture, storage, presence, disposal or transportation of any oil, petroleum products, flammable explosives, asbestos, urea formaldehyde, polychlorinated biphenyls, radioactive materials or waste, or other hazardous, toxic, contaminated or polluting materials, substances or wastes, including without limitation any "hazardous substances," "hazardous wastes," "hazardous materials" or "toxic substances" under any such laws, ordinances or regulations (collectively, "Hazardous Materials"). Tenant shall at its own expense procure, maintain in effect and comply with all conditions of any and all permits, licenses and other governmental and regulatory approvals required for Tenant's use of the Premises including, without limitation, discharge of (appropriately treated) materials or waste into or through any sanitary sewer system serving the Premises. Tenant shall cause any and all Hazardous Materials to be removed from the Premises and transported solely by duly licensed haulers to duly licensed facilities for final disposal of such Hazardous Materials and wastes. Tenant shall in all respects, handle, treat, deal with and manage any and all Hazardous Materials in, on, under or about the Premises in complete conformity with all applicable Hazardous Materials Laws and prudent industry practices regarding the management of such Hazardous Materials. All reporting obligations to the extent imposed upon Tenant by Hazardous Materials Laws are solely the responsibility of Tenant. Upon expiration or earlier termination of this Lease, Tenant shall cause all Hazardous Materials (except to the extent such Hazardous Materials are generated, stored, released or disposed of during the term of this Lease by Landlord) to be removed from the Premises and transported for use, storage or disposal in accordance and in compliance with all applicable Hazardous Materials Laws. Tenant shall not take any remedial action in response to the presence of any Hazardous Materials in, on, about or under the Premises, nor enter into any settlement agreement, consent, decree or other compromise in respect to any claims relating to any way connected with the foregoing without first notifying Landlord of Tenant's intention to do so and affording Landlord ample opportunity to appear, intervene or otherwise appropriately assert and protect Landlord's interest with respect thereto. In addition, at Landlord's written request, at the expiration of the term of this Lease or within sixty (60) days following the date of such request, whichever is later, Tenant shall remove all tanks or fixtures which were placed on the Premises during the term of this Lease and which contain, or are contaminated with, Hazardous Materials. Tenant shall immediately notify Landlord in writing of (a) any enforcement, clean-up, removal or other governmental or regulatory action instituted, completed or threatened pursuant to any Hazardous Materials Laws; (b) any claim made or threatened by any person against Landlord, or the Premises, relating to damage, contribution, cost recovery, compensation, loss or injury resulting from or claimed to result from any Hazardous Materials; and (c) any reports made to any environmental agency arising out of or in connection with any Hazardous Materials in, on or about the Premises, or with respect to any Hazardous Materials removed from the Premises including, any complaints, notices, warnings, reports or asserted violations in connection therewith. Tenant shall also provide to Landlord, as promptly as possible, and in any event within five (5) business days after Tenant first receives or sends the same, copies of all claims, reports, complaints, notices, warnings or asserted violations relating in any way to the Hazardous Materials in or on the Premises. Upon written request of Landlord (to enable Landlord to defend itself from any claim or charge related to any Hazardous Materials Law), Tenant shall promptly deliver to Landlord notices of hazardous waste manifests reflecting the legal and proper disposal of all such Hazardous Materials removed or to be removed from the Premises. All such manifests shall list the Tenant or its agent as a responsible party and in no way shall attribute responsibility for any such Hazardous Materials to Landlord. ARTICLE 5 SERVICES AND MAINTENANCE Section 5.1 Services Provided by Landlord at Tenant's Expense. Subject to the provisions of Article 2 hereof, Landlord shall provide the following services on all days excepting Saturdays, Sundays, federal holidays, and as otherwise stated in this Section 5.1: Maintenance in good order, condition and repair and appropriate illumination of the parking facilities and all driveways leading thereto and keeping the same free from any unreasonable accumulation of snow and ice. Landlord shall keep and maintain the landscaped area and parking facilities in a neat, safe and orderly condition, and shall maintain and repair the sewer and storm system serving the Project. All costs incurred in connection with this Section 5.1 shall be subject to reimbursement by Tenant pursuant to Article 2 or Section 5.5, as applicable. Section 5.2 Janitorial Service. Both Landlord and Tenant acknowledge that Tenant shall provide janitorial and CHAR services for the Premises at its sole cost and expense. Section 5.3 Other Provisions Relating to Services. No interruption in, or temporary stoppage of, any of the aforesaid services caused by repairs, renewals, improvements, alterations, strikes, lockouts, labor controversy, accidents, inability to obtain fuel or supplies, or other Unavoidable Delays shall be deemed an eviction or disturbance of Tenant's use and possession, or render Landlord liable for damages, by abatement of rent or otherwise or relieve Tenant from any obligation herein set forth. In no event shall Landlord be required to provide any service in excess of that permitted by involuntary guidelines or laws, ordinances or regulations of governmental authority. Section 5.4 Effects on Utilities. Tenant shall not connect with electric current or water pipes, except through existing electrical or water outlets already in the Premises. Section 5.5 Park Dues. Tenant acknowledges that the Property is part of a larger development and that certain dues or assessments will be levied in connection with the maintenance, repair and replacement of the off-site storm water retention facility which serves the Project, and all related storm water piping. Tenant's share of such dues or assessments will be based on a fraction, the numerator of which will be the net rentable area of the Premises and the denominator of which will be the net rentable area of developed buildings serviced by the facility. The dues and assessments will be more particularly set forth in the Declaration. Section 5.6 Maintenance Provided by Landlord at Landlord's Expense. Landlord shall, at its expense, keep and maintain in good order and repair the exterior structure and structural systems and roof of the Building. Notwithstanding anything to the contrary contained in this Lease, in the event any repair, replacement, or other maintenance is required as a result of the negligent actions or omissions of Tenant, Tenant shall be solely responsible for all costs and expenses arising in connection therewith. ARTICLE 6 INSURANCE Section 6.1 Landlord's Casualty Insurance Obligations. Landlord shall keep the Building insured in an amount equivalent to the full replacement value thereof (excluding foundation, grading and excavation costs) against: (a) loss or damage by fire; and (b) such other risk or risks of a similar or dissimilar nature as are now or may be customarily covered with respect to buildings and improvements similar in construction, general location, use, occupancy and design to the Building, including, but without limiting the generality of the foregoing, windstorms, hail, explosion, vandalism, malicious mischief, civil commotion, and such other coverage as may be deemed necessary by Landlord, provided such additional coverage is obtainable and provided such additional coverage is such as is customarily carried with respect to buildings and improvements similar in construction, general location, use, occupancy and design to the Building. These insurance provisions shall in no way limit or modify any of the obligations of Tenant under any provision of this Lease. Landlord agrees that such policy or policies of insurance shall include a waiver of subrogation clause in favor of Tenant. Notwithstanding the foregoing, Tenant shall be obligated to pay the rental called for hereunder in the event of damage to or destruction of the Premises if such damage or destruction is occasioned by the negligence or fault of Tenant, its agents or employees, such fault to be established by arbitration or a judicial proceeding. Insurance premiums paid for insurance coverage required under this Article 6 by Landlord (including Section 6.3) shall be a portion of the "Operating Expenses" described in Article 2 hereof. Section 6.2 Tenant's Casualty Insurance Obligations. Tenant shall keep all of its machinery, equipment, furniture, fixtures and personal property which may be located in, upon, or about the Premises insured for the benefit of Tenant in an amount equivalent to the full insurable value thereof against: (a) loss or damage by fire; and (b) such other risk or risks of a similar or dissimilar nature as are now, or may in the future be, customarily covered with respect to a tenant's machinery, equipment, furniture, fixtures, personal property and business located in a building similar in construction, general location, use, occupancy and design to the Building, including, but without limiting the generality of the foregoing, windstorms, hail, explosions, vandalism, theft, malicious mischief, civil commotion, and such other coverage as Tenant may deem appropriate or necessary. Tenant agrees that such policy or policies of insurance shall permit release of liability as provided herein and/or waiver of subrogation clause as to Landlord and Tenant waives, releases and discharges Landlord, its agents, employees, and contractors from all claims or demands whatsoever which Tenant may have or acquire arising out of damage to or destruction of the machinery, equipment, furniture, fixtures, personal property, and loss of use thereof occasioned by fire or other casualty, whether such claim or demand may arise because of the negligence or fault of Landlord, its agents, employees, contractors or otherwise, and Tenant agrees to look to the insurance coverage only in the event of such loss. Section 6.3 Landlord's Liability and Other Insurance Obligations. Landlord shall maintain, for its benefit and the benefit of its managing agent and Tenant, commercial general liability insurance against claims for personal injury, death or property damage occurring upon, in or about the Project, such insurance to afford protection to Landlord, its managing agent and Tenant of a combined single limit of Two Million and No/100 Dollars ($2,000,000.00) in respect to the injury, death or property damage arising out of any accident or occurrence. In addition, Landlord shall carry employer's liability insurance with a minimum limit of $1,000,000 for bodily injury; excess liability insurance over the commercial general and employer's liability insurance required above with combined, minimum coverage of $5,000,000; worker's compensation insurance in statutory limits; rental interruption insurance, and such other insurance coverage or increased amounts of referenced coverages or deductibles as is customarily carried in respect of comparable buildings in the Baltimore/Washington industrial corridor. Landlord agrees to include in its commercial general liability insurance policy the contractual liability coverage insuring Landlord's indemnification obligations provided for herein. Any such coverage shall be deemed secondary to any liability coverage secured by Tenant. Such insurance shall also afford coverage for all claims based upon acts, omissions, injury or damage, which claims occurred or arose (or the onset of which occurred or arose) in whole or in part during the policy period. At Tenant's request, Landlord shall furnish Tenant with a certificate of insurance certifying that the insurance coverage required of Landlord pursuant to this Article 6 is in effect. Any insurance required by the terms of this Lease to be carried by Landlord may be under a blanket policy (or policies) covering the other properties of the Landlord and/or its related or affiliated entities so long as the insurance requirements set forth herein are satisfied. If such insurance is maintained under a blanket policy, Landlord shall procure and deliver to Tenant a statement from the insurer or general agent of the insurer setting forth the coverage maintained and the amounts thereof allocated to the risks intended to be insured hereunder. Section 6.4 Tenant's Liability Insurance Obligations. Tenant shall, at Tenant's sole cost and expense but for the mutual benefit of Landlord, its managing agent and Tenant, maintain commercial general liability insurance against claims for personal injury, death or property damage occurring upon, in or about the Premises, such insurance to afford protection to Landlord, its managing agent and Tenant of a combined single limit of Two Million and No/100 Dollars ($2,000,000.00) in respect to the injury, death or property damage arising out of any accident or occurrence in the Premises. In addition, Tenant shall carry employer's liability insurance with a minimum limit of $500,000 for bodily injury; worker's compensation insurance in statutory limits; and excess liability insurance over the commercial general and employer's liability insurance required above with combined, minimum coverage of $5,000,000. Such policies of insurance shall be written in companies reasonably satisfactory to Landlord. Landlord agrees that an insurance company with a rating of not less than "A-" and a financial size of not less than Class VIII in the most current available "Best's Insurance Reports" is acceptable to Landlord. All such policies shall also name Landlord and its managing agent as additional insureds thereunder (on a primary basis), and such policies, or a memorandum or certificate of such insurance, shall be delivered to Landlord with evidence reasonably satisfactory to Landlord that the premium thereon has been paid. At such time as insurance limits required of tenants in light industrial buildings in the area in which the Premises are located are generally increased to greater amounts, Landlord shall have the right to require such greater limits as may then be customary. Tenant agrees to include in such policy the contractual liability coverage insuring Tenant's indemnification obligations provided for herein. Any such coverage shall be deemed primary to any liability coverage secured by Landlord. Such insurance shall also afford coverage for all claims based upon acts, omissions, injury or damage, which claims occurred or arose (or the onset of which occurred or arose) in whole or in part during the policy period. Section 6.5 Indemnification. Tenant agrees to indemnify, protect, defend and hold Landlord and Landlord's shareholders, employees, lender and managing agent harmless from and against any and all claims, costs, liabilities, actions, and damages arising from any breach or default on the part of Tenant in the performance of any covenant or agreement on the part of Tenant to be performed, pursuant to the terms of this Lease, or arising from any act or negligence on the part of Tenant or its agents, contractors, servants, employees or licensees, or arising from any accident, injury or damage to the extent caused by Tenant, its agents, and employees to any person, firm or corporation occurring during the term of this Lease or any renewal thereof, in or about the Project, and from and against all reasonable costs, reasonable counsel fees, expenses and liabilities incurred in or about any such claim or action or proceeding brought thereon; and in case any action or proceeding be brought against Landlord or its managing agent by reason of any such claim, Tenant, upon notice from Landlord, covenants to resist or defend such action or proceeding by counsel reasonably satisfactory to Landlord. Tenant's indemnification shall not apply to losses, claims, costs and the like arising as a result of the negligence or willful misconduct of Landlord or its agents. Section 6.6 Tenant's Waiver. Tenant agrees, to the extent not expressly prohibited by law, that Landlord, its agents, employees and servants shall not be liable, and Tenant waives all claims for damage to property, injury to person and damage to business sustained during the term of this Lease by Tenant occurring in or about the Project, arising at any time and from any cause other than by reason of the negligent or willful misconduct, or negligent omission of Landlord, its employees, agents, contractors or representatives. This paragraph shall apply especially but not exclusively, to damage caused by aforesaid or by the flooding of basements or other subsurface areas, or by refrigerators, sprinkling devices, air conditioning apparatus, water, snow, frost, steam, excessive heat or cold, falling plaster, broken glass, sewage, gas, odors or noise, or the bursting or leaking of pipes or plumbing fixtures. Section 6.7 Landlord's Deductible. Provisions herein to the contrary notwithstanding, in the event any damage to the Project results directly and exclusively from any act or omission of Tenant, its agents, employees or invitees, and all or any portion of Landlord's loss is "deductible," Tenant shall pay to Landlord the amount of such deductible loss up to One Hundred Thousand Dollars ($100,000). Section 6.8 Tenant's Property. All property on the Premises belonging to Tenant, its agents, employees, invitees or otherwise located at the Premises, shall be at the risk of Tenant only, and Landlord shall not be liable for damage thereto or theft, misappropriation or loss thereof and Tenant agrees to defend and hold Landlord, its agents, employees and servants harmless and indemnify them against claims and liability for injuries to such property. Section 6.9 Increase in Insurance. Tenant shall not do or permit anything to be done in or about the Premises nor bring or keep anything therein which will in any way increase the existing rate of or affect in any other way any fire or other insurance upon the Project or any of its contents, or cause a cancellation of any insurance policy covering the Project or any of its contents. Notwithstanding anything to the contrary contained herein, Tenant shall promptly, upon demand, reimburse Landlord for the full amount of any additional premium charged for such policy by reason of Tenant's failure to comply with the provisions of the paragraph, it being understood that such demand for reimbursement shall not be Landlord's exclusive remedy. Tenant shall promptly, upon demand, reimburse Landlord for any additional premium charged for any such policy by reason of Tenant's failure to comply with the provisions of this Article. Section 6.10 Tenant's Failure to Insure. In the event Tenant fails to provide Landlord with evidence of insurance required under this Article 6 within thirty (30) days of Landlord's written request therefor, but in any event at least ten (10) days prior to the expiration of the existing policy, Landlord may, but shall not be obligated to, without further demand upon Tenant, and without waiving or releasing Tenant from any obligation contained in this Lease, effect such insurance and Tenant agrees to repay, upon demand, all such sums incurred by Landlord in effecting such insurance. All such sums shall become a part of the Additional Rent payable hereunder, but no such payment by Landlord shall relieve Tenant from any default under this Lease. ARTICLE 7 CERTAIN RIGHTS RESERVED BY LANDLORD Section 7.1 Rights Reserved by Landlord. Landlord reserves the following rights exercisable without notice and without liability to Tenant and without effecting an eviction, constructive or actual, or disturbance of Tenant's use or possession, or giving rise to any claim for set off or abatement of rent: (a) Retain Keys. To retain at all times and to use in appropriate instances keys to all doors within and into the Premises. No locks shall be changed without the prior written notice to Landlord. (b) Make Repairs. Upon 24 hours notice to Tenant (except in the event of an emergency) to make repairs, alterations, additions, or improvements, whether structural or otherwise, in and about the Project, or any part thereof, and for such purposes to enter upon the Premises, and during the continuation of any of said work, to temporarily close doors, entryways, public spaces, and corridors in the Project and to interrupt or temporarily suspend services and facilities, so long as Landlord at all times endeavors in good faith to limit any interference with the conduct of Tenant's business or its occupancy and use of the Premises. (c) Regulate Heavy Equipment. Intentionally Deleted. Section 7.2 Emergency Entry. Landlord and its agents may enter the Premises at any time in case of emergency and shall have the right to use any and all means which Landlord may reasonably deem proper to open such doors during an emergency in order to obtain entry to the Premises. Any entry to the Premises obtained by Landlord in the event of an emergency shall not, under any circumstances, be construed or deemed to be a forcible or unlawful entry into, or detainer of, the Premises, or to be an eviction of Tenant from the Premises or any portion thereof. Section 7.3 Exhibition of Premises. Tenant shall permit Landlord and its agents, upon not less than twenty four (24) hours' notice, to enter and pass through the Premises or any part thereof at reasonable times during normal business hours to: (a) post notices of non-responsibility; (b) exhibit the Premises to holders of encumbrances on the interest of Landlord under the Lease and to prospective purchasers or mortgagees of the Project; and (c) during the period of six (6) months prior to the expiration of the Lease term, exhibit the Premises to prospective tenants thereof. In addition, Landlord may post commercially reasonable signage indicating that the Premises will be available for occupancy. If during the last month of the Lease Term, Tenant shall have removed substantially all of Tenant's property and personnel from the Premises, Landlord may enter the Premises and repair, alter, and redecorate the same, without abatement of Rent and without liability to Tenant, and such acts shall have no effect on this Lease. Section 7.4 Right of Landlord to Perform. All covenants and agreements to be performed by Tenant under any of the terms of this Lease shall be performed by Tenant at Tenant's sole cost and expense and without any abatement of Rent. If Tenant shall fail to pay any sum of money (other than Rent due Landlord) required to be paid by it hereunder or shall fail to perform any other act on its part to be performed hereunder, including, but not limited to, the failure to commence and complete repairs promptly and adequately, and the failure to remove any liens or otherwise to perform any act or fulfill any obligation required of Tenant under this Lease, Landlord may, but shall not be obligated to, and without waiving or releasing Tenant from any obligations of Tenant, make any such payment or perform any such act on Tenant's part to be made or performed as in this Lease provided. Notwithstanding the foregoing, Landlord shall not be required to give Tenant written notice prior to performing on Tenant's behalf in the event of an emergency. All sums so paid by Landlord and all necessary incidental costs, together with an administrative overhead charge equal to ten percent (10%) of the actual costs incurred, shall be payable to Landlord by Tenant as Rent on demand and Tenant covenants to pay all such sums. Landlord shall have (in addition to any other right or remedy of Landlord) the same rights and remedies in the event of Tenant's nonpayment of such sums, as in the case of default by Tenant in the payment of Rent to Landlord. ARTICLE 8 ALTERATIONS AND IMPROVEMENTS Section 8.1 Tenant's Changes and Alterations. Tenant shall have the right at any time, and from time to time during the term of this Lease, to make such changes and alterations, structural or otherwise, to the Premises, improvements and fixtures hereafter erected on the Premises as Tenant shall deem necessary or desirable in connection with the requirements of its business, subject in all cases to Landlord's prior written consent, such consent not to be unreasonably withheld. The changes and alterations (other than changes or alterations of Tenant's movable trade fixtures and equipment) shall be made in all cases subject to the following conditions, which Tenant covenants to observe and perform: (a) Permits. No change or alteration shall be undertaken until Tenant shall have procured and paid for, so far as the same may be required by the applicable governmental authorities from time to time, all municipal, state and federal permits and authorizations of the various governmental bodies and departments having jurisdiction thereof, and Landlord agrees to join in the application for such permits or authorizations whenever such action is necessary, all at Tenant's sole cost and expense. (b) Compliance with Plans and Specifications. Before commencement of any change, alteration, restoration or construction (here- inafter sometimes referred to as "Work") Tenant shall (i) furnish Landlord with detailed plans and specifications of the proposed change or alteration; (ii) obtain Landlord's prior written consent; (iii) provide Landlord with the name of the licensed architect or licensed professional engineer selected and paid for by Tenant, who shall supervise any such work (hereinafter referred to as "Alterations Architect or Engineer"); and (iv) obtain Landlord's prior written approval of detailed plans and specifications prepared and approved in writing by said Alterations Architect or Engineer, and of each amendment and change thereto. (c) Value Maintained. Any change or alteration shall, when completed, be of such character as not to reduce the value of the Premises or the Building to which such change or alteration is made below its value immediately before such change or alteration, nor shall such change or alteration reduce the area or cubic content of the Building, nor change the Building as to use without Landlord's express written consent. Tenant further agrees that in no event shall any change or alteration void or impair any of Landlord's warranties on the Building and, to the extent same are voided or impaired, Landlord's corresponding warranties to Tenant as contained in this Lease shall be likewise voided. Landlord's consent to any Work shall not be construed as a determination that such Work will not void or impair any applicable warranties. (d) Compliance with Laws. All Work done in connection with any change or alteration shall be done promptly and in a good and workmanlike manner and in compliance with all building and zoning laws of the place in which the Premises are situated, and with all laws, ordinances, orders, rules, regulations and requirements of all federal, state and municipal governments and appropriate departments, commissions, boards and officers thereof, and in accordance with the orders, rules and regulations of the Board of Fire Underwriters where the Premises are located, or any other body exercising similar functions. The cost of any such change or alteration shall be paid so that the Premises and all portions thereof shall at all times be free of liens for labor and materials supplied to the Premises, or any portion thereof. The Work of any change or alteration shall be prosecuted with reasonable dispatch, delays due to strikes, lockouts, acts of God, inability to obtain labor or materials, governmental restrictions or similar causes beyond the control of Tenant excepted. Tenant shall obtain and maintain, or cause to be obtained and maintained, at no expense to Landlord, during the performance of the Work, workers' compensation insurance in normal and customary amounts, covering all persons employed in connection with the Work and with respect to which death or injury claims could be asserted against Landlord or Tenant or against the Premises or any interest therein. Tenant shall also cause any contractor performing work on Tenant's behalf to carry and maintain, at no expense to Landlord, a comprehensive general liability insurance policy with a deductible of no greater than $10,000, which shall include contractor's liability coverage, contractual liability coverage, completed operations coverage, a broad form property damage endorsement and contractor's protective liability coverage to afford protection with limits, for each occurrence, of not less than Three Million Dollars ($3,000,000) combined single limit, written on an occurrence basis. In addition, the fire insurance with "extended coverage" endorsement required by Section 6.1 hereof shall be supplemented with "builder's risk" insurance on a completed value form or other comparable coverage on the Work. All such insurance shall be in a company or companies authorized to do business in the state in which the Premises are located and reasonably satisfactory to Landlord, and all such policies of insurance or, at Tenant's option, certificates of insurance shall be delivered to Landlord endorsed "Premium Paid" by the company or agency issuing the same, or with other evidence of payment of the premium satisfactory to Landlord. (e) Property of Landlord. Unless otherwise designated by Tenant at the time Landlord's consent is obtained, all improvements and alterations (other than Tenant's movable trade fixtures and equipment) made or installed by Tenant shall immediately, upon completion or installation thereof, become the property of Landlord without payment therefor by Landlord, and shall be surrendered to Landlord on the expiration of the term of this Lease. (f) Location of Improvements. No change, alteration, restoration or new construction shall connect the Premises with any other property, building or other improvement, nor shall the same obstruct or interfere with any existing easement. (g) Removal of Improvements. As a condition to granting approval for any changes or alterations Landlord, by written notice to Tenant, given at or prior to the time of granting such approval, may require Tenant to remove any improvements, additions or installations installed by Tenant in the Premises at Tenant's sole cost and expense, and repair and restore any damage caused by the installation and removal of such improvements, additions, or installations; provided, however, the only improvements, additions or installations which Tenant shall remove shall be those specified in such notice. (h) Written Notification Required. Tenant shall notify Landlord in writing ten (10) days prior to commencing any alterations, additions or improvements to the Premises which have been approved by Landlord so that Landlord shall have the right to record and post notices of non-responsibility on the Premises. Section 8.2 Nonstructural Alterations Without Landlord's Consent. Notwithstanding the foregoing, Tenant shall have the right from time to time and at any time, without Landlord's consent, to perform the following work within the Premises: (i) install, remove and relocate nonstructural office partitioning provided such work does not materially and adversely affect the base building structure or HVAC systems, (ii) paint and install wall coverings, (iii) install and remove office furniture, (iv) relocate electrical outlets, (v) install and remove workstations, (vi) install and remove Tenant's equipment and perform cable pulls in connection therewith, and (vii) install and remove carpeting and other floor coverings. Section 8.3 Freedom from Liens. Tenant shall not suffer or permit any mechanic's lien or other lien to be filed against the Project, or any portion thereof, by reason of work, labor, skill, services, equipment or materials supplied or claimed to have been supplied to the Premises at the request of Tenant, or anyone holding the Premises, or any portion thereof, through or under Tenant. If any such mechanic's lien or other lien shall at any time be filed against the Project, or any portion thereof, Tenant shall cause the same to be discharged of record or satisfied by bonding within 20 days of the date of filing the same. Tenant shall not be entitled to any additional grace or cure period. If Tenant shall fail to discharge or bond off such mechanic's lien or liens or other lien within such period, then an Event of Default shall have occurred and, in addition to any other right or remedy, Landlord may, but shall not be obligated to, discharge the same by paying to the claimant the amount claimed to be due or by procuring the discharge of such lien by deposit in the court having jurisdiction of such lien, the foreclosure thereof or other proceedings with respect thereto, of a cash sum sufficient to secure the discharge of the same, or by the deposit of a bond or other security with such court sufficient in form, content and amount to procure the discharge of such lien, or in such other manner having reasonable cost as is now or may in the future be provided by present or future law for the discharge of such lien as a lien against the Premises or the Project. Such amount paid by Landlord, or the value of such deposit so made by Landlord, together with all reasonable costs, fees and expenses in connection therewith (including reasonable attorney's fees of Landlord), together with interest thereon at the Default Rate, shall be repaid by Tenant to Landlord within thirty (30) days following demand by Landlord and if unpaid may be treated as Additional Rent. Tenant shall indemnify and defend Landlord against and save Landlord and the Premises, and any portion thereof, harmless from all losses, costs, damages, expenses, liabilities, suits, penalties, claims, demands and obligations, including, without limitation, reasonable attorney's fees resulting from the assertion, filing, foreclosure or other legal proceedings with respect to any such mechanic's lien or other lien. Tenant shall specifically notify all materialmen, contractors, artisans, mechanics, laborers and any other person now or hereafter furnishing any labor, services, materials, supplies or equipment to Tenant with respect to the Premises, or any portion thereof, that they must look exclusively to Tenant to obtain payment for the same, and that Landlord shall not be liable for any labor, services, materials, supplies, skill, machinery, fixtures or equipment furnished or to be furnished to Tenant upon credit, and that no mechanic's lien or other lien for any such labor, services, materials, supplies, machinery, fixtures or equipment shall attach to or affect the estate or interest of Landlord in and to the Project, or any portion thereof. Section 8.4 Landlord's Indemnification. The provisions of Section 8.3 above shall not apply to any mechanic's lien or other lien for labor, services, materials, supplies, machinery, fixtures or equipment furnished to the Premises in the performance of Landlord's construction obligations as set forth in the Work Agreement, and Landlord does hereby agree to indemnify and defend Tenant against and save Tenant and the Premises, and any portion thereof, harmless from all losses, costs, damages, expenses, liabilities, suits, penalties, claims, demands and obligations, including, without limitation, reasonable attorney's fees resulting from the assertion, filing, foreclosure or other legal proceedings with respect to any such mechanic's lien or other lien. Section 8.5 Removal of Liens. Except as otherwise provided for in this Article 8, Tenant shall not create, permit or suffer, and shall promptly discharge and satisfy of record, any other lien, encumbrance, charge, security interest, or other right or interest which shall be or become a lien, encumbrance, charge or security interest upon the Project, or any portion thereof, or the income therefrom, or on the interest of Landlord or Tenant in the Premises, or any portion thereof, save and except for those liens, encumbrances, charges, security interests, or other rights or interests consented to, in writing, by Landlord, or those mortgages, assignments of rents, assignments of leases and other mortgage documentation placed thereon by Landlord in financing or refinancing the Project. ARTICLE 9 REPAIRS Section 9.1 Tenant's Repair Obligations. Subject to Article 6 hereof, and except to the extent the responsibility of Landlord hereunder, Tenant shall, during the term of this Lease, at Tenant's expense, keep the non- structural elements of the Premises and all changes and alterations made by Tenant to the Premises (whether non-structural or structural) in as good order, condition and repair as they were at the time Tenant took possession of the same, reasonable wear and tear and damage from fire and other casualties excepted. Tenant shall keep the Premises in a neat and sanitary condition and shall not commit any nuisance or waste on the Premises or in, on, or throw foreign substances in the plumbing facilities. All uninsured damage or injury to the Project caused by Tenant moving furniture, fixtures, equipment, or other devices in or out of the Premises or by installation or removal of furniture, fixtures, equipment, devices or other property of Tenant, its agents, contractors, servants or employees, due to carelessness, omission, neglect, improper conduct, or other cause of Tenant, its servants, employees, agents, visitors, or licensees, shall be repaired, restored and replaced promptly by Tenant at its sole cost and expense to the reasonable satisfaction of Landlord. All repairs, restorations and replacements shall be in quality and class equal to the original work and shall comply with all requirements of the Lease. Section 9.2 Landlord's Inspection. Landlord or its employees, or agents, shall have the right, upon 24 hours notice to Tenant (except in the event of an emergency) to enter the Premises at any reasonable time or times for the purpose of inspection or performing work required by Landlord under the terms of this Lease, but nothing contained herein shall be construed as imposing any obligation on Landlord to make any repairs, alterations or improvements which are the obligation of Tenant. Section 9.3 Joint Inspection Upon Vacation. Tenant shall give written notice to Landlord at least thirty (30) days prior to vacating the Premises for the express purpose of arranging a meeting with Landlord for a joint inspection of the Premises. In the event of Tenant's failure to give such notice and arrange such joint inspection, Landlord's inspection at or after Tenant's vacation of the Premises shall be conclusively deemed correct for purposes of determining Tenant's responsibility for repairs and restoration hereunder. ARTICLE 10 ASSIGNMENT AND SUBLETTING Section 10.1 Restriction on Transfer. Tenant shall not sublet the Premises, or any portion thereof, nor assign, mortgage, pledge, transfer or otherwise encumber or dispose of this Lease, or any interest therein, or in any manner assign, mortgage, pledge, transfer or otherwise encumber or dispose of its interest or estate in the Premises, or any portion thereof, without obtaining Landlord's prior written consent in each and every instance, such consent not to be unreasonably withheld. Tenant agrees to pay on behalf of Landlord any and all reasonable, actual out-of- pocket costs of Landlord, including reasonable attorney's fees paid or payable in connection with the review of any such assignment or subletting. For purposes of this Lease, any transfer of less than fifty percent (50%) in the aggregate of stock, membership interest or partnership interest in Tenant shall not constitute an assignment. Section 10.2 Restriction From Further Assignment. Any further assignment or subleasing shall be governed by the terms of this Article 10. No assignment or subleasing shall relieve Tenant from any of Tenant's obligations set forth in this Lease. Section 10.3 Landlord's Termination Rights. Notwithstanding anything contained in this Lease to the contrary, should Tenant desire to assign this Lease, or its interest or estate in the Premises, or sublet the Premises, or any portion thereof, it shall give written notice of its intention to do so to Landlord sixty (60) days or more before the effective date of such proposed assignment or subletting and Landlord may, at any time within thirty (30) days after the receipt of such notice from Tenant, cancel this Lease by giving Tenant written notice of its intention to do so, in which event such cancellation shall become effective upon the date specified by Landlord, but not less than thirty (30) days nor more than sixty (60) days after its receipt by Tenant, with the same force and effect as if said cancellation date were the date originally set forth as the expiration date of the Term of this Lease, or any extension or renewal thereof. Landlord may enter into a direct lease with the proposed sublessee of assignee or with any other persons as Landlord may desire without obligation or liability to Tenant, its assignees, sublessees or their respective successors, assigns, agents or brokers. Section 10.4 Tenant's Failure to Comply. Tenant's failure to comply with the foregoing provisions and conditions of this Article 10 shall, at Landlord's option, render any purported assignment or subletting null and void and of no force and effect. Section 10.5 Sharing of Excess Rent. If Landlord consents to Tenant assigning its interest under this Lease or subletting all or any portion of the Premises, Tenant shall pay to Landlord (in addition to Rent and all other amounts payable by Tenant under this Lease) fifty percent (50%) of all rents and other considerations payable by such assignee or subtenant (net of brokerage commissions, improvement costs, legal fees and other reasonable costs and expenses incurred in connection with the assignment or subletting) in excess of the Rent otherwise payable by Tenant from time to time under this Lease. For the purposes of this computation, the additional amount payable by Tenant shall be determined by either (i) application of the rental rate per square foot for the Building or any portion thereof sublet, or (ii) the fair market rental rate for rooftop space or other space at the Premises sublet, as applicable. Said additional amount shall be paid to Landlord immediately upon receipt by Tenant of such Rent or other considerations from the assignee or subtenant. ARTICLE 11 DAMAGE BY FIRE OR OTHER CASUALTY Section 11.1 Tenantable Within 120 Days. If fire or other casualty shall render the whole or any material portion of the Premises untenantable, and Landlord determines that the Premises can reasonably be expected to be made tenantable within one hundred twenty (120) days from the date of such event, then Landlord shall repair and restore the Premises to as near their condition prior to the fire or other casualty as is reasonably possible within such one hundred twenty (120) day period (subject to delays for causes beyond Landlord's reasonable control) and notify Tenant that it will be doing so, such notice to be mailed within thirty (30) days from the date of such damage or destruction, and this Lease shall remain in full force and effect, but the Rent for the period during which the Premises are untenantable shall be abated pro rata (based upon the portion of the Premises which is untenantable). If Landlord is required to repair the Premises as aforesaid, said work shall be undertaken and prosecuted with all due diligence and speed. Section 11.2 Not Tenantable Within 120 Days. If fire or other casualty shall render the whole or any material part of the Premises untenantable and Landlord determines that the Premises cannot reasonably be expected to be made tenantable within one hundred twenty (120) days from the date of such event, then either party, by notice in writing to the other mailed within thirty (30) days from the date of such damage or destruction, may terminate this Lease effective upon a date within thirty (30) days from the date of such notice. Section 11.3 Building Substantially Damaged. In the event that more than fifty percent (50%) of the value of the Building is damaged or destroyed by fire or other casualty, and irrespective of whether damage or destruction can be made tenantable within one hundred twenty (120) days thereafter, then at Landlord's option, by written notice to Tenant, mailed within forty-five (45) days from the date of such damage or destruction, Landlord may terminate this Lease effective upon a date within ninety (90) days from the date of such notice to Tenant. Section 11.4 Uninsured Casualty. If fire or other casualty shall render any portion of the Premises or any material portion of the Building untenantable and the insurance proceeds are not sufficient to make such repair, then Landlord may, by notice to Tenant, mailed within thirty (30) days from the date of such damages or destruction, terminate this Lease effective upon a date within thirty (30) days from the date of such notice. Section 11.5 Deductible Payments. If the Premises or the Building is damaged, and such damage is of the type insured against under the fire and special form property damage insurance maintained by Landlord hereunder, the cost of repairing said damage up to the amount of the deductible under said insurance policy shall be included as a part of the Operating Expenses. If the damage is not covered by such insurance policies and Landlord elects to repair the damage, then Tenant shall pay Landlord a pro rata share of the "deductible amount" (if any, which deductible shall not exceed $100,000) under Landlord's insurance policies based on Tenant's percentage interest of the Building and, if the damage was due to an act or omission of Tenant, the difference between the actual cost of repair and any insurance proceeds received by Landlord. Section 11.6 Landlord's Repair Obligations. If fire or other casualty shall render the whole or any material part of the Premises untenantable and the Premises cannot reasonably be expected to be made tenantable within one hundred twenty (120) days from the date of such event and neither party hereto terminates this Lease pursuant to its rights herein, or in the event that more than fifty percent (50%) of the value of the Building is damaged or destroyed by fire or other casualty and Landlord does not terminate this Lease pursuant to its option granted herein, or in the event that fifty percent (50%) or less of the value of the Building is damaged or destroyed by fire or other casualty and neither the whole nor any material portion of the Premises is rendered untenantable, then Landlord shall repair and restore the Premises to as near its condition prior to the fire or other casualty as is reasonably possible with all due diligence and speed (subject to delays for causes beyond Landlord's reasonable control) and the Rent for the period during which the Premises are untenantable shall be abated pro rata (based upon the portion of the Premises which is untenantable). In no event shall Landlord be obligated to repair or restore any special equipment or improvements installed by Tenant at Tenant's expense. Section 11.7 Rent Apportionment. In the event of a termination of this Lease pursuant to this Article 11, Rent shall be apportioned on a per diem basis and paid to the date of the fire or other casualty. ARTICLE 12 EMINENT DOMAIN Section 12.1 Tenant's Termination. If the whole of or any substantial part of the Premises is taken by any public authority under the power of eminent domain, or taken in any manner for any public or quasi- public use, so as to render (in Tenant's reasonable judgment) the remaining portion of the Premises unsuitable for the purposes intended hereunder, then the term of this Lease shall cease as of the day possession shall be taken by such public authority and Landlord shall make a pro rata refund of any prepaid rent. All damages awarded for such taking under the power of eminent domain or any like proceedings shall belong to and be the property of Landlord, Tenant hereby assigning to Landlord its interest, if any, in said award. In the event that fifty percent (50%) or more of the building area or fifty percent (50%) or more of the value of the Building is taken by public authority under the power of eminent domain, then, at Landlord's option, by written notice to Tenant, mailed within sixty (60) days from the date possession shall be taken by such public authority, Landlord may terminate this Lease effective upon a date within ninety (90) days from the date of such notice to Tenant. Further, if all or any material part of the Premises is taken by public authority under the power of eminent domain, or taken in any manner for any public or quasi-public use, so as to render the remaining portion of the Premises unsuitable in Tenant's reasonable opinion, for the purposes intended hereunder, upon delivery of possession to the condemning authority pursuant to the proceedings, Tenant may, at its option, terminate this Lease as to the remainder of the Premises by written notice to Landlord, such notice to be given to Landlord within thirty (30) days after Tenant receives notice of the taking. Tenant shall not have the right to terminate this Lease pursuant to the preceding sentence unless (a) the business of Tenant conducted in the portion of the Premises taken cannot in Tenant's reasonable judgment be carried on with substantially the same utility and efficiency in the remainder of the Premises (or any substitute space securable by Tenant pursuant to clause [b] hereof); and (b) Tenant cannot secure substantially similar (in Tenant's reasonable judgment) alternate space upon the same terms and conditions as set forth in this Lease from Landlord in the Building. Any notice of termination shall specify the date not more than sixty (60) days after the giving of such notice as the date for such termination. Section 12.2 Tenant's Participation. Provisions in this Article 12 to the contrary notwithstanding, Tenant shall have the right to prove in any condemnation proceedings and to receive any separate award which may be made for damages to or condemnation of Tenant's movable trade fixtures and equipment and for moving expenses; provided, however, Tenant shall in no event have any right to receive any award for its interest in this Lease or for loss of leasehold. Provisions in this Article 12 to the contrary notwithstanding, in the event of a partial condemnation of the Building or the Premises and this Lease is not terminated, Landlord shall, at its sole cost and expense, restore the Premises and Building to a complete architectural unit and the Base Rent provided for herein during the period from and after the date of delivery of possession pursuant to such proceedings to the termination of this Lease shall be reduced to a sum equal to the product of the Base Rent provided for herein multiplied by a fraction, the numerator of which is the fair market rent of the Premises after such taking and after same has been restored to a complete architectural unit, and the denominator of which is the fair market rent of the Premises prior to such taking. ARTICLE 13 SURRENDER OF PREMISES Section 13.1 Surrender of Possession. On the last day of the term of this Lease, or on the sooner termination thereof, Tenant shall (i) peaceably surrender the Premises in good condition and repair consistent with Tenant's duty to make repairs as herein provided, reasonable wear and tear and casualty loss excluded; and (ii) at Tenant's sole cost and expense, remove all of its property and trade fixtures and equipment from the Premises which Tenant is required to remove pursuant to the terms of this Lease. All property not removed shall be deemed abandoned. Tenant hereby appoints Landlord its agent to remove all abandoned property of Tenant from the Premises upon termination of this Lease and to cause its transportation and storage for Tenant's benefit, all at the sole cost and risk of Tenant and Landlord shall not be liable for damage, theft, misappropriation or loss thereof and Landlord shall not be liable in any manner in respect thereto. Tenant shall reimburse Landlord upon demand for any reasonable expenses incurred by Landlord with respect to removal, transportation, or storage of abandoned property and with respect to restoring said Premises to good order, condition and repair. Tenant shall promptly surrender all keys for the Premises to Landlord at the place then fixed for the payment of rent and shall inform Landlord of combinations on any vaults, locks and safes left on the Premises. Section 13.2 Tenant Retaining Possession. In the event Tenant remains in possession of the Premises after expiration of this Lease, and without the execution of a new lease, but with Landlord's written consent, it shall be deemed to be occupying the Premises as a tenant from month to month, subject to all the provisions, conditions and obligations of this Lease insofar as the same can be applicable to a month-to-month tenancy, except that the Base Rent shall be the greater of (i) the then current Base Rent, or (ii) the then current fair market rate for the Premises as reasonably determined by Landlord. In the event Tenant remains in possession of the Premises after expiration of this Lease and without the execution of a new lease and without Landlord's written consent, Tenant shall be deemed to be occupying the Premises without claim of right and Tenant shall pay, as a charge for each day of occupancy, an amount equal to 150% of the Base Rent and Additional Rent (on a daily basis) then due under this Lease. ARTICLE 14 DEFAULT OF TENANT Section 14.1 Events of Default. The occurrence of any one or more of the following events (in this Article sometimes called "Event of Default") shall constitute a default and breach of this Lease by Tenant: (a) If Tenant fails to pay any Base Rent or Additional Rent payable under this Lease or fails to pay any obligation required to be paid by Tenant when and as the same shall become due and payable, and such default continues for a period of ten (10) days after the due date. (b) If Tenant fails to perform any of Tenant's nonmonetary obligations under this Lease for a period of thirty (30) days after written notice from Landlord; provided that if more time is required to complete such performance, Tenant shall not be in default if Tenant commences such performance within the thirty (30) day period and thereafter diligently pursues its completion. However, Landlord shall not be required to give such notice if Tenant's failure to perform constitutes a non-curable breach of this Lease. The notice required by this subsection is intended to satisfy any and all notice requirements imposed by law on Landlord and is not in addition to any such requirement. (c) If Tenant, by operation of law or otherwise, violates the provisions of this Lease relating to assignment, sublease, mortgage or other transfer of Tenant's interest in this Lease or in the Premises. (d) If Landlord discovers that any financial statement, warranty, representation or other information given to Landlord by Tenant, any assignee of Tenant, any subtenant of Tenant, any successor in interest of Tenant or any guarantor of Tenant's obligation hereunder, and any of them, in connection with this Lease, was materially false or misleading when made or furnished. (e) Tenant, by operation of law or otherwise, violates the provisions of this Lease relating to compliance with environmental laws. (f) If (i) Tenant makes a general assignment or general arrangement for the benefit of creditors; (ii) a petition for adjudication of bankruptcy or for reorganization or rearrangement is filed by or against Tenant and is not dismissed within thirty (30) days; (iii) if a trustee or receiver is appointed to take possession of substantially all of Tenant's assets located at the Premises or of Tenant's interest in the Lease and possession is not restored to Tenant within thirty (30) days; or (iv) if substantially all of Tenant's assets located at the Premises or of Tenant's interest in this Lease is subjected to attachment, execution or other judicial seizure which is not discharged within thirty (30) days. If a court of competent jurisdiction determines that any of the acts described in this subsection does not constitute an Event of Default and a trustee is appointed to take possession (or if Tenant remains a debtor in possession) and such trustee or Tenant transfers Tenant's interest hereunder, then Landlord shall receive, as Additional Rent, the difference between the Rent (or any other consideration) paid in connection with such assignment or sublease and the Rent payable by Tenant hereunder. As used in this subsection, the term "Tenant" shall also mean any guarantor of Tenant's obligations under this Lease. If any such Event of Default shall occur, Landlord, at any time during the continuance of any such Event of Default, may give written notice to Tenant stating that this Lease shall expire and terminate on the date specified in such notice, and upon the date specified in such notice this Lease, and all rights of Tenant under this Lease, including all rights of renewal whether exercised or not, shall expire and terminate, or in the alternative or in addition to the foregoing remedy, Landlord may assert and have the benefit of any other remedy allowed herein, at law, or in equity. Section 14.2 Landlord's Remedies. Upon the occurrence of an Event of Default by Tenant, and at any time thereafter, with or without notice or demand and without limiting Landlord in the exercise of any right or remedy which Landlord may have, Landlord shall be entitled to the rights and remedies set forth below. (a) Termination of Possession. Terminate Tenant's right to possession of the Premises by any lawful means, in which case the Lease shall terminate and Tenant shall immediately surrender possession of the Premises to Landlord. In such event, Landlord shall have the immediate right to reenter and remove all persons and property, and such property may be removed and stored in a public warehouse or elsewhere at the cost of, and for the account of Tenant, all without service of notice or resort to legal process and without being deemed guilty of trespass, or becoming liable for any loss or damage which may be occasioned thereby. In the event that Landlord shall elect to so terminate this Lease, then Landlord shall be entitled to recover from Tenant all damages incurred by Landlord by reason of Tenant's default, including: (i) The equivalent of the amount of the Base Rent and Additional Rent which would be payable under this Lease by Tenant if this Lease were still in effect, less (ii) The net proceeds of any reletting affected pursuant to the provisions of Section 14.2 hereof after deducting all of Landlord's reasonable expenses in connection with such reletting, including, without limitation, all repossession costs, brokerage commissions, legal expenses, reasonable attorneys' fees, alteration costs, and expenses of preparation of the Premises, or any portion thereof, for such reletting. Tenant shall pay such current damages in the amount determined in accordance with the terms of this Section 14.2 as set forth in a written statement thereof from Landlord to Tenant (hereinafter called the "Deficiency"), to Landlord in monthly installments on the days on which the Rent would have been payable under this Lease if this Lease were still in effect, and Landlord shall be entitled to recover from Tenant each monthly installment of the Deficiency as the same shall arise. (b) Damages. At any time after an Event of Default and termination of this Lease, whether or not Landlord shall have collected any monthly Deficiency as set forth in Section 14.2, Landlord shall be entitled to recover from Tenant, and Tenant shall pay to Landlord, on demand, as and for final damages for Tenant's default, an amount equal to the difference between the then present worth of the aggregate of the Base Rent and Additional Rent and any other charges to be paid by Tenant hereunder for the unexpired portion of the term of this Lease (assuming this Lease had not been so terminated), and the then present worth of the then aggregate fair and reasonable fair market rent of the Premises for the same period. In the computation of present worth, a discount rate equal to the discount rate of the Federal Reserve Bank of New York plus one percent (1%) shall be employed. If the Premises, or any portion thereof, shall be relet by Landlord for the unexpired term of this Lease, or any part thereof, before presentation of proof of such damages to any court, commission or tribunal, the amount of Rent reserved upon such reletting shall, prima facie, be the fair and reasonable fair market rent for the part or the whole of the Premises so relet during the term of the reletting. Nothing herein contained or contained in Section 14.2 shall limit or prejudice the right of Landlord to prove and obtain, as damages by reason of such expiration or termination, an amount equal to the maximum allowed by any statute or rule of law in effect at the time when, and governing the proceedings in which, such damages are to be proved, whether or not such amount be greater, equal to or less than the amount of the difference referred to above. (c) Reentry and Removal. Upon the occurrence of an Event of Default by Tenant, Landlord shall also have the right, with or without terminating this Lease, to reenter the Premises to remove all persons and property from the Premises. Such property may be removed and stored in a public warehouse or elsewhere at the cost of and for the account of Tenant. If Landlord shall elect to reenter the Premises, Landlord shall not be liable for damages by reason of such reentry. (d) No Termination; Recovery of Rent. If Landlord does not elect to terminate this Lease as provided in this Section 14.2, then Landlord may, from time to time, recover all Rent as it becomes due under this Lease. At any time thereafter, Landlord may elect to terminate this Lease and to recover damages to which Landlord is entitled. (e) Reletting the Premises. In the event that Landlord should elect to terminate this Lease and to relet the Premises, it may execute any new lease in its own name. Tenant hereunder shall have no right or authority whatsoever to collect any Rent from such Tenant. The proceeds of any such reletting shall be applied as follows: (i) First, to the payment of any indebtedness other than Rent due hereunder from Tenant to Landlord, including but not limited to storage charges or brokerage commissions owing from Tenant to Landlord as the result of such reletting; (ii) Second, to the payment of the costs and expenses of reletting the Premises, including alterations and repairs which Landlord, in its sole discretion, deems reasonably necessary and advisable and reasonable attorneys' fees incurred by Landlord in connection with the retaking of the said Premises and such reletting; (iii) Third, to the payment of Rent and other charges due and unpaid hereunder; and (iv) Fourth, to the payment of future Rent and other damages payable by Tenant under this Lease. The parties hereto shall, and they hereby do, waive trial by jury in any action, proceeding, or counterclaim brought by either of the parties hereto against the other on any matters whatsoever arising out of, or in any way connected with, this Lease, the relationship of Landlord and Tenant, Tenant's use or occupancy of the Premises and/or the Project, and/or claim or injury or damage. Section 14.3 Written Notice of Termination Required. Landlord shall not be deemed to have terminated this Lease and the Tenant's right to possession of the leasehold or the liability of Tenant to pay Rent thereafter to accrue or its liability for damages under any of the provisions hereof, unless Landlord shall have notified Tenant in writing that it has so elected to terminate this Lease. Tenant covenants that the service by Landlord of any notice pursuant to the applicable unlawful detainer statutes of the state in which the Building is located and the Tenant's surrender of possession pursuant to such notice shall not (unless Landlord elects to the contrary at the time of, or at any time subsequent to the service of, such notice, and such election be evidenced by a written notice to Tenant) be deemed to be a termination of this Lease or of Tenant's right to possession thereof. Section 14.4 Remedies Cumulative; No Waiver. All rights, options and remedies of Landlord contained in this Lease shall be construed and held to be cumulative, and no one of them shall be exclusive of the other, and Landlord shall have the right to pursue any one or all of such remedies or any other remedy or relief which may be provided at law or in equity whether or not stated in this Lease, including, without limitation, the right of self help. No waiver by Landlord of a breach of any of the terms, covenants or conditions of this Lease by Tenant shall be construed or held to be a waiver of any succeeding or preceding breach of the same or any other term, covenant or condition therein contained. No waiver of any default of Tenant hereunder shall be implied from any omission by Landlord to take any action on account of such default if such default persists or is repeated, and no express waiver shall affect default other than as specified in said waiver. The consent or approval by Landlord to or of any act by Tenant requiring Landlord's consent or approval shall not be deemed to waive or render unnecessary Landlord's consent to or approval of any subsequent similar acts by Tenant. Section 14.5 Legal Costs. Tenant shall reimburse Landlord, upon demand, for any costs or expenses incurred by Landlord in connection with any breach or default of Tenant under this Lease, whether or not suit is commenced or judgment entered. Such costs shall include reasonable legal fees and costs incurred for the negotiation of a settlement, enforcement of rights or otherwise. Furthermore, if any action for breach of or to enforce the provisions of this Lease is commenced, the court in such action shall award to the party in whose favor a judgment is entered a reasonable sum as attorneys' fees and costs. Such attorneys' fees and costs shall be paid by the losing party in such action. Tenant shall also indemnify Landlord against and hold Landlord harmless from all costs, expenses, demands and liability incurred by Landlord if Landlord becomes or is made a party to any claim or action (a) instituted by Tenant, or by any third party against Tenant; (b) for foreclosure of any lien for labor or material furnished to or for Tenant or such other person; (c) otherwise arising out of or resulting from any act or transaction of Tenant or such other person; or (d) necessary to protect Landlord's interest under this Lease in a bankruptcy proceeding, or other proceeding under Title 11 of the United States Code, as amended. Tenant shall defend Landlord against any such claim or action at Tenant's expense with counsel reasonably acceptable to Landlord or, at Landlord's election, Tenant shall reimburse Landlord for any legal fees or costs incurred by Landlord in any such claim or action. In addition, Tenant shall pay Landlord's reasonable attorneys' fees incurred in connection with Tenant's request for Landlord's consent in connection with any act which Tenant proposed to do and which requires Landlord's consent. Section 14.6 Waiver of Damages for Reentry. Tenant hereby waives all claims by Landlord's reentering and taking possession of the Premises or removing and storing the property of Tenant as permitted under this Lease and will save Landlord harmless from all losses, costs or damages occasioned Landlord thereby. No such reentry shall be considered or construed to be a forcible entry by Landlord. ARTICLE 15 SUBORDINATION/ESTOPPEL Section 15.1 Lease Subordinate. This Lease shall be subject and subordinate to any mortgage, deed of trust or ground lease now encumbering the Premises, the Property, or any portion thereof by Landlord, its successors or assigns. The foregoing subordination shall be effective without the necessity of the execution and delivery of any further instruments on the part of Tenant to effectuate such subordination. Provided Tenant receives a non-disturbance agreement substantially in the form attached hereto as Exhibit C, this Lease shall be further subject and subordinate to any future mortgages, deeds of trust or ground leases and any amendments, replacements, renewals and extensions thereof. Tenant agrees at any time hereafter, within fifteen (15) days following demand, to execute and deliver any instruments, releases, or other documents that may be reasonably required for the purpose of subjecting and subordinating this Lease, as above provided, to the lien of any such mortgage, deed of trust or ground lease. Section 15.2 Attornment. Subject to the terms of this Article 15, in the event the holder of any mortgage, deed of trust or ground lease shall at any time elect to have this Lease constitute a prior and superior lien to its mortgage, deed of trust or ground lease, then, and in such event, upon any such holder or landlord notifying Tenant to that effect in writing, this Lease shall be deemed prior and superior in lien to such mortgage, deed of trust, ground lease, whether this Lease is dated prior or subsequent to the date of such mortgage, deed of trust or ground lease and Tenant shall execute such attornment agreement as may be reasonably requested by said holder or landlord. Section 15.3 Tenant's Notice of Default. Tenant agrees, provided the mortgagee, ground landlord or trust deed holder under any mortgage, ground lease, deed of trust or other security instrument ("Mortgagee") shall have notified Tenant in writing (by the way of a notice of assignment of lease or otherwise) of its address, Tenant shall give such Mortgagee, simultaneously with delivery of notice to Landlord, by registered or certified mail, a copy of any such notice of default served upon Landlord. Tenant further agrees that said Mortgagee shall have the right to cure any alleged default during the same period that Landlord has to cure such default. Section 15.4 Estoppel Certificates. Tenant shall, without charge at any time and from time to time, within fifteen (15) days after written request by Landlord, certify, to the extent true, by written instrument, duly executed, acknowledged and delivered to any mortgagee, assignee of a mortgagee, proposed mortgagee, or to any purchaser or proposed purchaser, or to any other person transacting business with Landlord and relating to the Premises: (a) That this Lease (and all guaranties, if any) is unmodified and in full force and effect (or, if there have been modifications, that the same is in full force and effect, as modified, and stating the modifications); (b) The dates to which the Base Rent or Additional Rent have been paid in advance; (c) Whether or not there are then existing any breaches or defaults by such party or the other party known by such party under any of the covenants, conditions, provisions, terms or agreements of this Lease, and specifying such breach or default, if any, or any setoffs or defenses against the enforcement of any covenant, condition, provision, term or agreement of this Lease (or of any guaranties) upon the part of Landlord or Tenant (or any guarantor), as the case may be, to be performed or complied with (and, if so, specifying the same and the steps being taken to remedy the same); and (d) Such other statements or certificates as Landlord or any mortgagee may reasonably request. It is the intention of the parties hereto that any statement de- livered pursuant to this Section may be relied upon by any of such parties transacting business with Landlord and relating to the Premises. If Tenant does not deliver such statement to the requesting party within such fifteen (15) day period, Landlord and any applicable party transacting business relative to the Premises with Landlord, may conclusively presume and rely upon the following facts: (i) that the terms and provisions of this Lease have not been changed except as otherwise represented by Landlord; (ii) that this Lease has not been canceled or terminated and is in full force and effect, except as otherwise represented by Landlord; that the current amount of the Base Rent is as represented by Landlord; that there have been no subleases or assignments of the Lease; (iii) that not more than one month's Base Rent or other charges have been paid in advance; and (iv) that Landlord is not in default under the Lease. In such event, Tenant shall be estopped from denying the truth of such facts. ARTICLE 16 MISCELLANEOUS Section 16.1 Time is of the Essence. Time is of the essence with respect to the performance of every provision of this Lease in which time of performance is a factor. Section 16.2 Memorandum of Lease. Upon not less than ten (10) days prior written request by either party, the parties hereto agree to execute and deliver to each other a Memorandum Lease, in recordable form, setting forth the following: (a) The date of this Lease; (b) The parties to this Lease; (c) The term of this Lease; (d) A description of the Premises; and (e) Such other matters reasonably requested by Landlord or Tenant to be stated therein. The cost of recording (including all taxes) the memorandum shall be at the expense of the requesting party. Section 16.3 Joint and Several Liability. All parties signing this Lease as Tenant shall be jointly and severally liable for all obligations of Tenant. Section 16.4 Broker. Landlord and Tenant represent to each other that they have not dealt with any brokers in connection with this Lease other than CB Commercial Real Estate Services, Inc., whose commission shall be paid by Landlord pursuant to a separate agreement. Landlord and Tenant shall indemnify and hold each other harmless against any claims for brokerage or other commissions arising by reason of a breach of the aforesaid representation and warranty. Section 16.5 Notices. All notices, demands and requests shall be in writing, and shall be effectively served by forwarding such notice, demand or request by certified or registered mail, postage prepaid, or by commercial overnight courier service, or by hand delivery with signed receipts, addressed as follows: (a) If addressed to Tenant: Ace Hardware Corporation 2200 Kensington Court Oak Brook, Ill. 60523-2100 Attn: Mr. George H. Harris, Corporate Property and Planning Manager with a copy to: Ace Hardware Corporation 2200 Kensington Court Oak Brook, Ill. 60523-2100 Attn: John J. VanZeyl, Esq. (b) If addressed to Landlord: Arundel II L.L.C. c/o Opus East, L.L.C. 6707 Democracy Boulevard Suite 510 Bethesda, Maryland 20817 with copies to: Opus U.S. Corporation 700 Opus Center 9900 Bren Road Minnetonka, Minnesota 55343 Attn: Dan F. Nicol, Esq. and Hazel & Thomas, P.C. 3110 Fairview Park Drive Suite 1400 Falls Church, Virginia 22042 Attn: Donna P. Shafer, Esq. or at such other address as Landlord and Tenant may hereafter designate by written notice to the other party. The effective date of all notices shall be (i) three (3) days after the date of mailing if sent by United States Postal Service, (ii) the date of delivery if sent by a nationally recognized overnight courier service, or (iii) the date of receipt if sent by hand delivery with signed receipts. Section 16.6 Landlord's Agent. All rights and remedies of Landlord under this Lease or that may be provided by law may be executed by Landlord in its own name individually, or in the name of its agent, and all legal proceedings for the enforcement of any such rights or remedies, including those set forth in Article 14, may be commenced and prosecuted to final judgment and execution by Landlord in its own name or in the name of its agent. Section 16.7 Quiet Possession. Landlord covenants and agrees that Tenant, upon paying the Base Rent, Additional Rent and other charges herein provided for and observing and keeping the covenants, agreements and conditions of this Lease on its part to be kept and performed, shall lawfully and quietly hold, occupy and enjoy the Premises during the term of this Lease without hindrance or molestation by Landlord or by any person claiming under or through Landlord. Section 16.8 Successors and Assigns. The covenants and agreements herein contained shall bind and inure to the benefit of the Landlord, its successors and assigns, and Tenant and its permitted successors and assigns. Section 16.9 Severability. If any term or provision of this Lease shall to any extent be held invalid or unenforceable, the remaining terms and provisions of this Lease shall not be affected thereby, but each term and provision of this Lease shall be valid and enforced to the fullest extent permitted by law. This Lease shall be construed and enforced in accordance with the laws of the state in which the Premises are located. Section 16.10 No Abandonment or Waste. Tenant covenants not to do or suffer any waste or damage or disfigurement or injury to the Premises or the Project. Section 16.11 Transfers by Landlord. The term "Landlord" as used in this Lease so far as covenants or obligations on the part of Landlord are concerned shall be limited to mean and include only the owner or owners of the Premises at the time in question, and in the event of any transfer or transfers or conveyances the then grantor shall be automatically freed and released from all liability accruing from and after the date of such transfer or conveyance as respects the performance of any covenant or obligation on the part of Landlord contained in this Lease to be performed. It is intended hereby that the covenants and obligations contained in this Lease on the part of Landlord shall be binding on the Landlord, its successors and assigns, only during and in respect to their respective successive periods of ownership. In the event of a sale or conveyance by Landlord of the Premises or any part thereof, the same shall operate to release Landlord from any future liability upon any of the covenants or conditions herein contained and in such event Tenant agrees to look solely to the responsibility of the successor in interest of Landlord in and to this Lease. This Lease shall not be affected by any such sale or conveyance, and Tenant agrees to attorn to the purchaser or grantee, which shall be personally obligated on this Lease only so long as it is the owner of Landlord's interest in and to this Lease. Section 16.12 Headings. The marginal or topical headings of the several articles and sections are for convenience only and do not define, limit or construe the contents of said articles and sections. Section 16.13 Written Agreement. All preliminary negotiations are merged into and incorporated in this Lease, except for written collateral agreements executed contemporaneously herewith. Section 16.14 Modifications or Amendments. This Lease can only be modified or amended by an agreement in writing signed by the parties hereto. No receipt of money by Landlord from Tenant or any other person after termination of this Lease or after the service of any notice or after the commencement of any suit, or after final judgment for possession of the Premises shall reinstate, continue or extend the term of this Lease or affect any such notice, demand or suit, or imply consent for any action for which Landlord's consent is required, unless specifically agreed to in writing by Landlord. Any amounts received by Landlord may be allocated to any specific amounts due from Tenant to Landlord as Landlord determines. Section 16.15 Landlord Control. Landlord shall have the right to temporarily close any portion of the building area or land area to the extent as may, in Landlord's reasonable opinion, be necessary to prevent a dedication thereof or the accrual of any rights to any person or the public therein. Section 16.16 Utility Easement. Tenant shall permit Landlord (or its designees) to erect, use, maintain, replace and repair pipes, cables, conduits, plumbing, vents, and telephone, electric and other wires or other items, in, to and through the Premises, as and to the extent that Landlord may now or hereafter deem necessary or appropriate for the proper operation and maintenance of the Project. Section 16.17 Not Binding Until Properly Executed. Employees or agents of Landlord have no authority to make or agree to make a lease or other agreement or undertaking in connection herewith. The submission of this document for examination does not constitute an offer to lease, or a reservation of, or option for, the Premises. This document becomes effective and binding only upon the execution and delivery hereof by the proper officers of Landlord and Tenant. Tenant confirms that Landlord and its agents have made no representations or promises with respect to the Premises or the making of or entry into this Lease except as in this Lease expressly set forth, and agrees that no claim or liability shall be asserted by Tenant against Landlord for, and Landlord shall not be liable by reason of, breach of any representations or promises not expressly stated in this Lease. This Lease, except for the Building Rules and Regulations, in respect to which Section 16.18 of this Article shall prevail, can be modified or altered only by agreement in writing between Landlord and Tenant, and no act or omission of any employee or agent of Landlord shall alter, change or modify any of the provisions hereof. Section 16.18 Building Rules and Regulations. Tenant shall perform, observe and comply with any commercially reasonable rules and regulations which may be adopted by Landlord from time to time, with respect to the safety, care and cleanliness of the Premises, and the preservation of good order thereon, and, upon written notice thereof to Tenant, Tenant shall perform, observe, and comply with any changes, amendments or additions thereto as from time to time shall be established and deemed advisable by Landlord. Notwithstanding the foregoing, in no event shall any amendments or revisions to the rules and regulations change or alter Tenant's obligations or rights under this Lease, and in the event of a discrepancy between the rules and regulations and the Lease, the Lease shall govern. Section 16.19 Compliance with Laws and Recorded Covenants. Tenant shall not use the Premises or permit anything to be done in or about the Premises which will, in any way, conflict with any law, statute, ordinance or governmental rule or regulation now in force or which may hereafter be enacted or promulgated. Tenant shall, at its sole cost and expense, promptly comply with all laws, statutes, ordinances and governmental rules and regulations now in force or which may hereafter be in force, and with the requirements of any fire insurance underwriters or other similar body now or hereafter constituted relating to or affecting the condition, use or occupancy of the Premises. Tenant shall use the Premises and comply with any covenants, conditions, and restrictions affecting the Premises. Tenant shall have the responsibility to comply with the requirements of the ADA in the Premises only after the Commencement Date. As used in this Lease, "ADA" shall mean the Americans with Disabilities Act of 1991, 42 U.S.C. & 12.101 et seq. and all regulations applicable thereto promulgated as of the date hereof (collectively, "ADA"). Section 16.20 Obligations Survive Termination. All obligations of Tenant hereunder not fully performed as of the expiration or earlier termination of the term of this Lease shall survive the expiration or earlier termination of the term hereof, including, without limitation, all obligations with respect to Operating Expenses and Real Estate Taxes and all obligations concerning the condition of the Premises. Section 16.21 Tenant's Waiver. Intentionally Deleted. Section 16.22 Authorization. Landlord and Tenant shall furnish to each other, within ten (10) business days of written request from the other party, a corporate resolution, proof of due authorization of partners, or other appropriate and reasonable documentation evidencing the due authorization to enter into this Lease. [OPEN] Section 16.23 No Partnership or Joint Venture. This Lease shall not be deemed or construed to create or establish any relationship or partnership or joint venture or similar relationship or arrangement between Landlord and Tenant hereunder. Section 16.24 Landlord's Right to Substitute Premises. Intentionally Deleted. Section 16.25 Tenant's Obligation to Pay Miscellaneous Taxes. Tenant shall pay, prior to delinquency, all taxes assessed or levied upon its occupancy of the Premises, or upon the trade fixtures, furnishings, equipment and all other personal property of Tenant located in the Premises, and when possible, Tenant shall cause such trade fixtures, furnishings, equipment and other personal property to be assessed and billed separately from the property of Landlord. In the event any or all of Tenant's trade fixtures, furnishings, equipment or other personal property, or Tenant's occupancy of the Premises, shall be assessed and taxed with the property of Landlord, Tenant shall pay to Landlord its share of such taxes within thirty (30) days after delivery to Tenant by Landlord of a statement in writing setting forth the amount of such taxes applicable to Tenant's personal property. Section 16.26 Signs. Tenant shall not erect any signs on the exterior of the Building or on the Project without Landlord's prior written consent, such consent not to be unreasonably withheld. Section 16.27 Exhibits. The following are made a part hereof, with the same force and effect as if specifically set forth herein: (a) Exhibit A - Site Plan (b) Exhibit B - Work Agreement (c) Exhibit C - Non Disturbance Agreement (d) Exhibit D - Floor Plan (e) Exhibit E - Site Plan Showing Arundel I, III, IV and V Section 16.28 Landlord's Limited Liability. Anything contained in this Lease to the contrary notwithstanding, Tenant agrees that Tenant shall look solely to the estate and property of Landlord in the Project, subject, however, to the prior rights of any mortgagee or Landlord of the Project. No other assets of Landlord or any partners, shareholders, or other principals of Landlord shall be subject to levy, execution or other judicial process for the satisfaction of Tenant's claim. Section 16.29 Intentionally Deleted. Section 16.30 Parking. Landlord hereby grants to Tenant a license to use in common with other tenants of the Building and with the public, up to fifty seven (57) passenger car parking spaces in the portions of the Project designated for such common parking by Landlord from time to time, and Landlord grants Tenant a license to use the fifteen (15) trailer parking spaces located in the area designated on Exhibit A. Tenant shall not be required to pay any parking fees in connection with the foregoing privileges. The 15 tractor trailer parking spaces shall be in addition to the 21 tractor trailer parking spaces in front of Tenant's dock doors. Section 16.31 Measurement of Premises. As used in this Lease, the term "net rentable area" shall mean the number of square feet as certified by Landlord's Architect, and as measured to the outside face of the exterior Building walls and the center line of common/demising walls. Section 16.32 Renewal Options. Tenant shall have the right to renew and extend the term of this Lease for the Renewal Terms (herein so called) upon and subject to the following terms and conditions: Tenant may extend this Lease for two (2) Renewal Terms of five (5) years each by Tenant's giving Landlord a Renewal Notice no less than nine (9) months prior to the expiration of the initial term or the immediately preceding Renewal Term, as applicable. Such Renewal Term(s) shall commence immediately upon the expiration of the initial term or subsequent Renewal Term, and upon exercise of each renewal option the expiration date of the term shall automatically become the last day of the applicable Renewal Term(s). If Tenant does not renew the Lease in a timely manner for the Renewal Term(s), then Tenant's rights with respect to all successive Renewal Term(s) shall expire and be of no further force and effect. The exercise by Tenant of the renewal option(s) set forth herein must be made, if at all, by delivery of the Renewal Notice to Landlord on or before the dates set forth above. Once Tenant shall exercise such renewal option(s), Tenant may not thereafter revoke such exercise. At Landlord's election, Tenant's renewal options shall terminate and be of no further force or effect if (i) an Event of Default exists under the Lease at the time Tenant attempts to exercise its renewal option, (ii) Tenant defaults under any provision of the Lease after exercising its renewal option and such default continues beyond any applicable cure period provided in the Lease, (iii) at any time during the Term of the Lease, as extended, Tenant assigns the Lease to a third party, or (iv) at the time Tenant attempts to exercise its renewal option, Tenant has subleased or has demonstrated an intention to sublease thirty percent (30%) or more of the Premises to an unrelated third party. Tenant shall take the Premises "as is" for the Renewal Term(s) and Landlord shall have no obligation to make any improvements or alterations to same; provided, however, Landlord shall comply with its repair and maintenance obligations as set forth in this Lease. Annual Base Rent for each year during the Renewal Terms shall be at the per square foot rate equal to the greater of (i) the then current per square foot rate applicable to the Premises, or (ii) the "fair market rate". The "fair market rate" shall be agreed upon by Landlord and Tenant within fifteen (15) days of the date on which Tenant exercises its renewal option. In the event the parties are unable to timely agree on the "fair market rate", the dispute shall be resolved in accordance with the alternative dispute resolution method provided in Section 16.33 hereof. Each "Official" shall be a commercial real estate broker with at least ten (10) year experience in the Baltimore/Washington industrial corridor. Tenant shall not be entitled to any rental abatement concessions, additional renewal options or other similar concessions during any Renewal Term. Except as set forth herein, the leasing of the Premises for the Renewal Term(s) shall be upon the same terms and conditions as are applicable for the initial term and any subsequent Renewal Term(s), and shall be upon and subject to all of the provisions of this Lease, including, without limitation, the obligation of Tenant to pay any costs or amounts payable by Tenant to Landlord under the Lease. Tenant's rights under this Section 16.32 shall be personal to Tenant and shall not inure to the benefit of any assignee or occupant of the Premises other than an assignee which is a successor corporation into which or with which Tenant is merged or consolidated or which acquires substantially all of Tenant's assets and property, or to any subsidiary, affiliate or parent company of Tenant, or any subsidiary of the parent company of Tenant. Section 16.33 Alternative Dispute Resolution. In the event that a dispute arises between Landlord and Tenant under the Lease, and the Lease specifically provides that the dispute resolution procedure outlined in this Section 16.33 (herein referred to as the "Dispute Resolution Procedure") shall be utilized, the parties shall proceed as follows: (a) The party electing to proceed under the procedures outlined herein (the "Electing Party") shall give written notice of such election to the other party (the "Other Party"), and shall designate in writing the Electing Party's selection of an individual with the qualifications outlined in the section of the Lease giving rise to this remedy (the "Official") who shall act on the Electing Party's behalf in determining the disputed fact. (b) Within ten (10) days after the Other Party's receipt of the Electing Party's selection of an Official, the Other Party, by written notice to the Electing Party, shall designate an Official who shall act on the Other Party's behalf in determining the disputed fact. (c) Within ten (10) days of the selection of the Other Party's Official, the two (2) Officials shall render a joint written determination of the disputed fact. If the two (2) Officials are unable to agree upon a joint written determination within such ten (10) day period, each Official shall render his or her own written determination and the two Officials shall elect a third Official within such ten (10) day period. In the event the two Officials are unable to select a third Official within such ten (10) day period, then either party may apply to a court of original jurisdiction in Anne Arundel County, Maryland for appointment by such court of such third Official. (d) Within ten (10) days after the appointment of the third Official, the third Official shall select one of the determinations of the two (2) Officials originally selected, without modification or qualification. (e) If either Landlord or Tenant fails or refuses to select an Official, the Official selected shall alone determine the disputed fact. Landlord and Tenant agree that they shall be bound by the determination of disputed fact pursuant to this subsection. Landlord shall bear the fees and expenses of its Official, Tenant shall bear the fees and expenses of its Official, and Landlord and Tenant shall share equally the fees and expenses of the third Official, if any. Section 16.34 Intentionally Deleted. Section 16.35 Right of Notice. Each time during the Lease term that Landlord receives written notice that space is available in the buildings constructed in Arundel I, III, IV and V (as shown on the site plan attached hereto as Exhibit E) Landlord shall given Tenant written notice of such availability. The Right of Notice provided for in this Section shall be personal to Tenant and shall not be applicable to any assignee, subtenant or successor of Tenant. IN WITNESS WHEREOF the parties have executed this Lease as of the day and year first above written. Landlord: Arundel II L.L.C. By_/S/Joseph J. Rauenhorsp______[SEAL] Its______President__________________ Tenant: Ace Hardware Corporation By /S/David F. Myer_____________[SEAL] Its Vice President - Retail Support Exhibit A (This Exhibit is a graphic representation) EXHIBIT B to the Lease WORK AGREEMENT A. LANDLORD UNDERTAKINGS. 1. Final Completion of Premises (a) The Premises shall be deemed to be Finally Completed ("Final Completion", "Finally Complete" or "Finally Completed") on the earliest date on which all of the following conditions have been met: (1) The Tenant Improvements (as hereinafter defined) have been completed substantially (i.e., in all except minor and immaterial respects) in accordance with the Tenant Improvement Plans (as hereinafter defined), other than insubstantial details of construction or mechanical adjustment. (2) The Premises and loading docks and parking facilities contemplated in the Lease shall be free of construction debris and other obstructions and available for use by Tenant. (3) Landlord has put in good operating condition all service facilities and Tenant Improvement systems serving the Premises, including but not limited to heating, ventilating, air conditioning, lighting, water supply, any security, fire alarm, prevention, protection and detection and sewage systems in accordance with the Tenant Improvement Plans. The issuance of a certificate of occupancy (or like permit) for the Premises shall be dispositive that the Premises have been Finally Completed. 2. Tenant Improvements. Landlord shall furnish and install in the warehouse portion of the Premises the "Tenant Improvements" shown on the Outline Specifications attached hereto as Exhibit B-2. With respect to approximately 2,000 square feet of usable office area to be contained in the Premises, Landlord shall furnish and install those "Tenant Improvements" shown on the finish specifications contained in the Outline Specifications and the schematic space plan attached hereto as Exhibit B-3. . All design, space planning, and architectural and engineering work for or in connection with the Tenant Improvements, all drawings, plans, specifications, licenses, permits or other approvals relating thereto, and all insurance, bonds and other requirements and conditions hereunder, all construction costs, and all other costs and expenses incurred in connection with the Tenant Improvements (collectively, "Improvement Costs") shall be at Landlord's sole cost and expense. Notwithstanding the foregoing, (i) any costs or expenses incurred as a result of change orders (as hereinafter defined) shall be at Tenant's sole cost and expense, and (ii) any Improvement Costs relating to the office portion of the Premises in excess of the Allowance (as hereinafter defined) shall be at Tenant's sole cost and expense. To the extent any amounts are due from Tenant in connection with the immediately preceding sentence (collectively, "Tenant's Costs"), such amounts shall include overhead and profit (10%) and general conditions (6%), and all such amounts shall be paid in the manner set forth below. Allowance. Landlord grants to Tenant an allowance ("Allowance") of Fifty Thousand and no/100 Dollars ($50,000) to be applied to the Improvement Costs for the office portion of the Premises. It is mutually agreed that Tenant's liability for Improvement Costs relating to the office portion of the Premises shall not exceed $10,000, provided there are no Tenant requested change orders after the date of this Agreement. Tenant shall not be entitled to any unused portion of the Allowance. B. PLANS AND SPECIFICATIONS. 1. Plans and Specifications. The Landlord's Architect and the mechanical, electrical, plumbing and structural engineers selected by Landlord shall prepare the Plans and Specifications (as hereinafter defined) in conformance with the Outline Specifications and the schematic space plan attached hereto as Exhibits B-2 and B-3, respectively. 2. Time Schedule. (a) Within thirty (30) days of the date of this Lease, Landlord shall furnish to Tenant for its review and approval, all architectural plans, working drawings and specifications (the "Plans and Specifications") necessary and sufficient (i) for the construction of the Tenant Improvements in accordance with the Outline Specifications and the schematic space plan, and (ii) to enable the general contractor, Opus East L.L.C. ("Contractor"), to obtain a building permit for the construction of the Tenant Improvements. Tenant shall advise Landlord of Tenant's approval or disapproval of the Plans and Specifications within five (5) business days after Landlord submits the Plans and Specifications to Tenant. Landlord shall revise the Plans and Specifications to meet Tenant's objections, if any, and resubmit the Plans and Specifications to Tenant for its review and approval within five (5) business days after Tenant notifies Landlord of Tenant's objections, if any, together with an estimate of the Improvement Costs resulting from Tenant's change orders. Tenant shall advise Landlord of Tenant's approval or disapproval of the revised Plans and Specifications within five (5) business days after Landlord submits same. Upon approval of the Plans and Specifications, they shall be attached hereto and incorporated herein as Exhibit B-4. (b) The Outline Specifications, the schematic space plan and the Plans and Specifications are referred to collectively herein as the "Tenant Improvement Plans." Tenant's failure to timely approve or disapprove any component of the Tenant Improvement Plans or any revisions made after objections by Tenant shall constitute a Tenant Delay. (c) The Tenant Improvements shall be of first-class quality, shall consist of new materials, commensurate with the level of improvements for a first class facility to be used for office, warehouse, distribution and storage purposes in Anne Arundel County Maryland, and shall fully comply with the Plans and Specifications. (d) Tenant hereby designates _____________________, Ace Hardware Corporation, 2200 Kensington Court, Oak Brook, Illinois, 60523- 2100, Telephone: ______________________________; Fax: ___________________ as Tenant's Representative for purposes of granting any consents or approvals by Tenant under this Work Agreement, authorizing and executing any and all documents, workletters or other writings and changes thereto needed to effect this Work Agreement, and any and all changes, additions or deletions to the work contemplated herein, and Landlord shall have the right to rely on any documents executed by such authorized party. Landlord hereby designates Geoff Lilja and __________________, either of whom may act, Opus East, L.L.C., 6707 Democracy Boulevard, Suite 510, Bethesda, Maryland 20817, Telephone: (301) 493-4444; Fax (301) 493-8410, as Landlord's Representative for all purposes under this Work Agreement. All communications between Landlord and Tenant relating to the design and construction of the Premises shall be forwarded to or made by such party's Representative. 3. Changes to Tenant Improvement Plans. In the event that Tenant requests any changes ("change orders") to the Tenant Improvements contained in the Outline Specifications or the Tenant Improvement Plans after the parties have approved same as set forth in Paragraph B.2 hereof, all costs and expenses incurred in connection therewith shall constitute "Improvement Costs", and all ensuing delays shall constitute Tenant Delays pursuant to Paragraph D 2 below. C. COST OF TENANT IMPROVEMENTS. 1. Tenant's Costs. Tenant shall make payment of fifty percent (50%) of all Tenant's Costs at the time of final approval of the Plans and Specifications. Landlord shall submit monthly statements of Improvement Costs to Tenant showing application of Tenant's prepayment as set forth above. At such time as the prepayment has been applied in its entirety, Tenant shall, within ten (10) days of receipt of Landlord's monthly statement, pay to Landlord all amounts due from Tenant in accordance with the statement. D. CONSTRUCTION. 1. Construction Supervision. All Tenant Improvements shall be performed by Landlord or Landlord's Contractor. 2. Delays. (a) If Landlord shall be delayed in Finally Completing the Premises, or in delivering the Premises to Tenant as a result of any act, neglect, failure or omission of Tenant, its employees or agents (including, without limitation, any contractor, subcontractor or materialman employed by, or on behalf of, Tenant performing work in or at the Premises), including any of the following, such delay shall be deemed a Tenant Delay: (1) Tenant's delay in timely approving any drawings, plans or specifications; (2) Tenant's failure to provide, or delay in providing, Landlord with any other information available to Tenant requested by Landlord for the purpose of completing the Tenant Improvement Plans or the ordering of materials for the Tenant Improvements; (3) any change by Tenant (to the extent such change is permitted by this Work Agreement) in the Tenant Improvement Plans or in any other plan, specification or finish information furnished by Tenant, after the parties have approved the same; (4) delay in the completion of work by any person (other than Landlord or the Contractor) performing work for Tenant; (5) work by, or for the benefit of Tenant, if any, not being completed on schedule which under good construction scheduling practices should be completed before some portion of the Tenant Improvements is undertaken or which otherwise interferes with Landlord undertaking the Tenant Improvements; (6) change orders; (7) Long Lead Items (hereinafter defined); or (8) any other matter described as a Tenant Delay in the Lease or this Work Agreement. In any such event, Tenant's obligation to pay Rent shall be accelerated one day for each day of Tenant Delay. In addition, Tenant shall pay to Landlord, and shall indemnify and hold Landlord harmless from and against, all additional costs, expenses, damages and claims incurred by Landlord resulting from any Tenant Delay. Any costs payable by Tenant to Landlord under this Work Agreement shall constitute Additional Rent. If Tenant defaults in the payment of such Additional Rent, Landlord shall be entitled to all the remedies available for non-payment of Rent under the Lease. In no event shall Landlord's remedies or entitlements for the occurrence of a Tenant Delay be abated, deferred, diminished or rendered inoperative because of a prior, concurrent or subsequent delay resulting from any action or inaction of Landlord. (b) In the event that any particular item or items of Tenant Improvements is not readily available in reasonable quantities in, or for delivery to, the Baltimore/Washington industrial corridor or requires a long term lead time to procure, obtain or install, such item shall constitute a "Long Lead Item". (c) At Landlord's sole election, Tenant's failure to timely respond to a submission of plans or specifications shall be deemed an approval of Landlord's submission. (d) Landlord shall not be responsible for a delay in the completion of the Tenant Improvements, or for performing any other Lease obligations to the extent the delay is the result of an Unavoidable Delay. The term "Unavoidable Delays" means delays caused by strikes, Acts of God, lockouts, labor difficulties, riots, explosions, sabotage; accidents, shortages or inability to obtain labor or materials, legal requirements, governmental restrictions, enemy action, civil commotion, fire or other casualty or similar causes beyond the reasonable control of Landlord. LIST OF EXHIBITS to Exhibit B of the Lease Exhibit B-1 Intentionally Deleted Exhibit B-2 Outline Specifications Exhibit B-3 Schematic Space Plan Exhibit B-4 Plans and Specifications for Tenant Improvements EXHIBIT C to the Lease SUBORDINATION, NON-DISTURBANCE AND ATTORNMENT AGREEMENT This Agreement is made as of this _____ day of ___________, 1998, by and among NationsBank, N.A., a national banking association, with a principal place of business at _________________________________________ ("Lender"); Ace Hardware Corporation, a _____________________________ corporation , with a principal place of business at 2200 Kensington Court, Oak Brook, Illinois, 60523-2100 ("Tenant"); and Arundel Crossing II, L.L.C., a Delaware limited liability company with a principal place of business at 6707 Democracy Boulevard, Suite 510, Bethesda, Maryland 20817, ("Landlord"); and consented to by Suzanne D. Stylc and Mary R. Henderson, Trustees. W I T N E S S E T H : WHEREAS, Landlord owns the property located in Arundel Crossing Industrial Park in Anne Arundel County, Maryland, as more fully described in Exhibit A attached hereto and made a part hereof (the "Premises"); and WHEREAS, Tenant has entered into a certain deed of lease dated January ____, 1998 (the "Lease") with Landlord covering the Premises; and WHEREAS, the Premises are encumbered or to be encumbered by that certain first deed of trust (the "Deed of Trust"), which Deed of Trust has heretofore been or will be recorded among the Land Records of Anne Arundel County, Maryland; and WHEREAS, Lender has made or will make a loan to Landlord as borrower, the repayment of which is secured or will be secured by the Deed of Trust; and WHEREAS, Tenant has agreed that the Lease is now and shall remain subject and subordinate to the operation and effect of the Deed of Trust provided that, subject to the provisions of this Agreement, Tenant is assured that the Lease and the Tenant's rights thereunder will not be terminated or otherwise disturbed by any foreclosure of, or other action relating to, the Deed of Trust. NOW, THEREFORE, in consideration of the sum of One Dollar ($1.00), the receipt of which is hereby acknowledged, and in consideration of the mutual premises, covenants, and agreements herein contained, the parties hereto, intending to be legally bound hereby, promise, covenant, and agree as follows: 1. Subject to the terms of this Agreement, Tenant covenants and agrees that the Lease is and shall be subject and subordinate to the lien, operation and effect of the Deed of Trust and to all funds and all indebtedness which may be secured by such Deed of Trust and to all renewals, amendments, modifications, consolidations, replacements, increases, and extensions thereof, provided, however, that at any time, at the election of Lender, such Lender shall have the right to declare the Lease superior to the lien, provisions, operation and effect of the Deed of Trust. 2. In the event it should become necessary to foreclose the Deed of Trust pursuant to the power of sale contained therein, or by deed given in lieu of foreclosure, Lender, for itself and its successors and assigns, agrees that such foreclosure will not terminate nor otherwise disturb the Lease nor the rights of Tenant thereunder, as long as Tenant continues to pay rent as required by the Lease, and otherwise continues to perform its obligations on its part to be performed hereunder and under the Lease, and further provided that (unless waived by Lender): (a) Tenant shall not be, at the time of such foreclosure, in default beyond any applicable notice and cure period under any of the terms, covenants, or conditions of the Lease; (b) Tenant shall pay rent and otherwise perform its obligations under the Lease; (c) intentionally deleted; (d) Lender, its successors and assigns, and any party acquiring title to the Premises through foreclosure or by virtue of a deed given in lieu of foreclosure (hereinafter collectively referred to as a "Successor in Interest"), shall not be liable for any act or omission of any prior landlord or liable for any breach of an agreement contained in the Lease arising prior to the date such Successor in Interest acquired title to the property; (e) Such Successor in Interest shall not be bound by any rent or additional rent which Tenant might have paid for more than one month in advance to any prior landlord; (f) Such Successor in Interest shall not be bound by any amendment or modification of the Lease made after the recordation of the Deed of Trust and without the written consent of Lender or its successors or assigns; (g) Except to the extent that any offset rights contained in the Lease have already accrued, such Successor in Interest shall not be subject to any right of offset which Tenant may have against any prior landlord; and (h) Such Successor in Interest shall not be liable for damages for any act or omission of any prior landlord. 3. Subject to the terms of this Agreement, Tenant agrees with Landlord and Lender that in the event of a foreclosure sale of the Premises, including a conveyance to Lender by deed in lieu of foreclosure, or in the event that Landlord conveys its estate in the Premises or, in the event that Landlord's estate in the Premises passes to any other person, firm or corporation by operation of law or any other means, then in any of said events, Tenant shall promptly attorn to the purchaser at the foreclosure sale or to the grantee of the Premises from Landlord or to such other successors to Landlord's estate under all the terms, covenants, and conditions of the Lease and this Agreement and, at the request of Lender or such person or entity acquiring the Premises through or under Lender, shall execute a new lease with such person or entity on the same terms and conditions as are set forth in the Lease, except that the term of the new lease shall be for the then remaining balance of the term of the Lease. 4. Tenant hereby warrants and represents, covenants and agrees to and with Lender as follows: (a) so long as Tenant has been given written notice of the existence of and an address for Lender, to deliver to Lender a duplicate of each notice of default delivered to Landlord at the same time as such notice is given to Landlord; (b) that Tenant is now the sole owner of the leasehold estate created by the Lease and shall not hereafter assign the Lease or sublease the Premises except as permitted by the terms thereof, and that notwithstanding any such assignment or any sublease, Tenant shall remain primarily liable for the observance and performance of all of its agreements under the Lease except as otherwise provided therein; (c) not to seek to terminate the Lease by reason of any default of Landlord without prior written notice thereof to Lender and the lapse thereafter of the period given to Landlord under the Lease to cure its default within which time Lender, at its option, may remedy any such default, provided, however, that with respect to any default of Landlord under the Lease which cannot be remedied within such time, if Lender commences to cure such default within such time and thereafter diligently proceeds with such efforts, Lender shall have such time as is reasonably necessary to complete curing such default; (d) to promptly certify in writing to Lender whether or not any default on the part of Landlord then exists under the Lease or whether there are any events which, with notice or the passage of time, or both, would constitute a default of Landlord; (e) to provide on fifteen (15) days written request estoppel certificates in recordable form confirming Tenant's covenants and agreements pursuant to this Agreement and certifying to the extent true that: (i) the Lease is subordinate to the lien, operation and effect of the Deed of Trust, or is superior to the Deed of Trust (if Lender has so elected); (ii) Tenant is in full and complete possession of the Premises, stating the date on which rent commenced to accrue and the date to which it is paid; (iii) the Lease is in full force and effect, and has not been amended, modified, or superseded (except as indicated); (iv) Tenant has received no notice of any sale, transfer, pledge, or assignment of the Lease or of the rentals by the Landlord except for the assignment to Lender; (v) Tenant has not advanced any amounts to or on behalf of the Landlord under the Lease which have not been reimbursed; (vi) Tenant holds no claim against the Landlord which might be set off against accruing rentals; (vii) Tenant understands that the Lease has been collaterally assigned to Lender as security for Lender's loan; and (viii) containing such other certificates as Lender shall reasonably request; and (f) Not to alter, amend or modify any of the terms, covenants or conditions of the Lease without the prior written consent of Lender. 5. Tenant acknowledges that the Lease has been assigned by Landlord to Lender and agrees with Lender that, from and after the date Lender notifies Tenant in writing that Landlord is in default under the Deed of Trust and that Lender has exercised its rights under the Assignment of Rents given by Borrower to Lender, Tenant shall promptly remit all payments due under the Lease to Lender or to any receiver appointed by or at the instance of Lender. 6. This Agreement shall be binding upon and shall extend to and benefit the successors and assigns of the parties hereto. 7. This Agreement may be executed in two or more counterparts, all of which taken together shall constitute one and the same instrument. IN WITNESS WHEREOF, the parties hereto have executed this Agreement by their duly authorized officers the day and year first above written. WITNESS/ATTEST: LENDER: NationsBank, a national banking association By: Name: Name: Title: Title: WITNESS/ATTEST: TENANT: Ace Hardware Corporation, a _____________ corporation By: Name: Name: Title: Title: WITNESS/ATTEST: LANDLORD: Arundel Crossing II, L.L.C., a Delaware limited liability company By: Name: Name: Title: Title: [SIGNATURES CONTINUED ON FOLLOWING PAGE The trustees under the Deed of Trust hereby consent to the foregoing Agreement. WITNESS: Suzanne D. Stylc, Trustee Mary R. Henderson, Trustee STATE OF ) COUNTY OF ) On this, the ____ day of _______________, 1997, before me, _______________________, the undersigned Notary Public, personally appeared _______________________, who acknowledged himself to be the ___________________ of NationsBank, N.A., a national banking association, and that he as such _____________________, being authorized to do so, executed the foregoing instrument for the purposes therein contained by signing the name of the bank by himself as _____________________. Witness my hand and official seal. Notary Public My commission expires: STATE OF ) COUNTY OF ) On this, the ____ day of _______________, 199_, before me, _______________________, the undersigned Notary Public, personally appeared _______________________, who acknowledged himself to be the ___________________ of Ace Hardware Corporation, a _____________ corporation, and that he as such ___________________, being authorized to do so, executed the foregoing instrument for the purposes therein contained by signing the name of the corporation by himself as _____________________. Witness my hand and official seal. Notary Public My commission expires: STATE OF ) COUNTY OF ) On this, the ____ day of _______________, 1997, before me, _______________________, the undersigned Notary Public, personally appeared _______________________, who acknowledged himself to be the ___________________ of Arundel Crossing II, L.L.C., a Delaware limited liability company, and that he as such ___________________, being authorized to do so, executed the foregoing instrument for the purposes therein contained by signing the name of the limited liability company by himself as _____________________. Witness my hand and official seal. Notary Public My commission expires: STATE OF ) COUNTY OF ) On this, the ____ day of _______________, 199_, before me, ____________________, the undersigned Notary Public, personally appeared Suzanne D. Style, who acknowledged herself to be the Trustee identified in the foregoing instrument. Witness my hand and official seal. Notary Public My commission expires: STATE OF ) COUNTY OF ) On this, the ____ day of _______________, 199_, before me, _______________________, the undersigned Notary Public, personally appeared Mary R. Henderson, who acknowledged herself to be the Trustee identified in the foregoing instrument. Witness my hand and official seal. Notary Public My commission expires: Exhibit A To Exhibit C of the Lease (This exhibit is a graphic representation) Exhibits D and E to the Lease (These exhibits are graphical representations) EX-10 6 RESTATED DEFERRAL OPTION PLAN Exhibit 10-U ACE HARDWARE CORPORATION DIRECTORS' DEFERRAL OPTION PLAN 1997 AMENDMENT AND RESTATEMENT ACE HARDWARE CORPORATION DIRECTORS' DEFERRAL OPTION PLAN Ace Hardware Corporation hereby amends and restates in its entirety, effective as of January 1, 1997, the Ace Hardware Corporation Directors' Deferral Option Plan which was originally established effective January 1, 1995. I. PURPOSE The purpose of this Ace Hardware Corporation Directors' Deferral Option Plan (the "Plan") is to provide a further means whereby Ace Hardware Corporation (the "Company") may afford financial security to directors of the Company who have rendered and continue to render valuable service to the Company. Compensation reductions made pursuant to the Plan will be credited with interest for the benefit of each Participant. The intent of the Plan is to credit Participants' compensation deferrals with a specified rate of interest and to provide the Participants a means to accumulate supplemental funds for retirement, special needs prior to retirement or death. II. DEFINITIONS AND CERTAIN PROVISIONS 2.1 "Agreement" means the Ace Hardware Corporation's Directors' Deferral Option Agreement executed between a Participant and the Company, whereby a Participant agrees to defer a portion of his/her Compensation pursuant to the provisions of the Plan, and the Company agrees to make benefit payments in accordance with the provisions of the Plan. 2.2 "Beneficiary" means the person or persons who under this Plan becomes entitled to receive a Participant's interest in the event of the Participant's death. 2.3 "Board of Directors" means the Board of Directors of Ace Hardware Corporation or any committee thereof acting within the scope of its authority. 2.4 "Committee" means the committee appointed to manage and administer the Plan. 2.5 "Company" means Ace Hardware Corporation, a Delaware corporation and its subsidiaries and any successor in interest. 2.6 "Compensation" means the directors fees for personal services rendered by a Participant as a director of the Company during a calendar year. 2.7 "Deferral Year" means any calendar year, 1995 through 2000. 2.8 "Deferred Benefit Account" means the account(s) maintained on the books of the Company for a Participant under this Plan. A separate Deferred Benefit Account shall be maintained for each Participant. A Participant's Deferred Benefit Account shall not constitute or be treated as a trust fund of any kind. 2.9 "Determination Date" means the date on which the amount of a Participant's Deferred Benefit Account is determined as provided in Article III hereof. The last day of a Plan year or the date of a Participant's Termination of Service shall be a Determination Date. 2.10 "Disability" means a condition, as determined by the Company, that totally and continuously prevents the Participant, for at least six consecutive months, from engaging in an "occupation" for compensation or profit. During the first twenty- four (24) months of total disability, "occupation" means the Participant's occupation at the time the disability began. After that period, "occupation" means any occupation for which the Participant is or becomes reasonably fitted by education, training or experience. Notwithstanding the foregoing, a Disability shall not exist for purposes of this Plan if the Participant fails to qualify for disability benefits under the Social Security Act, unless the Company determines, in its sole discretion, that a Disability exists. 2.11 "Effective Date" means January 1, 1995. 2.12 "Interest Yield" means either the Normal Retirement Interest Yield, the Early Retirement Interest Yield, or the Death Interest Yield, as defined below: (a) "Normal Retirement Interest Yield" means a rate of interest equal to 120 percent of Prime. (b) "Early Retirement Interest Yield" means a rate of interest equal to 100 percent of Prime. This rate of interest shall be used only for crediting interest on amounts deferred in Deferral Years 1995 and 1996. (c) "Death Interest Yield" means a rate of interest equal to 120 percent of Prime. This rate of interest shall be fixed at the time of the Participant's death. 2.13 "Participant" means a member of the Board of Directors of the Company who is designated to be eligible pursuant to Section 3.1 and who has executed an Agreement with the Company. 2.14 "Payment Commencement Date" means the date benefits commence under this Plan in accordance with Sections 4.5 and 4.8. For amounts deferred pursuant to this Plan during Deferral Years 1995 and 1996, the Payment Commencement Date shall be within sixty (60) days of the date elected by the Participant in his/her Agreement, but in no event later than age 65. For amounts deferred pursuant to this Plan during Deferral Years 1997-2000, the Payment Commencement Date shall be a date within sixty (60) days of the Participant's Termination of Service. 2.15 "Plan" means the Ace Hardware Corporation Directors' Deferral Option Plan as amended from time-to-time. 2.16 "Prime" means the Prime Rate as of December 31st of the preceding year as reported in the Wall Street Journal. 2.17 "Retirement Date" means the date of a Participant's Termination of Service other than by reason of death or Disability. 2.18 "Termination of Service" means the Participant's cessation of his/her service with the Company for any reason whatsoever, whether voluntarily or involuntarily, including by reason of retirement, death, or Disability. III. PARTICIPATION AND COMPENSATION REDUCTION 3.1 Participation. Participation in the Plan shall be limited to directors of the Company who elect to participate in this Plan by filing an Agreement with the Company prior to the first day of the deferral period in which a Participant's participation commences in the Plan. The election to participate shall be effective upon receipt by the Committee of the Agreement that is properly completed and executed in conformity with the Plan. 3.2 Minimum and Maximum Deferral and Length of Participation. A Participant in the Plan may elect to defer 5% to 100% of his/her Compensation in 5% increments. A Participant may elect to defer a different percentage of Compensation for each Deferral Year. A Participant shall make an annual election for the upcoming Deferral Year by December 15th of the year preceding the Deferral Year for which the election is being made. 3.3 Timing of Deferral Credits. The amount of Compensation that a Participant elects to defer in the Agreement shall cause an equivalent reduction in his/her Compensation. Compensation deferrals shall be credited to the Participant's Deferred Benefit Account at such time as the Participant would have otherwise received or been eligible to receive the Compensation deferred pursuant to the Plan. 3.4 New Participants. A Participant who first attains such status subsequent to January 1, 1995, shall be entitled to participate in the Plan after satisfying the requirements of Section 3.1 and shall be bound by all terms and conditions of the Plan, provided, however, that this Agreement must be filed no later than thirty (30) days following his/her eligibility to participate. 3.5 Emergency Benefit; Waiver of Deferral. In the event that the Committee, upon written petition of the Participant or his/her Beneficiary, determines in its sole discretion, that the Participant or his/her Beneficiary has suffered an unforeseeable financial emergency, the Company shall pay to the Participant or his/her Beneficiary, as soon as possible following such determination, an amount, not in excess of the Participant's Deferred Benefit Account, necessary to satisfy the emergency. For purposes of this Plan, an unforeseeable financial emergency is an unanticipated emergency that is caused by an event beyond the control of the Participant or Beneficiary and that would result in severe financial hardship to the individual if the emergency distribution were not permitted. Cash needs arising from foreseeable events, such as the purchase of a residence or education expenses for children shall not be considered the result of an unforeseeable financial emergency. The Committee may also grant a waiver of the Participant's agreement to defer a stated amount of Compensation upon finding that the Participant has suffered an unforeseeable financial emergency. The waiver shall be for such period of time as the Committee deems necessary under the circumstances to relieve the hardship. 3.6 Determination of Account. Each Participant's Deferred Benefit Account as of each Determination Date shall consist of the balance of the Participant's Deferred Benefit Account as of the immediately preceding Determination Date, plus the Participant's elective deferred Compensation pursuant to Section 3.2 since the immediately preceding Determination Date. The Deferred Benefit Account of each Participant shall be reduced by the amount of all distributions, if any, made from such Deferred Benefit Account since the preceding Determination Date. The appropriate Interest Yield shall be credited on the average daily balance of the Deferred Benefit Account as of the Determination Date and since the last preceding Determination Date, but after the Deferred Benefit Account has been adjusted for any additions (including interest earnings) or distributions to be credited or deducted for each such day. 3.7 Vesting of Deferred Benefit Account. A Participant shall be 100% vested in his/her Deferred Benefit Account. IV. BENEFITS 4.1 Inservice Distribution. At the time a Participant executes the Agreement, he/she may elect to receive a return of up to 50%, in 5% increments, of the annual deferral originally made pursuant to the Plan. The return of deferral election applies only to the Participant's deferral and not to the interest credited to the Participant's Deferred Benefit Account. Each return of deferral shall be paid in a lump sum on December 1st of the year which is six (6) years after the year in which the deferral is made. A return of deferral shall only be paid prior to a Participant's Termination of Service. Any return of deferral paid shall be deemed a distribution, and shall be deducted from the Participant's Deferred Benefit Account. A separate return of deferral election shall be made for each Deferral Year. 4.2 Retirement Benefit. Subject to Section 4.5 below, upon a Participant's Retirement Date, he/she shall be entitled to receive the amount of his/her Deferred Benefit Account determined under Section 3.6 using the Retirement Interest Yield. The form of benefit payment shall be as provided in Section 4.5. 4.3 Death Benefits. Upon the death of a Participant or a retired Participant, the Beneficiary of the Participant or retired Participant shall receive the Participant's remaining Deferred Benefit Account. Payment of the Participant's remaining Deferred Benefit Account shall be in accordance with Section 4.5. 4.4 Disability. In the event of a Termination of Service due to Disability, which first manifests itself after the Effective Date of the Plan and prior to his/her Retirement Date, a disabled Participant may receive a benefit equal to the remaining balance, if any, of his/her Deferred Benefit Account. Such benefit shall be paid until the earliest of the following events: (i) there is no longer any balance in the Participant's Deferred Benefit Account; (ii) the Participant ceases to be disabled and resumes employment with the Company; (iii) the Participant dies. Payment of a Participant's remaining Deferred Benefit Account shall be in accordance with Section 4.5 over the number of years elected by the Participant. Disability benefits shall be treated as distributions from a Participant's Deferred Benefit Account. 4.5 Form of Benefit Payment. a) Deferral Years 1995 and 1996. Upon the happening of an event described in Section 4.2, 4.3 or 4.4, the Company shall pay to the Participant or his/her Beneficiary, monthly installments payable in substantially equal amounts over the number of years elected by the Participant. For purposes of any installment payments due under this Section 4.5, a Participant at the time of his/her election to defer into this Plan shall elect the number of years such payments shall be paid. The number of years installment payments may be paid shall not be fewer than five (5) years nor greater than twenty (20) years. In addition, for benefit payments related to deferrals made in Deferral Years 1995 and 1996, a Participant at the time he/she enters into his/her Agreement may elect to begin receiving benefits pursuant to this Section 4.5(a) within sixty (60) days of his/her Termination of Service or at a specific time up to and including the Participant's attainment of age 65. For Participants who elect to begin receiving their benefit payments immediately upon a Termination of Service, their Deferred Benefit Account shall be credited with interest utilizing the Normal Retirement Interest Yield or the Death Interest Yield in the event of a benefit payable pursuant to Section 4.3 until all benefits due from this Plan have been paid. For Participants who elect to defer the receipt of benefits until a later date upon a Termination of Service, interest on the unpaid principal balance utilizing the Normal Retirement Interest Yield until the Termination of Service and the Early Retirement Interest Yield from the date of the Participant's Termination of Service until all benefits under the Plan have been paid will be added to the Participant's Deferred Benefit Account on each Determination Date. During the period a Participant is receiving installment payments, the amount of the installment payments shall be based on the prevailing Interest Yield applicable at the commencement of payments, projected into the future. The amount of the installment payments shall be recomputed every three years and the installment payments shall be increased or decreased to reflect any changes in the applicable Interest Yield. Upon the death of a Participant or a retired Participant, the remaining installment payments payable to the Beneficiary shall be fixed. The Interest Yield used to determine the installment payment amounts shall be the Death Interest Yield, except in any instance where a retired Participant had elected to defer the receipt of benefits until a later date upon his/her Termination of Service in accordance with this Section 4.5(a). In that event, the Interest Yield used to determine the installment payment amounts shall be the Early Retirement Interest Yield. The Company may, in its sole discretion, elect to pay, at any time, a Participant's or Beneficiary's Deferred Benefit Account in a lump sum payment. b) Deferral Years 1997-2000. Upon the happening of an event described in Section 4.2, 4.3 or 4.4, the Company shall pay to the Participant or his/her Beneficiary, monthly installments payable in substantially equal amounts over the number of years elected by the Participant. For purposes of any installment payments due under this Section 4.5, a Participant at the time of his/her election to defer into this Plan shall elect the number of years such payments shall be paid. The number of years installment payments may be paid shall not be fewer than five (5) years nor greater than twenty (20) years. Interest on the unpaid principal balance equal to the applicable Normal Retirement Interest Yield in the event of a benefit payable pursuant to Section 4.2 or 4.4 or the Death Interest Yield in the event of a benefit payable pursuant to Section 4.3 will be added to the Deferred Benefit Account on each Determination Date. Payment of a Participant's benefits under this Section 4.5(b) shall commence within sixty (60) days of the Participant's Termination of Service. During the period a Participant is receiving installment payments, the amount of the installment payments shall be based on the prevailing Interest Yield applicable at the commencement of payments, projected into the future. The amount of the installment payments shall be recomputed every three years and the installment payments shall be increased or decreased to reflect any changes in the applicable Interest Yield. Upon the death of a Participant or a retired Participant, the remaining installment payments payable to the Beneficiary shall be fixed. The Interest Yield used to determine the installment payment amounts shall be the Death Interest Yield. The Company may, in its sole discretion, elect to pay, at any time, a Participant's or Beneficiary's Deferred Benefit Account in a lump sum payment. 4.6 Lump Sum Settlement Option. Notwithstanding any other provision of this Plan, any Participant, retired Participant or Beneficiary who has a Deferred Benefit Account hereunder may elect to receive an immediate lump sum payment of the balance of his/her Deferred Benefit Account, reduced by a penalty equal to six percent (6%) of the Participant's, retired Participant's or Beneficiary's remaining Deferred Benefit Account. The six percent (6%) penalty shall be permanently forfeited and shall not be paid to the Participant, retired Participant, or Beneficiary. A Participant who elects to receive a lump sum payment pursuant to this Section 4.6 must forego further participation in the Plan for eighteen (18) months. 4.7 Withholding; Employment Taxes. To the extent required by the applicable law in effect at the time payments are made, the Company shall withhold any taxes required to be withheld by any Federal, State or local government. 4.8 Commencement of Payments. Unless otherwise provided, commencement of payments under this Plan shall be within sixty (60) days following receipt of notice by the Committee of an event which entitles a Participant or a Beneficiary to payments under this Plan, or at such earlier date as may be determined by the Committee. All payments shall be made as of the first day of the month. 4.9 Full Payment of Benefits. Notwithstanding any other provision of this Plan, all benefits shall be paid no later than the Participant's eightieth (80th) birthday. 4.10 Recipients of Payments: Designation of Beneficiary. All payments to be made by the Company under the Plan shall be made to the Participant during his/her lifetime, provided that if the Participant dies prior to the completion of such payments, then all subsequent payments under the Plan shall be made by the Company to the Beneficiary determined in accordance with this Section 4.10. The Participant may designate a Beneficiary by filing a written notice of such designation with the Committee in such form as the Company requires and may include contingent Beneficiaries. The Participant may from time-to- time change the designated Beneficiary without the consent of such Beneficiary by filing a new designation in writing with the Committee. If no designation is in effect at the time when any benefits payable under this Plan shall become due, the Beneficiary shall be the spouse of the Participant, or if no spouse is then living, the representatives of the Participant's estate. V. CLAIMS FOR BENEFITS PROCEDURE 5.1 Claim for Benefits. Any claim for benefits under the Plan shall be made in writing to any member of the Committee. If such claim for benefits is wholly or partially denied by the Committee, the Committee shall, within a reasonable period of time, but not later than sixty (60) days after receipt of the claim, notify the claimant of the denial of the claim. Such notice of denial shall be in writing and shall contain: (a) The specific reason or reasons for denial of the claim; (b) A reference to the relevant Plan provisions upon which the denial is based; (c) A description of any additional material or information necessary for the claimant to perfect the claim, together with an explanation of why such material or information is necessary; and (d) An explanation of the Plan's claim review procedure. If no such notice is provided, the claim shall be deemed granted. 5.2 Request for Review of a Denial of a Claim for Benefits. Upon the receipt by the claimant of written notice of the denial of a claim, the claimant may within ninety (90) days file a written request to the Committee, requesting a review of the denial of the claim, which review shall include a hearing if deemed necessary by the Committee. In connection with the claimant's appeal of the denial of his/her claim, he/she may review relevant documents and may submit issues and comments in writing. 5.3 Decision Upon Review of a Denial of a Claim for Benefits. The Committee shall render a decision on the claim review promptly, but no more than sixty (60) days after the receipt of the claimant's request for review, unless special circumstances (such as the need to hold a hearing) require an extension of time, in which case the sixty (60) day period shall be extended to 120 days. Such decision shall: (a) Include specific reasons for the decision; (b) Be written in a manner calculated to be understood by the claimant; and (c) Contain specific references to the relevant Plan provisions upon which the decision is based. The decision of the Committee shall be final and binding in all respects on both the Company and the claimant. VI. ADMINISTRATION 6.1 Committee. The Plan shall be administered by the Committee. Members of the Committee or agents of the Committee may be Participants under the Plan. No member of the Committee who is also a Participant shall be involved in the decisions of the Committee regarding any determination of any claim for benefit with respect to himself or herself. 6.2 General Rights, Powers, and Duties of Committee. The Committee shall be responsible for the management, operation, and administration of the Plan. The Committee may designate a Committee member or an officer of the Company as Plan Administrator. Absent such delegation, the Committee shall be the Plan Administrator. The Plan Administrator shall perform duties as designated by the Committee. In addition to any powers, rights and duties set forth elsewhere in the Plan, it shall have the following powers and duties: (a) To adopt such rules and regulations consistent with the provisions of the Plan as it deems necessary for the proper and efficient administration of the Plan; (b) To administer the Plan in accordance with its terms and any rules and regulations it establishes; (c) To maintain records concerning the Plan sufficient to prepare reports, returns and other information required by the Plan or by law; (d) To construe and interpret the Plan and resolve all questions arising under the Plan; (e) To direct the Company to pay benefits under the Plan, and to give such other directions and instructions as may be necessary for the proper administration of the Plan; (f) To employ or retain agents, attorneys, actuaries, accountants or other persons, who may also be Participants in the Plan or be employed by or represent the Company, as it deems necessary for the effective exercise of its duties, and may delegate to such agents any power and duties, both ministerial and discretionary, as it may deem necessary and appropriate; and (g) To be responsible for the preparation, filing and disclosure on behalf of the Plan of such documents and reports as are required by any applicable Federal or State law. 6.3 Information to be Furnished to Committee. The Company shall furnish the Committee such data and information as it may require. The records of the Company shall be determinative of each Participant's period of employment, termination of employment and the reason therefore, leave of absence, reemployment, number of completed board terms, personal data, and Compensation deferrals. Participants and their Beneficiaries shall furnish to the Committee such evidence, data, or information, and execute such documents as the Committee requests. 6.4 Responsibility. No member of the Committee of the Company shall be liable to any person for any action taken or omitted in connection with the administration of this Plan unless attributable to his/her own fraud or willful misconduct. The Company agrees to defend, indemnify and hold each Committee member harmless from any and all damages, losses or costs (including reasonable attorney's fees) which occur by reason of, arise out of, or are incidental to the implementation or administration of the Plan unless attributable to his/her own willful fraud or willful misconduct. 6.5 Committee Review. Any action on matters within the discretion of the Committee shall be final and conclusive as to all Participants, retired Participants, Beneficiaries and other persons claiming rights under the Plan. The Committee shall exercise all of the powers, duties and responsibilities set forth hereunder in its sole discretion. VII. AMENDMENT AND TERMINATION 7.1 Amendment. The Plan may be amended in whole or in part by the Company at any time. Notice of any such amendment shall be given in writing to the Committee and to each Participant and each Beneficiary. No amendment shall decrease the value of a Participant's Deferred Benefit Account. 7.2 Company's Right to Terminate. The Company may terminate the Plan and/or the Agreements pertaining to the Participant at any time after the Effective Date of the Plan. In the event of any such termination, the Participant or Beneficiary shall be entitled to the amount of his/her Deferred Benefit Account determined under Section 3.6, using the Retirement Interest Yield as of the date of termination of the Plan and/or his/her Agreement. Such benefit shall be paid to the Participant in monthly installments over a period of no more than fifteen (15) years, except that the Company, in its sole discretion, may pay out such benefit in a lump sum or in installments over a period shorter than fifteen (15) years. VIII. MISCELLANEOUS 8.1 No Implied Rights; Rights on Termination of Service. Neither the establishment of the Plan nor any amendment thereof shall be construed as giving any Participant, retired Participant, Beneficiary, or any other person any legal or equitable right unless such right shall be specifically provided for in the Plan or conferred by specific action of the Company in accordance with the terms and provisions of the Plan. Except as expressly provided in this Plan, the Company shall not be required or be liable to make any payment under the Plan. 8.2 No Right to Company Assets. Neither the Participant nor any other person shall acquire by reason of the Plan any right in or title to any assets, funds or property of the Company whatsoever including, without limiting the generality of the foregoing, any specific funds, assets, or other property which the Company, in its sole discretion, may set aside in anticipation of a liability hereunder. Any benefits which become payable hereunder shall be payable from the general assets of the Company. The Participant shall have only a contractual right to the amounts, if any, payable hereunder unsecured by any asset of the Company. Nothing contained in the Plan constitutes a guarantee by the Company that the assets of the Company shall be sufficient to pay any benefit to any person. 8.3 No Employment Rights. Nothing herein shall constitute a contract of employment or of continuing service or in any manner obligate the Company to continue the services of the Participant, or obligate the Participant to continue in the service of the Company, or as a limitation of the right of the Company to discharge any of its directors, with or without cause. Nothing herein shall be construed as fixing or regulating the Compensation payable to the Participant. 8.4 Offset. If, at the time payments or installments of payments are to be made hereunder, the Participant, retired Participant or the Beneficiary are indebted or obligated to the Company, then the payments remaining to be made to the Participant, retired Participant, or the Beneficiary may, at the discretion of the Company, be reduced by the amount of such indebtedness or obligation, provided, however, that an election by the Company not to reduce any such payment or payments shall not constitute a waiver of its claim for such indebtedness or obligation. 8.5 Non-assignability. Neither the Participant nor any other person shall have any voluntary or involuntary right to commute, sell, assign, pledge, anticipate, mortgage or otherwise encumber, transfer, hypothecate or convey in advance of actual receipt the amounts, if any, payable hereunder, or any part thereof, which are expressly declared to be unassignable and non-transferable. No part of the amounts payable shall be, prior to actual payment, subject to seizure or sequestration for the payment of any debts, judgments, alimony or separate maintenance owed by the Participant or any other person, or be transferable by operation of law in the event of the Participant's or any other person's bankruptcy or insolvency. 8.6 Gender and Number. Wherever appropriate herein, the masculine may mean the feminine and the singular may mean the plural or vice versa. 8.7 Notice. Any notice required or permitted to be given under the Plan shall be sufficient if in writing and hand delivered, or sent by registered or certified mail, and if given to the Company, delivered to the principal office of the Company, directed to the attention of the Committee. Such notice shall be deemed given as of the date of delivery or, if delivery is made by mail, as of the date shown on the postmark or the receipt for registration or certification. 8.8 Governing Laws. The Plan shall be construed and administered according to the laws of the State of Illinois. In witness whereof, the Company has amended and restated this Ace Hardware Corporation Directors' Deferral Option Plan originally effective January 1, 1995, as of January 1, 1997. Ace Hardware Corporation By: --------------------- Its: --------------------- EX-10 7 EXECUTIVE HEALTHCARE PLANT Exhibit 10-Z EXECUTIVE HEALTHCARE PLAN Eligible Executives who are retiring, from Ace (and their family members), will be provided the same health/dental care/prescription drug benefits that active employees are provided by Ace. The assumption is that all eligible Executives would be covered by the indemnity program however, in those instances where they qualify they would be eligible to enroll in a HMO. Guidelines: benefit to be offered only to Officers who are retiring from Ace. Must be age 55 or older and have a minimum of 10 or more years of service at the time of retirement. Executive must be in good standing at the time of retirement and each Executive will require board approval to be eligible for this benefit. The Executive will co-pay the premium for family or single coverage at the same dollar amount as active employees are charged for the healthcare premium. This amount would be subject to annual review at the same time and at the same change amount implemented for active employees. Any Executive who upon leaving Ace to take a full-time position with another organization, become a full-time consultant or take a temporary position with another non-Ace organization is not eligible for the retirement benefit. Nor is anyone eligible, at a later date, to re- apply to Ace to become eligible for the healthcare benefit. If the retired employee reaches age 65 or becomes eligible for Medicare/Medicaid or if the Executive should die, coverage will continue for the spouse through age 65 or until remarriage, employment or failure to pay the premium. If spousal coverage is terminated, then employee's spouse shall be offered the opportunity to elect COBRA. Premiums, if employee elects coverage, shall be payable in advance on an annual basis no later than January 31, of the calendar year for which the coverage is elected. Currently, nationwide, all non-union employees are eligible to participate in our retirement medical subsidy plan. This provides $33 per month to offset approved healthcare insurance expenditures by the retiree. All Executives who qualify for this healthcare program would be eligible for the retiree medical subsidy. Per request of Ace counsel, all changes made via substitution pages. As such, first draft of lease re-named zace.lse and then duplicated to create second version of ace.lse. EX-10 8 RESTATED RETIREMENT BENEFITS REPLACEMENT PLAN SECOND AMENDMENT TO RESTATED ACE HARDWARE CORPORATION RETIREMENT BENEFITS REPLACEMENT PLAN (Adopted on December 8, 1998) This Second Amendment to the Restated Ace Hardware Corporation Retirement Benefits Replacement Plan is hereby entered into on this 8th day of December, 1998 and is effective January 1, 1999: WITNESSETH.- Whereas the Company adopted a Retirement Benefits Replacement Plan on October 1, 1985 and restated the Plan on December 7, 1993; and Whereas the Company has amended this Plan to provide for participation by certain officers of the corporation specifically named in the Plan as Participants therein; Now therefore, effective January 1, 1999, the Ace Hardware Corporation Retirement Benefits Replacement Plan is amended to add certain named officers and key employees of the corporation as Participants in the Plan and to restate Article III, Plan Participation, as follows: III PLAN PARTICIPATION Participation in this Plan shall be exclusively limited to any officer or key employee who is designated as a Participant by the Board of Directors of Ace Hardware Corporation ("Board") and whose benefits under any of the Profit Sharing Plan, Money Purchase Plan and the Pension Plan are reduced by reason of the Limitations. Effective as of January 1, 1999, the following individuals shall become or continue to be Participants hereunder: David F. Hodnik David F. Myer William A. Loftus Fred J. Neer Paul M. Ingevaldson Donald L. Schuman Rita D. Kahle William J. Bauman Michael C. Bodzewski Kenneth L. Nichols Lori L. Bossmann Daniel C. Prochaska Ray A. Griffith Wayne E. Wiggleton David W. League Effective 1/01/99 EX-23 9 CONSENT OF AUDITORS KPMG AUDITORS' CONSENT The Board of Directors Ace Hardware Corporation: We consent to the use of our report included herein and the reference to our firm under the heading "Experts" in the prospectus. KPMG LLP Chicago, Illinois March 12, 1999 EX-24 10 POWERS OF ATTORNEY 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 LORI L. BOSSMANN, 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 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 15th day of March, 1999. JENNIFER C. ANDERSON MARK JERONIMUS - ----------------------------------- ----------------------- Jennifer C. Anderson Mark Jeronimus ERIC R. BIBENS II HOWARD J. JUNG - ----------------------------------- ----------------------- Eric R. Bibens II Howard J. Jung LAWRENCE R. BOWMAN JOHN E. KINGREY - ----------------------------------- ----------------------- Lawrence R. Bowman John E. Kingrey JAMES T. GLENN MARIO R. NATHUSIUS - ---------------------------------- ----------------------- James T. Glenn Mario R. Nathusius DANIEL L. GUST ROGER E. PETERSON - ---------------------------------- ----------------------- Daniel L. Gust Roger E. Peterson D. WILLIAM HAGAN JON R. WEISS - ---------------------------------- ----------------------- D. William Hagan Jon R. Weiss EX-27 11 FDS
5 This schedule contains summary financial information extracted from SEC Form S-2 Post-Effective Amendment No. 4 and is qualified in its entirety by reference to such financial statements. 1,000 YEAR JAN-02-1999 JAN-02-1999 53901 0 399845 2725 334405 800572 403021 163176 1047726 608176 0 0 0 263086 6240 1047726 3120380 3120380 2868974 2868974 0 0 17161 89696 1736 87960 0 0 0 87960 0 0
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