-----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, WpApQVhANW3MwTq4ZYrXskfF/X0k1a/hk3Rgvz3/Dm4kALSHVuHSzl39FFxc+VCL bBO0sirT95HAwh89lAYRxw== 0000002024-01-000004.txt : 20010323 0000002024-01-000004.hdr.sgml : 20010323 ACCESSION NUMBER: 0000002024-01-000004 CONFORMED SUBMISSION TYPE: POS AM PUBLIC DOCUMENT COUNT: 20 FILED AS OF DATE: 20010322 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: 1576568 BUSINESS ADDRESS: STREET 1: 2200 KENSINGTON COURT CITY: OAK BROOK STATE: IL ZIP: 60521 BUSINESS PHONE: 7089906600 MAIL ADDRESS: STREET 1: 2200 KENSINGTON COURT CITY: OAKBROOK STATE: IL ZIP: 60523 POS AM 1 0001.txt S-2 BODY SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ----------------- Post-Effective Amendment No. 6 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, including zip code, and telephone number, including area code, of registrant's principal executive offices) Rita D. Kahle Executive Vice President 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: from time to time 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. If this Form is filed to register additional securities for an offering pursuant to the Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. If delivery of the prospectus is expected to be made pursuant to Rule 434, check the following box. The Registrant hereby amends the Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until this Registration Statement shall become effective on such date as the Commission acting pursuant to said Section 8(a) may determine. PROSPECTUS ACE HARDWARE CORPORATION 2200 Kensington Court Oak Brook, Illinois 60523 (630) 990-6600 698 Shares Class A (Voting) Stock, $1,000 par value 23,239 Shares Class C (Nonvoting) Stock, $100 par value We only offer Class A Voting Stock together with Class C Nonvoting Stock to hardware retailers for their initial membership in our cooperative. We offer Class C Nonvoting 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 $ 698,000 None $ 698,000 Class C Stock Per Share(1)(3)(4) $ 100 None $ 100 Total $2,323,900 None $2,323,900 (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 $1,500 ($2,500 for conversions or new investor ground-ups effective January 1, 2001) 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 $64,000. (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, 111 Eighth Avenue, New York, New York 10011. (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, 2002. The date of this Prospectus is , 2001 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. DOCUMENTS INCORPORATED BY REFERENCE We have filed an Annual Report on Form 10-K for our 2000 fiscal year ending December 30, 2000 under Section 15(d) of the Exchange Act. That Form 10-K Annual Report is incorporated by reference into this Prospectus. Someone to whom we deliver a Prospectus can request (in writing or verbally) a free copy of the Form 10-K and any other documents that we have incorporated by reference into this Prospectus. 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 Rita D. Kahle, Executive Vice President, 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 along with the fair market value of other qualified property. 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 December 6, 2000, 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 2000 fiscal year on December 30, 2000 were 5,011. (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 $1,500 charge for processing your application ($2,500 for conversions or new investor ground-ups effective January 1, 2001). 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 2000 fiscal year on December 30, 2000, the number of outstanding shares of our stock was as follows: Class A Stock 3,783 shares, Class B Stock 2,252 shares, and Class C Stock 2,504,796 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 4,446 shares, Class B Stock 2,224 shares, and Class C Stock 2,501,908 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 ------ -------- ------ -------- ------ -------- --------- 2000 Fiscal Year ended December 30, 2000 307 $1,000 180 $2,000 141,365 $100 $14,803,500 1999 Fiscal Year ended January 1, 2000 228 $1,000 160 $2,000 119,614 $100 $12,509,400 1998 Fiscal Year ended January 2, 1999 243 $1,000 124 $2,000 105,639 $100 $11,054,900
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 1998 through 2000 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. Other qualified property, 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 along with the fair market value of any other qualified property 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 240 field sales personnel including retail business managers, new business managers, retail development managers, and regional managers. Their duties include contacting retail dealers and promoting our business and programs. 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 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 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 so as 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 propose 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 than $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. (j) We have established a LBM Retailer Incentive Pool Plan for our members who purchase lumber and building materials ("LBM") products through Builder's Mart of America, Inc. ("BMA") and are eligible participants under our Ace Contractor Center standards. Under the plan, we calculate an annual estimate of the amount by which our stock in BMA has increased or decreased in value from our initial investment, net of certain expenses. We allocate this estimate to eligible members annually based on their qualifying purchases of LBM products. A member's pool allocation only becomes vested and can only be redeemed upon the termination of the member's Ace membership which results in the sale or redemption of Ace stock held for that location, Ace's termination of the LBM Retailer Incentive Pool Plan, or Ace's liquidation, whichever comes first. Negative pool balances are not charged to members. 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 2000 fiscal year on December 30, 2000, there were 5,011 stores having Membership Agreements with us. The States with the largest concentration of members are California (approximately 10%), Texas (approximately 6%), Florida and Illinois (approximately 5% each), and Michigan and Georgia (approximately 4% each). The States where we shipped the largest percentages of merchandise in fiscal year 2000 are California (approximately 12%), Illinois (approximately 10%), Florida (approximately 6%), Texas, Michigan and Georgia (approximately 4% each). Approximately 6.7% 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: 2000 1999 1998 ----- ----- ----- Member outlets at beginning of period 5,082 5,039 5,032 New member outlets 208 264 231 Member outlets terminated 279 221 224 ----- ----- ----- Member outlets at end of period 5,011 5,082 5,039 ===== ===== ===== Dealers having one or more member outlets at end of period 3,858 3,932 3,963 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 2000, warehouse sales were 70% of our total sales and bulletin sales were 3% of our total sales with the balance of 27% being direct shipment sales. 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 2000 1999 1998 -------------------- ---- ---- ---- Paint, cleaning and related supplies 20% 20% 20% Plumbing and heating supplies 15% 15% 15% Hand and power tools 14% 14% 14% Garden, rural equipment and related supplies 14% 13% 13% Electrical supplies 12% 13% 13% 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. We invite dealers and vendors to attend, and dealers generally place orders that are delivered before the next convention. During the convention, there are exhibits of regular merchandise, new merchandise and seasonal merchandise. Lawn and garden supplies and exterior paints are seasonal merchandise in many parts of the country. Some types of goods such as holiday decorations are also seasonal. Warehouse sales involve the sale of merchandise that we inventory at our warehouses. Direct shipment sales involve sales where the merchandise is shipped directly to dealers by vendors. Bulletin sales involve our special bulletin offers where we order specific merchandise after dealers sign up to buy particular quantities of it. Dealers place direct shipment orders with our vendors using special purchase orders. The vendors then bill us for these orders, which are shipped directly to dealers. We, in turn, bill the ordering dealers with an adder ("handling charge") that varies according to the following schedule: Invoice Amount Adder (Handling Charge) -------------- ----------------------- $ 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 our special bulletins offers. Generally, we notify dealers of our intention to purchase certain products for bulletin shipment. We then purchase these products in the quantities that the dealers order. When the bulletin shipment arrives, we do not place it into warehouse inventory. Rather, we break it up into smaller quantities and deliver it to the dealers who ordered it. We generally apply a 6% adder ("handling charge") to this category of sales. We typically apply an additional adder of 3% to merchandise that is exported outside of the United States, its territories and possessions. Ace dealers located outside of the United States, its territories and possessions who are not subject to the additional 3% adder are assessed a flat 2% adder on all direct shipment sales. We maintain inventories to meet only normal resupply orders. Resupply orders help keep our inventories at normal levels. Usually these resupply orders are filled within one day of receipt. Bulletin orders are somewhat similar to resupply orders, but can be for future delivery. We do not backlog normal resupply orders and therefore, no significant backlog exists at any point in time. Our Store Traffic Opportunity Program ("STOP") is a program where we offer our dealers specific products that we assign to a "competitive price sales" classification. These products are delivered from our warehouses with or without the addition of freight charges and with an adder (if any) of up to 5%, determined on an item by item basis. Management has the authority to add and withdraw items from the STOP program, and to establish reasonable minimum or multiple item purchase requirements for this program. We do not make any patronage dividend distributions for purchases under the STOP program. We do, however, consider STOP purchases to be either warehouse purchases or bulletin purchases, as applicable, in determining the forms of patronage dividend distributions. (See the heading "Business," subheading "Forms of Patronage Dividend Distributions.") Our LTL Plus Program allows dealers to purchase full or partial truckloads of products from specific vendors for direct shipment delivery. No adder or national advertising assessment applies to these purchases. (See heading "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. Our wholly owned subsidiary, Ace Hardware Canada, Limited, operates 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 2000. We operate our Company-owned retail hardware stores through 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 seasonal fluctuations do not have a major effect on our operations. For more discussion of our business, see "Management's Discussion and Analysis of Financial Condition and Results of Operations." We also offer services to members that relate to the operation of their retail businesses. We provide these services (such as advertising, merchandising and training programs) to assist our members and in some cases, to maximize our centralized buying power. Strategic Planning We have a strategic planning process that results in goals, objectives and programs that we want to develop in the future for 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 home center, do-it-yourself, rental and commercial/industrial categories. The future condition of the economy is also uncertain, when viewed domestically, internationally or in specific geographical regions. Some other uncertainties that could affect our plans include possible future changes in merchandise and inventory prices, and the effect of increasingly intense competition. There could be potential shifts in market demand for some products. Lawsuits and laws, especially laws dealing with franchising, licensing, importing, exporting and environmental matters could affect our future business. We cannot predict whether these uncertainties might 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 segments 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 "retail success initiatives," which are designed to improve their retail performance and competitiveness. These retail success initiatives include retail goals that we urge dealers to strive for within their stores and in locally competitive markets. These goals do not, however, impose major restrictions or requirements on members. Our minimum requirements for the acceptance of new members are outlined in the current Membership Agreement and Supplement and in the Member Operational Requirements that apply under that Agreement. The Operational Requirements do require that, within one year the member must make us the primary source of supply and terminate any previous participation in the program of any other major hardware wholesaler. There are currently no general requirements (apart from special voluntary programs) where members have to make particular percentages of purchases from us or have to achieve minimum retail performance levels, such as sales dollars per square foot. Our current strategic initiative, Vision 21, focuses on becoming a world class retail organization through encouraging dealers to adopt certain merchandising, marketing and operational practices that are supported by some of our most successful dealers to improve the Company's and the dealers' overall competitiveness and efficiency. The cornerstones to Vision 21 are to improve retailers' sales and profits, streamline our processes, bring wholesale and retail together as one Ace team and provide ultimate customer satisfaction. Vision 21 goals include minimizing disparities between retail and wholesale, developing dealer-friendly procedures that take duplication and costs out of dealers' operations, achieving consistent implementation of programs more rapidly and improving the dealers' financial performance and their ability to pursue new stores and store expansions. As retailers become Vision 21 retailers they are afforded various benefits to assist them to succeed at retail. Special Charges and Assessments We sponsor a national advertising program. To pay for this program, we assess dealers an amount equal to 1.365% of their purchases (except purchases of LTL Plus and certain hardware and software computer systems), with minimum and maximum yearly assessments of $1,916.46 and $6,500.00, respectively, for each store location. Effective January 1, 2001, we will assess dealers an amount equal to 1.5% of their purchases. The minimum assessment is $2,223.00, and the maximum assessment is $6,800.00 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 at a flat monthly rate or based on a percentage of sales for regional advertising not to exceed 2% of a dealer's annual purchases. Regional advertising assessments are subject to the same minimum and maximum amounts as the National Advertising assessment. Every two weeks, we bill the member store for a special low volume account service charge of $75 if annual purchases from us are less than $50,000. Effective January 1, 2001, every two weeks, we will bill the store for a special low volume account service charge of $60 per bi-weekly billing statement period if purchases from us during such period are less than $5,700.00. The low volume service charges that we bill to the store in a specific year are automatically refunded if that store's total purchases increase to over $148,200 during the year. The 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 $148,200 of merchandise from us during the year, 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 $5,700; 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 ($148,200), 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 bi-weekly statement period, except in Texas where the charge is .384% and Georgia where the charge is .692%. We consider a past due balance to exist whenever we do not receive payment of the amount shown as due on 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 "Ace Training Network" is required for all member stores in the United States and U.S. Territories. Under the "Ace Training Network," we will bill 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, 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. 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 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 Service Mark 840,176 December 5, 2007 "ACE HARDWARE" with winged emblem design Trademark 898,070 September 8, 2000(1) "THE PAINTIN' PLACE" Service Mark 1,138,654 August 12, 2000(2) "HARDWARE UNIVERSITY" with design Service Mark 1,180,539 December 1, 2001 "SUPER STRIKER" Trademark 1,182,330 December 15, 2001 "PACE" with design Service Mark 1,208,887 September 14, 2002 "ACE HARDWARE" with winged emblem design Trademark 1,277,581 May 15, 2004 "ACE HARDWARE" in stylized lettering design Trademark 1,426,137 January 27, 2007 "ACE" in stylized lettering design Service Mark 1,464,025 November 3, 2007 "ACE HARDWARE" in stylized lettering design Service Mark 1,486,528 April 26, 2008 "ACE HARDWARE AND GARDEN CENTER" in stylized lettering design Service Mark 1,487,216 May 3, 2008 "ACE NEW EXPERIENCE" in stylized lettering design Trademark 1,554,322 September 5, 2009 "ACE SEVEN STAR" in stylized lettering design Trademark 1,556,389 September 19, 2009 "ACE BEST BUYS" in circle design Service Mark 1,560,250 October 10, 2009 "ACENET" Service Mark 1,574,019 December 26, 2009 "ACE IS THE PLACE" Service Mark 1,602,715 June 19, 2010 "LUB-E" Trademark 1,615,386 October 2, 2010 "ASK ACE" Service Mark 1,653,263 August 6, 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 "THE OAKBROOK COLLECTION" in stylized lettering design Trademark 1,707,986 August 18, 2002 Registration Description of Mark Type of Mark Number Expiration Date ------------------- ------------ ------------ --------------- "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 "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 "QUALITY SHIELD" Trademark 2,102,305 September 30, 2007 "QUALITY TOUCH" Trademark 2,102,306 September 30, 2007 "STAINHALT" Trademark 2,122,418 December 16, 2007 "ACE CONTRACTOR CENTER" Service Mark 2,158,681 May 19, 2008 "NHS NATIONAL HARDLINES SUPPLY" Service Mark 2,171,775 July 7, 2008 "ACE COMMERCIAL & INDUSTRIAL SUPPLY" Service Mark 2,186,394 September 1, 2008 "THE OAKBROOK COLLECTION" Trademark 2,187,586 September 8, 2008 "ACE GARDEN PLACE" Service Mark 2,227,729 March 2, 2009 "ACE ROYAL" Trademark 2,237,981 April 13, 2009 "HELPFUL HARDWARE CLUB" Service Mark 2,239,400 April 13, 2009 "THE FOLKS IN THE RED VEST" Service Mark 2,261,946 July 20, 2009 "ACE CONTRACTOR PRO" Trademark 2,273,483 August 31, 2009 "ILLUMINATIONS" Trademark 2,353,666 May 30, 2010 "YOUR NEIGHBORHOOD SOLUTIONS PLACE" Service Mark 2,386,359 September 12, 2010 "ACE" with accent design Service Mark 2,378,123 August 15, 2010 "ACE SOLUTIONS PLACE" Service Mark 2,394,181 October 10, 2010
(1) Application for renewal of registration filed October 10, 2000. (2) Application for renewal of registration filed August 4, 2000. As of the date of this filing, we also have the following applications for new registrations pending in the U.S. Patent and Trademark Office: Mark Type of goods/services ---- ---------------------- "STORE-IT-RIGHT" hardware products, namely, hooks, brackets, knobs, hangers and extensions for support or hanging "ACE HOMEPLACE" magazines "ACE" with halo design retail hardware store services Competition Competitive conditions in the wholesale and retail hardware industry are intense and increasing. Independent hardware retailers must remain competitive with discount stores and chain stores, such as WalMart, Home Depot, Menard's, Sears, and Lowe's, and with other mass merchandisers. Retail hardware stores have been slowly shifting their locations to high rent shopping centers. There has also been a trend toward longer store hours. There is intense pressure on hardware retailers to obtain low cost wholesale supply sources. In several markets in the United States, we also compete directly with other dealer-owned wholesalers such as TruServ Corporation, Do it Best Corporation and United Hardware Distributing Co. Employees We have 5,513 full-time employees, of which 1,685 are salaried employees. We also have, as of the end of the 2000 fiscal year, union contracts covering one (1) truck driver's bargaining unit 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. 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: 2000 1999 1998 ---- ---- ---- Warehouse Sales 4.43564% 4.98172% 4.78251% Bulletin Sales 2.0% 2.0% 2.0% Direct Shipment Sales 1.0% 1.0% 1.0% Paint Sales 8.1131% 7.8827% 9.1653% 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 LTL Plus Program patronage dividend was .5% of these sales for fiscal year 2000, 1999 and 1998. 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 or other customers who do not qualify for patronage dividend distributions and any income or loss that we realize from the disposition of property and equipment. If a disposition 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 the taxable year in which the dealer receives them. Dealers who have not yet fully paid the $1,000 purchase price for their shares of our Class A voting stock are also required to include all patronage dividends we distribute to them in their gross income as explained above. Under our Stock Subscription Agreement, dealers must expressly consent to take these patronage dividend distributions into their gross incomes. The amount of the patronage dividends which dealers must include in their gross incomes includes both the cash portion of patronage dividends and any portion of patronage dividends that we apply against any indebtedness the dealer owes to us in accordance with Section 7 of Article XXIV of our By-laws. It also includes any portion of patronage dividends that they receive in shares of our Class C nonvoting stock, other property and patronage refund certificates. The Company also has the authority to issue a portion of the patronage dividend in the form of other property. Under our present program, patronage dividends on each of our three basic categories of sales (warehouse sales, bulletin sales and direct shipment sales) are allocated separately, as are patronage dividends under our LTL Plus Program. Dividend percentage calculations are made with reference to the net earnings derived from each of the respective categories. The 2000 patronage dividend rate for the LTL Plus Program is 0.5% of our LTL Plus sales. The 2000 patronage dividend rates for direct shipment and bulletin sales are 1% and 2%, respectively, while the current 2000 warehouse patronage dividend rate is 4.44%. Patronage dividends are calculated separately for full and partial truckloads of products purchased under the LTL Plus Program. (See the heading "Business", discussion of LTL Plus Program and the subheading "Forms of Patronage Dividend Distributions" below.) Any manufacturing profit realized on intracompany sales of products manufactured by our Paint Division is allocated and distributed as patronage dividends to eligible dealers in proportion to their respective annual dollar purchases of paint and related products from that division. The earnings we realize on wholesale sales of the Paint Division's products to our eligible dealers are currently distributed as patronage dividends to them as part of the patronage dividends which they receive each year in the basic patronage dividend categories of warehouse sales, bulletin sales and direct shipment sales. 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. We have established a LBM Retailer Incentive Pool Plan for our members who purchase LBM products through Builder Marts of America, Inc. ("BMA") and are eligible participants under our Ace Contractor Center standards. This is not a patronage dividend plan, but rather an allocation of the increase in our stock investment in BMA. Under the plan, we calculate an annual estimate of the amount by which our stock in BMA has increased or decreased in value from our initial investment, net of certain expenses. We allocate this estimate to eligible members annually based on their qualifying purchases of LBM products. A member's pool allocation only becomes vested and can only be redeemed upon the termination of the member's Ace membership which results in the sale or redemption of Ace stock held for that location, Ace's termination of the LBM Retailer Incentive Pool Plan, or Ace's liquidation, whichever occurs first. Negative pool balances are not charged to members. The 2000 incentive pool rate under this plan is 0.34% of qualifying purchases. Forms of Patronage Dividend Distributions We make patronage dividend distributions to our eligible dealers in cash, shares of our Class C Stock and patronage refund certificates according to a specific plan that has been adopted by our Board of Directors. This plan can be changed from time to time by the Board as they deem fit depending on business conditions and our Company's needs. This plan is summarized below for the purchases that our eligible dealers make from us for the year 2000 and subsequent years. 1.For each of 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 or property amounts above in the form of shares of our Class C nonvoting stock (par value $100 per share) until the total par value of all shares of all classes of our capital stock that 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) 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. 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. Under these programs, members have directed us to first apply the patronage refund certificate portion of their patronage dividend distributions toward the balance owed on financed items and next to apply patronage dividends which would otherwise be payable for the same year in the form of our Class C Stock. These signage, computer financing and store retrofit programs may be revised or discontinued by our Board at any time. Members also have the ability to apply for a Capital Stock loan which is designed to provide them with access to their future patronage dividends to assist them in opening new retail stores or to assist in significant store expansions. These loans are repaid at the end of seven (7) years from rebate distributions of the non-cash portion of the annual rebate on the respective store during that period. Federal Income Tax Treatment of Patronage Dividends Both the shares of Class C nonvoting stock and the patronage refund certificates that we use to pay patronage dividends are "qualified written notices of allocation" within the meaning of Sections 1381 through 1388 of the U.S. Internal Revenue Code. The Company may pay a portion of its dividend in the form of other qualified property pursuant to Section 1382 of the U.S. Internal Revenue Code. These Sections of the Internal Revenue Code deal with the income tax treatment of cooperatives and their patrons and have been in effect since 1963. The dollar amount stated on a qualified written notice of allocation and the fair market value of other qualified property must be taken into the gross income of the person to whom the notice is issued, even though this dollar amount may not actually be paid to the person in the same year that it is taxed. In order for us to receive a deduction from our gross income for federal income tax purposes for the amount of any patronage dividends that we pay to a patron (that is, to one of our eligible and qualifying dealers) in the form of qualified written notices of allocation or other qualified property, we have to pay (or apply against any indebtedness that the patron owes us in accordance with Section 7 of Article XXIV of our By-laws) not less than 20% of each patron's total patronage dividend distribution in cash and the patron also has to consent to having the written notices of allocation at their stated dollar amounts, and other qualified property at the fair market value, included in his gross income for the taxable year in which he receives them. The Internal Revenue Code also requires that any patronage dividend distributions that we deduct on our federal income tax return for business we do with patrons must be paid to those patrons within 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 and other qualified property 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 and other qualified property 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 and Supplement. You must submit a payment of $1,500 ($2,500 for conversions or new investor ground-ups effective January 1, 2001) with your signed Membership Agreement and Supplement. We use this fee toward our estimated costs of processing your membership application. If you submit a membership application and we accept it, we sign your Membership Agreement, Supplement 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 wholly-owned subsidiary National Hardlines Supply, Inc. ("NHS"), are not granted an ongoing license to use our trademarks and service marks. They can purchase selected types of products from us for resale. They are not members of our cooperative, and therefore do not own our stock or receive patronage dividends. In 1996, we established a license program for international non- shareholder dealers. These international licensees typically receive the exclusive right to use our trademarks and service marks, as well as exclusive rights to distribute the merchandise they purchase from us in their home countries. International licensees pay us a negotiated license fee and ongoing royalties on their retail sales in exchange for these rights, and for our ongoing training and support. In 1996, we also began operations through our subsidiary Ace Hardware Canada, Limited ("Ace Canada"). Ace Canada's customers are non-shareholders who do not receive patronage dividends from us. Only customers signed under the Ace Canada Franchise Agreement are licensed to use our trademarks and service marks. In 1998, we began developing joint ventures with certain members as a way of increasing the Ace presence in key markets without the need for Ace to use solely its own resources to open company stores. For each joint venture, we and the member enter into a Limited Liability Company Agreement, with the retailer acting as the managing member. The limited liability company ("LLC") operates the joint venture stores. In each joint venture to date, we own 50% or less of the LLC's units. As of the end of fiscal year 2000, we had entered into five joint ventures. In the future, we may explore other joint venture opportunities with our members; however we consider each situation unique and we evaluate each opportunity on its own merits. In our sole discretion, we may offer a member a mutually agreeable termination arrangement. In some situations, a member who terminates on this basis may be offered the opportunity to purchase products from us (including Ace private label products) for a period of up to 5 years after the termination of membership. The former member is not required to make any such purchases from us, but must maintain favorable credit status in order to do so. Sales to international non-shareholder dealers accounted for approximately 6.7% of our total sales in 2000 and approximately 6.5% in 1999 and 1998. Sales to domestic non-shareholder locations accounted for less than 2.5% of our total sales in fiscal year 2000, less than 1.5% of our total sales in 1999 and less than 1% in 1998. (See Appendix A, Article XXV, Sections 3 and 4 of our By-laws regarding International Retail Merchants and non-member accounts.) 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 Leased September 30, 2009 Oak Brook, Illinois 15,278 Leased September 30, 2009 Downers Grove, Illinois 23,962 Leased June 30, 2004 Markham, Ontario, Canada(1) 15,372 Leased February 28, 2006 Distribution Warehouses: Lincoln, Nebraska 345,440 Leased December 31, 2006 Arlington, Texas 313,091 Leased July 31, 2002 Perrysburg, Ohio 393,720 Leased November 1, 2004 Tampa, Florida 391,755 Owned Hanover, Maryland (2) 278,505 Owned Yakima, Washington 507,030 Owned Maumelle, Arkansas 597,253 Owned LaCrosse, Wisconsin (6) 591,964 Owned Huntersville, North Carolina (2) 354,336 Owned Rocklin, California 478,468 Owned Gainesville, Georgia 481,013 Owned Prescott Valley, Arizona 631,485 Owned Princeton, Illinois 1,094,756 Owned Square Feet Owned Lease of Facility or Expiration Location (Land in Acres) Leased Date -------- -------------- ------ ---------- Chicago, Illinois (3) 18,168 Leased May 31, 2002 Odenton, Maryland (3) 57,500 Leased June 26, 2003 Colorado Springs, Colorado 494,219 Owned Wilton, New York 800,525 Leased September 1, 2007 Loxley, Alabama 798,698 Leased May 27, 2009 Brantford, Ontario, Canada (4) 354,000 Leased March 31, 2006 Calgary, Alberta, Canada (4) 240,000 Leased December 31, 2001 Prince George County, Virginia (5)155.4 acres See Note 5 Fort Worth, Texas (3) 10,915 Leased December 31, 2005 Print Shop Facility: Downers Grove, Illinois 41,000 Leased April 30, 2002 Paint Manufacturing Facilities: Matteson, Illinois 371,411 Owned Chicago Heights, Illinois 194,000 Owned Other Property: Aurora, Illinois 72 acres Owned
(1) This property is leased by our subsidiary Ace Hardware Canada, Limited for its corporate office. (2) This property is under contract to be sold to Citation Properties, Inc. on May 1, 2001, and leased back by the Company for a five-year term ending April 30, 2006, with an option to terminate the lease at the end of the first nine months of the term. The Company recently announced that it intends to close this facility. (3) This property is leased for use as a freight consolidation center. (4) Our subsidiary, Ace Hardware Canada, Limited leases this property for a distribution warehouse. (5) This property is owned by Panattoni/Woods Road-Richmond, LCC, which has contracted with the Company to build a 778,000 square foot distribution warehouse. The property and distribution warehouse will be purchased by the Company upon completion, estimated to be on or before May 1, 2001. (6) Includes a 220,710 square foot expansion estimated to be completed in May, 2001. 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 slightly less than 25,000 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 ----- ------------------- Colorado 1 Georgia 8 Illinois 6 New Jersey 2 Washington 9 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 29 Consolidated Balance Sheets as of December 30, 2000 and January 1, 2000 30 Consolidated Statements of Earnings and Consolidated Statements of Comprehensive Income for each of the years in the three-year period ended December 30, 2000 32 Consolidated Statements of Member Dealers' Equity for each of the years in the three-year period ended December 30, 2000 33 Consolidated Statements of Cash Flows for each of the years in the three-year period ended December 30, 2000 34 Notes to Consolidated Financial Statements 35 INDEPENDENT AUDITORS' REPORT The Board of Directors Ace Hardware Corporation: We have audited the accompanying consolidated balance sheets of Ace Hardware Corporation and subsidiaries as of December 30, 2000 and January 1, 2000 and the related consolidated statements of earnings, comprehensive income, member dealers' equity and cash flows for each of the years in the three-year period ended December 30, 2000. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Ace Hardware Corporation and subsidiaries as of December 30, 2000 and January 1, 2000, and the results of their operations and their cash flows for each of the years in the three-year period ended December 30, 2000 in conformity with accounting principles generally accepted in the United States of America. KPMG LLP Chicago, Illinois January 26, 2001 ACE HARDWARE CORPORATION CONSOLIDATED BALANCE SHEETS December 30, 2000 and January 1, 2000 ASSETS December 30, January 1, 2000 2000 ------------- ------------ (000's omitted) Current assets: Cash and cash equivalents $ 24,644 $ 35,422 Short-term investments 12,772 - Receivables: Trade 316,339 317,144 Other 59,090 56,360 ------------- ------------ 375,429 373,504 Less allowance for doubtful receivables (2,458) (2,625) ------------- ------------ Net receivables 372,971 370,879 Inventories (Note 2) 395,565 373,090 Prepaid expenses and other current assets 15,105 13,341 ------------- ------------ Total current assets 821,057 792,732 ------------- ------------ Property and equipment (Note 10): Land 16,791 18,210 Buildings and improvements 211,024 188,795 Warehouse equipment 90,250 79,573 Office equipment 99,560 94,377 Manufacturing equipment 14,590 14,360 Transportation equipment 16,888 16,426 Leasehold improvements 17,445 17,400 Construction in progress 2,054 14,456 ------------- ------------ 468,602 443,597 Less accumulated depreciation and amortization (206,712) (184,419) ------------- ------------ Net property and equipment 261,890 259,178 Other assets 39,226 29,574 ------------- ------------ Total Assets $ 1,122,173 $ 1,081,484 ============= ============ See accompanying notes to consolidated financial statements. ACE HARDWARE CORPORATION CONSOLIDATED BALANCE SHEETS December 30, 2000 and January 1, 2000 LIABILITIES AND MEMBER DEALERS' EQUITY December 30, January 1, 2000 2000 ------------- ------------ (000's omitted) Current liabilities: Current installments of long-term debt (Note 4) $ 6,904 $ 4,067 Short-term borrowings (Note 3) 81,500 49,869 Accounts payable 448,766 449,497 Patronage dividends payable in cash (Note 5) 34,764 38,173 Patronage refund certificates payable (Note 5) 4,795 373 Accrued expenses 61,587 69,990 ------------- ------------ Total current liabilities 638,316 611,969 Long-term debt (Note 4) 105,891 111,895 Patronage refund certificates payable (Note 5) 68,385 55,257 Other long-term liabilities 24,923 22,400 ------------- ------------ Total liabilities 837,515 801,521 ------------- ------------ Member dealers' equity (Notes 5 and 8): Class A Stock of $1,000 par value 3,783 3,856 Class B Stock of $1,000 par value 6,499 6,499 Class C Stock of $100 par value 250,480 241,226 Class C Stock of $100 par value, issuable to dealers for patronage dividends 24,267 21,648 Additional stock subscribed, net 351 498 Retained earnings (deficit) (5,551) 594 Contributed capital 13,485 13,485 Accumulated other comprehensive income (loss) (162) 291 ------------- ------------ 293,152 288,097 Less: Treasury stock, at cost (8,494) (8,134) ------------- ------------ Total member dealers' equity 284,658 279,963 ------------- ------------ Commitments (Notes 6 and 10) ------------- ------------ $ 1,122,173 $ 1,081,484 ============= ============ See accompanying notes to consolidated financial statements. ACE HARDWARE CORPORATION CONSOLIDATED STATEMENTS OF EARNINGS Year Ended --------------------------------------- December 30, January 1, January 2, 2000 2000 1999 ------------- ------------ ------------ (000's omitted) Net sales $ 2,945,151 $ 3,181,802 $ 3,120,380 Cost of sales 2,665,614 2,908,138 2,879,296 ------------- ------------ ------------ Gross profit 279,537 273,664 241,084 ------------- ------------ ------------ Operating expenses: Warehouse and distribution 32,516 28,122 27,204 Selling, general and administrative 85,774 87,763 83,228 Retail success and development 73,132 57,149 32,907 ------------- ------------ ------------ Total operating expenses 191,422 173,034 143,339 ------------- ------------ ------------ Operating income 88,115 100,630 97,745 Interest expense (Note 12) (21,803) (16,651) (17,412) Other income, net 14,207 10,416 9,363 Income taxes (Note 7) (127) (1,833) (1,736) ------------- ------------ ------------ Net earnings $ 80,392 $ 92,562 $ 87,960 ============= ============ ============ Retained earnings at beginning of year $ 594 $ 3,292 $ 3,354 Net earnings 80,392 92,562 87,960 Patronage dividends (Note 5) (86,537) (95,260) (88,022) ------------- ------------ ------------ Retained earnings (deficit) at end of year $ (5,551) $ 594 $ 3,292 ============= ============ ============
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME Year Ended --------------------------------------- December 30, January 1, January 2, 2000 2000 1999 ------------- ------------ ------------ (000's omitted) Net earnings $ 80,392 $ 92,562 $ 87,960 Unrealized gains on securities 458 -- -- Foreign currency translation, net (911) 1,109 (483) ------------- ------------ ------------ Comprehensive income $ 79,939 $ 93,671 $ 87,477 ============= ============ ============ See accompanying notes to consolidated financial statements. ACE HARDWARE CORPORATION CONSOLIDATED STATEMENTS OF MEMBER DEALERS' EQUITY Three Years Ended December 30, 2000 (000's omitted) Class C Accum- Stock ulated Issuable to Other Comp- Dealers for Additional Retained rehensive Class A Class B Class C Patronage Stock Earnings Contributed Income/ Treasury Stock Stock Stock Dividends Subscribed* (deficit) Capital (loss) Stock Total ----- ----- ------ --------- ----------- --------- ------- --------- ----- ------ 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 - Patronage dividends issuable - - - 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 Net earnings - - - - - 92,562 - - - 92,562 Net payments on subscriptions - - - - 1,531 - - - - 1,531 Patronage financing deductions - - - (847) - - - - - (847) Stock issued 238 - 26,616 (25,323) (1,504) - - - - 27 Stock repurchased - - - - - - - - (12,509) (12,509) Stock retired (228) - (11,961) - - - - - 12,189 - Patronage dividends issuable - - - 21,648 - - 10,190 - - 31,838 Patronage dividends payable - - - - - (95,260) - - - (95,260) Accumulated other comprehensive income - - - - - - - 1,109 - 1,109 ------ ------ ------- --------- ----------- -------- ------- -------- ------ ------- Balance at January 1, 2000 3,856 6,499 241,226 21,648 498 594 13,485 291 (8,134) 279,963 Net earnings - - - - - 80,392 - - - 80,392 Net payments on subscriptions - - - - 1,830 - - - - 1,830 Patronage financing deductions - - - (158) - - - - - (158) Stock issued 234 - 23,391 (21,490) (1,977) - - - - 158 Stock repurchased - - - - - - - - (14,804) (14,804) Stock retired (307) - (14,137) - - - - - 14,444 - Patronage dividends issuable - - - 24,267 - - - - - 24,267 Patronage dividends payable - - - - - (86,537) - - - (86,537) Accumulated other comprehensive income - - - - - - - (453) - (453) ------ ------ -------- --------- ----------- -------- ------- -------- -------- -------- Balance at December 30, 2000 $3,783 $6,499 $250,480 $24,267 $ 351 $(5,551) $13,485 $ (162) $(8,494) $284,658 ====== ====== ======== ========= =========== ======== ======= ======== ======== ========
*Additional stock subscribed is comprised of the following amounts at January 2, 1999, January 1, 2000 and December 30, 2000: 1998 1999 2000 ---- ---- ---- Class A Stock $ 60 $ 118 $ 41 Class B Stock - - - Class C Stock 955 1,452 975 ----- ----- ----- 1,015 1,570 1,016 Less unpaid portion 544 1,072 665 ----- ----- ----- $ 471 $ 498 $ 351 ===== ===== ===== See accompanying notes to consolidated financial statements. ACE HARDWARE CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS Year Ended -------------------------------------- December 30, January 1, January 2, 2000 2000 1999 ------------ ----------- ----------- (000's omitted) Operating Activities: Net earnings $ 80,392 $ 92,562 $ 87,960 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization 32,273 23,396 21,536 Decrease (increase) in accounts receivable, net (11,569) 13,095 (44,481) Decrease (increase) in inventories (22,475) (38,685) 4,104 Decrease (increase) in prepaid expenses and other current assets (1,764) 1,805 (1,531) Increase (decrease) in accounts payable and accrued expenses (9,134) (1,101) 42,264 Increase in other long-term liabilities 2,523 3,718 3,960 ------------ ----------- ----------- Net Cash Provided by Operating Activities 70,246 94,790 113,812 ------------ ----------- ----------- Investing Activities: Purchase of short-term investments (12,314) - - Purchase of property and equipment (44,649) (43,074) (26,554) Proceeds from sale of property and equipment 9,664 349 8,148 Increase in other assets (10,563) (21,160) (3,383) ------------ ----------- ----------- Net Cash Used in Investing Activities (57,862) (63,885) (21,789) ------------ ----------- ----------- Financing Activities: Proceeds (payments) of short-term borrowings 31,631 24,869 (17,000) Proceeds from notes payable - - 26,117 Payments on long-term debt (3,167) (6,892) (7,593) Payment of cash portion of patronage dividend (38,173) (34,826) (29,943) Payments of patronage refund certificates (479) (21,557) (14,282) Proceeds from sale of common stock 1,830 1,531 1,463 Repurchase of common stock (14,804) (12,509) (11,055) ------------ ----------- ----------- Net Cash Used in Financing Activities (23,162) (49,384) (52,293) ------------ ----------- ----------- Increase (decrease) in Cash and Cash Equivalents (10,778) (18,479) 39,730 Cash and Cash Equivalents at beginning of year 35,422 53,901 14,171 ------------ ----------- ----------- Cash and Cash Equivalents at end of year $ 24,644 $ 35,422 $ 53,901 ============ =========== ===========
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. (b) Cash Equivalents and Investments The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. Short-term investments consist primarily of corporate and government agency bonds and are classified as held for sale. (c) Consolidation The accompanying consolidated financial statements include the accounts of the Company and subsidiaries. All significant intercompany transactions have been eliminated. The equity method of accounting is used for the Company's 50% or less owned affiliates over which the Company has the ability to exercise significant influence. The Company has other investments that are accounted for at cost. (d) 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. The Company recognizes revenue from product sales upon shipment to customers. (e) Inventories Inventories are valued at the lower of cost or net realizable value. Cost is determined primarily using the last-in, first-out method. (f) 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. (g) 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 ex- change rates prevailing during the year. The Company has utilized foreign exchange forward contracts to hedge non-U.S. equity investments. Gains and losses on these foreign hedges are included in the basis of the underlying hedged investment. During 1999 the Company settled all outstanding foreign currency contracts that resulted in a gain of approximately $2.0 million reflected within accumulated other comprehensive income at December 30, 2000 and January 1, 2000. Foreign currency translation adjustments, net of gains on foreign exchange contracts, are reflected in the accompanying Consolidated Statement of Comprehensive Income for 2000, 1999 and 1998. The Company does not have any outstanding foreign exchange forward contracts at December 30, 2000 or January 1, 2000. (h) 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. (i) 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. (j) 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. (k) Fiscal Year Effective January 1, 1998 the Company changed its fiscal year from December 31st to the Saturday nearest December 31st. Accordingly, 2000, 1999 and 1998 ended on December 30, 2000, January 1, 2000 and January 2, 1999, respectively. (l) Reclassifications Certain financial statement reclassifications have been made to prior year amounts to conform to comparable classifications followed in 2000. (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 $62,502,000 and $61,483,000 at December 30, 2000 and January 1, 2000, 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 2000 and 1999. The maximum amount outstanding at any month-end during the period was $147.0 million in 2000 and $108.0 million in 1999. The weighted average interest rate effective as of December 30, 2000 and January 1, 2000 was 7.18% and 6.84%, respectively. Short-term borrowings outstanding as of December 30, 2000 and January 1, 2000 were $81.5 and $49.9 million, respectively. At December 30, 2000 the Company has available a revolving credit facility with a group of banks providing for $175.0 million in committed lines and also has available $15.0 million in uncommitted lines. The aggregate unused line of credit available at December 30, 2000 and January 1, 2000 was $108.5 million and $160.1 million, respectively. At December 30, 2000 the Company had no compensating balance requirements. (4) Long-Term Debt Long-term debt is comprised of the following: December 30, January 1, 2000 2000 ----------- ---------- (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% $ 5,946 $ 8,108 $20,000,000 due in quarterly installments of $952,400 with interest payable quarterly at a fixed rate of 6.89% - 952 $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 25,000 Liability under capitalized leases (see Note 10) 83 510 Installment notes with maturities through 2004 with various interest rates 1,766 1,392 ----------- ---------- 112,795 115,962 Less current installments (6,904) (4,067) ----------- ---------- $ 105,891 $ 111,895 =========== ========== Aggregate maturities of long-term debt are $6,904,000, $6,715,000, $5,975,000, $5,629,000 and $12,857,000 in 2001 through 2005, respectively, and $74,715,000 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. In 1999, amounts exceeding the cash portion were distributed in the form of options (i.e. other property) exercisable by the dealers at a future date to acquire shares of the Company's ownership in a minority- owned investment. Amounts exceeding the cash portion will be distributed in the form of Class C $100 par value stock, to a maximum based upon the current year purchase volume or $20,000 whichever is greater, and thereafter in a combination of additional cash and patronage refund certificates having maturity dates and bearing interest as determined by the Board of Directors. A portion of the dealer's annual patronage dividends distributed under the above plan in a form other than cash can be applied toward payment of principal and interest on any balances outstanding for approved patronage financing programs. The patronage dividend composition for 2000, 1999 and 1998 follows: Subordinated Class Patronage Total Cash Refund C Other Financing Patronage Portion Certificates Stock Property Deductions Dividends ------- ------------ ----- -------- ---------- --------- (000's omitted) 2000 $34,764 $18,029 $24,267 $ - $ 9,477 $86,537 1999 38,173 12,249 21,648 10,190 13,000 95,260 1998 34,826 15,720 26,170 - 11,306 88,022 Patronage dividends are allocated on a fiscal year basis with issuance in the following year. The patronage refund certificates outstanding or issuable at December 30, 2000 are payable as follows: Interest January 1, Amount Rate ---------- ------ -------- (000's omitted) 2001 $ 4,795 6.00% 2002 9,142 6.25 2003 13,370 6.00 2004 15,348 6.00 2005 12,496 6.25 2006 18,029 6.50 (6) Retirement Plans The Company has two defined benefit pension plans covering substantially all non-union employees, the Employees' Pension Plan and Trust and the Employees' Retirement Income Plan and Trust. The Company terminated the Employees' Pension Plan and Trust effective April 30, 2000. In addition to the net periodic pension expense, the Company recognized a gain of $3,131,000 (net of tax) in 2000 of which the pre- tax portion is classified as other income, net in the accompanying consolidated financial statements. Benefits in these plans are based on years of service, highest average compensation (as defined) and the related profit sharing and primary social security benefit. Contributions to the plans are based on the Entry Age Normal, Frozen Initial Liability actuarial funding method and are limited to amounts that are currently deductible for tax reporting purposes. As of December 30, 2000 plan assets in the Employees' Retirement Income Plan and Trust were held primarily in equities, mutual funds and group annuity contracts. Pension expense for 2000, 1999 and 1998 included the following components: December 30, January 1, January 2, 2000 2000 1999 ------------ ---------- ---------- (000's omitted) Service cost - benefits earned during the period $ 52 $ 309 $ 293 Interest cost on projected benefit obligation 112 399 428 Expected return on plan assets (115) (733) (710) Net amortization and deferral (31) 125 87 ------------ ---------- ---------- Net periodic pension expense $ 18 $ 100 $ 98 ============ ========== ========== The following table sets forth the funded status of the plans and amounts recognized in the Company's Consolidated Balance Sheets at December 30, 2000 and January 1, 2000: December 30, January 1, 2000 2000 ------------ ---------- (000's omitted) Change in benefit obligation: Benefit obligation at beginning of year $ 5,412 $ 5,341 Service cost 52 309 Interest cost 112 399 Actuarial gains (119) (213) Benefits paid (3,801) (424) ------------ ---------- Benefit obligation at end of year 1,656 5,412 ------------ ---------- Change in plan assets: Fair value of plan assets at beginning of year 10,293 9,448 Actual return on plan assets 29 1,198 Employer contribution (reversion) (4,961) 71 Benefits paid (3,801) (424) ------------ ---------- Fair value of plan assets at end of year 1,560 10,293 ------------ ---------- Funded status (96) 4,881 Unrecognized transition asset (65) (78) Unamortized prior service cost (581) (583) Unrecognized net actuarial losses (gains) 688 (3,634) ------------ ---------- Prepaid (accrued) pension cost $ (54) $ 586 ============ ========== The weighted average discount rate used in determining the actuarial present value of the projected benefit obligation was 7.50% in 2000 and 7.75% in 1999. The related expected long-term rate of return was 8.0% in 2000 and 1999. The rate of increase in future compensation was projected using actuarial salary tables plus 1.0% in 2000 and 1999. The Company also participates in several multi-employer plans covering union employees. Amounts charged to expense and contributed to the plans totaled approximately $222,000, $233,000 and $216,000 in 2000, 1999 and 1998, respectively. The Company's profit sharing plan contribution for 2000, 1999 and 1998 was approximately $14,586,000, $15,071,000 and $13,746,000, 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 2000, 1999 and 1998 provisions (benefit) for federal income taxes were $(162,000), $1,000,000 and $1,105,000, respectively, and for state income taxes were $289,000, $833,000 and $631,000, respectively. The tax benefit for the current period results from a combination of losses in nonpatronage areas and from the offset of available tax credits against federal income tax liability. All available tax credits have been utilized. There are no available tax credits to carry forward into future periods. The Company made tax payments of $1,095,000, $2,755,000 and $1,374,000 during 2000, 1999 and 1998, respectively. (8) Member Dealers' Equity The Company's classes of stock are described below: Number of Shares at ------------------- December 30, January 1, 2000 2000 ------------ ---------- Class A Stock, voting, redeemable at par value - Authorized 10,000 10,000 Issued and outstanding 3,783 3,856 Class B Stock, nonvoting, redeemable at not less than twice par value- Authorized 6,500 6,500 Issued 6,499 6,499 Outstanding 2,252 2,432 Treasury stock 4,247 4,067 Class C Stock, nonvoting, redeemable at not less than par value - Authorized 4,000,000 4,000,000 Issued and outstanding 2,504,796 2,412,255 Issuable as patronage dividends 242,671 216,480 Additional Stock Subscribed: Class A Stock 41 118 Class B Stock - - Class C Stock 9,750 14,520
At December 30, 2000 and January 1, 2000 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. Treasury stock transactions during 1998, 1999 and 2000 are summarized below: Shares Held in Treasury ----------------------- Class A Class B Class C ----------- ----------- ----------- 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 - Stock issued - - - Stock repurchased 228 160 119,614 Stock retired (228) - (119,614) ----------- ----------- ----------- Balance at January 1, 2000 - 4,067 - Stock issued - - - Stock repurchased 307 180 141,365 Stock retired (307) - (141,365) ----------- ----------- ----------- Balance at December 30, 2000 - 4,247 - =========== =========== =========== ACE HARDWARE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) (9) Segments The Company is principally engaged as a wholesaler of hardware and related products and is a manufacturer of paint products. 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: December 30, 2000 ----------------- (000's omitted) Elimination of Paint Intersegment Wholesale Manufacturing Other Activities Consolidated --------- ------------- ----- ---------- ------------ Net sales from external customers $2,879,952 $ 20,852 $44,347 - $2,945,151 Intersegment sales 28,641 100,780 - (129,421) - Interest expense 21,803 1,209 1,278 (2,487) 21,803 Depreciation and amortization 29,176 1,694 1,403 - 32,273 Segment profit (loss) 73,540 9,739 (2,452) (435) 80,392 Identifiable segment assets 1,024,493 68,130 48,775 (19,225) 1,122,173 Expenditures for long-lived assets 39,807 937 3,905 - 44,649 January 1, 2000 --------------- (000's omitted) Elimination of Paint Intersegment Wholesale Manufacturing Other Activities Consolidated --------- ------------- ----- ---------- ------------ Net sales from external customers $3,128,269 $ 27,268 $26,265 - $3,181,802 Intersegment sales 22,647 100,758 - (123,405) - Interest expense 16,651 1,383 590 (1,973) 16,651 Depreciation and amortization 21,022 1,589 785 - 23,396 Segment profit (loss) 85,574 9,475 (1,819) (668) 92,562 Identifiable segment assets 975,618 78,057 40,235 (12,426) 1,081,484 Expenditures for long-lived assets 35,027 2,846 5,201 - 43,074 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 17,412 1,464 244 (1,708) 17,412 Depreciation and amortization 19,808 1,392 336 - 21,536 Segment profit (loss) 78,442 10,364 (382) (464) 87,960 Identifiable segment assets 963,354 54,215 39,030 (9,019) 1,047,580 Expenditures for long-lived assets 21,849 937 3,768 - 26,554
ACE HARDWARE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) Net sales and long-lived assets by geographic region based upon customer location for 2000, 1999 and 1998 were as follows: December 30, 2000 January 1, 2000 January 2, 1999 ----------------- --------------- --------------- (000's omitted) Net sales: United States $2,748,740 $2,975,567 $2,903,906 Foreign countries 196,411 206,235 216,474 ----------------- --------------- --------------- Total $2,945,151 $3,181,802 $3,120,380 ================= =============== =============== Long-lived assets, net: United States $ 258,802 $ 254,747 $ 234,543 Foreign countries 3,088 4,431 5,306 ----------------- --------------- --------------- Total $ 261,890 $ 259,178 $ 239,849 ================= =============== =============== (10) Commitments Leased property under capital leases is included as "Property and Equipment" in the Consolidated Balance Sheets as follows: December 30, January 1, 2000 2000 ------------ ---------- (000's omitted) Data processing equipment $3,598 $3,598 Less: accumulated depreciation and amortization (3,252) (2,711) ------------ ---------- $ 346 $ 887 ============ ========== The Company rents buildings and warehouse, office and certain other equipment under capital and operating leases. At December 30, 2000 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) 2001 $ 93 $ 22,646 2002 - 17,811 2003 - 13,304 2004 - 11,153 2005 - 9,070 Thereafter - 26,183 ------- --------- Total minimum lease payments 93 $100,167 ========= Less amount representing interest (10) ------- Present value of total minimum lease payments $ 83 ======= ACE HARDWARE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) All leases expire prior to 2014. 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 $45,514,000, $39,149,000 and $37,023,000 in 2000, 1999 and 1998, respectively. Rent expense includes $9,977,000, $7,352,000 and $6,004,000 in contingent rentals paid in 2000, 1999 and 1998, 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 $76,372,000, $79,639,000 and $70,254,000 was charged to operations in 2000, 1999 and 1998, respectively. (12) Interest Expense Interest paid was $20,256,000, $16,411,000 and $16,553,000 in 2000, 1999 and 1998, respectively, net of capitalized interest of $715,000 and $234,000 in 2000 and 1999. ACE HARDWARE CORPORATION SELECTED FINANCIAL DATA Income Statement Data: December 30, January 1, January 2, December 31, December 31, 2000 2000 1999 1997 1996 ------------ ---------- ---------- ------------ ------------ (000's omitted) Net sales $ 2,945,151 $3,181,802 $3,120,380 $ 2,907,259 $ 2,742,451 Cost of sales 2,665,614 2,908,138 2,879,296 2,693,362 2,542,562 ------------ ---------- ---------- ------------ ------------ Gross profit 279,537 273,664 241,084 213,897 199,889 Total expenses 199,145 181,102 153,124 137,510 127,582 ------------ ---------- ---------- ------------ ------------ Net earnings $ 80,392 $ 92,562 $ 87,960 $ 76,387 $ 72,307 ============ ========== ========== ============ ============ Patronage dividends (Notes A, B and 5) $ 86,537 $ 95,260 $ 88,022 $ 76,153 $ 73,837 ============ ========== ========== ============ ============
Balance Sheet Data: December 30, January 1, January 2, December 31, December 31, 2000 2000 1999 1997 1996 ------------ ---------- ---------- ------------ ------------ (000's omitted) Total assets $ 1,122,173 $1,081,484 $1,047,580 $ 977,478 $ 916,375 Working capital 182,741 180,763 191,926 158,676 146,862 Long-term debt 105,891 111,895 115,421 96,815 71,837 Patronage refund certificates payable, long-term 68,385 55,257 43,465 49,044 49,639 Member dealers' equity 284,658 279,963 261,512 245,479 233,313
(A) The Company operates as a cooperative organization, and pays patronage dividends to member dealers on earnings derived from business done with such dealers. It is the practice of the Company to distribute substantially all patronage sourced earnings in the form of patronage dividends. (B) The form in which patronage dividends are to be distributed can only be determined at the end of each year when the amount distributable to each of the member dealers is known. Patronage dividends were payable as listed in the table below. (5) Refers to Note 5 of the Consolidated Financial Statements on page 38 of this Form S-2. December 30, January 1, January 2, December 31, December 31, 2000 2000 1999 1997 1996 ------------ ---------- ---------- ------------ ------------ (000's omitted) In cash $ 34,764 $ 38,173 $ 34,826 $ 29,943 $ 28,178 In patronage refund certificates payable 18,029 12,249 15,720 13,726 9,500 In Class C Stock 24,267 21,648 26,170 22,366 26,474 In other property - 10,190 - - - In patronage financing deductions 9,477 13,000 11,306 10,118 9,685 ------------ ---------- ---------- ------------ ------------ Total patronage dividends $ 86,537 $ 95,260 $ 88,022 $ 76,153 $ 73,837 ============ ========== ========== ============ ============
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 $190.0 million of which $108.5 million was available at December 30, 2000. 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 $44.6, $43.1 and $26.5 million in 2000, 1999 and 1998, respectively. During 2000, the Company financed the $44.6 million of capital expenditures out of current and accumulated internally generated funds and short- term borrowings. Capital expenditures for 2001 are anticipated to be approximately $72.5 million primarily for a new distribution facility, improvements to existing facilities and technology investments. As a cooperative, the Company distributes substantially all of its patronage sourced 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 2000 Compared to 1999 On June 30, 1999 the Company entered into a business combination agreement with Builder Marts of America, Inc. (BMA) to combine the Company's lumber and building materials division (the "LBM Division") with BMA. Under this agreement, the Company contributed defined business assets (primarily vendor rebate receivables, fixed assets and inventories) for a non-controlling interest in the combined entity. The investment in the combined entity is accounted for under the equity method of accounting. The accompanying consolidated financial statements include the financial results of the LBM Division through the closing date of August 2, 1999. The total sales decrease of 7.4% was affected by the business combination of the LBM Division with BMA. As a result of this transaction, lumber and building materials (LBM) sales are not reported within the Company's sales results after August 2, 1999. Excluding LBM, sales increased 4.7% in 2000 primarily due to conversions to Ace membership, additional sales to non-members, increased existing retailer volume and targeted efforts on new store development within our retailer base. Domestic basic business sales increased 5.3%, while international basic business sales decreased 1.8%. Gross profit increased $5.9 million and increased as a percent of total sales from 8.60% in 1999 to 9.49% in 2000. The increase, as a percent of sales, results primarily from the loss of lower margin LBM Division sales volume since August 1999. Basic business (excluding LBM Division) gross profit decreased slightly as a percent of basic business sales (9.49% in 2000 vs. 9.52% in 1999) due to a sales mix shift towards the lower margin direct ship sales category and higher warehousing costs absorbed into inventory. Increased vendor rebates and increased company-owned store gross profit driven by higher sales volume partially offset the year-to-date gross profit percentage decline. Warehouse and distribution expenses increased $4.4 million over 1999 and increased as a percent of total sales from 0.9% in 1999 to 1.1% in 2000. As a percent of basic business sales, these costs increased from 1.0% in 1999 to 1.1% in 2000. Higher distribution wages required to support the increased sales volume combined with pre- opening costs associated for a new Loxley, Alabama distribution facility are partially offset by higher logistics income. Selling, general and administrative expenses decreased $2.0 million, or 2.3% due to continued cost control measures and lower LBM Division costs. Higher information technology costs and expenses associated with opening the Loxley, Alabama distribution facility partially offset these expense decreases, and, along with the exclusion of LBM sales in the sales base, account for the increase in general and administrative expenses as a percent of sales. Retail success and development expenses increased $16.0 million primarily due to operating costs associated with operating additional company-owned stores and investments made at retail to support our Vision 21 strategy. As part of this strategy, the Company entered into an agreement with an outside party to co-develop a common retail software platform for our dealers. This resulted in a write-down of prior software development costs which will not contribute to the new system. Increased advertising income partially offset these expense increases. 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. Interest expense increased $5.2 million due to higher average borrowing levels and increased interest rates. The increased borrowing levels resulted from the construction of the Loxley, Alabama distribution center, the expansion of our LaCrosse, Wisconsin facility and increased retailer dating programs. Other income increased $3.8 million primarily due to the gain on pension plan termination and income realized on non-controlling investments in affiliates. Income tax expense decreased due to increased operating losses from non-patronage activities. Operations 1999 Compared to 1998 On June 30, 1999 the Company entered into a business combination agreement with Builder Marts of America, Inc. (BMA) to combine the Company's lumber and building materials division (the "LBM Division") with BMA. Under this agreement, the Company contributed defined business assets (primarily vendor rebate receivables, fixed assets and inventories) for a non-controlling interest in the combined entity. The investment in the combined entity is accounted for under the equity method of accounting. The accompanying consolidated financial statements include the financial results of the LBM Division through the closing date of August 2, 1999. The total sales increase of 2.0% was affected by the business combination of the LBM Division with BMA. As a result of this transaction, LBM Division sales were not reported within the Company's sales results after August 2, 1999. Sales of basic hardware and paint merchandise (including warehouse, bulletin and direct shipments) increased 7.8% in 1999 primarily due to increased existing retailer volume, targeted efforts on new store development within our retailer base and conversions to Ace membership. Excluding international, domestic basic business sales were up 8.8%. Sales were negatively impacted by a decline in international sales. Net dealer outlets increased in 1999 due to targeted sales efforts on new store development and conversions to Ace membership and continued emphasis on retail success. Gross profit increased $32.6 million or 13.5% and increased as a percent of sales to 8.60% vs. 7.73% in 1998. This increase as a percent of sales results partially from the loss of lower margin LBM Division volume. Higher cash discounts and vendor rebates and increased margin from import products and retail operations resulted in the gross profit increase. Warehouse and distribution expenses increased $918,000 and increased as a percent of sales from 0.87% to 0.88%. Increased warehouse and distribution costs required to support higher handled sales are partially offset by increased logistics income. Higher logistics income combined with improvements in productivity drove expenses as a percent of basic business sales down to 1.00% in 1999 from 1.04% in 1998. Selling, general and administrative expenses increased by $4.5 million or 5.4% and increased as a percent to sales due to increased information technology costs to support our Year 2000 efforts. Retail success and development expenses increased $24.2 million or 73.7% due to increased new business development costs, costs associated with additional company-owned stores and costs to support retail initiatives. 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. Impact of New Accounting Standards In June, 1998, the Financial Accounting Standards Board (FASB)issued Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133, as amended by SFAS Nos. 137 and 138, requires companies to record derivatives on the balance sheet as assets and liabilities, measured at fair value. The accounting treatment of gains or losses resulting from changes in the values of those derivatives is dependent on the use of the derivative and whether it qualifies for hedge accounting. The company is required to comply with SFAS No. 133, as amended, in fiscal year 2001 and estimates its adoption will not have a material effect on the consolidated financial statements. In September, 2000, the FASB issued Statement of Financial Accounting Standards (SFAS) No. 140, "Accounting for Transfer and Servicing of Financial Assets and Extinguishments of Liabilities." SFAS No. 140 replaces SFAS No. 125 and revises the standards for accounting for securitizations and other transfers of financial assets and collateral. The Company is required to comply with SFAS No. 140 in the second quarter of fiscal year 2001 and does not believe its adoption will have a material effect 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 50 Director since June, 1994; term expires 2003; President of Davis Lumber and Ace Hardware, Inc., Davis, California since November, 1985. Richard F. Baalmann, Jr. 41 Director since June, 1999; term expires 2002; President of Homart, Inc., Centralia, Illinois since May, 1988. Eric R. Bibens II 44 Director since June, 1997; term expires 2003; President of Bibens Home Center, Inc., Springfield, Vermont since 1983. Michael C. Bodzewski 51 Vice President, Marketing, Advertising, Retail Development and Company Stores effective October, 2000; Vice President - Marketing, Advertising and Retail Operations East effective October, 1999; Vice President - Sales and Marketing effective October, 1998; Vice President - Merchandising effective June, 1990. Position(s) Currently Held and Business Experience Name Age (for the past 5 years) ---- --- ---------------------- Lori L. Bossmann 40 Vice President, Merchandising effective October, 2000; Vice President - Finance effective October 1999; Vice President - Controller effective September, 1997; Controller effective January, 1994. Lawrence R. Bowman 54 Director since February, 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 41 Director since June, 1996; term expires 2002; President of Ace Hardware of Chattanooga, Chattanooga, Tennessee since January, 1990. Ray A. Griffith 47 Executive Vice President, Retail effective October, 2000; Vice President - Merchandising effective October, 1998; Vice President - Retail Development and Marketing effective September, 1997; Director - Retail Operations, Western Division effective September, 1994. Daniel L. Gust 51 Director since June, 1998; term expires 2001; President of Garden Acres Ace Hardware, Longmont, Colorado since January, 1991. D. William Hagan 43 Director since June, 1997; term expires 2003; President of Hagan Ace Hardware, Orange Park, Florida since February, 1980. David F. Hodnik 53 President and Chief Executive Officer effective January, 1996; President and Chief Operating Officer effective January 1, 1995. Paul M. Ingevaldson 55 Senior Vice President - International and Technology effective September, 1997; Vice President - Corporate Strategy and International Business effective September, 1992. Howard J. Jung 53 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 44 Executive Vice President effective October, 2000; Senior Vice President - Wholesale effective September, 1997; Vice President - Finance effective January, 1994. Richard A. Karp 49 Director since June, 2000; President, Cole Hardware, San Francisco, California since June, 1979. David F. Myer 55 Senior Vice President, Retail Support and Logistics effective October, 2000; Vice President - Retail Support effective September, 1997; Vice President - Retail Support and New Business effective October, 1994. Position(s) Currently Held and Business Experience Name Age (for the past 5 years) ---- --- ---------------------- Mario R. Nathusius 57 Director since June, 1998; term expires 2001; President of Cemaco S.A. Guatemala City, Guatemala since March, 1978. Fred J. Neer 61 Vice President - Human Resources effective April, 1989. Ken L. Nichols 52 Vice President, Retail Operations effective October, 2000; Vice President - Retail Operations West effective October, 1999; Vice President - New Business effective October, 1998; Director - Retail Operations, Eastern Division effective October, 1994. Richard W. Stine 55 Director since June, 1999; term expires 2002; Vice President of Stine, Inc., Sulphur, Louisiana since September, 1976. Our By-laws provide that our Board shall have between 9 and 12 directors. A minimum of 9 directors must be dealer directors. A maximum of two directors may be non-dealer directors. Non-dealer directors cannot exceed 25% of the total number of directors in office at any one time. Non-dealer directors may (but do not have to be) shareholders of ours who are in the retail hardware business. Our By- laws provide for three classes of directors who are to be elected for staggered 3-year terms, except that one director who would not otherwise be eligible for reelection in 2001 may be elected at the 2001 annual meeting of stockholders for a two year term under Article IV, Sections 1 through 3 of our By-laws. On January 23, 2001, the Board of Directors passed a resolution reducing the number of directors from eleven to ten effective with the 2001 annual shareholders meeting on June 4, 2001. Our By-laws also provide that no one can serve as a dealer director unless that person is an owner, executive officer, general partner or general manager of a retail business organization that is a shareholder of ours. Regional dealer directors are elected from geographic regions of the United States. The Board under Article IV, Section 1 of our By-laws, determines these regions. If the Board finds that regional dealer directors represent all regions, then dealer directors at large may be elected, so long as the maximum number of directors allowed under our By-laws is not exceeded. A geographic breakdown of our current regions for the election of directors at our 2001 annual stockholders meeting to be held on June 4, 2001 appears below: Region 1 - Maine, New Hampshire, Vermont, Massachusetts, Connecticut, Rhode Island, New York, Pennsylvania, New Jersey; Region 2 - Delaware, Maryland, Virginia, West Virginia, Kentucky, Tennessee, North Carolina, South Carolina, District of Columbia, Ohio; Region 3 - Alabama, Mississippi, Georgia, Florida; Region 4 - Indiana, Illinois, Michigan, Wisconsin; Region 5 - Colorado, Idaho, Iowa, Kansas, Minnesota, Missouri, Montana, Nebraska, North Dakota, South Dakota, Utah, Wyoming; Region 6 - Arkansas, Louisiana, Oklahoma, Texas, New Mexico, Arizona; Region 7 - Hawaii, California, Nevada, Oregon, Washington, Alaska Under the procedure required by our By-laws, the following directors have been selected as nominees for reelection as dealer directors at the 2001 annual stockholders meeting: Nominee Age Class Region Term ------- --- ----- ------ ---- Daniel L. Gust 51 Third 5 3 years Howard J. Jung 53 First N/A* 2 years *Non-dealer director The person named below has been selected as a nominee for election to the Board for the first time at the 2001 annual meeting as a dealer director of the class, from the region and for the term indicated: Nominee Age Class Region Term ------- --- ----- ------ ---- David S. Ziegler 45 Third At large 3 years Non-dealer directors and dealer directors at large are not elected from particular geographic regions. Article IV of our By-laws has information about the qualifications for membership on the Board of Directors, the terms of directors, the limitations on the total period of time that a director may hold office, the procedure for 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. We have not authorized any dealer, salesman, or any other person to give any information or make any representations other than those ACE HARDWARE CORPORATION 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 solicitation. The delivery of this 698 Shares of Class A Prospectus at any time does not imply (Voting) Stock that there has been no change in our $1,000 par value Company's affairs afterward. 23,239 Shares of Class C In Florida the securities covered by (Nonvoting) Stock this Prospectus are being offered under $100 par value a limited offering exemption which 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 Documents Incorporated by Reference 2 Factors to be Considered 2 -------- Summary 3 Use of Proceeds 6 Distribution Plan and Offering Terms 6 Description of Capital Stock 8 The Company's Business 12 Dated: , 2001 Properties 26 Index to Consolidated Financial Statements 28 Independent Auditors' Report 29 Consolidated Financial Statements 30 Notes To Consolidated Financial Statements 35 Management's Discussion and Analysis of Financial Condition and Results of Operations 46 Management 48 Appendix A By-laws of Ace Hardware Corporation A-1 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 25,000 Legal Fees 25,000 Fees and Expenses under "Blue Sky" Laws of Various States 3,500 Miscellaneous Expenses 500 ------- Total $64,000 ======= 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 attorneys' 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". 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. Exhibit No. Exhibit - ------- ------- 3-B By-laws of the Registrant as amended through December 6, 2000 (included as Appendix A to the Prospectus constituting a part of this Post-Effective Amendment No. 6 to the Registrant's Form S-2 Registration Statement). 4-A Specimen copy of Class B Stock certificate as revised as of November, 1984 filed as Exhibit 4-A to Post-Effective Amendment No. 2 to the Registrant's Form S-1 Registration Statement (Registration No. 2-82460) on March 15, 1985 and incorporated herein by reference. 4-B Specimen copy of Patronage Refund Certificate as revised in 1988 filed as Exhibit 4-B to Post-Effective Amendment No. 2 to the Registrant's Form S-1 Registration Statement (Registration No. 33-4299) on March 29, 1988 and incorporated herein by reference. 4-C Specimen copy of Class A Stock certificate as revised in 1987 filed as Exhibit 4-C to Post-Effective Amendment No. 2 to the Registrant's Form S-1 Registration Statement (Registration No. 33-4299) on March 29, 1988 and incorporated herein by reference. 4-D Specimen copy of Class C Stock certificate filed as Exhibit 4-I to the Registrant's Form S-1 Registration Statement (Registration No. 2-82460) on March 16, 1983 and incorporated herein by reference. 4-E Copy of current standard form of Subscription for Capital Stock Agreement to be used for dealers to subscribe for shares of the Registrant's stock in conjunction with new membership agreements submitted to the Registrant filed as Exhibit 4-L to Post-Effective Amendment No. 2 to the Registrant's Form S-2 Registration Statement (Registration No. 33-46449) on or about March 23, 1994 and incorporated herein by reference. 4-F Copy of plan for the distribution of patronage dividends with respect to purchases of merchandise made from the Registrant for the year 2000 and subsequent years adopted by the Board of Directors of the Registrant on December 6, 2000. 4-G Copy of LBM Retailer Incentive Pool Plan adopted on December 8, 1999 by the Board of Directors of the Registrant filed as Exhibit 4-G to Post-Effective Amendment No. 5 to the Registrant's Form S-2 Registration Statement (Registration No. 33-58191) on or about March 15, 2000 and incorporated herein by reference. 5 Opinion of McDermott, Will & Emery as to the legality of securities being registered. 8 Opinion regarding tax matters by KPMG LLP. 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 Registrant's 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 Amend- ment No. 3 to the Registrant's Form S-2 Registration Statement (Registration No. 33-58191) on or about March 18, 1998 and incorporated herein by reference. 10-D Copy of Restated PREP Plan (formerly known as Executive Supplemental Benefit Plans) adopted on December 6, 2000. 10-E Copy of the Ace Hardware Corporation Restated Officer Incentive Plan effective January 1, 1999 filed as Exhibit 10-E to Post-Effective Amendment No. 4 to the Registrant's Form S-2 Registration Statement (Registration No. 33-58191) on or about March 15, 1999 and incorporated herein by reference. 10-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 Supplement to Ace Hardware Membership Agreement effective April 1, 2000. 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 Odenton, Maryland filed as Exhibit 10-P to Post-Effective Amendment No. 4 to the Registrant's Form S-2 Registration Statement (Registration No. 33-58191) on or about March 15, 1999 and incorporated herein by reference. 10-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 current standard form of Ace Hardware Corporation License Agreement for international licensees. 10-S Copy of Lease dated May 4, 1994 for freight consolidation center of the Registrant in Chicago, Illinois filed as Exhibit 10-Z to the Registrant's Form S-2 Registration Statement (Registration No. 33-58191) on or about March 23, 1995 and incorporated herein by reference. 10-T Copy of Long-Term Incentive Compensation Deferral Option Plan of the Registrant effective January 1, 2000, filed as Exhibit 10-a-13 to Post-Effective Amendment No. 5 to the Registrant's Form S-2 Registration Statement (Registration No. 33-58191) on or about March 15, 2000 and incorporated herein by reference. 10-U Copy of Ace Hardware Corporation Directors' Deferral Option Plan effective January 1, 2001. 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. 10-X Copy of Lease dated October 31, 1995 between Brant Trade & Industrial Park, Inc. and Ace Hardware Canada Limited for warehouse space in Brantford, Ontario, Canada filed as Exhibit 10-a-12 to Post-Effective Amendment No. 1 to the Registrant's Form S-2 Registration Statement (Registration No. 33-58191) on or about March 11, 1996 and incorporated herein by reference. 10-Y Copy of Lease dated November 27, 1995 between 674573 Ontario Limited and Ace Hardware Canada Limited for general office space in Markham, Ontario, Canada filed as Exhibit 10-a-13 to Post-Effective Amendment No. 1 to the Registrant's Form S-2 Registration Statement (Registration No. 33-58191) on or about March 11, 1996 and incorporated herein by reference. 10-Z Copy of Executive Healthcare Plan adopted by the Board of Directors of the Registrant on August 25, 1998 filed as Exhibit 10-Z to Post-Effective Amendment No. 4 to the Registrant's Form S-2 Registration Statement (Registration No. 33-58191) on or about March 15, 1999 and incorporated herein by reference. 10-a-1 Copy of Ace Hardware Corporation Executive Benefit Security Trust Agreement effective July 19, 1995 filed as Exhibit 10-a-18 to Post-Effective Amendment No. 1 to the Registrant's Form S-2 Registration Statement (Registration No. 33-58191) on or about March 11, 1996 and incorporated herein by reference. 10-a-2 Copy of current standard form of International Retail Merchant Agreements. 10-a-3 Copy of Lease Agreement dated as of September 1, 1996 for the Registrant's project facility in Wilton, New York filed as Exhibit 10-a-13 to Post-Effective Amendment No. 2 to the Registrant's Form S-2 Registration Statement (Registration No. 33-58191) on or about March 12, 1997 and incorporated herein by reference. 10-a-4 Copy of 6.47% Series A Senior Notes in the aggregate principal amount of $30,000,000 issued August 23, 1996 with a maturity date of June 22, 2008 and $70,000,000 Private Shelf Facility, pursuant to Amended and Restated Note Purchase and Private Shelf Agreement with the Prudential Insurance Company dated August 23, 1996 filed as Exhibit 10-a-14 to Post-Effective Amendment No. 2 to the Registrant's Form S-2 Registration Statement (Registration No. 33-58191) on or about March 12, 1997 and incorporated herein by reference. 10-a-5 Copy of Second Amendment to the Restated Ace Hardware Corporation Retirement Benefits Replacement Plan adopted on December 8, 1998 and effective January 1, 1999 filed as Exhibit 10-a-6 to Post-Effective Amendment No. 4 to the Registrant's Form S-2 Registration Statement (Registration No. 33-58191) on or about March 15, 1999 and incorporated herein by reference. 10-a-6 Copy of Lease Agreement dated May 27, 1999 for the Registrant's project facility in Loxley, Alabama filed as Exhibit 10-a-9 to Post-Effective Amendment No. 5 to the Registrant's Form S-2 Registration Statement (Registration No. 33-58191) on or about March 15, 2000 and incorporated herein by reference. 10-a-7 Copy of Agreement dated October 29, 1999 between Registrant and William A. Loftus filed as Exhibit 10-a- 10 to Post-Effective Amendment No. 5 to the Registrant's Form S-2 Registration Statement (Registration No. 33- 58191) on or about March 15, 2000 and incorporated herein by reference. 10-a-8 Copy of Third Amendment to Restated Ace Hardware Corporation Retirement Benefits Replacement Plan adopted December 8, 1999 and effective January 1, 2000 filed as Exhibit 10-a-11 to Post-Effective Amendment No. 5 to the Registrant's Form S-2 Registration Statement (Registration No. 33-58191) on or about March 15, 2000 and incorporated herein by reference. 10-a-9 Copy of First Amendment to Ace Hardware Corporation Restated Officer Incentive Plan adopted on December 8, 1999 and effective January 1, 2000 filed as Exhibit 10-a- 12 to Post-Effective Amendment No. 5 to the Registrant's Form S-2 Registration Statement (Registration No. 33- 58191) on or about March 15, 2000 and incorporated herein by reference. 10-a-10 Copy of Second Amendment to Ace Hardware Corporation Restated Officer Incentive Plan adopted on December 6, 2000 and effective January 1, 2001. 10-a-11 Copy of $175,000,000 Revolving Credit Facility Agreement dated as of May 2, 2000. 10-a-12 Copy of Lease effective November 27, 2000 for freight consolidation center of the Registrant in Fort Worth, Texas. 10-a-13 Copy of Lease (Reference Date April 1, 2000) for the Registrant's additional general office space at 1220 and 1300 Kensington Rd., Oak Brook, Illinois. 10-a-14 Copy of current standard form of Limited Liability Company Agreement for retail joint ventures. 10-a-15 Copy of Amendment dated September 25, 2000 to Restated Note Purchase and Private Shelf Agreement dated as of August 23, 1996 with The Prudential Insurance Company of America. 23 (a) Consent of KPMG LLP. (b) Consent of KPMG regarding tax matters, opinion contained in Exhibit 8. (c) Consent of McDermott, Will & Emery, contained in Exhibit 5. 24 Powers of Attorney. Upon request of the Commission, we agree to furnish copies of any agreements regarding indebtedness that does not exceed ten percent of our total assets and the assets of our subsidiaries on a consolidated basis. 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. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the Registrant pursuant to the provisions set forth or described in Item 15 of this Registration Statement , or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person in the successful defense of any action, suit or proceeding) is asserted against the Registrant by such director, officer or controlling person, in connection with the securities registered hereby, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question of whether such indemnification by it is against public policy as expressed in the Act and will be goverened by the final adjudication of such issue. 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. 6 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 22, 2001. ACE HARDWARE CORPORATION By HOWARD J. JUNG -------------------------- Howard J. Jung Chairman of the Board and Director Pursuant to the requirements of the Securities Act of 1933, this registration statement has been signed by the following persons in the capacities and on the dates indicated. Signature Title Date HOWARD J. JUNG Chairman of the Board March 22, 2001 ---------------------- Howard J. Jung and Director DAVID F. HODNIK President and Chief March 22, 2001 ---------------------- David F. Hodnik Executive Officer RITA D. KAHLE Executive Vice President March 22, 2001 ---------------------- (Principal Financial and Rita D. Kahle Accounting Officer) Jennifer C. Anderson, Richard F. Baalmann, Jr., Eric R. Bibens, II, Directors Lawrence R. Bowman, James T. Glenn, Daniel L. Gust, D. William Hagan, Richard A. Karp, Mario R. Nathusius and Richard W. Stine. *By DAVID F. HODNIK March 22, 2001 ------------------- David F. Hodnik *By RITA D. KAHLE March 22, 2001 ------------------- Rita D. Kahle *Attorneys-in-fact INDEX TO EXHIBITS FILED TO THE REGISTRATION STATEMENT ON FORM S-2 OF ACE HARDWARE CORPORATION Exhibit No. Exhibit ------- ------- 3-A Copy of Restated Certificate of Incorporation of the Registrant. 3-B By-laws of the Registrant as amended through December 6, 2000 (included as Appendix A to the Prospectus constituting a part of this Post-Effective Amendment No. 6 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 for the year 2000 and subsequent years adopted by the Board of Directors of the Registrant on December 6, 2000. 5 Opinion of McDermott, Will & Emery as to legality of securities being registered. 8 Opinion regarding tax matters of KPMG LLP. 10-D Copy of Restated PREP Plan (formerly known as Executive Supplemental Benefit Plans) adopted on December 6, 2000. 10-J Copy of current standard form of Ace Hardware Corporation International Franchise Agreement. 10-L Copy of Supplement to Ace Hardware Membership Agreement effective April 1, 2000. 10-R Copy of current standard form of Ace Hardware Corporation License Agreement for international licensees. 10-U Copy of Ace Hardware Corporation Directors' Deferral Option Plan effective January 1, 2001. 10-a-2 Copy of current standard form of Internaional Retail Merchant Agreements. 10-a-10 Copy of Second Amendment to Ace Hardware Corporation Restated Officer Incentive Plan adopted on December 6, 2000 and effective January 1, 2001. 10-a-11 Copy of $175,000,000 Revolving Credit Facility Agreement dated as of May 2, 2000. 10-a-12 Copy of Lease effective November 27, 2000 for freight consolidation center of the Registrant in Fort Worth, Texas. 10-a-13 Copy of Lease (Reference Date April 1, 2000) for the Registrant's additional general office space at 1220 and 1300 Kensington Rd., Oak Brook, Illinois. 10-a-14 Copy of current standard form of Limited Liability Company Agreement for retail joint ventures. 10-a-15 Copy of Amendment dated September 25, 2000 to Restated Note Purchase and Private Shelf Agreement dated as of August 23, 1996 with The Prudential Insurance Company of America. 23 (a) Consent of KPMG LLP. (b) Consent of KPMG regarding tax matters, opinion contained in Exhibit 8. (c) Consent of McDermott, Will & Emery, contained in Exhibit 5. 24 Powers of Attorney. The various exhibits incorporated by reference are listed in Item 16 of this Post-Effective Amendment No. 6 to the Form S-2 Registration Statement of Ace Hardware Corporation. EX-3 2 0002.txt RESTATED CERTIFICATE OF INCORPORATION RESTATED CERTIFICATE OF INCORPORATION ------------------------------------- OF -- ACE HARDWARE CORPORATION ------------------------ The original Certificate of Incorporation of said Corporation was filed under said name with the Secretary of State of Delaware on June 16, 1964. FIRST: The name of this corporation is ACE HARDWARE CORPORATION SECOND: Its registered office and place of business in the State of Delaware is to be located at 1314 King Street in the City of Wilmington, County of New Castle. The agent in charge thereof is Corporation Service Company at 1314 King Street, Wilmington, Delaware. THIRD: The nature of the business and the objects and purposes proposed to be transacted, promoted and carried on, are to do any or all of the things herein mentioned, as fully and to the same extent as natural persons might or could do, and in any part of the world, viz: To engage in a general hardware business, both retail and wholesale; To manufacture, purchase and sell machinists', electricians', plumbers' carpenters' and woodworking supplies and tools; To manufacture, purchase and sell house furnishing supplies, building supplies, automobile fittings and supplies, electrical fittings and supplies, plumbing fittings and supplies; To manufacture, purchase and sell paints and coatings, paint brushes, building glass and kindred articles; To manufacture, purchase and sell sporting goods, athletic goods, outdoor living equipment and kindred articles; To manufacture, purchase and sell housewares, cooking utensils, cleaning supplies and furniture; To manufacture, purchase and sell toys, woodenware, kitchen utensils, garden implements and equipment and all other supplies and equipment used in general household use; To manufacture, purchase and sell agricultural and farm supplies, garden implements, seed and fertilizer; To apply for, obtain, register, purchase, lease or otherwise to acquire and hold, use, own, operate and introduce and to sell, assign or otherwise dispose of trademarks, trade names, improvements and processes. IN FURTHERANCE AND NOT IN LIMITATION of the general powers conferred by the laws of the State of Delaware, and the objects and purposes herein set forth, it is expressly provided that this corporation shall also have the following powers, viz: To take, own, hold, deal in, mortgage or otherwise lien, and to lease, sell, exchange, transfer, or in any manner whatsoever dispose of real property within or without the State of Delaware, wherever situated. To manufacture, purchase or acquire in any lawful manner and to hold, own, mortgage, pledge, sell, transfer, or in any manner dispose of, and to deal and trade in goods, wares, merchandise, and property of any and every class and description, and in any part of the world. To acquire the good will, rights and property, and to undertake the whole or any part of the assets or liabilities of any person, firm, association or corporation; to pay for the same in cash, the stock of this company, bonds or otherwise; to hold or in any manner to dispose of the whole or any part of the property so purchased; to conduct in any lawful manner the whole or any part of any business so acquired, and to exercise all the powers necessary or convenient in and about the conduct and management of such business. To apply for, purchase or in any manner to acquire, and to hold, own, use and operate, and to sell or in any manner dispose of, and to grant license or other rights in respect of and in any manner deal with, any and all rights, inventions, improvements and processes used in connection with or secured under letters patent or copyrights of the United States or other countries, or otherwise, and to work, operate or develop the same and to carry on any business, manufacturing or otherwise, which may directly or indirectly effectuate these objects or any of them. To guarantee, purchase, hold, sell, assign, transfer, mortgage, pledge, or otherwise dispose of the shares of the capital stock of, or any bonds, securities or evidences of indebtedness created by any other corporation or corporations of this State or any other State, country, nation or government, and while owner of said stock may exercise all the rights, powers and privileges of ownership, including the right to vote thereon, to the same extent as natural persons might or could do. To enter into, make and perform contracts of every kind with any person, firm, association or corporation, municipality, body politic, county, territory, State, Government or colony or dependency thereof, and without limit as to amount to draw, make, accept, endorse, discount, execute and issue promissory notes, drafts, bills of exchange, warrants, bonds, debentures and other negotiable or transferable instruments and evidences of indebtedness whether secured by mortgage or otherwise, as well as to secure the same by mortgage or otherwise, so far as may be permitted by the laws of the State of Delaware. To have offices, conduct its business and promote its objects within and without the State of Delaware, in other States, the District of Columbia, the territories and colonies of the United States, and in foreign countries, without restriction as to place or amount. To do any or all of the things herein set forth to the same extent as natural persons might or could do and in any part of the world, as principals, agents, contractors, trustees, or otherwise, and either alone or in company with others. IN GENERAL to carry on any other business in connection therewith, whether manufacturing or otherwise, not forbidden by the laws of the State of Delaware, and with all the powers conferred upon corporations by the laws of the State of Delaware. FOURTH: (a) The total number of shares of stock which this corporation is authorized to issue is 70,000 shares, of which 4,000 shares, of the par value of $1,000.00 each, amounting to $4,000,000.00, are Class "A" voting stock; of which 20,000 shares, of the par value of $1,000.00 each, amounting to $20,000,000.00, are Class "B" nonvoting stock; and of which 46,000 shares, of the par value of $100.00 each, amounting to $4,600,000.00, are Class "C" nonvoting stock. (b) The holders of Class "B" stock and the holders of Class "C" stock shall not be entitled to vote and, except as otherwise provided by law, this provision shall prevail in all elections and all proceedings over the provisions of any stature which authorize any action by a vote or written consent of the holders of all of the shares, or a specific proportion of the shares, of the corporation; nor shall the holders of Class "B" stock or Class "C" stock be entitled to notice of stockholders' meetings. All rights to vote and all voting powers shall be vested solely in the Class "A" stock, with each holder of such stock being entitled at every meeting of stockholders to one vote for every share of such stock standing in his name on the books of the corporation. Cumulative voting of shares with respect to the election of directors or otherwise is expressly prohibited. (c) During the existence of the entity known as the "Ace Dealers' Perpetuation Fund" and the Voting Trust Agreement entered into by the Trustees of the Ace Dealers' Perpetuation Fund with the Voting Trustees of the Voting Trust established by said Voting Trust Agreement, ownership of issued and outstanding shares of Class "A" stock of this corporation shall be limited to the Trustees of the Ace Dealers' Perpetuation Fund or the Voting Trustees of the Voting Trust under said Voting Trust Agreement. Thereafter, ownership of issued and outstanding shares of Class "A" stock of this corporation shall be limited to bona fide retail hardware or other dealers having franchise agreements with this corporation, and no such dealer shall be entitled to own more than 1 share of said Class "A" stock. For this purpose, each retail hardware or other store owned or controlled, directly or indirectly, by the same person, partnership or corporation, shall be deemed to constitute only one "dealer". An unincorporated person or partnership shall be deemed controlled by another person, partnership or corporation if 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 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 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 50% or more of its capital stock (if incorporated) or 50% or more of its assets or profit shares (if unincorporated). (d) During the existence of the entity known as the "Ace Dealers' Perpetuation Fund" and the Voting Trust Agreement entered into by the Trustees of the Ace Dealers' Perpetuation Fund with the Voting Trustees of the Voting Trust established by said Voting Trust Agreement, ownership of issued and o outstanding shares of Class "B" stock of this corporation shall be limited to the Trustees of the Ace Dealers' Perpetuation Fund or the Voting Trustees of the Voting Trust under said Voting Trust Agreement. Thereafter, ownership of issued and outstanding shares of Class "B" stock of this corporation shall be limited to bona fide retail hardware or other dealers having franchise agreements with this corporation which were entered into by this corporation with such dealers on or before February 20, 1974. Each such dealer owning a share of Class "A" stock of this corporation shall be required to subscribe and pay for, at a price equal to the par value thereof, 4 shares of Class "B" stock with respect to each retail hardware or other store owned or controlled, directly or indirectly, by such dealer as of February 20, 1974. Determinations as to the number of retail hardware or other stores owned or controlled, directly or indirectly, by the same person, partnership or corporation (that is, by the same "dealer") for this purpose shall be made in the same manner as such determinations are to be made with respect to the number of shares of Class "A" stock which each "dealer" shall be entitled to own pursuant to Article Fourth (c) hereof. (e) During the existence of the entity known as the "Ace Dealers' Perpetuation Fund" and the Voting Trust Agreement entered into by the Trustees of the Ace Dealers' Perpetuation Fund with the Voting Trustees of the Voting Trust established by said Voting Trust Agreement, no shares of Class "C" stock of this corporation shall be issued. Thereafter, each retail hardware or other dealer who enters into or who has entered into a franchise agreement with this corporation subsequent to February 20, 1974 and who owns a share of Class "A" stock of this corporation shall be required to subscribe and pay for, at a price equal to not less than the par value thereof, 40 shares of Class "C" stock of this corporation with respect to the first store owned or controlled, directly or indirectly, by such dealer, and shall also be required to subscribe and pay for, at a price equal to not less than the par value thereof, 50 additional shares of Class "C" stock of this corporation for each retail hardware or other store over and above the first such store owned or controlled, directly or indirectly, by such dealer. In addition, each dealer having a franchise agreement with this corporation as of February 20, 1974 who owns a share of Class "A" stock of this corporation and who owned or controlled, directly or indirectly, more than one store as of February 20, 1974, shall be required to subscribe and pay for, at a price equal to not less than the par value thereof, 10 shares of Class "C" stock of this corporation with respect to each store over and above the first such store so owned or controlled by such dealer as of said date. Any dealer having a franchise agreement with this corporation as of February 20, 1974 who owns a share of Class "A" stock of this corporation and whose franchise is extended after February 20, 1974 to include an additional store owned or controlled, directly or indirectly, by such dealer which is opened by such dealer after February 20, 1974 and which does not merely replace a previous store shall be required to subscribe and pay for, at a price equal to not less than the par value thereof, 50 shares of Class "C" stock with respect to each such additional store. Determinations as to the number of retail hardware or other stores owned or controlled, directly or indirectly, by the same person, partnership or corporation (that is, by the same "dealer") for purposes of this Article Fourth (e) shall be made in the same manner as such determinations are to be made with respect to the number of shares of Class "A" stock which each "dealer" shall be entitled to own pursuant to Article Fourth (c) hereof. Additional shares of Class "C" stock of this corporation may be offered by the corporation from time to time at a price equal to not less than the par value thereof, provided, however, that ownership of issued and outstanding shares of Class "C" stock shall at all times be limited to retail hardware or other dealers having franchise agreements with the corporation and that any offering of additional shares of Class "C" stock shall be made to all of the corporation's franchised dealers on an equitable basis. At the election of the Board of Directors of the corporation, shares of its Class "C" stock may also be distributed from time to time to its franchised dealers in partial satisfaction of any obligation hereafter incurred by the corporation to distribute patronage rebates or dividends to stockholders of the corporation in a manner taking into account the amount of business done by the corporation with each of them, in which case the stated dollar amounts of such patronage rebates or dividends as are distributed in shares of Class "C" stock shall be equal to the par value of said shares. (f) No dividends shall ever be declared on any of the shares of any class of stock of the corporation. (g) No certificate representing any 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 refuses to consent to any transfer or assignment of any of said certificates of stock, then the corporation shall have the right and shall be obligated to purchase such stock from its owner, provided, however, that in the case of a proposed transfer of ownership of a store owned by a dealer holding shares of stock of this corporation to another dealer which this corporation has accepted or is willing to accept as a franchised dealer, then the dealer owning such stock shall have the option of either (1) selling or otherwise transferring to such other dealer such number of shares of stock of this corporation of any class which the corporation would otherwise have been required to offer to such other dealer in connection with the franchise granted to such other dealer with respect to such store or (2) selling such shares to the corporation. In the case of Class "A" stock, the price to be paid by the corporation in connection with any such purchase shall be the par value thereof. In the case of Class "B" stock, the price to be paid by the corporation in connection with any such purchase shall be equal to the price last established by the Board of Directors as the price to be paid by the corporation in connection with the redemption of shares of its Class "B" stock, which price shall also at all times be equal to 20 times the par share purchase price last established by the Board of Directors with respect to purchases of its Class "C" stock by the corporation and which price shall in no event be less than twice the par value of the Class "B" stock. In the case of Class "C" stock, the price to be paid by the corporation in connection with any such purchase shall be the price last established by the Board of Directors as the purchase price to be paid by the corporation for each share of its Class "C" stock purchased by it from time to time, which price shall in no event be less than the par value thereof. (h) The corporation may, at the option of its Board of Directors, redeem the whole or any part of the outstanding shares of its Class "B" stock at any time or from time to time after date of issuance by paying for each share thereof such price as shall be determined from time to time by the Board of Directors, which price shall be all times be equal to 20 times the per share purchase price last established by the Board of Directors with respect to purchases of its Class "C" stock and which price shall in no event be less than twice the par value of said Class "B" stock. Notice of such election to redeem shall be mailed to each holder of Class "B" stock so to be redeemed at his address as it appears on the books of the corporation not less than 30 days prior to the date upon which the stock is to be redeemed. In case less than all of the outstanding Class "B" stock is to be redeemed, the amount to be redeemed and the method of effecting such redemption, whether by lot or pro rata or otherwise, may be determined by the Board of Directors. (i) In the event of any purchase of shares of the corporation's Class "A" stock, Class "B" stock or Class "C" stock pursuant to Article Fourth (g) hereof, or in the event of the redemption by the corporation of shares of its Class "B" stock pursuant to Article Fourth (h) hereof, such portion of the purchase price or redemption price payable by the corporation to any holder of such shares as shall equal the amount paid to the corporation in connection with the original issuance of said shares shall be paid to the holder thereof by the corporation in cash, but the corporation shall have the option of paying any remainder of such purchase or redemption price in equal annual installments over a period of not more than 4 years with interest at 6% per annum on the unpaid balance of principal from time to time. (j) In the event of any liquidation or winding up of the affairs of the corporation, whether voluntary or involuntary, the net assets of the corporation shall be distributed among the holders of all classes of issued and outstanding stock of the corporation. In such event, there shall be added together the total par value of all of the issued and outstanding shares of Class "A" stock, the total purchase or redemption price of all of the issued and outstanding shares of Class "B" stock as last determined by the Board of Directors, and the total purchase price of all of the issued and outstanding shares of Class "C" stock as last determined by the Board of Directors. Each outstanding share of Class "A" stock shall share in the distribution of said net assets in the proportion which the par value of said share bears to the total dollar amount determined in the manner prescribed in the immediately preceding sentence hereof; each outstanding share of Class "B" stock shall share in the distribution of net assets in the proportion which the purchase or redemption price thereof last determined by the Board of Directors bears to said total dollar amount; and each outstanding share of Class "C" stock shall share in the distribution of said net assets in the proportion which the purchase price thereof last determined by the Board of Directors bears to said total dollar amount. (k) No stockholder of this corporation shall, by reason of his holding shares of any class of stock of the corporation, have any preemptive or preferential right to purchase or to subscribe to any shares of any class of this corporation, now or to be hereafter authorized, or any notes, debentures, bonds or other securities convertible into or carrying options or warrants to purchase any shares of any class, now or hereafter to be authorized. (l) The corporation shall have a first lien upon any shares of its stock held by any stockholder for the amount of any indebtedness payable to the corporation by such holder, and no sale or transfer of any such stock shall be made until all such indebtedness to the corporation shall have been fully paid and satisfied. (m) Compliance with all of the terms set forth in this Article Fourth with respect to shares of any class of stock of this corporation shall be construed as a condition precedent to the continued ownership or transfer of said shares of stock issued by the corporation, and notice of said provision shall be conspicuously noted or stated on every certificate of stock issued by the corporation. FIFTH: The existence of this corporation is to be perpetual. SIXTH: The private property of the stockholders shall not be subject to the payment of corporate debts to any extent whatever. SEVENTH: The Directors shall have power to make and to alter or amend the By-laws; to fix the amount to be reserved as working capital and to authorize and cause to be executed, mortgages and liens without limit as to the amount, upon the property and franchise of this corporation. The Board of Directors of the corporation, when and as authorized by a resolution duly adopted by a majority of the issued and outstanding Class "A" stock of the corporation, may sell, lease or exchange all or substantially all of the property and assets of the corporation. The By-laws shall determine whether and to what extent the accounts and books of this corporation, or any of them, shall be open to the inspection of the stockholders; and no stockholder shall have any right of inspecting any account, or book, or document of this corporation, except as conferred by the law or the By-laws, or by resolution of the stock holders. The stockholders and directors shall have power to hold their meetings and keep the books, documents and papers of the corporation outside of the State of Delaware, at such places as may be from time to time designated by the By-laws or by resolution of the stockholders or directors, except as otherwise required by the laws of Delaware. It is the intention that the objects, purposes and powers specified in Article Third hereof shall, except where otherwise specified in said Article, be nowise limited or restricted by reference to or inference from the terms of any other clause or Article in this Restated Certificate of Incorporation, but that the objects, purposes and powers specified in Article Third and in each of the clauses or Articles of this charter shall be regarded as independent objects, purposes and powers. The undersigned corporation, ACE HARDWARE CORPORATION, for the purpose of restating, integrating and amending its Certificate of Incorporation pursuant to Sections 245 and 242 of the General Corporation Law of the State of Delaware, hereby executes the foregoing Restated Certificate of Incorporation, which Restated Certificate of Incorporation was adopted by the unanimous affirmative vote of the holders of all of the issued and outstanding shares of capital stock of the corporation at the time of the adoption thereof, consisting of 1 share of Class "A" stock and 9,999 shares of Class "B" stock. IN WITNESS WHEREOF, the undersigned corporation has caused this Restated Certificate of Incorporation to be executed in its name by its President, and its corporate seal to be hereto affixed, attested by its Secretary, this 20th day of May, 1974. ATTEST: ACE HARDWARE CORPORATION /s/ Charles B. McClaskey By: /s/ Arthur H. Krausman - -------------------------- ------------------------- Secretary Its President (Corporate Seal) STATE OF ILLINOIS SS COUNTY OF COOK BE IT REMEMBERED, that on this 20th day of May, 1974, personally came before me a Notary Public in and for the County and State aforesaid, ARTHUR H. KRAUSMAN, President of Ace Hardware Corporation, a corporation of the State of Delaware, the corporation described in and which executed the foregoing Restated Certificate of Incorporation, known to me personally to be such, and he the said ARTHUR H. KRAUSMAN as such President, duly executed the said Restated Certificate of Incorporation before me and acknowledged the said Restated Certificate of Incorporation to be his act and deed and the act and deed of said corporation and the facts stated therein are true; that the signature of the Secretary of said corporation to said foregoing Restated Certificate of Incorporation is in the handwriting of the said Secretary of said corporation and that the seal affixed to said Restated Certificate of Incorporation is the common or corporate seal of said corporation. IN WITNESS WHEREOF, I have hereunto set my hand and seal of office the day and year aforesaid. /s/ Ruth Sheldrake --------------------- Notary Public (Notary Seal) CERTIFICATE OF AMENDMENT OF --------------------------- RESTATED CERTIFICATE OF INCORPORATION ------------------------------------- OF ACE HARDWARE CORPORATION --------------------------- The undersigned corporation, Ace Hardware Corporation, for the purpose of amending its restated Certificate of Incorporation pursuant to the provisions of Section 242 of the General Corporation Law of Delaware, hereby executes the following Certificate of Amendment, under which Article FOURTH (a) of the restated Certificate of Incorporation of this corporation is hereby amended to read as follows: "FOURTH: (a) The total number of shares of stock which this corporation is authorized to issue is 370,000 shares, of which 10,000 shares, of the par value of $1,000.00 each, amounting to $10,000,000.00, are Class `A' voting stock; of which 10,000 shares, of the par value of $1,000.00 each, amounting to $10,000,000.00, are Class `B' nonvoting stock; and of which 350,000 shares, of the par value of $100.00 each, amounting to $35,000,000.00 are Class `C' nonvoting stock." The number of issued and outstanding shares at the time of the adoption of the foregoing Amendment was 10,000 and the number of shares at the number of shares of each Class issued and outstanding at the time of the adoption of the foregoing Amendment and the designation of each such Class were as follows: Class Number of Shares ----- ---------------- A 1 B 9,999 C 0 The number of shares voting for said Amendment was 10,000, and the number of shares voting against said Amendment was 0. The number of shares of each Class entitled to vote as a Class voting for or against said Amendment was: Number of Shares Number of Shares Class Voting For Voting Against ----- ---------------- ---------------- A 1 0 B 9,999 0 IN WITNESS WHEREOF, the undersigned corporation has caused this Certificate of Amendment to be executed in its name by its President and its corporate seal to be hereunto affixed, attested by its Secretary, this 17th day of May, 1976. ACE HARDWARE CORPORATION Attest: By: /s/ Charles B. McClaskey By: /s/ Arthur H. Krausman ------------------------- ---------------------- Secretary Its President CORPORATE SEAL STATE OF ILLINOIS SS COUNTY OF COOK BE IT REMEMBERED, that on this 17th day of May, 1976, personally came before me a Notary Public in and for the County and State aforesaid, Arthur H. Krausman, President of Ace Hardware Corporation, a corporation of the State of Delaware, the corporation described in and which executed the foregoing Certificate of Amendment of the restated Certificate of Incorporation, known to me personally to be such and he the said Arthur H. Krausman as such President, duly executed the said Certificate of Amendment before me and acknowledged the said Certificate of Amendment to be his act and deed and the act and deed of said corporation and the facts stated therein are true; that the signature of the Secretary of said corporation to said foregoing Certificate of Amendment is in the handwriting of the said Secretary of said corporation and that the seal affixed to said Certificate of Amendment is the common or corporate seal of said corporation. IN WITNESS WHEREOF, I have hereunto set my hand and seal of office the day and year aforesaid. /s/ Ruth Sheldrake ---------------------- Notary Public NOTARY SEAL CERTIFICATE OF AMENDMENT OF --------------------------- RESTATED CERTIFICATE OF INCORPORATION ------------------------------------- OF ACE HARDWARE CORPORATION --------------------------- The undersigned corporation, Ace Hardware Corporation, for the purpose of amending its restated Certificate of Incorporation and pursuant to the provisions of Section 242 of the General Corporation Law of Delaware, hereby executes the following Certificate of Amendment, under which Article FOURTH (a) of the restated Certificate of Incorporation of this corporation is hereby amended to read as follows: "FOURTH: (a) The total number of shares of stock which this corporation is authorized to issue is 670,000 shares, of which 10,000 shares, of the par value of $1,000.00 each, amounting to $10,000,000.00, are Class `A' voting stock; of which 10,000 shares, of the par value of $1,000.00 each, amounting to $10,000,000.00, are Class `B' nonvoting stock; and of which 650,000 shares, of the par value of $100.00 each, amounting to $65,000,000.00, are Class `C' nonvoting stock." The number of issued and outstanding shares at the time of the adoption of the foregoing Amendment was 246,501 and the number of shares of each Class issued and outstanding at the time of the adoption of said Amendment and the designation of each such Class were as follows: CLASS NUMBER OF SHARES ----- ---------------- A 2,962 B 9,999 C 233,540 The number of shares of Class "A" voting stock voting for and against said Amendment, and the number of shares of Class "C" nonvoting stock entitled to vote as a class voting for and against said Amendment, were as follows: NUMBER OF SHARES NUMBER OF SHARES CLASS VOTING FOR VOTING AGAINST ----- ---------------- ---------------- A 1,504 44 C 133,908 2,793 IN WITNESS WHEREOF, the undersigned corporation has caused this Certificate of Amendment to be executed in its name by its President and its corporate seal to be hereunto affixed, attested by its Secretary, this 21st day of May, 1979. ATTEST: ACE HARDWARE CORPORATION /s/ Francis Henry By /s/ Arthur H. Krausman - -------------------- ---------------------- Secretary Its President (Corporate Seal) STATE OF ILLINOIS SS COUNTY OF DU PAGE BE IT REMEMBERED, that on this 21st day of May, 1979, personally came before me a Notary Public in and for the County and State aforesaid, Arthur H. Krausman, President of Ace Hardware Corporation, a corporation of the State of Delaware, the corporation described in and which executed the foregoing Certificate of Amendment of the restated Certificate of Incorporation, known to me personally to be such, and he the said Arthur H. Krausman, as such President, duly executed the said Certificate of Amendment before me and acknowledged the said Certificate of Amendment to be his act and deed and the act and deed of said corporation and the facts stated therein are true; that the signature of the Secretary of said corporation to said foregoing Certificate of Amendment is in the handwriting of the said Secretary of said corporation and that the seal affixed to said Certificate of Amendment is the common or corporate seal of said corporation. IN WITNESS WHEREOF, I have hereunto set my hand and seal of office the day and year aforesaid. /s/ Rosalie Saterberg --------------------- Notary Public (Seal of Notary Public) CERTIFICATE OF AMENDMENT OF --------------------------- RESTATED CERTIFICATE OF INCORPORATION ------------------------------------- OF -- ACE HARDWARE CORPORATION ------------------------ The undersigned corporation, Ace Hardware Corporation, for the purpose of amending its restated Certificate of Incorporation pursuant to the provisions of Section 242 of the General Corporation Law of Delaware, hereby executes the following Certificate of Amendment, under which Article FOURTH (a), Article FOURTH (h), Article FOURTH (i) and Article FOURTH (j) of the restated Certificate of Incorporation of this corporation is hereby amended to read as follows: "FOURTH: (a) The total number of shares of stock which this corporation is authorized to issue is 1,266,500 shares, of which 10,000 shares, of the par value of $1,000.00 each, amounting to $10,000,000.00, are Class `A' voting stock; of which 6,500 shares, of the par value of $1,000.00 each, amounting to $6,500,000.00, are Class `B' nonvoting stock; and of which 1,250,000 shares, of the par value of $100.00 each, amounting to $125,000,000.00 are Class `C' nonvoting stock. "(h) In addition to being obligated to purchase its shares of stock in a situation where its Board of Director's refuses to consent to the transfer or assignment of such stock as describe in Article FOURTH (g), the corporation shall be obligated to purchase from the owner thereof, at the price or prices which are applicable to purchases of shares of its stock under Article Fourth (g), all shares of the corporation's stock held by such owner with respect to any store or other retail business outlet for which the Franchise Agreement with the corporation is terminated in any situation in which the consent to a transfer or assignment of said shares has not been requested of the Board of Directors. The corporation further shall have the right, at the opinion of its Board of Directors, to redeem the whole or any part of the outstanding shares of its Class `B' stock or the whole or any part of the outstanding shares of its Class `C' stock which have been issued to the corporation's franchised dealers in partial satisfaction of the corporation's obligation to distribute patronage rebates or dividends to its stockholders in a manner taking into account the amount of business done by the corporation with each of them. Such redemptions may be made at any time or from time to time after date of issuance. The redemption price in each instance shall be determined by the Board of Directors, but the redemption price to be paid for Class `C' stock shall in no event be less than the par value thereof and the redemption price to be paid for Class `B' stock shall at all times be no less than twice the par value of said Class `B' stock and shall always be equal to twenty (20) times the per share price last established by the Board of Directors with respect to purchases or redemptions of its Class `C' stock. Notice of any election to redeem shall be mailed to each holder of the class of stock so to be redeemed at his address as it appears on the books of the corporation no less than thirty (30) days prior to the date upon which the stock is to be redeemed. In case less than all of the outstanding shares of either Class `B' stock or Class `C' stock are to be redeemed, the number of shares to be redeemed an the method of effecting such redemption, whether by lot or prorata or otherwise, may be determined by the Board of Directors. "(i) In the event of any purchase or redemption of shares of any class of stock of the corporation in accordance with any provision of Article FOURTH (g) or Article FOURTH (h) hereof, such portion of the purchase price or redemption price payable by the corporation to any holder of such shares as shall equal the amount paid to the corporation in connection with the original issuance of said shares shall be paid to the holder thereof by the corporation in cash, but the corporation shall have the option of paying any remainder of such purchase or redemption price in equal annual installments over a period of not more than four (4) years with interest on the unpaid balance of principal from time to time at 6.7% per annum or such greater rate of interest as shall be authorized by the Board of Directors. "(j) In the event of any liquidation or winding up of the affairs of the corporation, voluntary or involuntary, the net assets of the corporation shall be distributed among the holders of the outstanding stock of the corporation in the manner set forth below. In such event, the outstanding shares of the Class `B' stock and the Class `C' stock of the corporation shall have priority over the outstanding shares of the Class `A' stock in the distribution of said net assets to the extent of an amount equal to the total amount of which the corporation 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, and to such extent each outstanding share of Class `B' stock and each outstanding share of Class `C' stock shall share in the distribution of said net assets in the proportion which the purchase or redemption price bears for each share bears to said total amount. If said net assets exceed said total amount, such excess shall be distributed in equal portions to each holder of an outstanding share of Class `A' stock, provided, however, that the amount so distributed to each holder of a share of Class `A' stock shall not exceed the par value thereof. Any net assets which still remain after providing for the aforementioned distributions shall be distributed among the holders of all classes of issued and outstanding shares of stock of the corporation pursuant to the following procedure: "(1) 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 corporation 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; "(2) 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 "(3) 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." The undersigned corporation hereby certifies that the amendments set forth above were duly proposed by resolutions adopted by the Board of Directors of the undersigned declaring its advisability and that, in accordance with Section 242 of the General Corporation Law of Delaware, said amendment was voted upon at the annual meeting of the stockholders of the undersigned held on May 24, 1982; that voting was conducted at said annual meeting by the holders of shares of the corporation's Class "A" stock, Class "B" stock and Class "C" stock with respect to the amendment to Article Fourth (a) and voting was conducted at said meeting by the holders of each of three classes of stock of the corporation with respect to the amendments to Article FOURTH (h), Article FOURTH (i) and Article FOURTH (j) as a group; and that the foregoing amendments were duly adopted upon receiving the affirmative vote of a majority of the total of the outstanding shares of Class "A" stock. Class "B" stock and Class "C" stock which were entitled to vote at said meeting and the separate affirmative votes of majorities of the outstanding shares of Class "B" stock and Class "C" stock which were entitled to vote at said meeting. IN WITNESS WHEREOF, the undersigned corporation has caused this Certificate of Amendment to be executed in its name by its President and its corporate seal to be hereunto affixed, attested by its Assistant Secretary, this 24th day of May, 1982. ATTEST: ACE HARDWARE CORPORATION By: /s/ Fred H. Law, Jr. By: /s/ Arthur H. Krausman ---------------------- ---------------------- Assistant Secretary Its President CORPORATE SEAL CERTIFICATE OF AMENDMENT OF --------------------------- RESTATED CERTIFICATE OF INCORPORATION ------------------------------------- OF -- ACE HARDWARE CORPORATION ------------------------ The undersigned corporation, Ace Hardware Corporation, for the purpose of amending its restated Certificate of Incorporation pursuant to the provisions of Section 242 of the General Corporation Law of Delaware, hereby executes the following Certificate of Amendment adding to said restated Certificate of Incorporation Article EIGHTH reading as follows: "EIGHTH: (a) A director of the corporation shall not be personally liable to the corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, except for liability (i) for any breach of the director's duty of loyalty to the corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of the Delaware General Corporation Law, or (iv) for any transaction from which the director derived an improper personal benefit. No amendment to or repeal of this Article Eighth (a) shall apply to or have any effect on the liability or alleged liability of any director of the corporation for or with respect to any acts or omissions of such director occurring prior to such amendment. (b) (i) Each person who was or is made a party or is threatened to be made a party to or is involved in any action, suit or proceeding, whether civil, criminal, administrative or investigative (hereinafter a "proceeding"), by reason of the fact that he or she, or a person of whom he or she is the legal representative, is or was a director, officer, employee, or agent of the corporation or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation or of a partnership, joint venture, trust or other enterprise, including service with respect to employee benefit plans whether the basis of such proceeding is alleged action in an official capacity as a director, officer, employee or agent or in any other capacity while serving as a director, officer, employee, or agent, shall be indemnified and held harmless by the corporation to the fullest extent authorized by the Delaware General Corporation Law, as the same exists or may hereafter be amended (but, in the case of any such amendment, only to the extent that such amendment permits the corporation to provide broader indemnification rights than said law permitted the corporation to provide prior to such amendment), against all expense, liability and loss (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 such person in connection therewith and such indemnification shall continue as to a person who has ceased to be a director, officer, employee or agent and shall inure to the benefit of his or her heirs, executors and administrators; provided, however, that, except as provided in paragraph (ii) hereof, the corporation shall indemnify any such person seeking indemnification in connection with a proceeding (or part thereof) initiated by such person only if such proceeding (or part thereof) was authorized by the Board of Directors of the corporation. The right to indemnification conferred in this paragraph shall be a contract right and shall include the right to be paid by the corporation the expenses incurred in defending any such proceeding in advance of its final disposition; provided, however, that if the Delaware General Corporation Law requires, the payment of such expenses incurred by a director, officer, employee or agent of the corporation in such person's capacity as a director, officer, employee or agent (and not in any other capacity in which service was or is rendered by such person while a director, officer, employee or agent, including, without limitation, service to an employee benefit plan) in advance of the final disposition of a proceeding, shall be made only upon delivery to the corporation of an undertaking, by or on behalf of such person, to repay all amounts so advanced if it shall ultimately be determined that such person is not entitled to be indemnified under this paragraph or otherwise. (ii) If a claim under paragraph (i) of this Article Eighth (b) is not paid in full by the corporation within thirty days after a written claim has been received by the corporation, the claimant may at any time thereafter bring suit against the corporation to recover the unpaid amount of the claim and, if successful in whole or in part, the claimant shall be entitled to be paid also the expense of prosecuting such claim. It shall be a defense to any such action (other than an action brought to enforce a claim for expenses incurred in defending any proceeding in advance of its final disposition where the required undertaking, if any is required, has been tendered to the corporation) that the claimant has not met the standards of conduct which make it permissible under the Delaware General Corporation Law for the corporation to indemnify the claimant for the amount claimed, but the burden of proving such defense shall be on the corporation. Neither the failure of the corporation (including its Board of Directors, independent legal counsel, or its stockholders) to have made a determination prior to the commencement of such action that indemnification of the claimant is proper in the circumstances because he or she has met the applicable standard of conduct set forth in the Delaware General Corporation Law, nor an actual determination by the corporation (including its Board of Directors, independent legal counsel, or its stockholders) that the claimant has not met such applicable standard of conduct, shall be a defense to the action or create a presumption that the claimant has not met the applicable standard of conduct. (iii) The right to indemnification and the payment of expenses incurred in defending a proceeding in advance of its final disposition conferred in this Article Eighth (b) shall not be exclusive of any other right which any person may have or hereafter acquire under any statute, provision of the Certificate of Incorporation, by-law, agreement, vote of stockholders or disinterested directors or otherwise. (iv) The corporation shall have power to purchase and maintain insurance, at its expense, on behalf of any person who is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against any liability asserted against or incurred by such person in any such capacity, or arising out of his or her status as such, whether or not the corporation would have the power to indemnify such person against such liability under the provisions of this Article Eighth (b) or under the Delaware General Corporation Law." The undersigned corporation hereby certifies that the amendment set forth above was duly proposed by a resolution adopted by the Board of Directors of the undersigned declaring its advisability and that, in accordance with Section 242 of the General Corporation Law of Delaware, said amendment was voted upon at the annual meeting of the stockholders of the undersigned held on June 1, 1987, that voting upon said amendment was conducted at said meeting by the holders of shares of the corporation's Class "A" stock, and that said amendment was duly adopted upon receiving the affirmative vote of a majority of the total of the outstanding shares of Class "A" stock which were entitled to vote at the meeting. IN WITNESS WHEREOF, the undersigned corporation has caused this Certificate of Amendment to be executed in its name by its President and its corporate seal to be hereunto affixed, attested by its Secretary, this 1st day of June, 1987. ATTEST: ACE HARDWARE CORPORATION /s/ Fred H. Law, Jr. By: /s/ Roger E. Peterson --------------------- ----------------------- Secretary Its President (Corporate Seal) CERTIFICATE OF AMENDMENT OF --------------------------- RESTATED CERTIFICATE OF INCORPORATION ------------------------------------- OF -- ACE HARDWARE CORPORATION ------------------------ The undersigned corporation, Ace Hardware Corporation, for the purpose of amending its restated Certificate of Incorporation pursuant to the provisions of Section 242 of the General Corporation Law of Delaware, hereby executes the following Certificate of Amendment, under which Article FOURTH (a) of the restated Certificate of Incorporation of this corporation is hereby amended to read as follows: "FOURTH: (a) The total number of shares of stock which this corporation is authorized to issue is 2,016,500 shares, of which 10,000 shares, of the par value of $1,000.00 each, amounting to $10,000,000.00, are Class `A' voting stock; of which 6,500 shares, of the par value of $1,000.00 each, amounting to $6,500,000.00, are Class `B' nonvoting stock; and of which 2,000,000 shares, of the par value of $100.00 each, amounting to $200,000,000.00 are Class `C' nonvoting stock." The undersigned corporation hereby certifies that the amendment set forth above was duly proposed by a resolution adopted by the Board of Directors of the undersigned declaring its advisability and that, in accordance with Section 242 of the General Corporation Law of Delaware, said amendment was voted upon at the annual meeting of the stockholders of the undersigned held on June 5, 1989, that voting upon said amendment was conducted at said meeting by the holders of shares of the corporation's Class "A" stock and Class "C" stock, and further certifies that said amendment was duly adopted upon receiving the affirmative vote of a majority of the total of the outstanding shares of Class "A" stock and Class "C" stock which were entitled to vote at said meeting and by the separate affirmative vote of a majority of the outstanding shares of Class "C" stock which were entitled to vote at said meeting. IN WITNESS WHEREOF, the undersigned corporation has caused this Certificate of Amendment to be executed in its name by its President and its corporate seal to be hereunto affixed, attested by its Secretary, this 5th day of June, 1989. ATTEST: ACE HARDWARE CORPORATION By: /s/ Fred H. Law, Jr. By: /s/ Roger E. Peterson ---------------------- ----------------------- Secretary Its President CERTIFICATE OF AMENDMENT OF RESTATED CERTIFICATE OF INCORPORATION OF ACE HARDWARE CORPORATION The undersigned corporation, Ace Hardware Corporation, for the purpose of amending its restated Certificate of Incorporation pursuant to the provisions of Section 242 of the General Corporation Law of Delaware, hereby executes the following Certificate of Amendment, under which Article FOURTH (a) of the restated Certificate of Incorporation of this corporation is hereby amended to read as follows: "FOURTH: (a) The total number of shares of stock which this corporation is authorized to issue is 4,016,500 shares, of which 10,000 shares, of the par value of $1,000.00 each, amounting to $10,000,000.00, are Class `A' voting stock; of which 6,500 shares, of the par value of $1,000.00 each, amounting to $6,500,000.00, are Class `B' nonvoting stock; and of which 4,000,000 shares, of the par value of $100.00 each, amounting to $400,000,000.00 are Class `C' nonvoting stock." The undersigned corporation hereby certifies that the amendment set forth above was duly proposed by a resolution adopted by the Board of Directors of the undersigned declaring its advisability and that, in accordance with Section 242 of the General Corporation Law of Delaware, said amendment was voted upon at the annual meeting of the stockholders of the undersigned held on June 3, 1996, that voting upon said amendment was conducted at said meeting by the holders of shares of the corporation's Class "A" stock and Class "C" stock, and further certifies that said amendment was duly adopted upon receiving the affirmative vote of a majority of the total of the outstanding shares of Class "A" stock and Class "C" stock which were entitled to vote at said meeting and by the separate affirmative vote of a majority of the outstanding shares of Class "C" stock which were entitled to vote at said meeting. IN WITNESS WHEREOF, the undersigned corporation has caused this Certificate of Amendment to be executed in its name by its President and its corporate seal to be hereunto affixed, attested by its Secretary, this 3rd day of June, 1996. Attest: ACE HARDWARE CORPORATION By: /s/ David W. League By: /s/ David F. Hodnik -------------------- -------------------- David W. League, Secretary David F. Hodnik, President CORPORATE SEAL EX-3 3 0003.txt BY-LAWS APPENDIX A BY-LAWS OF ACE HARDWARE CORPORATION (As Amended through December 6, 2000) 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 provisions of Sections 2 and 3 of Article IV, one director who would not otherwise be eligible for election in 2001 may be elected at the annual meeting of stockholders to be held in 2001, for a two-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 dealerstockholders 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 shortterm and longterm 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 any case where the holder or holders of 50% or more of the outstanding voting stock of a corporation having a franchise from this corporation for one or more retail business outlets, or the holder or holders of 50% or more of the outstanding voting stock of a corporation owning 80% or more of the outstanding voting stock of a corporation having such a franchise, propose to sell or otherwise transfer all of the shares of capital stock (both voting and nonvoting) 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 percent (50%) or more of the assets or profit shares therein are legally or equitably owned by such other person, partnership or corporation, or by the legal or equitable owner or owners of fifty percent (50%) or more of such other person, partnership or corporation's assets or profit shares (if unincorporated) or shares of capital stock (if incorporated). A corporation shall be deemed controlled by another person, partnership or corporation if fifty percent (50%) or more of the capital stock of said corporation is owned by such other person, partnership or corporation, or by the owner or owners of fifty percent (50%) or more of its capital stock (if incorporated) or fifty percent (50%) or more of its assets or profit shares (if unincorporated). SECTION 2. In accordance with the policy heretofore established by the corporation in the Amendment to its By-laws adding Article XXIV thereto by the resolution adopted by the Board of Directors on July 20, 1973, there shall be distributed on a patronage basis to such members (that is, dealers holding memberships, as hereinabove defined, in the corporation) in a manner taking into account the amount of business done by the corporation with each of them, all the net savings and overcharges effected by or resulting from the operations conducted and carried on by the corporation in connection with sales of merchandise made by the corporation after May 31, 1974, to such members which remain after paying all operating and administration expenses of the corporation and all interest on its indebtedness and after the setting aside by the Board of Directors of such reasonable reserves as they shall determine from time to time to be appropriate for the purpose of insuring the safety and welfare of the corporation and for the purpose of providing for the expectancy of any losses or contingencies. Said distributions shall be made no later than eight and one half (8 1/2) months following the close of the year of the corporation during which the patronage occurred with respect to which each such distribution is made. In no event shall less than twenty percent (20%) of the total patronage distributions made each year to each member be distributed in cash. Notwithstanding any of the provisions of this Article XXIV, the remaining portion shall be distributed in cash, written notices of allocation (as defined in Section 1388 of the U.S. Internal Revenue Code) or other property in whatever proportions shall be determined each year by the Board of Directors. SECTION 3. Notwithstanding the foregoing, every such member on becoming such authorizes and directs that all net savings of every character effected by this corporation which are distributable to such member, to the extent of the excess thereof over the twenty percent (20%) minimum portion of such distributable amount required to be distributed in cash, may first be applied by the corporation to the payment of any indebtedness owed to the corporation by such member. Any such net savings which become distributable with respect to merchandise sold by this corporation for delivery to any retail hardware store owned or controlled, directly or indirectly, by the same person, partnership or corporation which so owns or controls one (1) or more other retail hardware stores may be so applied against any indebtedness owing with respect to merchandise sold by this corporation for delivery to any store which is part of any group deemed hereunder to constitute one (1) retail hardware dealer. The balance of any such net savings not so applied shall then be distributed as patronage dividends in the manner set forth in Article XXIV, Section 2, of these By-laws. SECTION 4. Each retail hardware dealer who applies for and is accepted as a member of this corporation shall, by his act of subscribing for a share of Class A stock of the corporation entitling such dealer to become such a member, consent that the amount of any patronage dividends with respect to his purchases of merchandise from this corporation occurring on or after June 1, 1974, which are made in written notices of allocation (as defined in Section 1388 of the U.S. Internal Revenue Code, as amended) or other property and which are received by such member from this corporation will be taken into account by him at their stated dollar amounts (representing the fair market value at date of distribution) in the manner provided in Section 1385(a) of said Code in the taxable year in which such notices of allocation or other property are received by said member. The term "written notice of allocation" as used here shall be deemed to include, but not to be limited to, a letter of advice to a member which discloses to such member an amount which the corporation has elected to apply against indebtedness owed to the corporation in accordance with the first sentence of Article XXIV, Section 3, of these By-laws. SECTION 5. The aforesaid written notices of allocation shall be redeemable by the corporation in cash at the discretion of the Board of Directors and/or in accordance with the restated Certificate of Incorporation of the corporation and these By-laws. As security for the payment to the corporation of any indebtedness owing at any time to the corporation by any retail hardware dealer having membership in the corporation or by any retail hardware dealer who has subscribed for the 1 share of Class A stock of the corporation which is required to be owned in order to become a member of the corporation, the corporation shall have a first lien upon any written notice of allocation held by any such dealer (including all retail hardware stores treated as being part of a group constituting one "member" or "dealer"). The interest of each holder of any written notice of allocation in and to the same shall at all times be deemed to be offset by the amount of any indebtedness payable to the corporation by such holder. SECTION 6. Notwithstanding any other provision of these By-laws, and in accordance with the policy heretofore established by the corporation in the Amendment to its By-laws adding Section 6 to Article XXIV thereof by the resolution adopted by the Board of Directors on April 24, 1974, commencing with respect to purchases of merchandise made from the corporation after May 31, 1974 the corporation shall also make distributions on a patronage basis to those of its dealers who have franchise or membership agreements with the corporation and who have executed unrevoked and unexpired written consents of the type referred to in Section 1388 (c)(2)(A) of the U.S. Internal Revenue Code to include in their gross income all patronage dividends distributed to them in the form of written notices of allocation (as defined in Section 1388 of the U.S. Internal Revenue Code), even though such dealers do not then own any shares of any class of the capital stock of the corporation. Such patronage dividend distributions shall be made to such dealers in a manner taking into account the amount of business done by the corporation with each of them during the periods with respect to which said written consents are effective for each of them and shall consist of all the net savings and overcharges effected by or resulting from the business done by the corporation with such dealers which remain after paying all of the operating and administration expenses and interest on indebtedness of the corporation allocable to such business and after the setting aside by the Board of Directors of such reasonable reserves as they shall determine from time to time to be appropriate for the purpose of insuring the safety and welfare of the corporation and for the purpose of providing for the expectancy of any losses or contingencies. Each such written consent shall provide that it may be revoked at any time by the dealer, effective with respect to business done by the corporation with such dealer after the close of the taxable year of this corporation during which the revocation is filed with it. Each such written consent shall cease to be effective with respect to all business done by this corporation with any dealer who has furnished such a written consent to this corporation immediately upon said dealer's becoming an owner of a share of Class A stock of this corporation, as of which date such consent shall expire and such dealer shall be deemed to hold a "membership" in this corporation so that the provisions of this Article XXIV which are applicable to the distribution of patronage dividends to its members then become effective with respect to such dealer. Unless the same shall have been revoked or otherwise terminated, any such consent which has theretofore been executed by a dealer shall in any event be deemed to have expired and been rendered ineffective at the end of one hundred twenty (120) days following the later of (a) the date as of which an initial Registration Statement and Prospectus with respect to an offer to sell shares of the capital stock of the corporation (including shares of its Class A stock) to its dealers have become effective under the U.S. Securities Act of 1933, or (b) the date as of which such Prospectus can be used under the securities law of any state in which state registration of such stock is required. No such dealer shall be eligible to receive distributions of patronage dividends from the corporation with respect to business done by the corporation with such dealer after the expiration of such 120-day period unless such dealer either has become a member of the corporation by owning a share of its Class A stock (in which case such dealer shall thereupon be entitled to patronage dividends as provided for in Section 2 of this Article XXIV) or has executed a subscription agreement for the purchase of shares of capital stock of the corporation (including one (1) share of its Class A stock) which has been accepted by the corporation. There shall be incorporated in all such subscription agreements which include a subscription for a share of the Class A stock of the corporation a provision whereby the subscribing dealer consents to include in his gross income all patronage dividends distributed to such dealer in the form of written notices of allocation (as defined in Section 1388 of the U.S. Internal Revenue Code), and any dealer who has executed such a subscription agreement but who is not entitled to become the owner of a share of Class A stock of this corporation until he has completed payment of the purchase price for such share in accordance with such subscription agreement shall be entitled to receive patronage dividends pursuant to this Section 6 during the period for which he makes payments on account of such purchase price as required by the subscription agreement. Upon the completion of such payments and the issuance of such share of stock to him, such dealer shall then be entitled to receive patronage dividends pursuant to Section 2 of this Article XXIV. In no event shall less than twenty percent (20%) of the total patronage dividend distributions made each year to any dealer who is entitled to receive such distributions pursuant to this Section 6 be distributed in cash. Any amount in excess of said twenty percent (20%) minimum portion of the patronage dividends otherwise distributable to a dealer under this Section 6 may first be applied by the corporation to the payment of any indebtedness owed to the corporation by such dealer in the same manner as set forth in Section 3 of this Article XXIV. Any patronage dividends distributed in the form of written notices of allocation pursuant to this Section 6 shall be subject to all of the provisions with respect to distributions made in the form of written notices of allocation which are set forth in Section 5 of this Article XXIV. SECTION 7. Notwithstanding any of the foregoing provisions, the portion of any patronage dividends which would otherwise be distributable in cash under any provision of this Article XXIV to a retail hardware dealer with respect to a retail hardware store having a franchise or membership agreement with this corporation which has been cancelled or terminated at any time subsequent to the date of the annual meeting of stockholders to be held on the third Monday of May in 1980 by any means or for any reason whatsoever prior to the time of distribution of such patronage dividends shall be applied by the corporation to the payment of any indebtedness owed to the corporation by or on behalf of such store to the extent of such indebtedness instead of being distributed in cash, provided, however, that an amount equal to 20% of the total patronage dividends distributable for the applicable year to any such dealer with respect to such store shall nevertheless be paid in cash within 8 months following the close of such year if a timely written request for the payment of such amount in cash is submitted to the corporation by the dealer. However, in all events no less than 30% of the total annual patronage dividends distributable to a retail hardware dealer with respect to a retail business outlet pursuant to any provision of these By-laws shall be paid in cash if the retail business outlet is located in a jurisdiction as to which the 30% income tax withholding provisions of Section 1441 or Section 1442 of the U.S. Internal Revenue Code are applicable. SECTION 8. Effective with respect to business done by them with this corporation after December 31, 1982, each retail hardware dealer having membership in this corporation on that date and each retail hardware dealer who is a subscriber on that date or who becomes a subscriber after that date for the 1 share of Class A stock of this corporation which is required to be owned in order to become a member of this corporation shall, solely by such dealer's act of commencing or continuing to do business with this corporation after said date, be deemed to have authorized and directed that, notwithstanding any other provision of this Article XXIV of these By-laws, the distributions to be made on a patronage basis as provided for in Section 2 and Section 6 of this Article XXIV shall be made in a manner taking into account the quantity or value of business done with each dealer by each separate division of the corporation as shall be established on the books of the corporation with respect to its operations and/or the quantity or value of business done by the corporation or each such division of the corporation with each of its dealers with respect to each category of sales as shall be established on the books of the corporation. Each such dealer shall further thereby be deemed to have authorized and directed that, in any taxable year of this corporation during which it incurs a loss in connection with the operations of any such division or in connection with any such category of sales, (i) a proportionate share of such loss shall be deducted from the net earnings of the corporation on the business done during such year by each of its other divisions or with respect to each of its other sales categories with its dealers and (ii) the amount of patronage dividends which the corporation would otherwise be obligated to distribute to its dealers in connection with their purchases from each such other division of the corporation or in connection with each of the other sales categories established by the corporation (as the case may be) shall be reduced by such proportionate share of said loss. For the foregoing purposes the proportionate share of any such loss in connection with the operations of any such division of the corporation or in connection with any such category of sales which shall be deducted from the net earnings realized by it with respect to business done by each other division of the corporation or with respect to each of the other sales categories established by the corporation shall be determined by multiplying the total amount of such loss by a fraction having as its numerator the net earnings which would otherwise be distributable as patronage dividends in connection with the business done with its members by each such other division or each such other category of sales and having as its denominator the total of the net earnings which would otherwise be distributable as patronage dividends in connection with the business done with its members by all such divisions of this corporation and/or all such sales categories. ARTICLE XXV ESTABLISHMENT OF ACE HARDWARE CORPORATION DEALERSHIPS AND NON-MEMBER ACCOUNTS SECTION 1. Except as provided in Article XXV, Section 3 hereof, no person, partnership or corporation shall be authorized or permitted to use the name "Ace Hardware" or any trademark or trade name including the word "Ace" in conjunction with the sale of hardware or related merchandise, to display any identification sign or emblem indicating that said person, partnership or corporation is an authorized Ace Hardware dealer, or to purchase merchandise (including items carried under the Ace brand name) from Ace Hardware Corporation unless such person, partnership or corporation has first been accepted by Ace Hardware Corporation as a duly licensed or franchised dealer and has executed the membership or similar agreement then utilized by Ace Hardware Corporation for the establishment of such a dealer relationship and has otherwise complied with the usual requirements of Ace Hardware Corporation with respect thereto. Any such agreement may contain such reasonable provisions with respect to the termination thereof as shall be legally permitted by the laws of the United States of America and by the laws of the state or other jurisdiction in which the business of the dealer is located. SECTION 2. In order for any person, partnership or corporation to be accepted by Ace Hardware Corporation as a licensed dealer, such person, partnership or corporation shall also be required to purchase the necessary number of shares of capital stock of the corporation as required by Article Fourth (c) and Article Fourth (e) of the restated Certificate of Incorporation of Ace Hardware Corporation filed with the Secretary of State of Delaware on September 18, 1974. Accordingly, each such person, partnership or corporation shall, concurrently with the execution by such person, partnership or corporation of the Ace Dealer Membership Agreement then utilized by the corporation, also agree in writing to purchase one (1) share of Class A stock of the corporation at a price equal to the par value thereof of $1,000 per share, and forty (40) shares of Class C stock of the corporation at a price equal to the par value thereof of $100 per share or, when the store which is licensed under such Membership Agreement is not the first store owned or controlled by said person, partnership or corporation which has become accepted by Ace Hardware Corporation as a licensed dealer, to purchase fifty (50) shares of Class C stock at a price equal to the par value thereof of $100 per share. The terms of payment with respect to any shares of capital stock of the corporation purchased by any such person, partnership or corporation shall be as set forth in such resolution as shall be adopted from time to time by the Board of Directors of the corporation for the purpose of establishing such terms of payment. SECTION 3. Ace Hardware Corporation may make or approve sales of merchandise for delivery to any customers either directly, or under the terms of a written agreement entered into with it by a person, partnership or corporation operating one or more businesses, whether located within or outside the United States of America, its territories and possessions, 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 registered 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. EX-4 4 0004.txt DISTRIBUTION OF PATRONAGE DIVIDENDS ACE HARDWARE CORPORATION PATRONAGE DIVIDEND DISTRIBUTION PLAN ADOPTED BY THE BOARD OF DIRECTORS FOR THE YEAR 2000 AND SUBSEQUENT YEARS --------------------------------------------------------- 1. With respect to each store owned or controlled by each eligible and qualifying dealer, such dealer shall receive a minimum cash distribution determined as follows: a) an amount equal to 20% of the first $5,000 of the total patronage dividends allocated for distribution each year to such dealer in connection with the purchases made for such store; b) an amount equal to 25% of the portion of the total patronage dividends allocated for distribution each year to such dealer for such store which exceeds $5,000 but does not exceed $7,500; c) an amount equal to 30% of the portion of the total patronage dividends allocated for distribution each year to such dealer for such store which exceeds $7,500 but does not exceed $10,000; d) an amount equal to 35% of the portion of the total patronage dividends allocated for distribution each year to such dealer for such store which exceeds $10,000 but does not exceed $12,500; e) an amount equal to 40% of the portion of the total patronage dividends allocated for distribution each year to such dealer for such store which exceeds $12,500. 2. The portion of the total annual distribution allocated to any such dealer for each store owned or controlled by such dealer in excess of the amount to be distributed to such dealer for such store in cash shall be distributed to him each year in the form of shares of Class C nonvoting stock of Ace Hardware Corporation (par value $100 per share), valued at the par value thereof, until the total par value of all shares of all classes of capital stock of the corporation held by such dealer with respect to such store equals the greater of: a) $20,000; or b) a sum equal to the total of the following categories of purchases made by such dealer for such store during the most recent calendar year: (i) 15% of the volume of 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 (including STOP and excluding Ace manufactured paint and related products) and bulletin purchases, plus (iv) 4% of the volume of LTL Plus purchases; provided, however, that no fractional shares of Class C nonvoting stock shall be issued to any dealer and that any amount which would have otherwise been distributable as a fractional share of such stock shall instead be distributed to such dealer in cash. 3. The portion of the total patronage dividends allocated each year to any such dealer for each store owned or controlled by such dealer which exceeds the sum of (a) the amount to be distributed to such dealer for such store in cash pursuant to Paragraph 1. above and (b) any amount to be distributed to him in the form of shares of Class C nonvoting stock of Ace Hardware Corporation (par value $100 per share) pursuant to Paragraph 2. above shall be distributed to such dealer in cash; provided, however, that in no event shall the total amount distributed under this plan to any such dealer for any such store in cash exceed 45% of the total patronage dividends allocated for such store for such year, and to the extent that any distribution to be made to any such dealer for any store pursuant to this Paragraph 3. would otherwise cause the total cash distribution to such dealer for such store to exceed 45% of the total patronage dividends allocated for such store for such year, the distribution to be made under this Paragraph 3. shall instead be made in the form of a non-negotiable patronage refund certificate having such a maturity date and bearing interest at such an annual rate as shall be determined by the Board of Directors prior to the issuance thereof. EX-5 5 0005.txt OPINION OF MCDERMOTT, WILL & EMERY March 22, 2001 Ace Hardware Corporation 2200 Kensington Court Oak Brook, Illinois 50523 Re: Post-Effective Amendment No. 6 to Form S-2 Registration Statement (Reg No. 33-58191) Ladies and Gentlemen: We have acted as counsel to Ace Hardware Corporation (the "Company") in connection with Post-Effective Amendment No. 6 to the Company's Form S-2 Registration Statement (Reg. No. 33-58191) (such Registration Statement, as amended by Post-Effective Amendment No. 6, being hereinafter referred to as the "Registration Statement") filed with the Securities and Exchange Commission under the Securities Act of 1933, as amended (the "Act") on or about the date hereof. The Registration Statement relates to the proposed issuance and sale of up to 698 shares of the Company's Class A Stock ($1,000 par value) and up to 23,239 shares of the Company's Class C Stock ($100 par value) (collectively, the "Stock") which may be sold by the Company from time to time as set forth in the prospectus which forms a part of the Registration Statement (the "Prospectus"). We have reviewed such records, documents and questions of law as we have considered necessary as a basis for the opinion expressed below. In our review, we have assumed the authenticity of all documents submitted to us as originals, the conformity to the original documents of all documents submitted to us as copies, the genuineness of all signatures on documents reviewed by us and the legal capacity of natural persons. We have assumed that the Stock will be issued and sold in accordance with the terms described in the Prospectus under "Distribution Plan and Offering Terms." Based upon, subject to and limited by the foregoing, we are of the opinion that, when the Registration Statement has become effective under the Act, upon issuance and delivery of shares of Stock against payment of the consideration therefor, such shares of Stock will be legally issued, fully paid and non-assessable. We express no opinion as to the applicability of, compliance with or effect of, the law of any jurisdiction other than United States Federal law, the General Corporation Law of the State of Delaware and the laws of Illinois. We hereby consent to the filing of this opinion as an exhibit to the Registration Statement. In giving this consent, we do not hereby admit that we come within the category of persons whose consent is required under Section 7 of the Act or the rules and regulations of the Securities and Exchange Commission thereunder. Very truly yours, McDermott, Will & Emery EX-8 6 0006.txt TAX OPINION OF KPMG LLP Ace Hardware Corporation March 9, 2001 March 15, 2001 The Board of Directors Ace Hardware Corporation 2200 Kensington Court Oak Brook, Illinois 60523 Dear Ladies and Gentlemen: You have requested the opinion of KPMG LLP ("KPMG") regarding certain federal income tax consequences resulting from distributing patronage dividends and selling and redeeming Class A and Class C shares in Ace Hardware Corporation ("Ace"). Unless otherwise indicated, all section references in this opinion letter are to the Internal Revenue Code of 1986 as amended (the "IRC") and the regulations promulgated thereunder. The opinions contained in this letter are based on the facts, assumptions and representations stated herein. You represented to us that you have provided us with all facts and circumstances that you know or have reason to know are pertinent to this opinion letter. If any of these facts, assumptions or representations is not entirely complete or accurate, it is imperative that we be informed immediately in writing as the incompleteness or inaccuracy could cause us to change our opinions. In various sections of this letter, for ease of understanding and as a stylistic matter, we may use language such as "will" which might suggest that we reached a conclusion on an issue at a standard different from a "should" level of certainty. Such language should not be so construed. Our conclusions on any issue discussed in this opinion letter do not exceed a "should" standard. Facts Ace Hardware Corporation operates as a cooperative corporation for federal income tax purposes under IRC Section 1381. Ace maintains this status because its dealers, which are called patrons for tax purposes, own shares in the corporation and purchase their inventory and supplies through the cooperative. To become a patron, a dealer must purchase shares from Ace. When a new hardware dealer enters the cooperative, this person (including individuals, corporations or other entities) must purchase one Class A voting share for its $1000 par value. Along with this Class A share the new dealer must purchase 40 Class C nonvoting shares for their par value of $100 each. A dealer who opens another store in addition to his first store must purchase an additional 50 shares of Class C stock at the $100 per share par value. The Class C shares may also be distributed to the patrons as part of the yearly patronage dividend. Class C shares may neither be sold nor assigned to non-patrons. However, Ace may approve a person to become a patron in order for shares to be transferred. Each year, Ace distributes patronage dividends to its patrons based upon the quantity or value of business done with these dealers. The patronage dividend must consist of at least 20% cash, but may not exceed 45% cash. In addition to cash, Ace may distribute additional Class C shares, Patronage Refund Certificates, and/or other qualified property. Assumptions and Representations Ace makes the representations listed below and affirms the reasonableness of the representations and assumptions listed below. We have not independently verified, and will not independently verify, the completeness or accuracy of any of these assumptions and representations. It is understood and agreed that we are relying on these assumptions and representations in rendering the opinions contained herein. The By-Laws, Articles of Incorporation, and any other corporate documents of Ace Hardware Corporation are in conformity with the requirements of all United States Laws and Administrative Regulations to qualify for cooperative corporation status and any transaction described in this letter. Ace has never and does not intend to issue a patronage dividend in the form of a non-qualified written notice of allocation. Opinions Based on the Facts and Assumptions and Representations and subject to any conditions or limitations herein, including the Scope of the Opinion below, it is our opinion that the federal income tax consequences described in the Analysis section below should prevail (i.e., there is a 70- percent or greater likelihood that those consequences will prevail) if challenged by the Internal Revenue Service and, therefore, that there is substantial authority for those consequences within the meaning of Treasury Regulation Section 1.6662-4(d). Analysis Income Tax Liability Incidental to Patronage Dividends Any patronage dividends that are distributed by Ace will be includible in the gross income of the distributee patrons. Therefore, gross income will include the amount of cash, the value of the Class C shares, the value of Patronage Refund Certificates of Ace and the value of any other qualified property distributed to the cooperative patrons. The Patronage Refund Certificates will be distributed in the form of written notices of allocation from Ace. These Patronage Refund Certificates are equivalent to non-negotiable subordinated notes with a stated maturity date and pay an annual interest rate that is determined by Ace's Board of Directors before the certificates are issued. A minimum of 20% of the total annual patronage dividend will be paid in cash, unless this portion of the dividend has been applied to the outstanding indebtedness of the patron to Ace. The cash portion would be applied to outstanding indebtedness if the dealer's patronage had been terminated and the terminated patron had not requested the payment of the cash distributed. Depending on the tax bracket of the patron receiving the patronage distribution, the cash distributed may not be sufficient to pay the federal income tax liability generated by the distribution. Federal Income Tax Treatment of Patronage Dividends Treatment in General The patronage dividends, which will be includible in the patron's gross income, may consist of any combination of cash (minimum of 20%, maximum of 45%), Class C shares, Patronage Refund Certificates and other qualified property within the meaning of Internal Revenue Code ("IRC") Sections 1385 and 1388. The total amount of the patronage dividend will be includible in gross income. The Class C shares and the Patronage Refund Certificates qualify as written notices of allocation under IRC Section 1388(b) and (c). They qualify by meeting the following requirements: 1) the notice must be in written form, which includes capital stock, certificates of indebtedness or other written notices which disclose to the recipient the stated dollar amount allocated to him; 2) at least 20% of the patronage dividend must be paid in cash or a qualified check; 3) the patron must be able to redeem the notice for cash at its stated dollar amount for a period beginning on the day the notice is paid and ending not earlier than 90 days after that date, but only if the distributee receives written notice of the right of redemption at the time he receives such written notice of allocation; and 4) the patron must consent to treating the face value of the allocation as gross income in the year the notice is received. That consent is given by each patron upon joining the cooperative. In order for Ace to receive the corresponding deduction from federal gross income for the amount of patronage dividends paid to a patron, Ace must pay (or apply against indebtedness that the patron owes Ace in accordance with Article 24, Section 7 of the Ace Hardware Corporation By-laws) not less than 20% of each patron's distribution in cash. Further, the patrons must consent to have the stated dollar value of the written notice of allocation plus the fair market value of other qualified property included in the patron's gross income for the year that the patron receives the distribution and Ace will, as required by the IRC, pay the dividends within eight and one half months after the end of its tax year. Once a person or entity becomes a patron of Ace, by purchasing one share of Class A voting stock, the patron consents under the Ace By-Laws Article 24, Section 4, to include in his income the total stated dollar amounts of any patronage dividends distributed in whatever form. Consent is also given by dealers who have subscribed for shares of Ace stock because the Subscription Agreement provides for this consent as a term of the agreement. Interest Income Resulting from Patronage Refund Certificates As a result of receiving Patronage Refund Certificates, the distributee patrons may be deemed to receive interest income. Any interest will be in the form of original issue discount if the face value of the refund certificates exceed the present value of the stated principal and interest payments due from Ace under the terms of the refund certificate. IRC Section 7872(b) determines the amount of the original issue discount and IRC Section 1272(a) requires the discount, as determined above, to be included in the income of the distributee patron ratably over the term of the refund certificates. To determine the present value of the stated principal and interest, the patrons must use a discount rate equal to the applicable federal rate, at the date of issuance, compounded semi-annually. Withholding Ace will be subject to the general withholding requirements under IRC Section 3406. If a patron does not provide a taxpayer identification number ("TIN") or provides an incorrect TIN, Ace will be required to withhold 31% of the total face amount of the patronage dividend. Ace will also be required to withhold if there has been a notified payee underreporting as described in IRC Section 3406(c) or the patron has failed to certify that he is not subject to backup withholding under IRC Section 3406(d). These last two withholding requirements should not apply to Ace or its patrons, so long as Ace does not distribute 50% or more of the patronage dividend in cash. Foreign Patrons Patronage dividends and interest distributed to patrons who are located in foreign countries and certain United States Territories (including those patrons incorporated in Puerto Rico or non-United States citizens residing in Puerto Rico) are considered "fixed or determinable annual or periodic income." Rev. Rul. 66-53, 1966-1 C.B. 204. Ace is required to withhold tax on the full stated amount of the dividend and any interest distributed to non-citizens outside of the United States at a rate of 30% (or other applicable rate as determined by tax treaties in effect) under IRC Section 871(a) and IRC Section 881(a). The tax will not apply to corporations organized in Guam, American Samoa, the Northern Mariana Islands or the Virgin Islands if: 1) at all times during the year, less than 25% of the value of the stock of such corporation is beneficially owned by foreign persons, 2) at least 65% of the gross income of the corporation is connected with the conduct of a trade or business in the possession or the U.S. for the three years ending with the close of the taxable year of the distribution, and 3) no substantial part of income of such corporation is used directly or indirectly to satisfy obligations to persons who are not bona fide residents of such possession or the United States. Federal Tax Status of Purchased Class A and Class C Shares Sale of Purchased Shares by Patrons If a patron's membership in the cooperative terminates for all of that patron's store locations and Ace redeems its shares from the patron, the redemption necessarily includes the one share of Class A voting stock. The redemption of that share will not result in taxable gain or loss under the U.S. Internal Revenue Code ("IRC") as Ace must repurchase Class A shares at their $1000 par value as stated in the Ace By-Laws Article XVI, Section 10. If Ace redeems a patron's Class C shares, there may be taxable gain or loss under the IRC. The selling patron may need to recognize gain or loss if the price per share paid by Ace to redeem the shares differs from the patron's tax basis in the shares. Any taxable gain recognized upon redemption may qualify for capital gains treatment. If a patron's purchased Class C shares are redeemed and the patron retains its Class A and other Class C shares to maintain its patronage membership for other stores, then the amount paid for redemption of the purchased Class C shares may be characterized as an ordinary dividend and taxed as ordinary income. If the IRC requires that the income be treated as ordinary, the basis of the patron's remaining shares may be increased by the amount of tax basis in the shares that were redeemed. Unstated Interest If the purchase of the Class A and/or Class C shares by a patron occurs on a deferred basis with periodic payments extending for more than one year from the date of purchase, interest may be imputed to the sale contract. For payments that are due greater than six months after the purchase date, IRC Section 483 may impute "unstated interest" that may be deducted so long as the basis of the shares does not include this deemed unstated interest. This unstated interest will also be taken into income for Ace. Unstated interest may also be imputed to the sale of shares when a membership in the cooperative is terminated. IRC Section 483 would also apply if Ace redeems the shares with a four-year installment note as allowed by Article XVI, Section 12 of the Ace By-Laws. If the total payments to be made to the terminated patron exceed the present value of the total payments plus the present value of any interest due to the patron under the installment note, IRC Section 483 may cause part of the stated payments to be treated as unstated interest. The discount rate to be used for the present value calculations is the applicable federal rate at the time of termination, compounded semi- annually. This section may cause part of the payments received by the terminated patron to be treated as interest income rather than a return of capital. Scope of the Opinion Our opinions in this letter are limited to those specifically set forth herein under the heading Opinions. KPMG expresses no opinion with respect to any other federal, state, local, or foreign tax or legal aspect of the transactions described herein. No inference should be drawn on any matter not specifically opined on above. In rendering our opinions, we are relying upon the relevant provisions of the internal revenue laws, including the Internal Revenue Code of 1986, as amended, the regulations thereunder, and judicial and administrative interpretations thereof -- all as in effect on the date of this letter. These authorities are subject to change or modification retroactively and/or prospectively and any such change could affect the validity or correctness of our opinions. We will not update our advice for subsequent changes or modifications to the law and regulations or to the judicial and administrative interpretations thereof, unless you separately engage us to do so in writing after such subsequent change or modification. These opinions are not binding on the Internal Revenue Service, any other tax authority, or any court, and no assurance can be given that a position contrary to that expressed herein will not be asserted by a tax authority and ultimately sustained by a court. KPMG consents to the use of our reports included herein and to the reference of our firm within the 2001 Securities and Exchange Commission S-2 filing. Very truly yours, KPMG LLP EX-10 7 0007.txt RESTATED PREP PLAN 10-D RESTATED PREP PLAN (Formerly Known as Executive Supplemental Benefit Plans) (Adopted on December 6, 2000) Ace Hardware Corporation PREP Plan is intended to provide part of the basis for attracting, retaining and rewarding key executives. This Plan will supplement, as set forth within this document, the Corporation's life insurance program offered to executive employees. Compensation and Human Resources Committee The Compensation and Human Resources Committee of the Board of Directors shall have overall administrative responsibility for the Plan. Eligibility The participants in the Plan are nominated by the President and confirmed by the Board of Directors. Executive Tiers Each participant in the Plan is assigned one of the Tiers listed below which are reflective of position responsibility and level of benefits provided. Supplemental Life Insurance Program The Corporation will provide, by Tier level, a supplemental universal life insurance policy to each eligible executive. The reason for providing a universal life insurance policy, instead of a term life policy, is to provide an investment vehicle for the supplemental retirement benefit. The policy will be owned by each individual executive. The Corporation will pay up to 125% of the standard term life premium rate for each individual policy. If an individual executive's policy costs more than the established rate, it will be that individual's responsibility to pay the additional costs or accept a reduced face amount of life insurance. Listed below are the face amounts of life insurance to be provided by Tier: Tier(s) Face Amount Tier I $600,000.00 Tier II $400,000.00 Tier III $200,000.00 Participants in the Plans for the year 1998 and subsequent years; Tier I President and Chief Executive Officer David F. Hodnik Tier II Corporate Vice President Michael C. Bodzewski Lori L. Bossmann Paul M. Ingevaldson Ray A. Griffith Rita D. Kahle David W. League David F. Myer Fred J. Neer Kenneth L. Nichols Tier III Company Vice President William J. Bauman Daniel C. Prochaska Plan Administration Policy and Issues The PREP Plan will be administered by the Compensation and Human Resources Committee and its interpretation of the Plan and determination of the benefit granted under the Plan will be final and binding on all participants and their estates. Subject to the provisions of the Plan, the Compensation and Human Resources Committee, at any time, will have the authority to establish, adopt or revise such rules and regulations as it deems necessary for the administration of the Plan. The Board of Directors has the authority to terminate or amend the supplemental plan in any respect. The supplemental plan does not constitute an employment contract and does not alter the fact that plan participant(s), if not under contract, may resign from the Corporation and the Corporation may discharge plan participant(s). Each participant, at such time as the participant is no longer an employee of the Company, shall also cease to be eligible for corporate benefits under this Plan. The Restated PREP Plan is effective September 1, 2000. Effective 9/01/00 EX-10 8 0008.txt AHC INTERNATIONAL FRANCHISE AGREEMENT 10-J 1 8/97 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 60523, 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 market 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 in United States Dollars that must be purchased by Franchisee from Company hereunder shall be, exclusive of all handling charges, $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 two percent (2%) 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 Franchisee's country ("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 Franchisee's country, 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 Franchisee'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 Franchisee'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 Franchisee'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. Franchisee's rights hereunder shall be non-exclusive, and Company reserves the right to sell in Franchisee'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. Notwithstanding the foregoing, Company agrees that, if at any time during the first eighteen (18) months of the term of this Agreement, Company receives an offer from a third party to enter into a license agreement for the Franchisee's country, then Company shall provide Franchisee with written notice of the material terms of such offer and Franchisee shall have thirty (30) days thereafter to notify Company in writing of its intent to enter into a license agreement with Company for the Franchisee's country on substantially the same terms and conditions as those contained in the offer. If the Franchisee does not notify Company of its intent to enter into a license agreement as set forth above, or if the Franchisee does notify Company but Company and Franchisee do not negotiate and enter into a license agreement within thirty (30) days after Franchisee's notice to Company, then the right set forth in this Section 9 shall terminate and the Company may enter into a license agreement with any other party. 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 Franchisee'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 Franchisee'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 Franchisee'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 Franchisee'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", "ACE HARDWARE" and "ACE HOME CENTER" (hereinafter "the Marks") 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 Marks 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 Marks only in the form, manner, and logotype previously approved by Company in writing and to comply with all guidelines and instructions from time to time issued by Company with respect thereto. All use of the Marks 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 Marks 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 Marks or create or use any trademark, service marks, trade names, symbols or logos that are confusingly similar to those owned by Company, whether or not licensed hereunder. Franchisee also agrees to at no time use the Marks 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 with respect to any actual or alleged invalidity of the Marks or in connection with Franchisee's use of the Marks, or the use of the services furnished by Franchisee in connection therewith. (h) Franchisee acknowledges Company's ownership of the Marks, 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 Marks 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 Marks, or contest the ownership of the Marks 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 Marks, or to register, retain, enforce or defend the Marks. (i) Franchisee agrees to notify Company of any unauthorized use of the Marks by others, as promptly as such use may come to Franchisee's attention. Company shall have the sole and exclusive right, but not the obligation, to register or renew the Marks 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 marks 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 warehouse catalogs, videotapes, 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 Franchisee's transactions with Company or for the purpose of promoting Franchisee'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 Franchisee'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 Marks 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 Marks, and to destroy all printed or visual materials of any sort bearing the Marks. 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 Franchisee'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 Franchisee'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 Franchisee'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 Franchisee'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 Franchisee'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 Franchisee'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.$1,000,000.00 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 Franchisee's sole expense, take such steps as may be required in Franchisee'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 Franchisee'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. Franchisee's act of continuing to do business with Company after the effective date of such amendment shall be deemed to constitute Franchisee'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. All written notices hereunder shall be sent by a internationally recognized courier service (e.g. Federal Express, DHL). 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 _________________________, 2000, 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 ________________, 2000. By:___________________________ ____________________________ (Title of Officer) ACE HARDWARE CORPORATION FRANCHISE 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._________________________________________________________________ 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 __________________, 2000. By:___________________________________ ___________________________________ (Title of Officer) EX-10 9 0009.txt SUPPLEMENT TO AHC MEMBERSHIP AGREEMENT 10-L April 1, 2000 Store Number _____________ SUPPLEMENT TO ACE HARDWARE MEMBERSHIP AGREEMENT 1. The Member agrees that this Supplement amends the Member's current version of the Ace Hardware Membership Agreement in the following respects: New paragraphs Text of new paragraphs added Article II "16. Restrictions on the Manufacture and Sale of Paragraph 16. Private Label Products. The Member shall not enter into any arrangements for the production or distribution of its own private label goods that involve the use of any registered or unregistered trademarks of the Company in connection therewith, nor shall the Member make any references whatsoever to the Member's affiliation with the Company in connection with the labeling, promotion or sale of any such goods. In connection with the Member's resale of authentic private label goods which were purchased directly or indirectly from the Company and which bear the registered or unregistered trademarks of the Company, the Member shall refrain at all times from directly or indirectly assisting any third party in misrepresenting to the public that such party is a Company-authorized distribution outlet for such goods or a licensee of the Company. Article III "8. Advertising Former Relationship to Company. Upon the Paragraph 8. termination of this Agreement, the Member agrees to make no reference to the Member's former relationship with the Company in the advertising or promotion of the Member's business. The provisions of this Article III, Paragraph 8. shall survive the termination of this Agreement." New sentences Text of new sentences added At the end of "The Member understands that the Board of Directors of the Article II Company reserves the right to change advertising Paragraph 3. assessments from time to time and in the event that there are different advertising assessments imposed for the DIY Retail format and the Ace Contractor Center or other format and the Member is operating the licensed location under more than one such format, then the higher applicable assessment shall be imposed." At the end of "The Member understands that the Board of Directors of the Article II Company reserves the right to change minimum purchase Paragraph 10. level requirements from time to time, and in the event that there are different levels of low volume service charges or minimum purchase requirements imposed for the DIY Retail format and the Ace Contractor Center or other format and the Member is operating the licensed location under more than one such format, then the higher applicable level of low volume service charges or minimum purchase requirements, as the case may be, shall be imposed. New phrases Text of new phrases added In Article II "and domain name registrations" Paragraph 5. line 14 immediately following the word "entities" 2. The Member agrees with the Company's designation of format(s) for the licensed location identified in the Membership Agreement as follows: ___ DIY Retail ___ Ace Contractor Center ___ Both ___ Other__________ 3. Except as specifically modified by this Supplement, all of the terms and conditions of the Company's current form Membership Agreement signed by the Member remain in full force and effect. IN WITNESS WHEREOF, this Supplement has been executed on this day of , 20 by the person(s) signing it for the Member, whose authority to sign shall be deemed to have been duly authorized by the Member. _______________________________________________________ Business Name _______________________________________________________ Trading Name: D/B/A _______________________________________________________ Signature(s) of Member _______________________________________________________ _______________________________________________________ _______________________________________________________ (If the Member is a corporation, the corporate name should be written hereon followed by the name and title of an appropriate officer. If the member 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 ________________________ , 20________ By:___________________________________ ___________________________________ (Title of Officer) EX-10 10 0010.txt AHC LICENSE AGREEMENT 10-R ACE HARDWARE CORPORATION LICENSE AGREEMENT FOR ________________________ TABLE OF CONTENTS PARAGRAPH PAGE - --------- ---- I. APPOINTMENT 2 II. FEES 2 III. TERM & RENEWAL 5 IV. PROPRIETARY MARKS 6 V. CONFIDENTIAL INFORMATION 8 VI. COMPANY'S OBLIGATIONS 10 VII. LICENSEE'S OBLIGATIONS 12 VIII. CONFIDENTIAL OPERATIONS MANUAL 18 IX. COVENANTS NOT TO COMPETE 18 X. DEFAULT AND TERMINATION 19 XI. EXPIRATION OR TERMINATION 22 XII. TRANSFERABILITY OF INTEREST 24 XIII. NO AGENCY 25 XIV. MISCELLANEOUS 25 EXHIBITS A. ACE STORE LOCATIONS ACE HARDWARE CORPORATION LICENSE AGREEMENT This License Agreement ("Agreement"), by and between ACE HARDWARE CORPORATION, a Delaware corporation having its principal place of business at 2200 Kensington Court, Oak Brook, Illinois, 60521 U.S.A. ("Company") and _________________________________, a corporation incorporated under the laws of _____________, having its general offices at ___________________________ ____________________________________________("Licensee"). WITNESSETH: 1. Company is in the business of selling home improvement products, tools, hardware, paint and related merchandise and products, including private labelled merchandise containing the name "ACE" or "ACE Hardware" (collectively referred to as the "Merchandise") at wholesale; and 2. Company is also in the business of granting the rights to operate businesses selling Merchandise from retail locations("ACE Stores") under the trade names and service marks "ACE", "ACE Hardware", and "ACE Home Center" and associated logos and commercial symbols, and such other trade names, trademarks and service marks ("ACE Marks") as are now designated (and may hereinafter be designated in writing by Company) as an integral part of the ACE Stores; and 3. Licensee desires to establish and operate ACE Stores outside the United States of America in the country of________________(the "Territory") as a licensee of Company and to sublicense others the right to establish and operate ACE Stores in the Territory, using procedures and standards developed and prescribed by Company; and 4. Company expressly disclaims the making of, and Licensee acknowledges that it has not received nor relied upon, any warranty or guaranty, express or implied, as to the revenues, profits or success of the business venture contemplated by this Agreement. NOW, THEREFORE, the parties, in consideration of the undertakings and commitments of each party to the other set forth in this Agreement, agree as follows: PARAGRAPH I APPOINTMENT 1.01. Subject to the terms and conditions herein and during the term of this Agreement, Company grants to Licensee the exclusive right throughout the Territory to use the ACE Marks and Licensee undertakes the obligation to establish and operate ACE Stores solely in compliance with operational procedures and standards prescribed by Company from time to time. Company will not, so long as this Agreement is in force and effect and Licensee is not in default under any of the terms hereof, license another to operate, or itself operate, any other ACE Stores within the Territory. 1.02 Company further grants to Licensee, upon and subject to the terms and conditions set forth in Section 7.03 below, the right to sublicense others to establish and operate ACE Stores in the Territory solely in compliance with operational procedures and standards prescribed by Company from time to time, and to supervise the operations of such sublicensed ACE Stores. 1.03 In order to maintain the goodwill and prestige which the Ace Marks enjoy with the public, the uniform high standards of quality of the Merchandise, and to maintain the integrity of the Ace Marks as indicators of product origin and uniform quality, Company further grants to Licensee, upon and subject to the terms and conditions set forth herein, the right to purchase Merchandise from Company for resale at the ACE Stores in the Territory. 1.04 In connection with the above rights, Company grants to Licensee the exclusive right and license to use certain ACE Marks , as well as exclusive access to Company's proprietary systems, operations manuals ("Operations Manuals"), standard forms and formats, and operational knowledge as Company shall, in its discretion, provide for use within the Territory. PARAGRAPH II FEES 2.01 In consideration of the license granted herein, Licensee shall pay to Company a non-refundable license fee in the amount of ____________________ United States Dollars ($_________________ U.S.) ("License Fee"). 2.02 In connection with the purchase of Merchandise for resale from ACE Stores in the Territory, Licensee agrees to pay Company as follows: (i) for Merchandise purchased from Company's warehouses,the Company's United States dealer cost for such merchandise, plus a three percent (3%) international handling charge; (ii) for Merchandise purchased directly from Company's vendors in the United States and billed through Company, the vendor invoice cost of such merchandise, plus a five percent (5%) international handling charge; (iii) for Merchandise purchased through Company's bulletin program (pooled merchandise), the cost of such merchandise, plus six percent (6%), plus a three percent (3%) international handling charge; and (iv) for Merchandise purchased directly from vendors outside the United Sates and billed through Company, the cost of such merchandise plus a handling charge to be determined by Company on a per purchase basis. It is mutually understood that the Company's handling charges may be changed by Company upon sixty (60) days prior written notice to Licensee. 2.03 Licensee shall also pay to Company a net royalty fee ("Royalty Fee") in an amount equal to__________________________percent (______%) of the annual gross retail revenues generated from the sale of home improvement products, tools, hardware, paint and related merchandise and products, from whatever source, provided to customers of the ACE Stores operated by Licensee in the Territory or other retail customers of Licensee towhom Licensee sells merchandise purchased from or through Company in the Territory including, without limitation, sales to customers over the internet ("Gross Retail Revenues"). For the purposes of this Subparagraph, the term "Gross Retail Revenues" shall exclude customer refunds, customer credits and all sales taxes and value added taxes actually collected by Licensee from customers and paid to any government authority in the Territory, which shall be the sole responsibility of Licensee. 2.04 Licensee shall also pay to Company a sublicensee royalty fee ("Sublicensee Royalty Fee") in an amount equal to __________________ percent (____%) of any royalty fee or similar fee collected by the Licensee from its sublicensees in the Territory generated by its sublicensees 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 the sublicensees or other retail customers of the sublicensees in the Territory including, without limitation, sales to customers over the internet. The minimum royalty fee to be charged by Licensee to its sublicensees shall not be less than ______ percent (__%). 2.05 Licensee shall also pay to Company a unit opening fee ("Unit Opening Fee") in an amount equal to_________________percent (___%) of the license fee, unit fee or similar fee collected by Licensee from its sublicensees. Licensee shall also pay to Company _________ percent ( __%) of the license fee, area development fee or similar fee collected by Licensee from any area or regional developer appointed by Licensee and approved by Company in the Territory 2.06 All Royalty Fees, Sublicensee Royalty Fees and Unit Opening Fees shall be due and payable to the Company, in United States Dollars, thirty (30) days after the end of each calendar quarter for the calendar quarter just ended. In the event that payment of the above fees in United States Dollars is not possible by application of law, Licensee shall be entitled to make payment in _____________ currency (____) at the currencyexchange rate reported in the Wall Street Journal, on the date the payment is transmitted, provided, however, that if the payment is transmitted after the date on which payment is due, the currency exchange rate used shall be the rate as of the day payment is transmitted or the date payment was due, whichever rate produces the larger amount in United States Dollars. 2.07 Licensee shall reimburse Company for any and all 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 during the initial six (6) years after execution of this Agreement. Commencing with the first day of the seventh year after execution of this Agreement, expenses for travel, food and lodging will be borne by the party requesting the service. 2.08 Licensee shall pay all amounts shown as currently due on Company's billing statements for purchases of merchandise, supplies and services made by Licensee with such promptness as shall enable Company to receive payment no later than the tenth (10th) day following the date of the statement (it being understood that all invoices for merchandise purchased on extended payment terms become currently due when other items billed are not paid when due), and pay a service charge 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. Company shall provide Licensee with credit terms of a minimum of 52 days from the date the warehouse invoice first appears on Licensee's billing statement for purchases of merchandise from the Company's warehouse (142 days for the warehouse portion of any opening stock order). All amounts becoming payable by Licensee pursuant to Company's billing statements shall be payable in United States currency. 2.09 Licensee shall pay to Company a fee of Five Thousand United States Dollars ($5,000 U.S.) for each additional store account identification number requested provided, however, that if the Ace Store for which such additional store account number meets the Company's Premier Hardlines Dealer (PHD) standards, then such fee shall be reduced to One Thousand Dollars ($1,000 U.S.). 2.10 All production and translation expenses will be paid by Licensee. PARAGRAPH III TERM & RENEWAL 3.01 This Agreement shall be effective and binding from the date of its execution for an initial term equal to ten(10) years from the date of this Agreement (the "Initial Term"). 3.02 Licensee shall have the right to renew this license at the expiration of the initial term of the license for two (2) additional terms of five (5) years each ("Renewal Terms"), provided that all of the following conditions have been fulfilled: a. Licensee has, during the entire term of this Agreement, complied with all the provisions hereof; b. Licensee has given Company written notice of its intent to renew the license not less than six (6) months nor more than twelve (12) months prior to expiration of the then current term; c. Licensee has satisfied all monetary obligations owed by it to Company and has paid these obligations in a timely manner as required herein throughout the term of this Agreement; d. Licensee has satisfied the performance requirements for number of square feet of retail space and dollar volume of merchandise purchases established in Paragraph 7.05 of this Agreement; and e. Upon renewal, and if requested by Company, Licensee has executed a new Agreement, which agreement shall supersede in all respects this Agreement, the terms of which shall be substantially the same as the terms of this Agreement but which may include, without limitation, a different Royalty Fee or other monetary terms. PARAGRAPH IV PROPRIETARY MARKS 4.01 Company grants Licensee exclusive license to use the ACE Marks in connection with the retail hardware services offered and performed by Licensee at the location(s) within the Territory, and in connection with the Merchandise purchased from Company for resale from the said location(s). Licensee and its sublicensees shall display an exterior store identification sign that shall comply with the identity standards and requirements set forth in the Operations Manual or the ACE Identity Standards Manual. 4.02 Company does not guarantee, warrant or offerany patent or trademark protection to Licensee on any of the products purchased by Licensee from Company, and Company shall not be obligated or liable in any way to indemnify Licensee for any actual or alleged violations of patent or patent rights, or trademark, service mark, trade name or other intellectual property rights arising from or in connection with the sale or use of any products, programs or services purchased from Company by Licensee or the exercise of any rights granted hereunder. 4.03 Licensee agrees to use the ACE Marks only in the form, manner, and logotype previously approved by Company in writing and to comply with all guidelines and instructions from time to time issued by Company with respect thereto. All use of the ACE Marks shall clearly and conspicuously disclose that the ACE Marks are owned by, or used under license from Company. 4.04 All services provided in connection with which the ACE Marks are used shall be of high quality as determined by Company, and otherwise in accordance with such specifications as Company may, from time to time, prescribe. 4.05 In no event shall the license herein granted be construed as authorizing Licensee to use any marks, trade names, slogans or logos of Company other than as specifically licensed hereunder. Licensee agrees that it shall not place or cause to be placed the names "ACE" or "ACE Hardware" on any merchandise without the Company's prior written consent. 4.06 Licensee agrees not to adapt or vary the ACE Marks or create or use any trademark, service marks, trade names, symbols or logos that are confusingly similar to those owned by Company, whether or not licensed hereunder. Licensee also agrees to at no time use the ACE Marks in association or conjunction with any trade name, trademark or service mark owned or registered by a competitor of Company. 4.07 Company expressly disclaims any and all liability to Licensee or to any third party with respect to any actual or alleged invalidity of the Mark or in connection with Licensee's use of the ACE Marks, or the use of the services furnished by Licensee in connection therewith. 4.08 Licensee acknowledges Company's ownership of the ACE Marks, and agrees that it will not do or permit any act to be done which may impair such ownership. Licensee agrees that all use of the ACE Marks by it shall inure to the benefit of, and be on behalf of, Company. Licensee agrees that it will never in any manner represent that it has an ownership interest in the ACE Marks, or contest the ownership of the ACE Marks by Company, or attack the validity of the license herein granted. Licensee agrees to execute, upon request, such documents as Company may deem necessary or desirable to acknowledge Company's ownership of the ACE Marks, or to register, retain, enforce or defend the ACE Marks. 4.09 Licensee agrees to notify Company of any unauthorized use of the ACE Marks by others, as promptly as such use may come to Licensee's attention. Company shall have the sole and exclusive right, but not the obligation, to register or renew the Ace Marks or to commence infringement, opposition or other proceedings with respect thereto. 4.10 Licensee agrees at no time to register or attempt to register, adopt or use, authorize, permit or condone the use by any other person or firm, of any name, word or mark which is similar to or likely to be confused with, any trade name, trademark or service mark belonging to or registered by Company, whether or not licensed hereunder, (it being understood and agreed that all variations or adaptations of any trademarks or service marks owned or registered by Company shall be the exclusive property of Company and that Company shall have the exclusive right to register the same and to license the use thereof). 4.11 In order to preserve the validity and integrity of the ACE Marks and copyrighted materials licensed herein and to assure that Licensee is properly employing the same in the operation of its ACE Stores, Company or its agents shall have the right of entry and inspection of Licensee's premises upon 10 days prior notice to Licensee and, additionally, shall have the right to observe the manner in which Licensee is conducting its operations and activities, to confer with Licensee's customers and employees and to inspect merchandise, products, reports, forms and documents and related data for test of content and evaluation purposes to make certain that the operations and activities are satisfactory and meet the Company's Premier Hardlines Dealer (P.H.D.) standards and other performance standards. Licensee shall also provide, upon Company's request, samples of advertising or other documents to confirm compliance with Company's standards and the terms of this Agreement. 4.12 Licensee shall not use the Marks in any advertising or any other form of promotion without appropriate registration symbols, or other designation of ownership and rights required by law in the country in which the ACE Stores is operated. PARAGRAPH V CONFIDENTIAL INFORMATION 5.01 Licensee acknowledges that its entire knowledge of the operation of an ACE Stores, including the knowledge or know-how regarding the specifications, standards and operating procedures of the Company services, is derived from information disclosed to Licensee by Company and that certain of such information is proprietary, confidential and a trade secret of Company. Licensee shall maintain the absolute confidentiality of all such proprietary information during and after the term of this Agreement and shall not use any such information in any other business or in any manner not specifically authorized or approved in writing by Company. 5.02 Licensee agrees to keep in strict confidence all Operations Manuals, warehouse checklists, CD Rom, computer software, videotapes, bulletins, vendor catalogs, price lists, order forms and other documents and information furnished by Company with respect to the merchandise, programs and services which are available from Company, and at no time to divulge or display any of the foregoing, other than in connection with Licensee's transactions with Company or its sublicensees or for the purpose of promoting Licensee's business. Licensee agrees to comply with all policy statements and guidelines communicated from time to time by Company with respect to any confidential information belonging to Company and at no time to authorize, permit or condone the use of any of the foregoing by any other person or firm. 5.03 Licensee shall divulge such confidential information only to the extent and only to such of its employees as must have access to it in order to operate the ACE Stores. Any and all information, knowledge and know-how including, but not limited to, specifications and standards concerning the operation of the ACE Stores and other data which Company provides in connection with the operation of the ACE Stores shall be deemed confidential for purposes of this Agreement, except information which Licensee can demonstrate lawfully came to its attention prior to disclosure thereof by Company; or which, at the time of disclosure by Company to Licensee, had lawfully become a part of the public domain, through publication or communication by others; which, after disclosure to Licensee by Company, lawfully becomes a part of the public domain through publication or communication by others, or which Licensee is required to be furnished to any government or public authority pursuant to any law or judicial order applicable to Licensee. 5.04 Licensee acknowledges and agrees that Company owns or is the licensee of various works of authorship used in connection with the operation of the ACE Stores including, but not limited to, all categories of works eligible for protection under the United States copyright law, all of which shall be deemed to be Copyrighted Works under this Agreement. Such Copyrighted Works include, but are not limited to, the Manual, advertisements, promotional materials, posters and signs, and may include all or part of the Marks, trade dress and other portions of the System. Company intends that all works of authorship related to the operation of ACE Stores which are created by Company in the future shall be owned by Company. 5.05 If Licensee develops any new program, project, work of art or other material in the course of operating the ACE Stores which incorporates the ACE marks or the ACE name and Company approves the use and sale of this service in the ACE Stores, this new program, project, work of art or other material shall automatically become the property of Company as though Company had developed the program, project, work of art or other material itself ("Work for Hire"). PARAGRAPH VI COMPANY'S OBLIGATIONS Company agrees to provide to Licensee the following: 6.01 Numerous proprietary Operations Manuals covering the functional areas within the ACE system. 6.02 The use of Company's pre-developed formats for promotional materials, annual surveys and other operations functions. 6.03 The use of Company's extensive promotional and educational videotapes and new videotaped titles as produced and developed. 6.04 The use of Company's consultants in connection with the operation of distribution centers and retail stores. 6.05 Training provided in various locations in the United States over the term of the Agreement: a. Up to _____ (__) weeks of distribution training; b. ____ (__) weeks of merchandising training; c. ___ (__) weeks of wholesale training; d. A minimum of ____ (__) weeks of retail training at Company's offices and/or distribution centers; e. Between ____ (__) and ___ (__) weeks of retail training at retail locations to be designated by Company. Company estimates that it will provide components of the above training to a maximum of _______ (__) persons. Any training beyond that set out above shall be evaluated and discussed by Company and Licensee upon request of the Licensee. Such additional training shall be provided on a fee basis. 6.06 On-site training in the Territory: a. ____ (_) weeks of in-store training will be provided by a Company employee at each of the first ____ (_) sites to be opened by Licensee in the Territory. b. At least ____ (_) weeks at the office selected for Licensee's new operation in the Territory, providing training by a Company employee in areas such as merchandising, quality control and reporting. c. A Company employee will oversee the entire project in the Territory for up to twelve (12) weeks. 6.07 Assistance in developing a business plan detailing how to develop ACE Stores in the Territory including analysis of human resources needs, marketing strategies, cash flow requirements, and other operational needs. 6.08 Assistance in developing a marketing plan to attract and qualify potential sublicensees. 6.09 Periodic on-going consultation and follow-up to ensure that Company's systems are being properly implemented. 6.10 On-going research and development into new suppliers, product lines, merchandising techniques and operational techniques, from a worldwide perspective. 6.11 Access to Company's existing and on-going advertising and promotional support, including the consultation services of the Company's advertising coordinator for at least one (1) week to assist in developing an advertising and marketing program. 6.12 Exclusive access to Company's on-going private label product lines in the Territory. 6.13 Exclusive access to Company's proprietary systems, standard forms and formats, and operational knowledge for use within the Territory. 6.14 An annual review of operations and a written report outlining operational deficiencies or defaults identified by such review together with a timetable for correcting such defaults which cure period in no event shall exceed six (6) months from receipt of Company's notice of such default. 6.15 The parties agree that all information provided by Company to Licensee or developed by Company in conjunction with the Licensee pursuant to this Paragraph VI shall be subject to the confidentiality obligations set forth in Paragraph V above. PARAGRAPH VII LICENSEE'S OBLIGATIONS 7.01 Licensee shall comply with all requirements set forth in this Agreement, the Operations Manual, the plans and reports set forth in sections 6.07, 6.08 and 6.14, and other written policies provided to Licensee by Company and as developed by the parties. Mandatory specifications, standards, operating procedures and rules prescribed from time to time by Company in the Manual or otherwise communicated to Licensee in writing, shall constitute provisions of this Agreement as if fully set forth herein. 7.02 Licensee shall comply with any and all laws, regulations and governmental orders of the United States of America, the several states, or the country or Territory in which Licensee's ACE Stores is located, which may be applicable to the sale and distribution of the products purchased by Licensee from Company or to the conduct of Licensee's business operations, as the case may be. Licensee agrees to order only such merchandise as may lawfully be resold without alterations in labeling or otherwise in the country or Territory in which Licensee's business is located and agrees to indemnify Company and hold it harmless from and against any and all claims, suits, proceedings, demands, actions, judgments, orders, fines or penalties arising in connection with the actual or alleged failure of such merchandise to comply with any laws, regulations or governmental requirements applicable to the sale or resale thereof. Licensee shall provide Company with copies of all licenses, permits and certificates required by applicable law for the operation of a business. 7.03 Licensee shall have the right to sublicense the ACE Marks: "ACE", "ACE Hardware", and "ACE Home Center" within the Territory, provided that Licensee satisfies the following obligations: a. Licensee personally operates ACE Stores in the Territory which shall total at least ___________________square feet in the aggregate. b. Licensee satisfies the minimum annual purchase requirements set forth in Section 7.05 below. Licensee shall advise Company of the address, telephone number and size of each ACE Store opened by Licensee and its sublicensees during the term of this Agreement, a list of which shall be attached hereto as Exhibit A. Exhibit A shall be modified as each new ACE Store is opened in the Territory. 7.04 Licensee shall, at its expense, provide the following services to sublicensed ACE Stores within the Territory: a. Licensee shall develop individual license agreements for use with individual sublicensees in the Territory. Licensee shall submit a draft of such license agreement to Company for Company's prior approval. Licensee shall enter into individual license agreements with individual sublicensees for the operation of individual ACE Stores within the Territory. b. Licensee shall train all individual sublicensees with a training program supplied by or approved by Company. At a minimum, Licensee shall provide individual sublicensees and their managers or employees with a minimum six (6) week retail training program prior to commencement of operations. c. Licensee shall make periodic visits to all individual sublicensed businesses located within the Territory, for the purposes of consultation, assistance and guidance of individual sublicensees in all aspects of the operation and management of the individual ACE Stores. Licensee's representatives who visit at the individual sublicensed businesses will prepare, for the benefit of individual sublicensees, Licensee and Company, written reports with respect to such visits outlining any suggested changes or improvements in the operations and detailing any defaults in such operations which become evident as a result of any such visit. A copy of each such written report shall be provided to both the individual sublicensees and Company. Licensee's agreements with its sublicensees shall also provide that the Company may make periodic visits to sublicensed ACE Stores to ensure that they are operating in accordance with the Company's standards. d. Licensee shall advise individual sublicensees within the Territory of problems arising out of the operation of the individual ACE Stores as disclosed by reports submitted to Licensee, or to Licensee's representative, by individual sublicensees or pursuant to inspections of the individual ACE Stores conducted by Licensee or Licensee's representative. e. Licensee shall take all necessary steps to enforce the terms of each individual sublicensee's Individual License Agreement and the provisions of the Manual. f. Licensee shall coordinate, administer, supervise and otherwise monitor advertising and promotional activities of individual sublicensees within the Territory. All expenses incurred by Licensee in performing its obligations under this Agreement shall be the sole responsibility of Licensee. Licensee agrees to expend such sums for office administration, travel, promotions, and advertising as may be reasonably required to develop and supervise the Territory. 7.05 Licensee agrees to purchase from Company the following minimum annual dollar volume purchases in United States currency during the Initial Term: Year One $ Year Six $ Year Two $ Year Seven $ Year Three $ Year Eight $ Year Four $ Year Nine $ Year Five $ Year Ten $ Licensee further agrees to develop ACE Stores (both Licensee owned and sublicensed) during the Initial Term of this Agreement consisting of a minimum of ________________ square feet of retail space as follows: Year One Year Six Year Two Year Seven Year Three Year Eight Year Four Year Nine Year Five Year Ten The Years referred to in this Section 7.05 refer to twelve (12) month periods commencing upon execution of this Agreement. The minimum annual performance requirements for the Renewal Term(s), if any, shall be mutually agreed upon by the Company and Licensee prior to the Initial Term, provided, however, that the minimum performance requirements for the Renewal Term(s) shall in no event be less than those required for Year Ten as set forth above. All of the ACE Stores opened by Licensee or its sublicensees in the Territory shall comply with the Company's Premier Hardlines Dealer (P.H.D.) standards. 7.06 Licensee shall purchase products from Company as follows: a. Licensee shall refrain from making any representation that a product purchased from Company can be used for a purpose or in a manner not intended by its manufacturer, and Licensee assumes full responsibility for, and hereby indemnifies Company and holds it harmless from and against any and all claims asserted against Company (a) which are based upon or arise out of any such representation or (b) which are based upon or arise out of any act performed by Licensee or its sublicensees to assist Licensee's customer in using a product purchased from Company, or to alter, install, repair or service any product purchased by Licensee from Company. b. Licensee shall indemnify Company and hold it harmless from and against any and all claims for (a) charges asserted against Company by another party for services provided by such party to Licensee or its sublicensees or for merchandise shipped by another party at Licensee's or its sublicensee's request and (b) damages demanded from Company in connection with any occurrence concerning which it is alleged that Licensee functioned as an agent of the Company. c. Licensee shall indemnify Company and hold it harmless for the amount of all attorneys' fees and expenses reasonably incurred by it in: (i) enforcing compliance by Licensee with the provisions of this Agreement or enforcing collection of any past due balances owing by Licensee on Company's billing statements, (ii) defending any claims asserted against Company which are based upon or arise out of any occurrence of the types described in Paragraphs IV, V, VII and XIII hereof or in attempting to avoid or mitigate any losses to Company in connection therewith, and (iii)in protecting any security interest of Company granted in any property of Licensee in the event that Licensee becomes a debtor in bankruptcy or insolvency proceedings. d. Licensee shall furnish Company with annual financial statements of their year end and financial statements, books and records and related information including purchase and sales figures, concerning Licensee's business on a quarterly basis or as shall reasonably be requested from time to time by Company in order to confirm Licensees compliance with the terms of this Agreement. Licensee shall require its sublicensees and area or regional developers to provide to Licensee and Company similar financial information on a quarterly basis including, without limitation, retail sales data and data regarding their cost of goods sold. e. Licensee shall provide Company with a standby irrevocable letter of credit, issued or confirmed by a United States bank approved by Company or with such other instruments or collateral as Company shall deem to be appropriate in order to secure the prompt payment of the indebtedness to it incurred by Licensee from time to time. Company agrees to, as long as Licensee is not in breach of this Agreement, extend credit to Licensee, in such amount as Company and its credit insurance company shall, in their sole discretion, deem reasonable for sales of Merchandise and services to Licensee. Company reserves the right to change the amount of credit extended to Licensee from time to time. f. All orders for merchandise, supplies and services placed by Licensee shall be subject to acceptance or nonacceptance by Company at its corporate headquarters, now located in Oak Brook, Illinois, United States of America. Company shall cause all items ordered by Licensee to be shipped to Licensee's designated receiving terminal in the United States for shipment by Licensee only to Licensee's location listed hereinabove. Title to all such merchandise and supplies shipped to Licensee shall pass to Licensee upon delivery to such receiving terminal. Licensee shall be responsible for and agrees to pay to Company all costs and charges related to the delivery of such items to said terminal, except in the case of prepaid shipments from Company's vendors. g. Licensee shall be solely responsible for and shall pay when due all import or export permit fees, customs duties and taxes of any nature mposed upon the sales made by Company to Licensee by the United States Government or the government of the country in which Licensee's place of business is located. Licensee shall fully indemnify Company for the amount of any such fees, duties and taxes, together with any interest or penalties thereon, which Company may be required to pay as a result of Licensee's failure to do so. h. At its sole discretion and notwithstanding any other provisions of this Agreement to the contrary, Company may limit or restrict the quantities or types of merchandise sold to Licensee hereunder in order to maintain an adequate inventory of merchandise to supply other dealers and licensees. i. Nothing herein shall be deemed in any way to limit the right of Licensee to determine the prices or terms at which products purchased through Company shall be resold by Licensee. It is expressly understood that Licensee may resell such products at any prices determined by Licensee, whether greater or lesser than any prices listed or suggested by Company. j. Company shall supply Licensee with such quantities of sales aids as Company, in its sole discretion, deems necessary or desirable. All such sales aids shall be in the English language. All copyrights which may be issued or applied for with respect to such sales aids or any translations thereof shall be issued or applied for in the name of Company, and shall be the sole property of Company. k. Licensee agrees to return no merchandise to Company without the written consent of Company first being obtained. l. Licensee agrees to use the Ace International Redistribution Center on the west coast of the United States in connection with the export by Licensee of all merchandise purchased from Company by Licensee for itself and for resale to its sublicensees . m. Company warrants that it has good and marketable title to the Merchandise. NO OTHER EXPRESS OR IMPLIED WARRANTY IS MADE BY COMPANY WITH RESPECT TO THE MERCHANDISE, SUCH BEING SUBJECT TO WARRANTIES MADE BY THEIR RESPECTIVE MANUFACTURERS. COMPANY'S TOTAL LIABILITY TO LICENSEE RESULTING FROM THE SALE OF MERCHANDISE SHALL NOT EXCEED THE PRICE PAID BY LICENSEE FOR SUCH MERCHANDISE. Notwithstanding the above, Company agrees that, to the extent available, it will make its standard defective goods policy available to Licensee. Licensee agrees not to return any merchandise to Company except in compliance with such policy. 7.07 If requested at any time by Company, and if reasonably available to Licensee in the Territory, Licensee shall maintain at Licensee's sole expense, with a reputable insurance carrier or carriers, a policy or policies of liability insurance with commercially reasonable coverage limits as agreed upon by Company and Licensee with respect to any claims for damages to property, personal injuries or wrongful death which are based upon or arise out of any occurrence concerning which it is alleged that Licensee functioned as an agent of Company, or that Licensee, Company, or either of them is otherwise liable therefor, except for claims based on or arising out of the sole negligence of Company. Company shall be named as an additional insured party in each such policy and Company shall be furnished with a certificate of insurance evidencing such coverages as are required herein. 7.08 Licensee and its sublicensees shall participate in the following advertising and marketing programs: a. Each calendar month Licensee shall spend an amount equal to_____ percent (__%) of Licensee's gross retail revenues on local advertising of Licensee's ACE Stores. Company shall provide guidelines for conducting such advertising. Licensee shall provide to Company an accounting as to its expenditures for local advertising and promotion on a quarterly basis. b. Licensee shall require each of its sublicensees to spend an amount equal to two percent (2%) of such sublicensee's gross retail revenues on advertising in the Territory. One percent (1%) of such amount shall be spent directly by the sublicensee on local advertising of its ACE Store(s). The other one percent (1%) shall be paid by the sublicensee to Licensee and shall be spent by Licensee on institutional advertising of the ACE Stores in the Territory. c. Licensee shall submit all advertising and promotional materials promoting the ACE Stores to Company for review and approval prior to use. Company shall notify Licensee in writing of its disapproval of any such advertising or promotional materials within thirty (30) business days of receipt of such materials, or fifteen (15) business days if received via telefax, from Licensee. If Company does not notify Licensee of its disapproval of any such advertising or promotional materials within said thirty (30) business day period, such advertising or promotional materials shall be deemed approved. All advertising conducted by the ACE Stores shall be conducted in a dignified manner and shall display the ACE Marks in the manner prescribed by Company. 7.09 Licensee shall not engage in the wholesale distribution of ACE branded products throughout the Territory to non-ACE Stores, home centers and other channels of distribution. 7.10 Licensee shall operate additional Ace Stores only if (i) Licensee is in compliance with all requirements and obligations of this Agreement and all other agreements between Company and Licensee, and (ii) Licensee is in compliance with all of its performance obligations of Paragraph 7.05. of this Agreement. 7.11 Licensee shall notify Company in writing within fifteen (15) days after it becomes aware of the commencement of any action, suit or proceeding and of the issuance of any order, writ, injunction, award or decree of any court, agency or other governmental instrumentality which may adversely affect the operation or financial condition of the ACE Stores. 7.12 Licensee may, with Company's prior written consent, develop additional ACE Stores within the Territory upon the same terms and conditions set forth in this Agreement including satisfaction of the performance schedule set forth in Paragraph 7.05 of this Agreement and, provided that Licensee has made application to Company and has timely fulfilled its obligations arising hereunder and under any other agreement between the parties and is in compliance with the terms of this Agreement for each ACE Stores Licensee owns and operates. PARAGRAPH VIII CONFIDENTIAL OPERATIONS MANUAL 8.01 Company shall provide to Licensee one (1) or more manuals containing specifications, standards, operating procedures and rules prescribed from time to time by Company relative to the operation of the ACE Stores. Licensee shall, at its expense, have the Manual translated into the primary language used in the Territory. The Manual, as used herein, shall refer to the entire series of manuals detailing the operation of the ACE Stores. Company shall have the right to add to and otherwise modify the Manual from time to time to reflect changes in the specifications, standards, operating procedures and rules prescribed by Company for the ACE Stores, provided that no such addition or modification shall alter Licensee's fundamental status and rights under this Agreement. 8.02 The Manual shall at all times remain the sole property of Company and shall promptly be returned upon the expiration or other termination of this Agreement. Licensee agrees and covenants that it shall not disclose, duplicate or otherwise use in an unauthorized manner any portion of the Manual. 8.03 The Manual contains proprietary information of Company and shall be kept confidential by Licensee both during the term of this Agreement and for a period of five (5) years subsequent to the expiration or termination of this Agreement. Licensee shall at all times ensure that its copy of the Manual be available at the ACE Stores premises in a current and up-to-date manner. PARAGRAPH IX COVENANTS NOT TO COMPETE 9.01 Licensee covenants that during the term of this Agreement and any renewal thereof, except as otherwise approved in writing by Company, Licensee shall not, whether alone, as a partner, officer, director, employee, consultant or holder of any beneficial interest in any such business or activity or any person or entity engaged in any such activity, either directly or indirectly, for itself or through, on behalf of or in conjunction with any person, persons, partnership, corporation or other legal entity: a. Divert or attempt to divert any business or customer of the business licensed hereunder to any competitor, by direct or indirect inducement or otherwise, or do or perform, directly or indirectly, any other act injurious or prejudicial to the goodwill associated with Company's ACE Marks and the ACE Stores. b. Employ or seek to employ any person who is at that time employed by Company or by any other licensee of Company or otherwise, directly or indirectly, induce or seek to induce such person to leave his or her employment with Company or its licensee, without first obtaining the Company's or its licensee's written consent. c. Own, maintain, engage in, or have any interest in any retail hardware business utilizing a similar format as the ACE Stores licensed hereunder. 9.02 Licensee shall not for a period of two (2) years following the expiration or termination of this Agreement (or the maximum period allowable by law, if less than two [2] years), either directly or indirectly, on behalf of itself or through any other entity, engage in offering or selling home improvement products, tools, hardware and merchandise and related products pursuant to a franchise, license, or similar agreement with any U.S. competitor of the Company. PARAGRAPH X DEFAULT AND TERMINATION 10.01 Either party may terminate this Agreement upon written notice to the other for any of the following events: a. the discovery of a material misrepresentation or omission made by a party which, if known to the other party at the time of execution of this Agreement, would cause such party to elect not to enter into this Agreement; b. the liquidation, bankruptcy or insolvency of one of the parties; c. the appointment of a trustee, receiver or liquidator for all or substantially all of the assets or the business of one of the parties; d. the attachment, sequestration, execution or seizure of all or substantially all of the assets of the parties, provided that such attachment, sequestration, execution or seizure is not discharged within thirty (30) days from the institution thereof; or e. subject to section 10.02 below, a breach by one of the parties of any terms or conditions of this Agreement, such breach not being rectified (assuming it is capable of being rectified within a reasonable period of time, not to exceed sixty (60) days, following the receipt of written notice from the non-breaching party. 10.02 This Agreement shall, at the option of Company, terminate automatically upon delivery of notice of termination to Licensee, if Licensee: a. Is convicted of or pleads no contest to a felony or other crime or offense that is likely to adversely affect the reputation of Company, Licensee or the ACE Stores. b. Makes any unauthorized use, disclosure or duplication of any portion of the Operations Manual or duplicates or discloses or makes any unauthorized use of any trade secret or confidential information provided to Licensee by Company. c. Abandons, fails or refuses to actively operate any of the ACE Stores for ten (10) business days in any twelve (12) month period provided (excluding the closing of the ACE Stores for holidays recognized in the Territory, or for reasons beyond the control of Licensee, such as natural disasters), or if any of the ACE Stores are not being operated for a purpose approved by Company or fails to relocate the premises of the ACE Stores to approved premises within an approved period of time following expiration or termination of the lease for the premises of the ACE Store. d. Surrenders or transfers control of the operation of the ACE Stores, makes or attempts to make an unauthorized direct or indirect assignment of the license or an ownership interest in Licensee or fails or refuses to assign the license or the interest in Licensee of a deceased or incapacitated controlling owner thereof as herein required. e. Submits to Company on two (2) or more separate occasions at any time during the term of this Agreement any reports or other data, information or supporting records which understate by more than two percent (2%) the Royalty Fees, amounts due for merchandise purchased by Company or any fees owed to Company for any period and Licensee is unable to demonstrate that such understatements resulted from inadvertent error. f. Materially misuses or makes any unauthorized use of any of the Marks or commits any other act which can reasonably be expected to materially impair the goodwill associated with any of the Marks. A "material misuse" shall mean any use of the Marks not previously approved in this Agreement or otherwise in writing by Company, or any use other than for the promotion of the ACE Stores. g. Materially misuses or makes any unauthorized use of the ACE International Computer System. A "material misuse" shall mean any use of the ACE International Computer System not previously approved in this Agreement or otherwise in writing by Company, or any use other than for the promotion of the ACE Stores. h. Fails on two (2) or more separate occasions within any period of twelve (12) consecutive months to submit when due reports or other information or supporting records, to pay when due the Royalty Fees, amounts due for purchases from Company or other payments due to Company, or otherwise fails to comply with this Agreement, whether or not such failures to comply are corrected after notice thereof is delivered to Licensee. i. Fails to make expenditures for advertising as prescribed in Paragraph 7.08. of this Agreement. j. Fails to comply with the performance requirements in accordance with the Schedule agreed upon by the parties as prescribed in Paragraph 7.05 of this Agreement. k. Fails or refuses to make payments of any amounts due Company for Royalty Fees, purchases from Company or any other amounts due to Company, and does not correct such failure or refusal within fifteen (15) days after written notice of such failure is delivered to Licensee; or l. Fails or refuses to comply with any other provision of this Agreement, or any mandatory specification, standard or operating procedure prescribed in the Manual as developed by the parties or as otherwise agreed to by the parties in writing, and does not correct such failure within six (6) months or provide proof acceptable to Company that Licensee has made all efforts as agreed upon by the parties to correct such failure and will continue to make efforts to cure until a cure is effected as agreed upon by the parties, if such failure cannot be corrected within ninety (90) days after written notice of such failure to comply is delivered to Licensee. 10.03 If Licensee is a corporation, unless Licensee first obtain's Company's prior written approval, this Agreement shall automatically terminate upon the consummation of any sale or transfer of all of the shares of capital stock (both voting and non-voting) of such corporation held by the holder or holders of fifty percent (50%) or more of its outstanding voting stock. PARAGRAPH XI RIGHTS AND DUTIES OF THE PARTIES UPON EXPIRATION OR TERMINATION 11.01 Upon termination or expiration, this Agreement and all rights granted hereunder to Licensee shall forthwith terminate, and: a. Licensee shall immediately cease to operate the ACE Stores under this Agreement and shall not thereafter, directly or indirectly, represent to the public or hold itself out as a present or former licensee of Company. b. Licensee shall immediately and permanently cease to use, by advertising or in any other manner whatsoever, any confidential methods, procedures and techniques associated with the Marks and any distinctive forms, slogans, signs, symbols, logos or devices associated with the Marks. In particular, Licensee shall cease to use, without limitation, all signs, advertising materials, stationery, forms and any other article which displays the ACE Marks. c. Licensee shall take such action as may be necessary to cancel or assign to Company or Company's designee, at Company's option, any assumed name or equivalent registration filed with governmental authorities which contains the name "ACE" or any of the ACE Marks and Licensee shall furnish Company with evidence satisfactory to Company of compliance with this obligation within thirty (30) days after termination or expiration of this Agreement. d. In the event Licensee continues to operate or subsequently begins to operate any other business, Licensee shall not use any reproduction, counterfeit, copy or colorable imitation of the ACE Marks either in connection with such other business or the promotion thereof, which is likely to cause confusion, mistake or deception, or which is likely to dilute Company's exclusive rights in and to the ACE Marks. This Paragraph XI. is not intended as an approval of Licensee's right to operate other businesses and in no way is it intended to contradict Paragraph IX. of this Agreement. Licensee shall not utilize any designation of origin or description or representation which falsely suggests or represents an association or connection with Company so as to constitute unfair competition. Licensee shall make such modifications or alterations to the premises of the ACE Stores immediately upon termination or expiration of this Agreement as may be necessary to prevent any association between Company and any business thereon subsequently operated by Licensee or others, and shall make such specific additional changes thereto as Company may reasonably request for that purpose. In the event Licensee fails or refuses to comply with the requirements of this Paragraph XI., Company shall have the right to enter upon the premises where Licensee's ACE Stores were located, without incurring any liability to Licensee, for the purpose of making or causing to be made such changes as may be required at the expense of Licensee, which expense Licensee shall pay upon demand. e. Licensee shall promptly pay all sums owing to Company as agreed upon by the parties. In the event of termination for any default of Licensee, such sums shall include but not be limited to, all damages, costs, expenses, including reasonable attorneys' fees, license fees and lost future royalties incurred by Company as a result of the default. f. The losing party shall pay to the prevailing party all damages, costs and expenses, including reasonable attorneys' fees, incurred subsequent to the termination or expiration of the license herein granted in obtaining injunctive or other relief for the enforcement of any provisions of this Paragraph XI. or Paragraph IX. g. Licensee shall immediately turn over to Company all Manuals, customer lists, records, files, instructions, brochures, agreements, disclosure statements and any and all other materials provided by Company to Licensee relating to the operation of the ACE Stores (all of which are acknowledged to be Company's property). h. Company shall acquire all right, title and interest in and to any sign or sign faces bearing the Marks. Licensee acknowledges Company's right to have access to the premises of the ACE Stores should Company elect to take possession of any said sign or sign faces bearing the ACE Marks. Removal shall be at Licensee's expense. i. Licensee shall comply with the covenants contained in Paragraph IX. of this Agreement. j. Licensee shall, at Company's request in Company's sole discretion, assign to Company or Company's nominee, without charge, all of Licensee's rights under its agreements with any area or regional developer or any sublicensee, provided that the foregoing shall not apply in the event of termination by Licensee for a material breach by Company. 11.02 All obligations of Company and Licensee which expressly or by their nature survive the expiration or termination of this Agreement shall continue in full force and effect subsequent to and notwithstanding its expiration or termination and until they are satisfied or by their nature expire. PARAGRAPH XII TRANSFERABILITY OF INTEREST 12.01 This Agreement and all rights hereunder may be assigned and transferred by Company and, if so, shall be binding upon and inure to the benefit of Company's successors and assigns. 12.02 Licensee agrees to notify Company in writing: a. prior to or concurrently with the effective date thereof, as to any change in the legal form of ownership of Licensee (such as, for example, a change from individual or partnership form to corporate form, or vice versa), it being understood that no such change will operate to release from liability to Company any party previously responsible for Licensee's obligations hereunder without the written consent of Company, b. as promptly as feasible, as to the death of any partner having an interest in any partnership by which Licensee is owned or the death of any stockholder owning 50% or more of the voting stock of Licensee if Licensee is incorporated, or c. not less than thirty (30) days prior to the closing of the transaction, as to the name and address of each proposed buyer or transferee in any proposed sale, assignment or transfer of fifty (50%) or more of the ownership interest(s) of Licensee or of the business operated at the location of Licensee's business indicated hereinabove or of all of the capital stock (both voting and non-voting) owned by the holder(s) in a corporation owning the business operated at such location if fifty percent (50%) or more of the outstanding voting stock of such corporation is owned by such holder(s). 12.03 Licensee shall not transfer or assign this Agreement or any part hereof without Company's written consent. Licensee shall promptly advise Company in writing of any relocation of its place of business or the closing of any existing place of business. PARAGRAPH XIII NO AGENCY 13.01 Licensee shall not have authority to represent Company in Licensee's country, the Territory or elsewhere as an agent, nor to bind Company to any contract, representation, understanding, act or deed concerning Company or any products sold by it. Neither the making of this Agreement nor the performance of any part of the provisions hereof shall be construed to constitute Licensee as an agent or representative of Company for any purpose nor shall this Agreement be deemed to establish a joint venture or partnership between the parties. All sales of merchandise by Licensee shall be for its own account, it being understood that Licensee is an independent business reselling products which are purchased from Company. 13.02 Company shall not, by virtue of any approvals, advice or services, provide to Licensee, assume responsibility or liability to Licensee or any third parties to which Company would not otherwise be subject. PARAGRAPH XIV MISCELLANEOUS 14.01 The prevailing party shall be entitled to recover reasonable attorneys' fees, experts' fees, court costs and all other expenses of litigation in any action instituted against the other party in order to secure or protect its rights under this Agreement or to enforce terms hereof. 14.02 This Agreement, any Exhibit attached hereto and the documents referred to herein, shall be construed together and constitute the entire, full and complete agreement between Company and Licensee concerning the subject matter hereof, and supersede all prior agreements. This Paragraph XIV shall not be orally modified. No other representation has induced Licensee to execute this Agreement and there are no representations, inducements, promises or agreements, oral or otherwise, between the parties not embodied herein, which are of any force or effect with reference to this Agreement or otherwise. No amendment, change or variance from this Agreement shall be binding on either party unless executed in writing by both parties. 14.03 The Recitals set forth in this Agreement are specifically incorporated into the terms of this Agreement and constitute a part of this Agreement. 14.04 The signing of this Agreement by Licensee constitutes an application only and this Agreement shall not be effective unless and until it has been duly accepted and countersigned by Company at its principal office in Illinois, United States of America not later than thirty (30) days after the date of signing by Licensee. All orders for merchandise, supplies and services placed by Licensee pursuant to this Agreement shall be transmitted to Company at said office and Licensee shall be deemed to have consented and agreed that: a. all provisions of this Agreement shall be interpreted and construed in accordance with the substantive laws of the State of Illinois, United States of America; and b. all controversies, disputes or claims arising between Company and Licensee arising out of or related to the relationship of the parties hereto, this Agreement or any provision hereof, or any related agreement, shall be submitted for arbitration to be administered by the office of the American Arbitration Association ("AAA") in Chicago, Illinois, U.S.A. on demand of either party. Such arbitration proceedings shall be conducted in Chicago as herein provided before a panel of three (3) neutral arbitrators and, except as otherwise provided in this Agreement, shall be conducted in accordance with the then current commercial arbitration rules of the AAA for international arbitrations. The arbitrators shall have the right to award or include in their award any relief which they deem proper in the circumstances, including without limitation, money damages (with interest on unpaid amounts from date due), specific performance, injunctive relief, legal fees and costs, but shall not have the authority to award exemplary, punitive or special damages. The award and decision of the arbitrators shall be conclusive and binding upon all parties hereto and judgment upon the award may be entered in any court of competent jurisdiction, including courts in the United States of America and the Territory. The parties further agree to be bound by the provisions of any applicable limitation on the period of time in which claims must be brought under applicable law or this Agreement, whichever is less. The parties further agree that in connection with any such arbitration proceeding, each shall submit or file any claim which would constitute a compulsory counterclaim (as defined by Rule 13 of the United States Federal Rules of Civil Procedure) within the same proceeding as the claim to which it relates. Any such claim which is not submitted or filed as described above shall be barred. c. any suit brought by Company against Licensee to enforce any provision of this Agreement or seeking any relief in connection with or arising out of the relationship between Company and Licensee may be instituted in an appropriate court in the State of Illinois, United States of America. 14.05 Except as otherwise specifically provided, all notices required or permitted to be given hereunder by one party to the other party shall be effective if personally delivered, airmailed or sent by telex or facsimile to the addresses set forth hereinabove or to such other address as either party designates to the other in writing for the receipt of notices hereunder, with receipt deemed within fourteen (14) days after airmailing or within two (2) days after sending by telex or facsimile. 14.06 The English version of this Agreement shall govern in the event of any variations between the English version and any translation hereof and shall be used exclusively in any arbitration, legal proceeding or suit hereunder. 14.07 The failure of either party to enforce its rights under any provision hereof shall not be deemed a waiver of such rights for purposes of future enforcement. No modification of this Agreement or any waiver of rights hereunder shall be of any force and effect unless in writing and signed by the party against whom enforcement of such waiver or modification is sought. 14.08 The terms and conditions set forth in any purchase order or other document shall be effective only to the extent that the same shall not be inconsistent with the terms and conditions hereof. 14.09 Any provision or provisions hereof which contravene the law of any state or country in which this Agreement is effective shall, in such state or country, to the extent of such contravention of law, be deemed separable and shall not impair the validity of any other term, condition orprovision hereof. 14.10 a. Company represents and warrants that: (i) it is a corporation duly incorporated and existing under the laws of the State of Delaware, the United States of America; (ii) it has all necessary licenses to carry out its business in the United Sates of America; and (iii)this Agreement constitutes legally valid and binding obligations of Company, enforceable against Company in accordance with its terms, and the person or persons signing this agreement on behalf of Company are duly authorized to do so. b. Licensee represents and warrants that: (i) it is a corporation duly incorporated and existing under the laws of ___________; (ii) it has all necessary licenses to carry out its business in the Territory; and (iii)this Agreement constitutes legally valid and binding obligations of Licensee, enforceable against Licensee in accordance with its terms, and the person or persons signing this agreement on behalf of Licensee are duly authorized to do so. IN WITNESS WHEREOF, this Agreement has been executed by the parties on this _________ day of __________________, 20__. COMPANY: LICENSEE: ACE HARDWARE CORPORATION _____________________________________ By: By: Title: Title: EXHIBIT A TO THE LICENSE AGREEMENT ACE STORE LOCATIONS Address: Address: Telephone No.: Telephone No.: Commencement Date Commencement Date Of Operations: Of Operations: Number of Square Number of Square Feet: Feet: Address: Address: Telephone No.: Telephone No.: Commencement Date Commencement Date Of Operations: Of Operations: Number of Square Number of Square Feet: Feet: Address: Address: Telephone No.: Telephone No.: Commencement Date Commencement Date Of Operations: Of Operations: Number of Square Number of Square Feet: Feet: Address: Address: Telephone No.: Telephone No.: Commencement Date Commencement Date Of Operations: Of Operations: Number of Square Number of Square Feet: Feet: EX-10 11 0011.txt AHC DIRECTORS DEFERRAL OPTION PLAN 10-U ACE HARDWARE CORPORATION DIRECTORS' DEFERRAL OPTION PLAN Effective January 1, 2001 ACE HARDWARE CORPORATION DIRECTORS' DEFERRAL OPTION PLAN 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, 2001 through 2006. 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, 2001. 2.12 "Interest Yield" means either the Normal 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) "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 2001-2006, 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. 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. The Deferred Benefit Account shall continue to be credited with interest on each Determination Date, 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. Upon the written request by a Participant, filed with the Committee at least three hundred sixty-seven (367) days prior to his/her Retirement Date, the Committee may, in its sole discretion, allow a Participant to change the number of years installment payments are paid. Any change in the number of years installment payments are to be paid shall apply to all installment payments due a Participant and still must be paid over no fewer than five (5) years and no greater than twenty (20) years. 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 adopted this Ace Hardware Corporation Directors' Deferral Option Plan effective January 1, 2001. Ace Hardware Corporation By: DAVID F. HODNIK Its: President and CEO EX-10 12 0012.txt INTERNATIONAL RETAIL MERCHANT AGREEMENTS 10-A-2 EXHIBIT 10-a-2 ACE HARDWARE CORPORATION INTERNATIONAL RETAIL MERCHANT 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 60521,60523, 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 "International Retail Merchant") 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 International Retail Merchant agree as follows: 1. Concurrently with the submission of this Agreement for acceptance by Company, International Retail Merchant shall include payment to Company in the amount of U.S. $5,000.00 as an application processing fee for each retail business location set forth on Exhibit A. Upon acceptance of this Agreement by Company, the said fee becomes non-refundable. If Company elects not to accept this Agreement, then the said fee will be refunded to International Retail Merchant. 2. As of the date of acceptance by Company hereof, Company grants to International Retail Merchant, upon and subject to the terms and conditions set forth herein, the right to purchase from Company for resale at retail only from International Retail Merchant 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"Ace" or "Ace Hardware". The minimum volume of merchandise that must be purchased by International Retail Merchant from Company hereunder shall be U.S. $200,000.00, exclusive of all handling charges, per year, based upon the anniversary date of this Agreement. 3. All amounts becoming payable by International Retail Merchant pursuant to Company's billing statements shall be payable in United States currency. 4. International Retail Merchant shall not be required to pay to Company any charges or assessments for any national advertising program sponsored or established by Company for advertising in the United States of America, its territories or possessions. 5. The price of merchandise sold to International Retail Merchant hereunder shall be the regular dealer cost of such merchandise, plus the regular dealer handling charge then in effect (hereinafter the "Subtotal"), plus any International Retail Merchant handling charge in effect from time to time.the amount of three per cent (3%) of the Subtotal. It is mutually understood and agreed that the regular dealer cost of merchandise and the regular dealer handling charge may be changed by Company at any time during the term hereof, but the International Retail Merchant handling charge set forth herein may be changed by Company only upon sixty (60) days advance written notice to International Retail Merchant. 6. International Retail Merchant agrees to pay all amounts shown as currently due on Company's billing statements for purchases of merchandise, supplies and services made by International Retail Merchant 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. 7. International Retail Merchant 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 International Retail Merchant from time to time. 8. All orders for merchandise, supplies and services placed by International Retail Merchant 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 International Retail Merchant to be shipped to International Retail Merchant's designated receiving terminal in the United States for shipment by International Retail Merchant only to International Retail Merchant location listed hereinabove. Title to all such merchandise and supplies shipped to International Retail Merchant shall pass to International Retail Merchant upon delivery to such receiving terminal. International Retail Merchant shall be responsible for and agrees to pay to Company all costs and charges related to the delivery of such items to said terminal. 9. International Retail Merchant 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 International Retail Merchant by the United States Government or the government of the Country in which International Retail Merchant's place of business is located. International Retail Merchant 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. 10. 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 International Retail Merchant hereunder. 11. 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. International Retail Merchant 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. 12. Nothing herein shall be deemed in any way to limit the right of International Retail Merchant to determine the prices or terms at which products purchased through Company shall be resold by International Retail Merchant. It is expressly understood that International Retail Merchant may resell such products at any prices determined by International Retail Merchant, whether greater or lesser than any prices listed or suggested by Company. 13. International Retail Merchant 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 International Retail Merchant from Company, or to the conduct of International Retail Merchant's business operations, as the case may be. International Retail Merchant 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. 14. Company shall supply International Retail Merchant 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. 15. International Retail Merchant 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 International Retail Merchant 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 International Retail Merchant shall be for its own account, it being understood that International Retail Merchant is an independent business reselling products which are purchased from Company. 16. International Retail Merchant agrees to return no merchandise to Company without the written consent of Company first being obtained. 17. (a) Company hereby grants International Retail Merchant a non-exclusive, royalty-free license to use the service marks "ACE" and "ACE HARDWARE""Ace" and "Ace Hardware" (hereinafter "the Mark") in connection with the retail hardware services offered and performed by International Retail Merchant 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 International Retail Merchant 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 International Retail Merchant on any of the products purchased by International Retail Merchant from Company, and Company shall not be obligated or liable in any way to indemnify International Retail Merchant 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 International Retail Merchant or the exercise of any rights granted hereunder. (c) International Retail Merchant 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 International Retail Merchant to use any marks, trade names, slogans or logos of Company other than as specifically licensed hereunder. International Retail Merchant agrees that it shall not place or cause to be placed the names "ACE" or "ACE"Ace" or "Ace Hardware" on any merchandise without the Company's prior written consent. (f) International Retail Merchant 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. International Retail Merchant 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 International Retail Merchant or to any third party and International Retail Merchant 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 International Retail Merchant in connection therewith. 18. International Retail Merchant 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. International Retail Merchant agrees that all use of the Mark by it shall inure to the benefit of, and be on behalf of, Company. International Retail Merchant 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. International Retail Merchant 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) International Retail Merchant 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) International Retail Merchant 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). 19. International Retail Merchant 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. International Retail Merchant 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. 20. Upon the termination hereof, International Retail Merchant 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. International Retail Merchant 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. 21. International Retail Merchant 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 International Retail Merchant 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 International Retail Merchant 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 International Retail Merchant from Company. 22. International Retail Merchant 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 International Retail Merchant 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 International Retail Merchant functioned as an agent of the Company. 23. International Retail Merchant 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 International Retail Merchant with the provisions of this Agreement or enforcing collection of any past due balances owing by International Retail Merchant 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 International Retail Merchant in the event that International Retail Merchant becomes a debtor in bankruptcy or insolvency proceedings. 24. International Retail Merchant 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 International Retail Merchant (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 International Retail Merchant is owned or the death of any stockholder owning 50% or more of the voting stock of International Retail Merchant if International Retail Merchant is incorporated, or (c) not less then 30 days prior to the closing of the trans- action, 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 International Retail Merchant 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). 25. International Retail Merchant agrees to furnish Company with annual financial statement of their year end and such current financial statements and related information, including purchase and sales figures, concerning International Retail Merchant's business as shall reasonably be requested from time to time by Company. 26. If requested at any time by Company, International Retail Merchant 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 International Retail Merchant functioned as an agent of Company, or that International Retail Merchant, 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. 27. International Retail Merchant 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. 28. This Agreement shall be for an initial term of one (1) 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 International Retail Merchant in the event that any payment owing to Company for merchandise or services supplied to International Retail Merchant 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 International Retail Merchant at any time after International Retail Merchant 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 International Retail Merchant 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. 29. Notwithstanding anything herein to the contrary, if International Retail Merchant is an individual sole proprietor, this Agreement shall automatically terminate upon the death of such individual. If International Retail Merchant 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. 30. If International Retail Merchant 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. 31. 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 International Retail Merchant. 36. 32. 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 International Retail Merchant 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 International Retail Merchant does not consent to be bound by such amendment, then International Retail Merchant 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. 33. The signing of this Agreement by International Retail Merchant 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 International Retail Merchant pursuant to this Agreement shall be transmitted to Company at said office, and International Retail Merchant 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 International Retail Merchant to enforce any provision of this Agreement or seeking any relief in connection with or arising out of the relationship between Company and International Retail Merchant may be instituted in an appropriate state or federal court in the State of Illinois and International Retail Merchant hereby expressly submits to the jurisdiction of said court for purposes of the enforcement of this Agreement and all matters related to this Agreement. 34. Neither this Agreement nor any interest of International Retail Merchant herein shall be assignable or subject to transfer or encumbrance by International Retail Merchant at any time without Company's prior written consent. 35. 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. 36. 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. 37. 36. 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. 38. 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. 39. 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 _________________________, 20_____, by the person(s) signing it for International Retail Merchant, whose authority to sign shall be deemed to have been duly authorized by International Retail Merchant. International Retail Merchant: _____________________________________ [Corporate or Partnership Name] (COMPANY SEAL) By:__________________________________ Printed name:________________________ Title:_______________________________ (If International Retail Merchant is a corporation, the corporate name should be written hereon followed by the signature and title of an appropriate officer. If International Retail Merchant 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 ________________, 20____. By:________________________ ________________________ (Title of Officer) (CORPORATE SEAL) ACE HARDWARE CORPORATION INTERNATIONAL RETAIL MERCHANT AGREEMENT EXHIBIT A The following is(are) the retail business location(s) applicable to the International Retail Merchant Agreement: DATE OF NAME OF BUSINESS ADDRESS (LOCATION) AFFILIATION 1. ___________________________________________________________________ ____________________ 2. ___________________________________________________________________ ____________________ 3. ___________________________________________________________________ ____________________ 4. ___________________________________________________________________ ____________________ 5. ___________________________________________________________________ ____________________ International Retail Merchant: ________________________________ _________ [Corporate or Partnership Name] (COMPANY SEAL) By:____________________________________(COMPANY SEAL) By:_____________________________ __________ Printed Name:______________________________ Title:__________________________ ___________ (If International Retail Merchant is a corporation, the corporate name should be written hereon followed by the signature and title of an appropriate officer. If International Retail Merchant 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 __________________, 20____. By:___________________________________ ___________________________________ (Title of Officer) (CORPORATE SEAL) EX-10 13 0013.txt RESTATED OFFICER INCENTIVE PLAN 10-A-10 SECOND AMENDMENT TO ACE HARDWARE CORPORATION RESTATED OFFICER INCENTIVE PLAN Pursuant to Section 5 of the Ace Hardware Corporation Restated Officer Incentive Plan ("The Plan"), effective January 1, 2001, the Company hereby amends the Plan as follows: 1. Exhibit A is modified and restated to set forth the participants and tiers for the ST Plan and VA Plan for plan years commencing January 1, 2001 as set forth on Exhibit A (2001). 2. Exhibits B and BB are modified and restated to set forth the multiplier matrix for the team portion of the short term goal, and the method of calculation for the retail portion of the short term goal, as set forth on Exhibit B (2001) and Exhibit BB (2001), respectively. 3. Exhibit C is modified and restated and presents a financial model which supports the VA Plan, as set forth in Exhibit C (2001). 4. Section 7 shall be amended by deleting the third and fourth paragraph of Subsection Performance Measure as amended by the First Amendment and substituting the following: Following is a presentation of ratios in effect as of January 1, 2001 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. -Permanent Sharing Ratio is 4.63 percent. 5. This Second Amendment is effective January 1, 2001. Except as specifically amended herein, the Plan and First Amendment to the Plan shall remain in full force and effect as prior to this Second Amendment. Dated: December 6, 2000 Ace Hardware Corporation a Delaware corporation By:__HOWARD JUNG___________________ Chairman of the Board of Directors and By:__DAVID F. HODNIK_______________ President and CEO EX-10 14 0014.txt REVOLVING CREDIT FACILITY AGREEMENT 10-A-11 $175,000,000 REVOLVING CREDIT FACILITY AGREEMENT among ACE HARDWARE CORPORATION, as Company, THE NORTHERN TRUST COMPANY, as Administrative Agent, BANK OF AMERICA, NATIONAL ASSOCIATION, as Syndication Agent, SUNTRUST BANK, as Documentation Agent, and the Banks named herein May 2, 2000 TABLE OF CONTENTS Page Section 1. Definitions and Accounting 1 1.1. Defined Terms 1 1.2. Accounting 11 Section 2. The Loans 11 2.1. The Revolving Loans 11 2.2. The Bid Loans 12 2.3. Notice of Borrowings 14 2.4. Changes of Commitments 14 2.5. Fees 17 2.6. Lending Offices 18 2.7. Several Obligations; Remedies Independent 18 2.8. Loan Accounts 18 2.9. Voluntary Conversion or Continuation of Loans 18 Section 3. Payments of Principal and Interest 19 3.1. Repayment of Loans 19 3.2. Prepayments of Loans 19 3.3. Interest 19 Section 4. Payments; Pro Rata Treatment; Computations; Etc. 20 4.1. Payments 20 4.2. Pro Rata Treatment 20 4.3. Computations 21 4.4. Minimum Amounts 21 4.5. Certain Notices 22 4.6. Non-Receipt of Funds by the Agent 23 4.7. Set-off and Sharing of Payments, Etc. 23 Section 5. Yield, Capital Maintenance and Taxes Provisions 24 5.1. Additional Costs 24 5.2. Limitation on Types of Loans 25 5.3. Illegality 26 5.4. Treatment of Affected Loans 26 5.5. Compensation 27 5.6. Taxes 27 5.7. Change of Applicable Lending Office. 29 5.8. Substitution of Bank 29 Section 6. Conditions Precedent 29 6.1. Initial Loan 29 6.2. Initial and Subsequent Loans 30 6.3. Bid Loans 30 Section 7. Representations and Warranties 30 7.1. Corporate Existence and Related Matters 30 7.2. Financial Condition 30 7.3. Litigation 31 7.4. No Breach 31 7.5. Corporate Power and Action; Binding Effect 31 7.6. Approvals 31 7.7. Margin Stock 31 7.8. ERISA 32 7.9. Taxes 32 7.10. Investment Company Act 33 7.11. Credit Agreements 33 7.12. Environmental Laws 33 7.13. Subsidiaries, Etc. 33 7.14. Liens 34 7.15. Subordination. 34 7.16. Compliance with Laws. 34 Section 8. Covenants 34 8.1. Financial Statements and other Information 34 8.2. Litigation 35 8.3. Corporate Existence, Etc. 36 8.4. Insurance 36 8.5. Business Combinations and Asset Dispositions 36 8.6. Limitation on Liens 38 8.7. Acquisitions 38 8.8. Lines of Business 39 8.9. No Change in Subordination Terms, etc. 39 8.10. Use of Proceeds 39 8.11. Financial Covenants. 39 8.12. Restrictions on Transactions with Affiliates 39 8.13. Issuance of Stock by Subsidiaries 40 8.14. Compliance with ERISA 40 8.15. Cooperative Status 40 Section 9. Events of Default 40 Section 10. The Agent 42 10.1. Appointment, Powers and Immunities 42 10.2. Reliance by Agent 43 10.3. Defaults 43 10.4. Rights as a Bank 43 10.5. Indemnification 43 10.6. Non-Reliance on Agent and other Banks 44 10.7. Failure to Act 44 10.8. Resignation or Removal of Agent 44 10.9. Documentation and Syndication Agent 45 Section 11. Miscellaneous 45 11.1. Waiver 45 11.2. Notices 45 11.3. Expenses, Etc. 45 11.4. Amendments, Etc. 46 11.5. Successors and Assigns 46 11.6. Assignments and Participations 46 11.7. Survival 48 11.8. Captions 48 11.9. Counterparts 48 11.10. Confidentiality 48 11.11. Governing Law 48 11.12. Waiver of Jury Trial 48 11.13. No Fiduciary Relationship 48 11.14. Consent To Jurisdiction 49 11.15. Company Indemnification 49 Schedule 1 - Commitments and Information Concerning Banks Schedule 2 - Authorized Officers of the Company Schedule 3 - Existing Debt, Credit and Refinanced Debt Agreements Schedule 4 - Subsidiaries Schedule 5 - Subordination Provisions Schedule 6 - Schedule of Liens Schedule 7 - ERISA Matters Exhibit A - Form of Revolving Note Exhibit B - Form of Bid Loan Note Exhibit C - Form of Request for Bid Loans Exhibit D - Form of Offer to Make Bid Loans Exhibit E - Form of Notice of Eurodollar or Alternate Base Borrowing Exhibit F - Form of Notice of Conversion or Continuation Exhibit G - Form of Opinion of Counsel to the Company Exhibit H - Form of Accession Agreement Exhibit I - Form of Assignment Agreement REVOLVING CREDIT FACILITY AGREEMENT ----------------------------------- REVOLVING CREDIT FACILITY AGREEMENT ("Agreement") dated as of May 2, 2000 among ACE HARDWARE CORPORATION, a Delaware corporation (the "Company"), each of the financial institutions named under the caption "Banks" on the signature pages hereof that is a signatory hereto (individually, a "Bank" and, collectively, the "Banks"), THE NORTHERN TRUST COMPANY, as administrative agent for the Banks (in such capacity, together with its successors in such capacity, the "Agent"), BANK OF AMERICA, NATIONAL ASSOCIATION, as the Syndication Agent and SUNTRUST BANK, as the Documentation Agent. WHEREAS, the Company has requested that the Banks provide a five-year revolving credit facility in an aggregate amount of $175,000,000 at any time outstanding, and the Banks are willing to make such loans upon the terms hereof. NOW, THEREFORE, the parties hereto agree as follows: Section 1. Definitions and Accounting. 1.1. Defined Terms. As used herein, the following terms shall have the following meanings (terms defined in this Section 1.1 or in other provisions of this Agreement in the singular to have correlative meanings when used in the plural and vice versa): "Accession Agreement" shall have the meaning attributed to that term in Section 2.4(a)(v) hereto. "Adjusted Net Earnings" shall mean Consolidated Net Earnings plus amounts deducted in the calculation thereof for depreciation, amortization, interest expense, and lease expense, all determined in accordance with GAAP. "Affiliate" shall mean any Person directly or indirectly controlling, controlled by, or under direct or indirect common control with, the Company, except a Subsidiary. A Person shall be deemed to control another Person if such controlling Person owns 10% or more of the Voting Stock (or other ownership interest) of the controlled Person or possesses, directly or indirectly, the power to direct or cause the direction of the management or policies of such controlled Person, whether through the ownership of voting securities, by contract or otherwise. "Alternate Base Rate" shall mean for each day such interest rate per annum as shall be equal to the highest of (a) the Prime Rate on such day and (b) the Fed Funds Rate from time to time plus 0.5%. "Alternate Base Rate Loan" shall mean any Loan bearing interest based upon the Alternate Base Rate. "Applicable Lending Office" shall mean, for each Bank and for each type of Loan (other than a Bid Loan), the "Applicable Lending Office" of such Bank (or of an affiliate of such Bank) designated on Schedule 1 hereto or such other office of such Bank (or of an affiliate of such Bank) as such Bank may from time to time specify to the Agent and the Company as the office by which its Loans (other than a Bid Loan) of any type are to be made and maintained and, in the case of a Bid Loans, the office of such Bank (or an affiliate of such Bank) specified in the relevant Offer to Make Bid Loans. "Applicable Margin" shall mean, for any period, the applicable of the following percentages per annum in effect with respect to such period as the ratio of Debt to EBITDA as determined in accordance with Section 8.11(b) shall fall within the indicated ranges: Debt to EBITDA Ratio Level I Level II Level III Level IV Ratio =1.25:1.0 >1.25:1.0 >1.75:1.0 >2.25:1.0 but but =1.75:1.0 =2.25:1.0 Facility Fee .10% .125% .15% .20% LIBOR Rate .40% .525% .65% .80% plus For purposes of determining the Applicable Margin, Debt to EBITDA shall be calculated by the Company as of the end of each of its fiscal quarters and shall be reported to the Agent pursuant to a certificate executed by a senior financial officer of the Company and delivered concurrently with the certificate required by Section 8.1 hereof. The Applicable Margin shall be adjusted, if necessary, effective on and after the first Business Day after the date of receipt by the Agent of the certificate required to be delivered pursuant to Section 8.1 hereof; provided, however, that if such certificate, together with the financial statements to which such certificate relates, are not delivered by the required delivery date, then Level IV pricing shall apply until the date such certificate is actually delivered and unless it indicates that a lower Level is applicable. Notwithstanding the foregoing, Level II pricing shall apply until the fiscal quarter ended on June 30, 2000 unless Level IV pricing is applicable because the Company fails to deliver the certificate as provided herein. "Authorized Officer" shall mean (a) in the case of the Company, its president, chief executive officer, vice president - finance or treasurer, any Person designated as an "Authorized Officer" of the Company in Schedule 2 attached hereto or any other Person designated as an "Authorized Officer" of the Company for the purpose of this Agreement in an officer's certificate executed by the Company's secretary, assistant secretary or vice president - finance and delivered to the Agent, and (b) in the case of each Bank, any officer of such Bank designated as its "Authorized Officer" in Schedule 1 or any officer of such Bank designated its "Authorized Officer" for the purpose of this Agreement in a certificate executed by one of its Authorized Officers. Any action taken under this Agreement on behalf of the Company by any individual who on or after the date of this Agreement shall have been an Authorized Officer of the Company and whom the Agent or any Bank in good faith believes to be a Authorized Officer of the Company at the time of such action shall be binding on the Company even though such individual shall have ceased to be an Authorized Officer of the Company, and any action taken under this Agreement on behalf of any Bank by any individual who on or after the date of this Agreement shall have been an Authorized Officer of such Bank and whom the Company in good faith believes to be an Authorized Officer of such Bank at the time of such action shall be binding on such Bank even though such individual shall have ceased to be an Authorized Officer of such Bank. "Bid Loan" shall mean any Loan borrowed pursuant to Section 2.2 hereto. "Bid Loan Note" shall mean a promissory note executed by the Company payable to a Bank pursuant to Section 2.8(b) in substantially the form of Exhibit B hereto, evidencing Bid Loans. "Business Day" shall mean any day (a) on which commercial banks are not authorized or required to close in Chicago, Illinois, or (b) if such day relates to a borrowing of, a payment or prepayment of principal or of interest on, or an Interest Period for, or any notice in respect of, a Eurodollar Loan, a day which is also a day on which dealings in Dollar deposits are carried out in the London interbank market. "Capital Lease Obligations" shall mean, as to any Person, the obligations of such Person which are required to be accounted for as capital leases on a balance sheet of such Person under GAAP and, for purposes of this Agreement, the amount of such obligations shall be the capitalized amount thereof, determined in accordance with GAAP. "Change in Control" means the acquisition by a Person, or two or more Persons acting in concert, of beneficial ownership (within the meaning of Rule 13d-3 of the Securities and Exchange Commission under the Securities Exchange Act of 1934) of 20% or more of the outstanding Voting Stock of the Company. "Code" shall mean the Internal Revenue Code of 1986, as amended from time to time. "Commitments" shall mean, as to each Bank, the obligation of such Bank to make Alternate Base Rate Loans and Eurodollar Loans in an aggregate amount at any time outstanding up to the amount specified for such Bank in Schedule 1. "Consolidated Net Earnings" shall mean: (a) consolidated gross revenues of the Company and its Subsidiaries less (b) all operating and non-operating expenses of the Company and its Subsidiaries including all charges of a proper character (including any restructuring charges, current and deferred taxes on income, provision for taxes on unremitted foreign earnings which are included in gross revenues, and current additions to reserves), but not including in gross revenues: (i) any extraordinary gains (net of expenses and taxes applicable thereto) resulting from the sale, conversion or other disposition of capital assets in excess of extraordinary losses resulting from the sale, conversion or other disposition of capital assets (i.e., assets other than current assets); (ii) any gains resulting from the write-up of assets; (iii) any earnings or losses attributable to the equity owned by the Company or any Subsidiary of any Person which is not a Subsidiary; (iv) any earnings of any Person acquired by the Company or any Subsidiary through purchase, merger or consolidation or otherwise for any period prior to the date of acquisition; or (v) any deferred credit representing the excess of equity in any Subsidiary at the date of acquisition over the cost of the investment in such Subsidiary; all determined in accordance with GAAP. "Continue", "Continuation" and "Continued" shall refer to the continuation pursuant to Section 2.9 hereof of a Eurodollar Loan as a Eurodollar Loan from one Interest Period to the next Interest Period. "Convert", "Conversion" and "Converted" shall refer to a conversion pursuant to Section 2.9 hereof of Alternate Base Rate Loans into Eurodollar Loans, or of Eurodollar Loans into Alternate Base Rate Loans. "Debt" of any Person means, without duplication, (a) all indebtedness for borrowed money; (b) all obligations issued, undertaken or assumed as the deferred purchase price of property or services (other than trade payables entered into, and accruals (including accruals for patronage dividends payable in cash) arising, in the ordinary course of business on ordinary terms); (c) all non-contingent reimbursement or payment obligations with respect to Surety Instruments; (d) all obligations evidenced by notes, bonds, debentures or similar instruments, including obligations so evidenced incurred in connection with the acquisition of property, assets or businesses; (e) all indebtedness created or arising under any conditional sale or other title retention agreement, or incurred as financing, in either case with respect to property acquired by the Person (even though the rights and remedies of the seller under such agreement in the event of default are limited to repossession or sale of such property, in which case the amount of the Debt with respect thereto shall be equal to the fair market value of such property); (f) all Capital Lease Obligations; (g) all indebtedness referred to in clauses (a) through (f) above secured by (or for which the holder of such Debt has an existing right, contingent or otherwise, to be secured by) any Lien upon or in property (including accounts and contracts rights) owned by such Person, even though such Person has not assumed or become liable for the payment of such Debt; provided, the amount of such Debt for this clause (g) shall be the amount stipulated in any agreement or instrument evidencing such Person's obligation); (h) obligations arising in connection with the transfer of an interest in accounts or notes receivable which transfer constitutes a true sale, including securitizations and (i) all Guaranty Obligations in respect of indebtedness or obligations of others of the kinds referred to in clauses (a) through (h) above; provided, "Debt" of the Company and its Subsidiaries shall not, in any case, include obligations in respect of Patronage Indebtedness. "Default" shall mean an Event of Default or an event which with notice or lapse of time or both would become an Event of Default. "Documentation Agent" means SunTrust Bank, together with its successors and assigns in such capacity. "Dollars" and "$" shall mean lawful money of the United States of America. "EBITDA" means Consolidated Net Earnings plus amounts deducted in the calculation thereof for interest expense, charges against income for foreign, federal, state and local taxes, depreciation and amortization, all determined in accordance with GAAP. "Environmental Laws" shall mean all federal, state and local laws, including statutes, regulations, ordinances, codes, rules and other governmental restrictions and requirements, relating to the discharge of air pollutants, water pollutants or process waste water or otherwise relating to the environment or hazardous substances or the treatment, processing, storage, disposal, release, transport or other handling thereof, including, but not limited to, the federal Solid Waste Disposal Act, the federal Clean Air Act, the federal Clean Water Act, the federal Comprehensive Environmental Response, Compensation and Liability Act of 1980, the federal Toxic Substances Control Act, regulations of the Nuclear Regulatory Agency, and regulations of any state department of natural resources or state environmental protection agency, in each case as now or at any time hereafter in effect. "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended from time to time. "ERISA Affiliate" shall mean any corporation or trade or business which is a member of the same controlled group of corporations (within the meaning of Section 414(b) of the Code) as the Company or is under common control (within the meaning of Section 414(c) of the Code) with the Company. "Eurodollar Loan" shall mean any Loan bearing interest based upon the LIBOR Base Rate. "Event of Default" shall have the meaning attributed to such term in Section 9 hereof. "Excluded Asset Dispositions" means the Company's (a) fee simple sale or sale and leaseback pursuant to an operating lease of (i) the Company's headquarters, consisting of two buildings with a common address of 1220 Kensington Court and 1300 Kensington Court, respectively, in Oak Brook, Illinois and (ii) retail support centers located in Hanover, Maryland, Huntersville, North Carolina and Rocklin, California only; (b) sale or other disposition of its stock ownership in OurHouse, Inc.; (c) sales of retail locations owned by the Company if and only if the cash proceeds of such sale received by the Company equal or exceed the Company's net investment in each such sold retail location; and (d) sales or transfers of its entire ownership position in any joint venture in which the Company is an investor if and only if the cash proceeds of such sale received by the Company equal or exceed the Company's net investment in such joint venture. "Fixed Charge Coverage Ratio" shall mean, for the period of determination, the ratio of (a) its Adjusted Net Earnings for such period to (b) the sum of interest expense, lease expense and scheduled principal payments made by the Company and its Subsidiaries on a consolidated basis on all Debt and Patronage Indebtedness for such period, all determined in accordance with GAAP. "Fed Funds Rate" shall mean for each day the rate per annum (rounded upwards, if necessary, to the nearest 1/100th of 1%) equal to the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers on such day, as published by the Federal Reserve Bank of New York in the Composite Closing Quotation for U.S. Government Securities on such day, provided, that (a) if the day for which such rate is to be determined is not a Business Day, the Fed Funds Rate for such day shall be such rate on such transaction for the next preceding Business Day as so published on the next succeeding Business Day, and (b) if such rate is not so published for any date, the Fed Funds Rate for such day shall be the average rate charged to the Agent on such day on such transactions as determined by the Agent. "GAAP" shall mean generally accepted accounting principles as in effect at the time of the preparation of the consolidated financial statements of the Company and its Subsidiaries referred to in Section 7.2. "Guaranty Obligation" means, as to any Person, any direct or indirect liability of that Person, whether or not contingent, with or without recourse, without duplication, with respect to any Debt, lease, dividend, letter of credit or other obligation (the "primary obligations") of another Person (the "primary obligor"), including any obligation of that Person (a) to purchase, repurchase or otherwise acquire such primary obligations or any security therefor, (b) to advance or provide funds for the payment or discharge of any such primary obligation, or to maintain working capital or equity capital of the primary obligor or otherwise to maintain the net worth or solvency or any balance sheet item, level of income or financial condition of the primary obligor, (c) to purchase property, securities or services primarily for the purpose of assuring the owner of any such primary obligation of the ability of the primary obligor to make payment of such primary obligation, or (d) otherwise to assure or hold harmless the holder of any such primary obligation against loss in respect thereof. The amount of any Guaranty Obligations shall be deemed to be the lower of (y) an amount equal to the stated or determinable amount of the primary obligation in respect of which such Guaranty Obligation is made and (z) the maximum amount for which such guaranteeing Person may be liable pursuant to the terms of the instrument embodying such Guaranty Obligation, unless such primary obligation and the maximum amount for which such guaranteeing Person may be liable are not stated or determinable, in which case the amount of such Guaranty Obligation shall be such guaranteeing Person's reasonably anticipated liability in respect thereof; provided that any determination of the amount of the Guaranty Obligations of the Company and its Subsidiaries shall exclude the following: (i) standby letters of credit issued at the request of the Company having an aggregate face amount not in excess of $20,000,000, (ii) any obligation of the Company or any Subsidiary arising from the guaranty or discount or sale with the guaranty or endorsement of the Company or any Subsidiary of any obligation evidenced by or contained in a note payable to the order of the Company, any Subsidiary or third party lender which has been executed and delivered by a dealer-member of the Company or any Subsidiary to the extent that the aggregate amount of such obligations referred to in this clause (ii) does not at any time exceed $50,000,000, and (iii) any obligation of the Company or any Subsidiary arising from the guaranty or the discount or sale with the guaranty or endorsement of the Company or any Subsidiary of any obligation evidenced by or contained in a note payable to the order of the Company, any Subsidiary or third party lender which has been executed and delivered by a franchisee of the Company or any Subsidiary to the extent that the aggregate amount of such obligations referred to in this clause (iii) does not at any time exceed $10,000,000. "Interest Period" shall mean, with respect to any Eurodollar Loan, each period commencing on the date such Eurodollar Loan is made or Converted from an Alternate Base Rate Loan or the last day of the next preceding Interest Period for such Eurodollar Loan and ending on the numerically corresponding day in the first, second, third, sixth, ninth or twelfth calendar month thereafter, as the Company may select, except that each Interest Period which commences on the last Business Day of a calendar month (or on any day for which there is no numerically corresponding day in the appropriate subsequent calendar month) shall end on the last Business Day of the appropriate subsequent calendar month; provided, that (a) no Interest Period for a Eurodollar Loan shall end after the Termination Date, and (b) each Interest Period which would otherwise end on a day which is not a Business Day shall end on the next succeeding Business Day or, if such next succeeding Business Day falls in the next succeeding calendar month, on the next preceding Business Day. "Level" means any of the four ratio ranges applicable to the Debt to EBITDA ratio as set forth in the table contained in the definition of "Applicable Margin." "LIBOR Base Rate" shall mean, with respect to any Eurodollar Loans to be made or Continued or Converted from Alternate Base Rate Loans on any day for any Interest Period therefor, the applicable per annum London interbank offered rate for deposits in U.S. Dollars appearing on Telerate Page 3750 as of 11:00 a.m. (London time) two Business Days prior to the first day of such Interest Period, and having a maturity approximately equal to such Interest Period. If no London interbank offered rate of such maturity then appears on Telerate Page 3750, then the LIBOR Base Rate shall be equal to the London interbank offered rate for deposits in U.S. Dollars maturing immediately before or immediately after such maturity, whichever is higher, as determined by the Agent from Telerate Page 3750. If Telerate Page 3750 is not available, the applicable LIBOR Base Rate for the relevant Interest Period shall be the rate determined by the Agent to be the rate at which The Northern Trust Company offers to place deposits in U.S. Dollars with first-class banks in the London interbank market at approximately 11:00 a.m. (London time) two Business Days prior to the first day of such Interest Period, in the approximate amount of The Northern Trust Company's relevant portion of the Eurodollar Loan to be made or Continued and having a maturity approximately equal to such Interest Period. "LIBOR Rate" shall mean, for any Eurodollar Loan for any Interest Period therefor, a rate per annum (rounded upwards, if necessary, to the nearest 1/100 of 1%) determined by the Agent to be equal to (a) the LIBOR Base Rate for such Loan for such Interest Period divided by (b) the remainder of 1 minus the Reserve Requirement for such Loan for such Interest Period. "Lien" shall mean, with respect to any property, any mortgage, lien, pledge, charge, security interest or encumbrance similar to the foregoing of any kind in respect thereof, including the interest of a vendor or lessor under any conditional sale, capital lease or other title retention agreement. "Loan" shall mean any Eurodollar Loan or Alternate Base Rate Loan or Bid Loan. A reference to a "type" of Loan refers to Eurodollar Loans as a group or Alternate Base Rate Loans as a group. "Loan Fraction" shall mean, for each Bank at any time, a fraction the numerator of which equals the remainder obtained by subtracting (a) the aggregate principal amount of then outstanding Loans made by such Bank from (b) such Bank's Commitment and the denominator of which equals the remainder obtained by subtracting (x) the aggregate principal amount of Loans then outstanding from (y) the aggregate Commitments of all of the Banks. "Majority Banks" shall mean Banks holding at least 51% of the aggregate amount of the Commitments; provided, that, if the Commitments shall have terminated, Majority Banks shall mean Banks holding at least 51% of the aggregate unpaid principal amount of the Loans; provided further, however, in the event any Bank holds 51% or more of the Commitments or unpaid Loans at any time, then Majority Banks shall mean such Bank plus at least one other Bank. "Margin Stock" shall mean margin stock within the meaning of Regulations U and X. "Member Dealers' Equity" shall mean, as of the time of any determination, the total of (a) the par value (or stated value on the books of the Company) of the capital stock of all classes of the Company, plus (or minus in the case of a surplus deficit) (b) the amount of the consolidated surplus, whether capital or earned, of the Company and its Subsidiaries; provided, that in no event shall amounts attributable to treasury stock be included in Member Dealers' Equity. "Multiemployer Plan" shall mean a multiemployer plan defined as such in Section 3(37) of ERISA to which contributions have been made by the Company or any ERISA Affiliate as a "contributing sponsor" (within the meaning of Section 4001(a)(13) of ERISA) and which is covered by Title IV of ERISA. "Non Pro-Rata Loan Fraction" shall mean for each Bank at any time, a fraction the numerator of which equals the Commitment of such Bank and the denominator of which equals the aggregate Commitments of all of the Banks. "Notes" shall mean the Revolving Notes and the Bid Loan Notes. "Offer to Make Bid Loans" shall mean (a) a telephonic offer to make Bid Loans made by an Authorized Officer on behalf of a Bank to the Company containing the information specified in Section 2.2(c) hereof or (b) a written Offer to Make Bid Loans in substantially the form of Exhibit D hereto, duly completed and executed by an Authorized Officer on behalf of a Bank. "Patronage Indebtedness" shall mean subordinated indebtedness of the Company issued to its members as all or part of a patronage dividend and evidenced by a certificate bearing subordination language substantially the same as that set forth in Schedule 5 hereto. "PBGC" shall mean the Pension Benefit Guaranty Corporation or any entity succeeding to any or all of its functions under ERISA. "Pension Plan" shall mean a Plan which is a "defined benefit plan" within the meaning of Section 3(35) of ERISA. "Person" shall mean any individual, corporation, limited liability company, voluntary association, partnership, trust, estate, unincorporated organization or government (or any agency, instrumentality or political subdivision thereof). "Plan" shall mean any plan, program or arrangement which constitutes an "employee benefit plan" within the meaning of Section 3(3) of ERISA. "Post-Default Rate" shall mean a rate per annum equal to two percent (2%) above the rate applicable to such Loan, but in no event less than a rate per annum equal to two percent (2%) above the Alternate Base Rate as in effect at the time of such default. "Prime Rate" shall mean on any day the prime rate established by The Northern Trust Company and in effect on such day. Each change in the Prime Rate shall be effective from the date of the announcement by The Northern Trust Company of a change in its prime rate. Neither the Prime Rate nor the prime rate of The Northern Trust Company is intended to constitute the lowest rate of interest charged by The Northern Trust Company or any Bank. "Quarterly Dates" shall mean the last Business Day of each March, June, September and December, commencing in June, 2000. "Refinanced Debt" shall mean the Debt which is outstanding under the agreements identified as "Refinanced Debt Agreements" on Schedule 3 hereto. "Regulations D, U and X" shall mean, respectively, Regulations D, U and X of the Board of Governors of the Federal Reserve System (or any successor), as the same may be amended or supplemented from time to time. "Regulatory Change" shall mean any change after the date of this Agreement in federal, state or foreign law or regulations (including, without limitation, Regulation D) or the adoption or making after such date of any interpretation, directive or request applying to a Bank (whether or not having the force of law) by any court or governmental or monetary authority. "Request for Bid Loans" shall mean (a) a telephonic request for bids on Bid Loans made by an Authorized Officer on behalf of the Company to a Bank, which request shall contain the information specified in Section 2.2(b) or (b) a written Request for Bid Loans in substantially the form of Exhibit C hereto, duly completed and executed by an Authorized Officer on behalf of the Company. "Reserve Requirement" shall mean, for any Interest Period for any Eurodollar Loan, the sum (expressed as a decimal) of (a) the average maximum rate at which reserves (including any marginal, supplemental or emergency reserves) are required to be maintained during such Interest Period under Regulation D by member banks of the Federal Reserve System against "Eurocurrency liabilities" and (b) any other reserves required to be maintained by such member banks by reason of any Regulatory Change against (i) any category of liabilities which includes deposits by reference to which the LIBOR Base Rate is to be determined or (ii) any category of extensions of credit or other assets which includes a Eurodollar Loan. "Revolving Note" shall mean a promissory note executed by the Company payable to a Bank pursuant to Section 2.8(b) in substantially the form of Exhibit A hereto evidencing Loans (other than Bid Loans). "Subsidiary" shall mean any Person of which or in which the Company or its other Subsidiaries owns, directly or indirectly, more than fifty percent (50%) of (a) the combined voting power of all classes of stock having general voting power under ordinary circumstances to elect a majority of the board of directors of such Person, if it is a corporation, (b) the capital interest or profits interest of such Person, if it is a partnership, joint venture or similar entity, or (c) the beneficial interest of such Person, if it is a trust, association or other unincorporated organization. "Substantial Part" shall mean (a) in the context of the consolidated assets of the Company and its Subsidiaries, assets which constitute 10% or more thereof and (b) in the context of assets' contribution to Consolidated Net Earnings, assets which contributed 15% or more thereof. "Surety Instruments" means all letters of credit (including standby and commercial), banker's acceptances, bank guaranties, shipside bonds, surety bonds and similar instruments. "Syndication Agent" means Bank of America, National Association, together with its successors and assigns in such capacity. "Termination Date" shall mean May 2, 2005. "Voting Stock" shall mean, with respect to any corporation, any shares of stock of such corporation whose holders are entitled under ordinary circumstances to vote for the election of directors of such corporation (irrespective of whether at the time stock of any other class or classes shall have or might have voting power by reason of the happening of any contingency). 1.2. Accounting. Unless otherwise specified herein, all accounting terms used herein shall be interpreted, all determinations with respect to accounting matters hereunder shall be made, and all financial statements and certificates and reports as to financial matters required to be furnished to the Agent or the Banks hereunder shall be prepared, in accordance with GAAP applied on a basis consistent with the audited consolidated financial statements of the Company and its Subsidiaries referred to in Section 7.2 hereof. In the event that the Company or the Majority Banks believe that there has been a change in GAAP from those utilized in preparing the financial statements referred to in Section 7.2 which materially affect (whether favorably or adversely) compliance or measurement under the financial covenants of this Agreement, each of the Banks and the Company agree to negotiate an amendment to this Agreement to bring the Company into substantially the same compliance or measurement with respect to the financial covenants as immediately preceding such change in GAAP. If no resolution of such item or items of compliance or measurement is effected, the Company and each of the Banks agree, for the purposes of the disputed item or items only, to determine compliance by using GAAP. Section 2. The Loans. 2.1. The Revolving Loans. (a) Each Bank severally agrees, on the terms of this Agreement, to make loans to the Company during the period from and including the date hereof to but not including the Termination Date in an aggregate principal amount at any one time outstanding up to but not exceeding the amount of such Bank's Commitment as then in effect. Subject to the terms of this Agreement, during such period the Company may borrow, repay and reborrow the amount of the Commitments by means of Alternate Base Rate Loans and Eurodollar Loans and may Convert Loans of one type into Loans of the other type or Continue Eurodollar Loans; provided, that no more that five (5) Eurodollar Loans may be outstanding from each Bank at any one time; and provided further, that the Commitment of each Bank shall be deemed utilized from time to time to the extent of the aggregate amount of the Bid Loans made by such Bank. (b) The Loans (other than Bid Loans) to be made on any day shall be in an aggregate amount not less than that specified in Section 4.4 and shall consist of Loans of the same type (except as otherwise provided in Section 2.2 with respect to Bid Loans). 2.2. The Bid Loans. (a) Each Bank severally agrees that, on the terms of this Agreement, the Company may borrow Bid Loans under this Section 2.2 from time to time on any Business Day during the period from the date hereof until the Termination Date, in the manner set forth below; provided, that following the making of each Bid Loan, the aggregate amount of Loans then outstanding shall not exceed the aggregate amount of Commitments. (b) Bid Loans shall constitute utilization of the Commitments. The Company may request the making of Bid Loans under this Section 2.2 by making a Request for Bid Loans, specifying the date and aggregate amount of the proposed Bid Loans, the maturity date for repayment of each Bid Loan (which maturity date may be overnight or up to one year later but may not be later than the Termination Date), the interest payment date or dates relating thereto, and any other terms to be applicable to such Bid Loans, not later than 11:30 a.m. (Chicago time) on the Business Day of the proposed Bid Loans. Each telephonic Request for Bid Loans shall be made upon all the Banks and shall be promptly confirmed by written Request for Bid Loans sent by telecopier the same day to each Bank and the Agent. (c) Each Bank may, if, in its sole discretion, it elects to do so, irrevocably offer to make one or more Bid Loans to the Company in response to any Request for Bid Loans at a rate or rates of interest specified by such Bank in its sole discretion, by notice to the Company before 12:30 p.m. (Chicago time) on the date of such proposed Bid Loans by making an Offer to Make Bid Loans specifying the minimum amount (which shall be at least $1,000,000 and an integral multiple of $500,000 in excess thereof) and maximum amount of each Bid Loan which such Bank would be willing to make as part of such proposed Bid Loans (which amounts may not exceed such Bank's then unused Commitment), the rate or rates of interest therefor (which rate or rates shall include all adjustments, including adjustments in respect of reserve requirements and assessments) and such Bank's Applicable Lending Office with respect to such Bid Loan. Unless otherwise agreed by the Agent and the Company, no such offer shall contain qualifying, conditional or similar language or propose terms other than or in addition to those set forth in the applicable Request for Bid Loans and, in particular, no such offer may be conditioned upon acceptance by the Company of all of the principal amount of the Bid Loans for which such offer is being made. If any Bank shall not make an offer before 12:30 p.m. (Chicago time), it shall be deemed to have elected not to make an offer, and such Bank shall not be obligated to, and shall not, make any Bid Loan. Each telephonic Offer to Make Bid Loans shall be promptly confirmed by a written Offer to Make Bid Loans sent by telecopy the same day to the Company and the Agent. (d) The Company shall, in turn, before 1:00 p.m. (Chicago time) on the date of such proposed Bid Loans, either (i) cancel the relevant Request for Bid Loans by giving telephonic notice to that effect to the Banks and the Agent, which notice shall be confirmed in writing by telecopy sent the same day to the Agent and each Bank, or (ii) accept one or more of the offers made by any Bank or Banks pursuant to paragraph (c) above in its sole discretion but only in ascending order of interest rates, by giving telephonic notice to the Banks whose offers are being accepted and the Agent of the interest rate, term and amount of each Bid Loan (which amount shall be equal to or greater than the minimum amount, and equal to or less than the maximum amount notified to the Company by such Bank in its Offer to Make Bid Loans for such Bid Loan, pursuant to paragraph (c) above) to be made by each Bank, and reject any remaining offers made by Banks pursuant to paragraph (c) above by giving the Banks and the Agent telephonic notice to that effect; provided, that the Company may not accept any offer if the Agent has advised the Company that such offer fails to comply with paragraph (c) above or otherwise fails to comply with the requirements of this Agreement (including, without limitation, paragraph (a) above). If offers are made by two or more Banks with the same interest rates for a greater aggregate principal amount than the amount in respect of which offers are accepted, the principal amount of Bid Loans in respect of which offers are accepted shall be allocated by the Company among such Banks as nearly as possible (in multiples of $500,000) in proportion to the aggregate principal amount of such offers. Determinations by the Company of the amounts of Bid Loans shall be conclusive, absent manifest error. (e) If the Company notifies the Banks that the relevant Request for Bid Loans is canceled pursuant to paragraph (d)(i) above, no Bid Loans shall be made in respect thereof. (f) If the Company accepts one or more of the offers made by any Bank or Banks pursuant to paragraph (d)(ii) above, the Company shall confirm such acceptance in writing by telecopy sent the same day to the Agent and each Bank. (g) Each Bank that is to make a Bid Loan shall, before 2:00 p.m. (Chicago time) on the date of such Bid Loan specified in the notice received from the Company pursuant to paragraph (b) make available the amount of such Bid Loan for the account of its Applicable Lending Office to the Agent. Upon fulfillment of the applicable conditions set forth in Section 6 and after receipt by the Agent of such funds, the Agent will make such funds available to the Company at the Agent's address. Promptly after the making of each Bid Loan, the Agent will notify each Bank of the amount and type thereof, the amount of each Commitment utilized thereby and the dates upon which the same commenced and are scheduled to terminate. (h) The Bid Loans to be made on a particular date shall be in an aggregate amount not less than $1,000,000 or an integral multiple of $500,000 in excess thereof and, following the borrowing thereof, the Company shall be in compliance with the limitation set forth in the proviso to the first sentence of Section 2.2(a). (i) Within the limits set forth in this Section 2.2, the Company may from time to time borrow, repay and reborrow Bid Loans under this Section 2.2. (j) The Company shall repay to the Agent for the account of each Bank which has made a Bid Loan, on the maturity date of each Bid Loan (such maturity date being that specified by the Company for repayment of such Bid Loan in the related Request for Bid Loans delivered pursuant to paragraph (a) above and provided in the applicable loan account or Bid Loan Note, if any), the then unpaid principal amount of such Bid Loan. The Company shall have no right to prepay any principal amount of any Bid Loan except (i) on the terms, specified by the Company for such Bid Loan in the related Request for Bid Loans delivered pursuant to paragraph (a) above and set forth in the applicable loan account or Bid Loan Note, if any, or (ii) with the consent of the applicable Bank. The Company agrees to provide the Agent with written notice of any prepayment of Bid Loans on the date such Loans are prepaid. (k) The Company shall pay interest on the unpaid principal amount of each Bid Loan from the date of such Bid Loan to the date the principal amount of such Bid Loan is repaid in full, at the rate of interest for such Bid Loan specified by the Bank making such Bid Loan in its Offer to Make Bid Loans delivered pursuant to paragraph (c) above, payable on the interest payment date or dates specified by the Company for such Bid Loan in the related Request for Bid Loans delivered pursuant to paragraph (a) above, as provided in the applicable loan account or Bid Loan Note, if any. 2.3. Notice of Borrowings. The Company shall give the Agent (which shall promptly notify the Banks) notice of each borrowing of Alternate Base Rate Loans or Eurodollar Loans under Section 2.1 as provided in Section 4.5 hereof. Not later than 1:00 p.m., Chicago time on the date specified for each such borrowing hereunder, each Bank shall make available the amount of the Alternate Base Rate Loan or the Eurodollar Loan to be made by it on such date to the Agent, at such account as it shall specify, in immediately available funds, for the account of the Company. The amount so received by the Agent shall, subject to the terms and conditions of this Agreement, be made available to the Company by depositing the same, in immediately available funds, in an account of the Company maintained at the Agent. 2.4. Changes of Commitments. (a) Increases in Commitments. (i) If no Default has occurred and is continuing, the Company may, once during each calendar year prior to the Termination Date commencing May 2, 2000, request an increase in the aggregate Commitments, by giving written notice to the Agent and each Bank (each such notice an "Increase Request"). Concurrently with delivering an Increase Request, the Company may seek additional commitments from other financial institutions ("New Bank(s)"). An Increase Request may request an increase in the aggregate Commitments of at least $5,000,000 but not more than $50,000,000; provided, that in no event shall the aggregate Commitments of the Banks (including New Banks) hereunder exceed $225,000,000 at any time. Each Bank may, in its sole and absolute discretion, commit to increase its Commitment by all or a part of the increase requested in the Increase Request by delivering to the Company and the Agent a commitment valid for a period of 30 days ("Commitment Increase Notice") to such effect, which Commitment Increase Notice shall refer to this Section 2.4(a)(i) and which shall be given no later than 10 Business Days after the date of the Increase Request (the period between the date of the Increase Request and the 10 Business Day deadline for response being referred to as the "Consent Period"). The existing Commitment of any Bank shall not be increased in connection with an Increase Request if such Bank (x) by notice ("Decline Notice") declines to increase its Commitment during the Consent Period or (y) fails to respond to the Company and the Agent within the Consent Period (each such Bank giving a Decline Notice or failing to respond on or before the expiration of the Consent Period being called a "Declining Bank" and each other Bank being called an "Increasing Bank"). (ii) Upon expiry of the Consent Period (or sooner if all existing Banks and New Banks respond sooner), if the commitments of the Increasing Banks specified in their respective Commitment Increase Notices and the New Bank(s) in their commitment letters equal or exceed the Increase Request, the Agent shall allocate such commitments up to the amount specified in the Increase Request to the Increasing Banks and New Bank(s) based on the ratio of each Increasing Bank's commitment specified in its Commitment Increase Notice (or New Bank in its commitment letter) to the aggregate of all commitments of the Increasing Banks specified in the Commitment Increase Notices and New Bank(s) in their commitment letters. (iii) Upon expiry of the Consent Period, if the commitments of the Increasing Banks specified in their respective Commitment Increase Notices and the New Bank(s) in their commitment letters are less than the Increase Request, the Company may agree to accept such commitments from the Increasing Banks and New Bank(s). Upon expiry of the Consent Period (or sooner if all existing Banks and New Banks respond sooner), the Company may add New Bank(s) with commitments up to the amount specified in their commitment letters provided, that (A) no Default shall have occurred and be continuing, (B) the aggregate amount of Commitments plus increases in Increasing Bank existing Commitments and New Bank commitments does not exceed $225,000,000, (C) any such New Bank assumes all the rights and obligations of a "Bank" hereunder pursuant to accession documentation as the Agent shall specify and described below and (D) such New Bank is reasonably satisfactory to the Agent. If the Company does accept such commitments, the Agent shall allocate such commitments to each of the Increasing Banks and New Bank(s) based on the ratio of its commitment specified in its Commitment Increase Notice or commitment letter to the aggregate of all commitments of the Increasing Banks and New Bank(s) specified in their Commitment Increase Notices and commitment letters. (iv) Upon allocation of the increased commitments to the Increasing Banks and/or New Bank(s), the Company shall deliver such documentation as the Agent may reasonably require to evidence the Company's authority to incur the increased obligations hereunder, including, without limitation, documents similar to those described in Section 6.1(b) - (e) inclusive, and if requested by the Increasing Banks and/or New Banks, replacement Notes to the Increasing Banks and/or new notes to the New Bank(s) reflecting the Commitment of each Increasing Bank and New Bank. Such new and replacement notes, if any, shall be deemed to constitute a "Note" or "Notes" hereunder for all purposes and such new and increased commitments shall constitute a "Commitment" or "Commitments" hereunder for all purposes. The Agent shall promptly provide each of the Banks a revised Schedule 1 reflecting the Commitments of the Banks. (v) Any New Bank may become a "Bank" under this Agreement by executing and delivering to the Company and the Agent an Accession Agreement (an "Accession Agreement") in substantially the form of Exhibit H hereto and such related documentation as shall be reasonably satisfactory in form and substance to the Agent, pursuant to which such New Bank shall assume the rights, privileges, duties and obligations of a "Bank" hereunder. Upon the effectiveness of any such Accession Agreement and related documentation, the New Bank shall become a "Bank" for all purposes of this Agreement having the Commitments specified in such Accession Agreement. The Agent shall promptly provide a copy of each Accession Agreement to each of the Banks. (vi) If any Alternate Base Rate Loans or Eurodollar Loans shall be outstanding at the time an Accession Agreement and/or increase in Commitments becomes effective, the Company shall repay such portion of such Loans and borrow an equal principal amount of new Alternate Base Rate Loans and Eurodollar Loans from each New Bank which has acceded and/or Increasing Bank so that after giving effect to such prepayment and borrowing Alternate Base Rate Loans and Eurodollar Loans are held pro rata among the Banks in accordance with the Commitments (or, if any Bid Loan has been outstanding, so that such Alternate Base Rate Loans and Eurodollar Loans are held in such proportion as they would be held if such New Bank and/or Increasing Bank had been a Bank hereunder that had not made any Bid Loans (and whose loan amounts were determined as provided in Section 4.2)). The Banks shall make disbursements among themselves to give effect to such prepayment and borrowing pursuant to instructions from the Agent. The Company shall pay accrued interest to the date of prepayment on any Loans so prepaid, together with any amounts payable as a result of such prepayment pursuant to Section 5.5, such prepayments being due on the date of such prepayments. Any Eurodollar Loans made by any New Bank and/or Increasing Bank shall (if not made on the first day of the relevant Interest Period hereunder) bear interest from the date they are made to the end of the then current Interest Period(s) for Eurodollar Loans hereunder at, in the case of the New Bank, such rate(s) per annum as shall be set forth in the Accession Agreement or, in the case of any Increasing Bank, at a rate per annum equal the cost of funding such Loan in the London interbank market for the period to the end of the Interest Period plus the Applicable Margin. (b) Reductions/Terminations of Commitment. The Company shall have the right to terminate or reduce the aggregate amount of the unused Commitments at any time or from time to time, provided, that: (i) the Company shall give notice of each such termination or reduction as provided in Section 4.5 hereof; (ii) each partial reduction shall be in minimum amounts of $5,000,000 or an integral multiple of $1,000,000 in excess thereof; (iii)the aggregate amount of Commitments shall not be reduced below the aggregate outstanding principal amount of Loans; and (iv) no such reduction shall cause the Commitment of any Bank to be reduced below the outstanding principal amount of Loans made by such Bank. (c) No Reinstatement. Commitments once terminated or reduced may not be reinstated. 2.5. Fees. (a) The Company shall pay to the Agent for the account of each Bank (to be paid to each Bank pro rata based on such Bank's Commitment without giving effect to any usage thereof) an annual facility fee for the period from and including the date hereof to but not including the date such Commitment is terminated or the Termination Date, at the Applicable Margin specified for "Facility Fee" in the definition of Applicable Margin. The accrued Facility Fee in respect of the Commitments shall be payable in arrears on the Quarterly Dates and on the earlier of the date the Commitments are terminated or the Termination Date. (b) On or before the date hereof, the Company shall pay to the Agent for the account of each Bank an irrevocable upfront fee as shall be set forth in a letter agreement dated the date of this Agreement between the Company and the Agent based on each Bank's Commitment on the date hereof. (c) The Company shall pay to the Agent for the account of the Agent an agent's fee and such other fees as shall be set forth in a letter agreement dated the date of this Agreement between the Agent and the Company. 2.6. Lending Offices. The Loans of each type made by each Bank shall be made and maintained at such Bank's Applicable Lending Office for Loans of such type and Bid Loans made by each Bank shall be made and maintained at the Applicable Lending Office specified in the relevant Offer to Make Bid Loans. 2.7. Several Obligations; Remedies Independent. The failure of any Bank to make any Loan to be made by it on the date specified therefor shall not relieve any other Bank of its obligation, if any, to make any Loan on such date, but neither any Bank nor the Agent shall be responsible for the failure of any other Bank to make a Loan to be made by such other Bank. The amounts payable by the Company at any time hereunder and under the Notes, if any, to each Bank shall be a separate and independent debt, and each Bank shall be entitled to protect and enforce its rights arising out of this Agreement and the Notes, if any, and it shall not be necessary for any other Bank or the Agent to consent to, or be joined as an additional party in, any proceedings for such purposes. 2.8. Loan Accounts. (a) The Loans made by each Bank shall be evidenced by one or more accounts or records maintained by such Bank in the ordinary course of business. The accounts or records maintained by the Agent and each Bank shall be conclusive absent manifest error of the amount of the Loans made by the Banks to the Company, and the interest and payments thereon. Any failure so to record or any error in doing so shall not, however, limit or otherwise affect the obligation of the Company hereunder to pay any amount owing with respect to the Loans. (b) Upon the request of any Bank made through the Agent, the Loans (other than Bid Loans) made by such Bank may be evidenced by one or more Revolving Notes, and the Bid Loans made by such Bank may be evidenced by one or more Bid Loan Notes, each instead of loan accounts. Each such Bank shall endorse on the schedules annexed to its Note(s) the date, amount and maturity of each Loan made by it and the amount of each payment of principal made by the Company with respect thereto. Each such Bank is irrevocably authorized by the Company to endorse its Note(s) and each Bank's record shall be conclusive absent manifest error; provided, however, that the failure of a Bank to make, or an error in making, a notation thereon with respect to any Loan shall not limit or otherwise affect the obligations of the Company hereunder or under any such Note to such Bank. 2.9. Voluntary Conversion or Continuation of Loans. Subject to Section 4.4 hereof, the Company shall have the right to Convert Loans (other than Bid Loans) of one type into Loans of another type or Continue Eurodollar Loans as such at any time, provided, that: (a) the Company shall give the Agent written notice of each such Conversion or Continuation as provided in Section 4.5 hereof; and (b) Eurodollar Loans may be Continued or Converted only on the last day of an Interest Period for such Loans. So long as any Default or Event of Default shall have occurred and be continuing, no Loan may be Converted or Continued (upon expiration of the current Interest Period) into or as a Eurodollar Loan unless the Agent and each of the Banks shall otherwise consent in writing. Section 3. Payments of Principal and Interest. 3.1. Repayment of Loans. The Company unconditionally promises to pay to the Agent for the account of each Bank, the principal of such Bank's Loans on the earlier of (a) the Termination Date, (b) the date on which all amounts outstanding under this Agreement have been declared or have automatically become due and payable (whether by acceleration or otherwise), or (c) in the case of any Bid Loan, on the maturity date for such Bid Loan as specified by the Company in the Request for Bid Loans. 3.2. Prepayments of Loans. (a) The Company shall have no right to prepay any principal amount of any Alternate Base Rate Loans or Eurodollar Loans other than as provided in paragraph (b) below. (b) The Company may, upon the giving of such notice as is specified in Section 4.5 hereof, and if such notice is given the Company shall, prepay the outstanding principal amounts of the Alternate Base Rate Loans or Eurodollar Loans in whole or ratably (in accordance with the outstanding principal amounts of Loans of such type then held by the Banks) in part, together with accrued interest to the date of such prepayment on the principal amount prepaid; provided, however, (i) partial prepayment shall be in an aggregate principal amount not less than that specified in Section 4.4 and (ii) Eurodollar Loans prepaid on a day other than the last day of an Interest Period shall be subject to Section 5.5. 3.3. Interest. (a) The Company promises to pay to the Agent for the account of each Bank, interest on the unpaid principal amount of each Loan (other than any Bid Loan) made by such Bank for the period from and including the date of such Loan to but excluding the date such Loan shall be paid in full, (i) while such Loan is an Alternate Base Rate Loan, at a rate per annum equal to the Alternate Base Rate (as in effect from time to time); and (ii) while such Loan is a Eurodollar Loan, for each Interest Period relating thereto, at a rate per annum equal to the LIBOR Rate for such Loan for such Interest Period plus the Applicable Margin specified in "LIBOR Rate plus" in the definition of "Applicable Margin." (b) Notwithstanding the foregoing, the Company will pay to the Agent for the account of each Bank, interest at the Post-Default Rate on any principal of any Loan (including any Bid Loan) made by such Bank, and (to the fullest extent permitted by law) on any interest or other amount payable by the Company hereunder or under any Note, if any, held by such Bank which shall not be paid in full when due (whether at stated maturity, by acceleration or otherwise), for each day during the period from and including the due date thereof to but excluding the date the same is paid in full (or the date the same is no longer due as a result of a notice of acceleration being rescinded). (c) Accrued interest shall be payable (i) in the case of an Alternate Base Rate Loan, quarterly on the Quarterly Dates or at maturity if earlier, (ii) in the case of a Eurodollar Loan, on the last day of each Interest Period therefor and if such Interest Period is in excess of three months, the day three months after the commencement of such Interest Period and thereafter the day three months after each preceding payment date or maturity, and (iii) in the case of any Alternate Base Rate Loan or Eurodollar Loan, upon the payment or prepayment thereof or the Conversion of such Loan to a Loan of another type (but only on the principal amount so paid, prepaid or Converted), except that interest payable at the Post-Default Rate shall be payable from time to time on demand and interest on any Eurodollar Loan that is Converted into an Alternate Base Rate Loan pursuant to Section 5.4 hereof shall be payable on the date of Conversion (but only to the extent so Converted). (d) Promptly after the determination of any interest rate provided for herein (other than in respect of any Bid Loan) or any change therein, the Agent shall give notice thereof to the Banks and the Company. Section 4. Payments; Pro Rata Treatment; Computations; Etc. 4.1. Payments. (a) Except to the extent otherwise provided herein, all payments of principal, interest and other amounts to be made by the Company under this Agreement and the Notes, if any, shall be made in Dollars, in immediately available funds, without deduction, defense, set-off or counterclaim, to the Agent at such account as it may specify, not later than 1:00 p.m., Chicago time, on the date on which such payment shall become due (each such payment made after such time to be deemed to have been made on the next succeeding Business Day). (b) The Agent may (but shall not be obligated to) debit the amount of any payment which is required to be made by the Company under this Agreement or any Note, if any, to any ordinary deposit account of the Company with the Agent (with notice to the Company) on or after the due date of such payment. (c) Each payment received by the Agent under this Agreement or any Note, if any, for the account of a Bank shall be paid promptly to such Bank, in immediately available funds, for the account of such Bank's Applicable Lending Office for the Loan in respect of which such payment is made. 4.2. Pro Rata Treatment. (a) Except to the extent otherwise provided herein: (i) each borrowing from the Banks under Section 2.1 hereof shall be made from the Banks, each payment of fees under Section 2.5(a) hereof shall be made for the account of the Banks, and each termination or reduction of the amount of the Commitments under Section 2.4 hereof shall be applied to the Commitments of the Banks, pro rata according to the amounts of such Commitments; (ii) the making, Conversion and Continuation of Loans of a particular type (other than Conversions provided for by Section 5.4 hereof and Bid Loans) shall be made pro rata among the Banks according to the amounts of the Commitments, and the then current Interest Period for each Loan of such type shall be coterminous; (iii) each payment or prepayment of principal of Loans (other than Bid Loans) by the Company shall be made for the account of the Banks pro rata in accordance with the respective unpaid principal amounts of the Loans of the relevant type held by the Banks; and (iv) each payment of interest on Loans (other than Bid Loans) by the Company shall be made for the account of the Banks pro rata in accordance with the amounts of interest due and payable to the respective Banks with respect to Loans of the relevant type. (b) Notwithstanding the foregoing, if any Bid Loans shall be outstanding, the amount of each Eurodollar Loan or Alternate Base Rate Loan to be made on any day by any Bank shall be such amount as is the product obtained by multiplying (i) the total amount of the Loans to be made on such day times (ii) such Bank's Loan Fraction on such day. (c) Notwithstanding the foregoing, if no Bid Loans shall be outstanding but there shall be outstanding any Eurodollar Loans or Alternate Base Rate Loans which are not then held by the Banks pro rata in accordance with the Commitments, the amount of each Eurodollar Loan or Alternate Base Rate Loan to be made on any day by any Bank shall be such amount as is obtained by (i) determining for each Bank the product obtained by multiplying (A) such Bank's Non-Pro Rata Loan Fraction on such day times (B) the aggregate principal amount of all Loans to be outstanding under this Agreement on such day (including the Loans being made on such day) and (ii) subtracting from the amount determined for each Bank pursuant to clause (i) the aggregate principal amount of all Loans made by such Bank to be outstanding on such day, other than such Loans being made on such day. (d) Notwithstanding the foregoing, if no Bid Loans shall be outstanding but there shall be outstanding any Eurodollar Loans or Alternate Base Rate Loans which are not then held by the Banks pro rata in accordance with the Commitments and an Event of Default shall have occurred and be continuing and the Commitments terminated and the Loans accelerated, then the Banks holding Loans less than their pro rata share of the Commitments shall promptly purchase participations in the Loans held by such other Banks in such amounts, and make such other adjustments from time to time as shall be equitable, to the end that all Banks shall hold the Loans pro rata in accordance with the Commitments. 4.3. Computations. Interest on Eurodollar Loans, Bid Loans and fees shall be computed on the basis of a year of 360 days for the actual number of days elapsed (including the first day but excluding the last day) occurring in the period for which such interest or fees are payable. Interest on Alternate Base Rate Loans shall be computed on the basis of a year of 365 or 366 days, as the case may be, for the actual number of days elapsed (including the first day but excluding the last day) occurring in the period for which such interest is payable. Each determination by the Agent of an interest rate hereunder shall be conclusive and binding for all purposes, absent manifest error. 4.4. Minimum Amounts. Except for Conversions or prepayments made pursuant to Section 2.2, 2.4(a) or 5.4 hereof, each borrowing, Conversion and prepayment of principal of Loans shall be in an amount at least equal to $1,000,000, in the case of Alternate Base Rate Loans, and $5,000,000, in the case of Eurodollar Loans (borrowings, prepayments or Conversions of or into Loans of different types or, in the case of Eurodollar Loans, having different Interest Periods at the same time hereunder to be deemed separate borrowings, Conversions and prepayments for purposes of the foregoing, one for each type or Interest Period). Anything in this Agreement to the contrary notwithstanding, the aggregate principal amount of Eurodollar Loans having the same Interest Period shall be at least equal to $5,000,000 and, if any Eurodollar Loans would otherwise be in a lesser principal amount for any period, such Loans shall be Alternate Base Rate Loans during such period. 4.5. Certain Notices. (a) Notices by the Company to the Agent of terminations or reductions of Commitments, of borrowings, Conversions, Continuations and prepayments of Loans, of the type of Loans and of the duration of Interest Periods shall be irrevocable and shall be effective only if received by the Agent not later than 10:00 a.m. Chicago time on the number of Business Days prior to the date of the relevant termination, reduction, borrowing, Conversion, Continuation or prepayment or the first day of such Interest Period specified below: Number of Business Notice Days Prior Termination or reduction of Commitments 2 Borrowing or repayment of, or Conversions into, Alternate Base Rate Loans 0 Borrowing or repayment of, Conversions into, Continuations as, or duration of Interest Period for, Eurodollar Loans 2 (b) Each such notice of termination or reduction shall specify the amount of the Commitments to be terminated or reduced. Each such notice of borrowing (which shall be in substantially the form of Exhibit E hereto), Conversion or Continuation (which shall be in substantially the form of Exhibit F hereto), or prepayment shall specify the Loans to be borrowed, Converted, Continued or prepaid and the amount (subject to Section 4.4 hereof) and type of the Loans to be borrowed, Converted, Continued or prepaid and the date of borrowing, Conversion, Continuation or prepayment (which shall be a Business Day). Each such notice of the duration of an Interest Period shall specify the Loans to which such Interest Period is to relate. The Agent shall promptly notify the Banks of the contents of each such notice. (c) In the event that the Company fails to select the type of Loan, or the duration of any Interest Period for any Eurodollar Loan within the time period and otherwise as provided in this Section 4.5, such Loan (if outstanding as a Eurodollar Loan) will be automatically Converted into an Alternate Base Rate Loan on the last day of the then current Interest Period for such Loan or (if outstanding as an Alternate Base Rate Loan) will remain as, or (if not then outstanding) will be made as, an Alternate Base Rate Loan. 4.6. Non-Receipt of Funds by the Agent. Unless the Agent shall have been notified by a Bank or the Company (the "Payor") prior to the time by which the Payor is scheduled to make a payment to the Agent (a "Required Payment"), which notice shall be effective upon receipt, that the Payor does not intend to make the Required Payment to the Agent, the Agent may assume that the Required Payment has been made and may in reliance upon such assumption (but shall not be required to) make the amount thereof available to the intended recipient(s) on such date and, if the Payor has not in fact made the Required Payment to the Agent, the recipient(s) of such payment shall, on demand, repay to the Agent the amount so made available together with interest thereon in respect of each day during the period commencing on the date such amount was so made available by the Agent until the date the Agent recovers such amount at a rate per annum equal to (if the recipient is the Company) the Alternate Base Rate for such day, and (if the recipient is a Bank) the Fed Funds Rate for such day as determined by the Agent; and if such recipient(s) shall fail promptly to make such payment, the Agent shall be entitled to recover such amount, on demand, from the Payor, together with interest as aforesaid at the Alternate Base Rate (if the Payor is the Company) or the Fed Funds Rate (if the Payor is a Bank). 4.7. Set-off and Sharing of Payments, Etc. (a) The Company agrees that in addition to any right of set-off, banker's lien or counterclaim a Bank may otherwise have, each Bank shall be entitled to apply and offset balances and other claims of the Company at any of such Bank's or its affiliate's offices, in Dollars or in any other currency, against any amount payable to such Bank hereunder or under the Notes, if any, which is not paid when due (regardless of whether such balances and other claims are then due). (b) If any Bank shall obtain payment of any principal of or interest on any Loan through the exercise of any right of set- off, banker's lien or counterclaim or similar right or otherwise and, as a result of such payment, such Bank shall have received a greater percentage of the principal or interest then due hereunder by the Company to such Bank than the percentage received by any other Banks, it shall promptly purchase from such other Banks participations in the Loans made by such other Banks in such amounts, and make such other adjustments from time to time as shall be equitable, to the end that all the Banks shall share the benefit of such excess payment pro rata in accordance with the unpaid principal and/or interest on the Loans held by each of the Banks. To such end all the Banks shall make appropriate adjustments among themselves (by the resale of participations sold or otherwise) if such payment is rescinded or must otherwise be restored. (c) The Company agrees that any Bank so purchasing a participation may exercise all rights of set-off, banker's lien, counterclaim or similar rights with respect to such participation as fully as if such Bank were a direct holder of Loans in the amount of such participation. (d) Nothing contained herein shall require any Bank to exercise any such right or shall affect the right of any Bank to exercise, and retain the benefits of exercising, any such right with respect to any other indebtedness or obligation of the Company. Section 5. Yield, Capital Maintenance and Taxes Provisions. 5.1. Additional Costs. (a) The Company shall pay directly to each Bank from time to time such amounts as such Bank may determine to be necessary to compensate it for any costs which such Bank determines are attributable to its making or maintaining of any Eurodollar Loans or its obligation to make any Eurodollar Loans hereunder, or any reduction in any amount receivable by such Bank hereunder in respect of any of such Loans or such obligation (such increases in costs and reductions in amounts receivable being herein called "Additional Costs"), resulting from any Regulatory Change which: (i) changes the basis of taxation of any amounts payable to such Bank under this Agreement or its Notes, if any, in respect of any of such Loans (other than franchise taxes and taxes on the overall net income of such Bank or its Applicable Lending Office imposed by the jurisdiction in which such Bank is organized or has its principal office or such Applicable Lending Office); or (ii) imposes or modifies any reserve, special deposit or similar requirements (other than the Reserve Requirement utilized in the determination of the LIBOR Rate for such Loan) relating to any extensions of credit or other assets of, or any deposits with or other liabilities of, such Bank or any commitment of such Bank; or (iii) imposes any other condition affecting this Agreement or its Notes, if any (or any of such extensions of credit or liabilities) or Commitment. (b) Without limiting the effect of the provisions of Section 5.1(a) hereof, the obligation of any Bank to make or Continue, or to Convert Alternate Base Rate Loans into, Eurodollar Loans hereunder shall be suspended upon notice to the Company (with a copy to the Agent) until any Regulatory Change ceases to be in effect (in which case the provisions of Section 5.4 hereof shall be applicable), in the event that, by reason of such Regulatory Change, such Bank either (i) incurs Additional Costs based on or measured by the excess above a specified level of the amount of a category of deposits or other liabilities of such Bank which includes deposits by reference to which the interest rate on Eurodollar Loans is determined or (ii) becomes subject to restrictions on the amount of such a category of liabilities or assets which it may hold. (c) Without limiting the effect of the foregoing provisions of this Section 5.1 (but without duplication), if any Bank determines that compliance with any law or regulation or any guideline or request from any central bank or other governmental authority (whether or not having the force of law) affects or would affect the amount of capital required or expected to be maintained by such Bank or any Person controlling such Bank and that the amount of such capital is increased by or based upon the existence of such Bank's Commitment to lend hereunder and other commitments of this type or any Loan, then, upon demand by such Bank (with a copy of such demand to the Agent), the Company shall immediately pay to the Agent for the account of such Bank, from time to time as specified by such Bank, additional amounts sufficient to compensate such Bank or such Person in the light of such circumstances, to the extent that such Bank determines such increase in capital to be allocable to the existence of such Bank's Commitment to lend or Loans hereunder. (d) Each Bank will notify the Company of any event occurring after the date of this Agreement that will entitle such Bank to compensation under paragraph (a) or (c) of this Section 5.1 as promptly as practicable but in any event within 90 days after such Bank obtains actual knowledge thereof; provided, however, that if any Bank fails to give such notice within 90 days after it obtains actual knowledge of such an event, such Bank shall, with respect to compensation payable pursuant to this Section 5.1 in respect of any costs resulting from such event, only be entitled to payment under this Section 5.1 for costs incurred from and after the date 90 days before the date that such Bank does give such notice. Each Bank will furnish to the Company a certificate setting forth the basis and amount of each request by such Bank for compensation under paragraph (a) or (c) of this Section 5.1, which certificate shall be conclusive and binding on the Company in the absence of manifest error. Determinations and allocations by any Bank for purposes of this Section 5.1 of the effect of any Regulatory Change, law, regulation, guideline or request of any central bank or other monetary authority shall be conclusive and binding on the Company absent manifest error. 5.2. Limitation on Types of Loans. Anything herein to the contrary notwithstanding, if, on or prior to the determination of any LIBOR Base Rate for any Interest Period: (a) the Agent reasonably determines (which determination shall be conclusive) that quotations of interest rates for the relevant deposits referred to in the definition of "LIBOR Base Rate" are not being provided in the relevant amounts or for the relevant maturities for purposes of determining rates of interest for Eurodollar Loans as provided herein; or (b) the Majority Banks reasonably determine (which determination shall be conclusive) and notify the Agent that the relevant rates of interest referred to in the definition of "LIBOR Base Rate" upon the basis of which the rate of interest for Eurodollar Loans for such Interest Period is to be determined are not likely adequately to cover the cost to such Banks of making or maintaining such type of Loans for such Interest Period; then the Agent shall give the Company and each Bank prompt notice thereof and, so long as such condition remains in effect, the Banks shall be under no obligation to make or Continue Eurodollar Loans or to Convert Alternate Base Rate Loans into Eurodollar Loans and the Company shall, on the last day(s) of the then current Interest Period(s) for the outstanding Eurodollar Loans, either prepay such Loans or Convert such Loans into Alternate Base Rate Loans in accordance with Section 2.9 hereof. 5.3. Illegality. Notwithstanding any other provision of this Agreement, in the event that it becomes unlawful for any Bank or its Applicable Lending Office to honor its obligation to make or maintain Eurodollar Loans hereunder, then such Bank shall promptly notify the Company thereof (with a copy to the Agent) and such Bank's obligation to make or Continue, or to Convert Alternate Base Rate Loans into, Eurodollar Loans shall be suspended until such time as such Bank may again make and maintain Eurodollar Loans (in which case the provisions of Section 5.4 hereof shall be applicable). 5.4. Treatment of Affected Loans. (a) If the obligation of any Bank to make or Continue, or to Convert Alternate Base Rate Loans into, Eurodollar Loans is suspended pursuant to Section 5.1, 5.2(a) or (b) or 5.3 hereof, such Bank's Eurodollar Loans shall be automatically Converted into Alternate Base Rate Loans on the last day(s) of the then current Interest Period(s) for such Eurodollar Loans (or, in the case of a Conversion required by Section 5.3 hereof, on such earlier date as such Bank may specify to the Company with a copy to the Agent), and, unless and until such Bank gives notice as provided below that the circumstances specified in Section 5.1, 5.2(a) or (b) or 5.3 hereof which gave rise to such Conversion no longer exist: (i) to the extent that such Bank's Eurodollar Loans have been so Converted, all payments and prepayments of principal which would otherwise be applied to such Bank's Eurodollar Loans shall be applied instead to its Alternate Base Rate Loans; and (ii) all Loans which would otherwise be made or Continued by such Bank as Eurodollar Loans shall be made or Continued instead as Alternate Base Rate Loans and all Loans of such Bank which would otherwise be Converted into Eurodollar Loans shall remain as Alternate Base Rate Loans. (b) If such Bank gives notice to the Company (with a copy to the Agent) that the circumstances specified in Section 5.1, 5.2 or 5.3 hereof which gave rise to the Conversion of such Bank's Eurodollar Loans pursuant to this Section 5.4 no longer exist (which such Bank agrees to do promptly upon such circumstances ceasing to exist) at a time when Eurodollar Loans are outstanding, such Bank's Alternate Base Rate Loans shall be automatically Converted, on the first day(s) of the next succeeding Interest Period(s) for such outstanding Eurodollar Loans to the extent necessary so that, after giving effect thereto, all Eurodollar Loans are held pro rata (as to principal amounts, types and Interest Periods) in accordance with the Commitments. 5.5. Compensation. (a) The Company shall pay to the Agent for the account of each Bank, upon the request of such Bank through the Agent, such amount or amounts as shall be sufficient to compensate it for any loss, cost or expense which such Bank reasonably determines are attributable to (i) any payment, prepayment or Conversion of a Eurodollar Loan or a Bid Loan made by such Bank for any reason (including, without limitation, the acceleration of the Loans pursuant to Section 9 hereof or a prepayment pursuant to Section 3.2 or 5.4 (other than as a result of some culpable act of such Bank) hereof) on a date other than the last day of the Interest Period for such Loan (in the case of a Eurodollar Loan) or the due date of such Loan (in the case of a Bid Loan); or (ii) any failure by the Company for any reason (including, without limitation, the failure of any of the conditions precedent specified in Section 6 hereof to be satisfied) to borrow, Convert or Continue a Eurodollar Loan or borrow a Bid Loan from such Bank on the date for such borrowing specified in the relevant Request for Bid Loans or notice of borrowing given pursuant to Section 2.3 hereof, but excluding any such failure that results from the failure or refusal of a Bank to make such Loan if all of the conditions precedent specified in Section 6 shall have been satisfied in respect thereof. (b) Without limiting the effect of Section 5.5(a), such compensation shall include an amount equal to the excess, if any, of (i) the amount of interest which otherwise would have accrued on the principal amount so paid, prepaid or Converted or not borrowed for the period from the date of such payment, prepayment, Conversion or failure to borrow to (x) in the case of Eurodollar Loans, the last day of the then current Interest Period for such Loan (or, in the case of a failure to borrow, the Interest Period for such Loan which would have commenced on the date specified for such borrowing) at the applicable rate of interest for such Loan or (y) in the case of Bid Loans, the due date of such Bid Loan (or, in the case of a failure to borrow, the due date of the Bid Loan which would have been made on the date of such borrowing) at the applicable rate of interest for such Loan over (ii) (x) in the case of Eurodollar Loans, the interest component of the amount such Bank would have bid in the London interbank market for Dollar deposits of leading banks in amounts comparable to such principal amount and with maturities comparable to such period (as reasonably determined by such Bank) and (y) in the case of Bid Loans, the interest rate certified by such Bank as the rate which reflects the Bank's cost of funding such Bid Loan. Each Bank will furnish to the Company a certificate setting forth the basis and amount of each request by such Bank for compensation under this Section 5.5, which certificate shall be conclusive and binding on the Company in the absence of manifest error. 5.6. Taxes. (a) All payments by the Company hereunder or under the Notes, if any, shall be made free and clear of and without deduction or withholding for or on account of all present or future taxes, levies, imposts, deductions, charges or withholdings and all liabilities with respect thereto, excluding, in the case of each Bank (or its Applicable Lending Office) and the Agent, taxes imposed on its income, and franchise taxes imposed on it, by the jurisdiction under the laws of which such Bank (or its Applicable Lending Office) or the Agent is organized or any political subdivision thereof (all such non-excluded taxes, deductions and withholdings being hereinafter referred to as "Taxes"). If the Company shall be required by law to deduct any Taxes from any amount payable hereunder or under any Note, if any, (i) the amount payable shall be increased as may be necessary so that after making all required deductions (including deductions applicable to additional amounts payable under this Section 5.6) the payee receives an amount equal to the amount it would have received had no such deductions been made and (ii) the Company shall pay the full amount deducted to the relevant authority in accordance with applicable law. (b) In addition, the Company agrees to pay any present or future stamp, documentary, excise or property taxes, charges or similar levies which arise from any payment made hereunder or under the Notes, if any, or from the execution, delivery or registration of, or otherwise with respect to, this Agreement or the Notes (hereinafter referred to as "Other Taxes"). (c) The Company will indemnify each Bank and the Agent for the full amount of Taxes or Other Taxes (including, without limitation, any Taxes or Other Taxes imposed by any jurisdiction on amounts payable under this Section 5.6) paid by such Bank or the Agent. This indemnification shall be made within 30 days from the date such Bank or the Agent (as the case may be) makes written demand therefor. (d) Within 30 days after the date of any payment of Taxes, the Company will furnish to the Agent the original or a certified copy of a receipt evidencing payment thereof. (e) Without prejudice to the survival of any other agreement of the Company hereunder, the agreements and obligations of the Company contained in this Section 5.6 shall survive the payment in full of principal and interest hereunder and under the Notes, if any. (f) At least five Business Days prior to the first date on which interest or fees are payable hereunder for the account of any Bank, each Bank that is not incorporated under the laws of the United States of America or a state thereof agrees that it will deliver to each of the Company and the Agent two duly completed copies of United States Internal Revenue Service Form 1001 or 4224 or any other applicable or successor form, certifying in either case that such Bank is entitled to receive payments under this Agreement and the Notes, if any, without deduction or withholding of any United States federal income taxes. Each Bank which is so obligated to deliver a Form 1001 or 4224 or any other applicable or successor form, further undertakes to deliver to each of the Company and the Agent two additional copies of such form (or a successor form) on or before the date that such form expires or becomes obsolete or after the occurrence of any event requiring a change in the most recent form so delivered by it, and such amendments thereto or extensions or renewals thereof as may reasonably requested by the Company or the Agent, in each case certifying that such Bank is entitled to receive payments under this Agreement and the Notes, if any, without deduction or withholding of any United States federal income taxes, unless an event (including without limitation any change in treaty, law or regulation) has occurred prior to the date on which any such delivery would otherwise be required which renders all such forms inapplicable or which would prevent such Bank from duly completing and delivering any such form with respect to it and such Bank advises the Company and the Agent that it is not capable of receiving payments without any deduction or withholding or United States federal income tax. 5.7. Change of Applicable Lending Office. Each Bank agrees that if it makes any demand for payment under Section 5.1 or 5.6, or if any adoption or change of the type described in Section 5.3 shall occur with respect to it, it will use reasonable efforts (consistent with its internal policy and legal and regulatory restrictions and so long as such efforts would not be materially disadvantageous to it, as determined in its sole discretion) to designate a different Applicable Lending Office if the making of such a designation would reduce or eliminate the need for the Company to make payments under Section 5.1 or 5.6, or would eliminate or reduce the effect of any adoption or change described in Section 5.3. 5.8. Substitution of Bank. In the event the Company is required to pay any additional amounts pursuant to Section 5.1 or 5.6, the Company may, so long as no Event of Default has occurred and is continuing, require any Bank claiming such additional amounts, upon five Business Days' prior written notice from the Company, to assign the entire then outstanding principal amount of the Loans owing to such Bank and the entire Commitment of such Bank to another bank or financial institution selected by the Company and, if such bank or financial institution is not then a Bank, reasonably satisfactory to the Agent. Any such assignment shall be effected in accordance with Section 11.6 and, as a condition to such assignment, the Company shall pay all amounts due to such Bank hereunder on the effective date of such assignment. Section 6. Conditions Precedent. 6.1. Initial Loan. The obligation of each Bank to make its initial Loan hereunder is subject to the receipt by the Agent of the following documents, each of which shall be satisfactory to the Agent and its counsel in form and substance: (a) The Agreement and Notes. This Agreement and the Notes, if any, duly completed and executed. (b) Corporate Action. Certified copies of the articles of incorporation and by-laws of the Company and all corporate action taken by the Company approving this Agreement and the Notes, if any, and borrowing by the Company hereunder (including a secretary's or assistant secretary's certificate setting forth the resolutions of the Board of Directors of the Company adopted in respect of the transactions contemplated hereby). (c) Incumbency. A certificate of the secretary or assistant secretary of the Company naming and setting forth the specimen signature of each of the officers and Authorized Officers of the Company (i) who is authorized to sign on its behalf this Agreement and the Notes, if any, and (ii) who will, until replaced by another officer or officers duly authorized for that purpose, act as its representative for the purposes of signing documents and giving Requests for Bid Loans, notices and other communications in connection with this Agreement and the transactions contemplated hereby. (d) Officer's Certificate. A certificate of a senior officer of the Company to the effect set forth in the first sentence of Section 6.2 hereof. (e) Opinion of General Counsel to the Company. An opinion of David W. League, general counsel of the Company, substantially in the form of Exhibit G hereto. (f) Other Documents. Such other documents as the Agent or any Bank may reasonably request. 6.2. Initial and Subsequent Loans. The obligations of the Banks to make any Loan (including its initial Loan) are subject to the further conditions precedent that, both immediately prior to such Loan and also after giving effect thereto: (a) no Default shall have occurred and be continuing; and (b) the representations and warranties made by the Company in Section 7 hereof shall be true and correct in all material respects on and as of the date of the making of such Loans with the same force and effect as if made on and as of such date except to the extent such representations and warranties state that they relate solely to a specified date. Each notice of borrowing and Request for Bid Loans by the Company hereunder shall constitute a certification by the Company to the effect set forth in the preceding sentence. 6.3. Bid Loans. The obligation of any Bank to make any Bid Loan is subject to the completion of the procedures set forth in Section 2.2. Section 7. Representations and Warranties. The Company represents and warrants to the Banks that: 7.1. Corporate Existence and Related Matters. Each of the Company and its Subsidiaries: (a) in the case of the Company and its corporate Subsidiaries, is a corporation duly organized and validly existing under the laws of the jurisdiction of its incorporation; (b) in the case of non-corporate Subsidiaries, are entities duly organized, validly existing and in good standing under the laws of the jurisdiction of their respective organization, (c) has all requisite power, and has all material governmental licenses, authorizations, consents and approvals, necessary to own its assets and carry on its business as now being or as proposed to be conducted; and (d) is qualified to do business in all jurisdictions in which the failure so to qualify would have a material adverse effect on the business, affairs or financial condition of the Company or such Subsidiary. 7.2. Financial Condition. (a) The consolidated balance sheet of the Company and its Subsidiaries as at January 1, 2000 and the related consolidated statements of income, stockholders' equity and cash flows of the Company and its Subsidiaries for the fiscal year ended on said date, with the opinion thereon (in the case of said consolidated balance sheet and statements) of KPMG Peat Marwick, heretofore furnished to each of the Banks, have been prepared in conformity with GAAP applied on a basis consistent with the preceding fiscal year and fairly present in all material respects the consolidated financial condition of the Company and its Subsidiaries as at said date, and the consolidated results of their operations for the fiscal year ended on said date in accordance with GAAP. (b) Neither the Company nor any of its Subsidiaries had on said date any material contingent liabilities or liabilities for taxes, except as referred to or reflected or provided for in said balance sheets or the notes thereto as at said dates. (c) Since January 1, 2000 through and including the date hereof, there has been no material adverse change in the consolidated financial condition, operations, business or prospects taken as a whole of the Company and its Subsidiaries from that set forth in said financial statements as at said date. 7.3. Litigation. There is no litigation, investigation or legal or arbitral proceeding or any proceeding by or before any governmental or regulatory authority or agency, now pending or (to the knowledge of the Company) threatened against the Company or any of its Subsidiaries which would have a material adverse effect on the legality, validity or enforceability of this Agreement and the Notes, if any, or the consolidated financial condition, operations, business or prospects taken as a whole of the Company and its Subsidiaries. 7.4. No Breach. The execution, delivery and performance of this Agreement and the Notes, if any, will not conflict with or result in a breach of, or cause the creation of a Lien or require any consent under, (a) the articles of incorporation or by-laws of the Company, (b) any applicable law or regulation, or any order, injunction or decree of any court or governmental authority or agency, or (c) any agreement or instrument to which the Company or any of its Subsidiaries is a party or by which any of them is bound, except for breaches which could not reasonably be expected to have a material adverse effect on the legality, validity or enforceability of this Agreement and the Notes, if any, or the consolidated financial condition, operations, business or prospects taken as a whole of the Company and its Subsidiaries. 7.5. Corporate Power and Action; Binding Effect. The Company has all necessary corporate power and authority to execute, deliver and perform its obligations under this Agreement and the Notes, if any; the execution, delivery and performance by the Company of this Agreement and the Notes, if any, have been duly authorized by all necessary corporate action on its part; and this Agreement has been duly and validly executed and delivered by the Company and constitutes, and each of the Notes, if any, when executed and delivered will constitute, legal, valid and binding obligations, enforceable in accordance with its terms. 7.6. Approvals. No authorizations, approvals or consents of, and no filings or registrations with, any governmental or regulatory authority or agency are necessary for the execution, delivery or performance by the Company of this Agreement or the Notes, if any, or for the validity or enforceability thereof. 7.7. Margin Stock. Neither the Company nor any of its Subsidiaries is engaged principally, or as one of its important activities, in the business of extending credit for the purpose of buying or carrying Margin Stock and no part of the proceeds of any Loan hereunder will be used to buy or carry any Margin Stock. 7.8. ERISA. (a) Subject to Section 7.8(c) hereof, the Company and the ERISA Affiliates and the plan administrator of each Plan have fulfilled in all material respects their respective obligations under ERISA and the Code with respect to each Plan and each Plan is currently in material compliance with the applicable provisions of ERISA and the Code. (b) Subject to Section 7.8(c) hereof, with respect to each Plan, there has been no (i) "reportable event" within the meaning of Section 4043 of ERISA and the regulations thereunder which is not subject to the provision for waiver of the 30-day notice requirement to the PBGC; (ii) failure to make or properly accrue any contribution which is due to any Plan; (iii) except as set forth on Schedule 7 hereto, action under Section 4041 of ERISA to terminate any Pension Plan; (iv) withdrawal from any Pension Plan with two or more contributing sponsors or the termination of any such Pension Plan resulting in liability pursuant to Section 4063 or 4064 of ERISA; (v) institution by the PBGC of proceedings to terminate any Pension Plan, or the occurrence of any event or condition which might constitute grounds under ERISA for the termination of, or the appointment of a trustee to administer, any Pension Plan; (vi) the imposition of liability pursuant to Section 4062(e), 4069 or 4212 of ERISA; (vii) complete or partial withdrawal (within the meaning of Sections 4203 and 4205 of ERISA) from any Pension Plan which is a Multiemployer Plan that it is in reorganization or insolvency pursuant to Sections 4241 or 4245 of ERISA, or that it intends to terminate or has terminated under Sections 4041A or 4042 of ERISA; (viii) prohibited transaction described in Section 406 of ERISA or 4975 of the Code which could give rise to the imposition of any material fines, penalties, taxes or related charges; (xi) assertion of a material claim (other than routine claims for benefits) against any Plan (other than a Multiemployer Plan) which could reasonably be expected to be successful; (x) receipt from the Internal Revenue Service of notice of the failure of any Plan to qualify under Section 401(a) of the Code, or the failure of any trust forming part of any Plan to qualify for exemption from taxation under Section 501(a) of the Code, if applicable; or (xi) imposition of a lien pursuant to Section 401(a)(29) of the Code or 412(n) of the Code or Section 302(f) of ERISA. (c) The representations and warranties set forth in Sections 7.8(a) and (b) shall not be deemed to be breached as a result of any event, occurrence or condition affecting or relating to a Multiemployer Plan of which the Company does not have knowledge. 7.9. Taxes. United States federal income tax returns of the Company and the Subsidiaries have been examined and closed through the fiscal year of the Company ended December 31, 1995. The Company and its Subsidiaries have filed all United States federal income tax returns and all other material tax returns which are required to be filed by them and have paid all material taxes due pursuant to such returns or pursuant to any assessment received by the Company or any of its Subsidiaries. The charges, accruals and reserves on the books of the Company and its Subsidiaries in respect of taxes and other governmental charges are, in the opinion of the Company, adequate in all material respects. 7.10 Investment Company Act. The Company is not an "investment company", or a company "controlled" by an "investment company", within the meaning of the Investment Company Act of 1940, as amended. 7.11 Credit Agreements. As of the date hereof, Schedule 3 hereto is a complete and correct list of each credit, loan or purchase agreement, Guaranty Obligation or other arrangement providing for any Debt or any extension of credit to, or Guaranty Obligation by, the Company or any of its Subsidiaries, and the aggregate principal or face amount outstanding or which may become outstanding under each such arrangement is correctly described in said Schedule 3. The Agreements identified on Schedule 3 under the caption "Refinanced Debt Agreements" will be terminated upon repayment of the Debt thereunder with the proceeds of the initial Loans hereunder. 7.12 Environmental Laws. (a) Subject to the last paragraph of this Section 7.12, the Company and each of its Subsidiaries have obtained all permits, licenses and other authorizations which are required under all Environmental Laws and are in compliance in all respects with any applicable Environmental Laws. (b) Subject to the last paragraph of this Section 7.12, no notice, demand, request for information, citation, summons or order has been issued, no complaint has been filed, no penalty has been assessed and no investigation or review is pending or threatened by any governmental or other entity or other Person with respect to any alleged failure by the Company or any of its Subsidiaries to comply in any respect with any Environmental Laws. (c) Subject to the last paragraph of this Section 7.12, there are no Liens arising under or pursuant to any Environmental Laws on any of the property owned or leased by the Company or any of its Subsidiaries. (d) Subject to the last paragraph of this Section 7.12, there are no conditions existing currently or likely to exist during the term of this Agreement which would subject the Company and its Subsidiaries or any of its property to any Lien, damages, penalties, injunctive relief or cleanup costs under any Environmental Laws or which require or are likely to require cleanup, removal, remedial action or other response pursuant to Environmental Laws by the Company and its Subsidiaries. The representations and warranties of the Company set forth in this Section 7.12 shall not be deemed to be breached as a result of any event, occurrence or condition which would not result in a material adverse effect on the business, condition (financial or otherwise) or operations of the Company and its Subsidiaries taken as a whole. 7.13 Subsidiaries, Etc. Set forth in Schedule 4 hereto, or in the most recent schedule delivered pursuant to Section 8.1, is a complete and correct list of all Subsidiaries of the Company and the respective jurisdiction of organization of each such Subsidiary. The Company owns, free and clear of all Liens, all outstanding shares or other ownership interests of such Subsidiaries. 7.14 Liens. As of the date hereof, no property of the Company or any Subsidiary is subject to any Lien, except Liens permitted pursuant to Section 8.6 hereof. 7.15 Subordination. All indebtedness identified as "Patronage refund certificates payable" on the Company's most recently furnished balance sheet is effectively subordinated to the Loans pursuant to subordination language substantially the same as that set forth in Schedule 5 hereto, which language appears on all certificates evidencing such indebtedness. The subordination language set forth in Schedule 5 hereto effectively subordinates to the Loans and the Notes, if any, all indebtedness evidenced by instruments bearing such language. 7.16 Compliance with Laws. The Company and each of its Subsidiaries are in material compliance with all statutes and governmental rules and regulations applicable to them. Section 8. Covenants. The Company agrees that, so long as the Commitments are in effect and until payment in full of all Loans and all other amounts payable by the Company hereunder and under the Notes, if any: 8.1. Financial Statements and other Information. The Company shall deliver to each of the Banks: (a) within 60 days after the end of each of the first three fiscal quarterly periods of each fiscal year of the Company, consolidated statements of income and cash flow of the Company and its Subsidiaries for such period and for the period from the beginning of the respective fiscal year to the end of such period, and the related consolidated balance sheets as at the end of such period, setting forth in respect of such statements in comparative form the corresponding consolidated figures for the corresponding period in the preceding fiscal year and setting forth in respect of such balance sheets the corresponding consolidated figures for the end of the preceding fiscal year, accompanied by a certificate of a senior financial officer of the Company which shall state that said financial statements fairly present in all material respects the consolidated financial condition and results of operations of the Company and its Subsidiaries in accordance with GAAP for such period; (b) within 120 days after the end of each fiscal year of the Company, consolidated statements of income, stockholders' equity and cash flow of the Company and its Subsidiaries for such year and the related consolidated balance sheets as at the end of such year, setting forth in each case in comparative form the corresponding consolidated figures for the preceding fiscal year, and accompanied (i) by an unqualified opinion thereon of independent certified public accountants of recognized national standing which shall state that said consolidated financial statements fairly present in all material respects the consolidated financial condition and results of operations of the Company and its Subsidiaries as at the end of, and for, such fiscal year, and (ii) by a certificate of such accountants stating that, in making the examination necessary for their opinion, they obtained no knowledge, except as specifically stated, of any Default; (c) promptly upon their becoming available, copies of all registration statements and reports which the Company shall have filed with the Securities and Exchange Commission; (d) promptly upon the mailing thereof to the shareholders of the Company generally, copies of all financial statements, reports and proxy statements so mailed; (e) promptly after the Company knows that any Default has occurred, a notice of such Default describing the same in reasonable detail and, together with such notice or as soon thereafter as possible, a description of the action that the Company has taken and proposes to take with respect thereto; (f) promptly upon receipt thereof, a copy of any notice, demand, request for information, citation, summons, complaint, order or other communication from any governmental or other entity or other Person with respect to any alleged failure by the Company or a Subsidiary to comply in any respect with any Environmental Laws or any assertion or allegation of any Lien or liability thereunder involving individually or in the aggregate $1,000,000 or more; (g) in the event there has been a sale, transfer or other disposition of any retail location or warehouse distribution location owned by the Company (collectively, "Company Location") or joint venture interest owned by the Company during a fiscal quarter, concurrently with the financial statements delivered pursuant to paragraph (a) above, a schedule of the net investment of the Company in each such Company Location or joint venture interest and the proceeds received by the Company upon the disposition of such Company Location or joint venture interest, all in form and substance satisfactory to the Agent; (h) concurrently with the financial statements delivered pursuant to paragraph (b) above, a certificate of an Authorized Officer of the Company as to a complete and current list of Subsidiaries substantially in the form of Schedule 4 hereto; and (i) from time to time such other information regarding the business, affairs or financial condition of the Company or any of its Subsidiaries as any Bank or the Agent may reasonably request. The Company will furnish to each Bank, at the time it furnishes each set of financial statements pursuant to paragraph (a) or (b) above, a certificate of a senior financial officer of the Company (i) to the effect that no Default has occurred and is continuing (or, if any Default has occurred and is continuing, describing the same in reasonable detail and describing the action that the Company has taken and proposes to take with respect thereto) and (ii) setting forth in reasonable detail the computations necessary to determine whether the Company is in compliance with the financial covenants herein (including Section 8.11 hereof) as of the end of the respective fiscal quarter or fiscal year, as applicable. 8.2. Litigation. The Company will promptly give to each Bank notice of all material legal or arbitral proceedings, and of all proceedings by or before any governmental or regulatory authority or agency, and any material development in respect of such legal or other proceeding, affecting the Company or any of its Subsidiaries, except proceedings which would not have a material adverse effect on the legality, validity or enforceability or this Agreement or the Notes, if any, or the consolidated financial condition, operations, business or prospects taken as a whole of the Company and its Subsidiaries. 8.3. Corporate Existence, Etc. The Company will, and will cause each of its Subsidiaries to: (a) preserve and maintain its corporate or other existence and all of its rights, privileges and franchises (provided, that nothing in this Section 8.3 shall prohibit any transaction permitted under Section 8.5 hereof), except such rights, privileges and franchises of the Company or its Subsidiaries which the applicable Board of Directors has determined to abandon or exit; (b) comply in all material respects with the requirements of all applicable laws, rules, regulations and orders of governmental or regulatory authorities, including all Environmental Laws; (c) pay and discharge all its obligations, including, without limitation, taxes, assessments and governmental charges or levies imposed on it or on its income or profits or on any of its property, franchises or assets prior to the date on which penalties attach thereto, except for any such obligation, tax, assessment, charge or levy which is immaterial in amount or the payment of which is being contested in good faith and by proper proceedings and against which adequate reserves are being maintained; (d) maintain all of its properties used or useful in its business in good working order and condition, ordinary wear and tear excepted; (e) maintain complete and accurate books and records in which full and correct entries in conformity with GAAP shall be made of all dealings and transactions in relation to its prospective business and activities and (f) upon request, permit representatives of any Bank or the Agent, during normal business hours, to visit its premises, to examine, copy and make extracts from its books and records, to inspect its properties, and to discuss its business and affairs with its senior officers and accountants. 8.4. Insurance. The Company will, and will cause each of its Subsidiaries to, keep all of its property adequately insured by financially sound and reputable insurers in accordance with prudent business practices and will carry such other insurance as is customarily maintained in accordance with prudent business practices. 8.5. Business Combinations and Asset Dispositions. The Company will not, nor will it permit any of its Subsidiaries to, (a) merge or consolidate with any other Person, or (b) sell, or otherwise dispose of, or part with control of shares of stock of a Subsidiary, or (c) sell, lease or transfer or otherwise dispose of all of the consolidated assets of the Company and its Subsidiaries, or assets which, together with all assets of the Company and Subsidiaries sold, leased or otherwise disposed of during the most recent 36-month rolling period ended on the date of determination (excluding items described in clauses (ii), (iii), (v), (vi) and (vii) below and Excluded Asset Dispositions), constitute on a book value basis a Substantial Part of the consolidated assets of the Company and its Subsidiaries or shall have contributed a Substantial Part of average Consolidated Net Earnings for the three fiscal years then most recently ended, to any Person, except that: (i) any Subsidiary may merge or consolidate with the Company (provided, that the Company shall be the continuing or surviving corporation), or with any one or more other Subsidiaries; (ii) any Subsidiary may sell, lease, transfer or otherwise dispose of any of its assets to the Company or another Subsidiary; (iii)any Subsidiary may sell or otherwise dispose of all or substantially all of its assets subject to the conditions specified in clause (v) below with respect to a sale of the stock of such Subsidiary; (iv) the Company may merge or consolidate with any other corporation, provided, that (A) the Company shall be the continuing or surviving corporation, (B) after giving effect to such merger or consolidation, no Default or Event of Default shall exist under this Agreement and (C) without limiting the foregoing, assuming that the effective date of such merger or consolidation was the last day of a fiscal quarter, no Default or Event of Default would exist hereunder, including under Section 8.11; (v) the Company and any Subsidiary may sell or otherwise dispose of, or part with control of, any shares of stock of any Subsidiary or joint venture (A) as permitted by Section 8.13, (B) to the Company or another Subsidiary or (C) to any other Person, provided, that all of the shares of stock of any such Subsidiary at the time owned by the Company and all Subsidiaries shall be sold as an entirety for such consideration which represents the fair value (as determined in good faith by the Board of Directors of the Company) at the time of sale of the shares of stock so sold, provided, further, that the assets of such Subsidiary, together with the assets of any other Subsidiaries sold or otherwise disposed of during the most recent 36-month rolling period ended on the date of determination, do not constitute a Substantial Part of the consolidated assets of the Company and its Subsidiaries and that such Subsidiary, together with any other Subsidiaries sold or otherwise disposed of during the most recent 36-month period, shall not have contributed a Substantial Part of average Consolidated Net Earnings for the three fiscal years most recently ended, and further provided, that, at the time of such sale, such Subsidiary shall not own, directly or indirectly, any shares of stock of any other Subsidiary (unless all of the shares of stock of such other Subsidiary owned, directly or indirectly, by the Company and its Subsidiary are simultaneously being sold as permitted by this Section 8.5(v)); (vi) the Company or any Subsidiary may transfer an interest in accounts or notes receivable on a non-recourse or a limited recourse basis, provided, that the transfer qualifies as a sale under GAAP and that the amount of the financing does not exceed $200,000,000 at any one time outstanding; and (vii)the Company or any Subsidiary may dispose of inventory or used, worn-out or surplus equipment, all in the ordinary course of business. 8.6. Limitation on Liens. The Company will not, nor will it permit any of its Subsidiaries to, create, incur, assume or suffer to exist any Lien upon any of its property, whether now owned or hereafter acquired, except: (a) Liens for taxes not yet due or which are being actively contested in good faith by appropriate proceedings and as to which such reserves or other appropriate provisions as may be required by GAAP are being maintained; (b) other Liens incidental to the conduct of its business or the ownership of its property and assets which were not incurred in connection with the borrowing of money or the obtaining of advances or credit, and which do not in the aggregate materially detract from the value of its property or assets or materially impair the use thereof in the operation of its business; (c) Liens on property or assets of a Subsidiary to secure obligations of such Subsidiary to the Company or another Subsidiary; (d) Liens consisting of capitalized leases if (i) the Debt represented by the related Capitalized Lease Obligations is permitted under the provisions of Section 8.11, and (ii) such Lien would be permitted by the provisions of clause (e) of this Section 8.6; (e) other Liens (including existing Liens), provided, that the aggregate amount of Debt secured by all such Liens and any Liens permitted by clause (d) above shall at no time exceed an amount equal to 15% of Member Dealers' Equity, and further provided, such Debt is permitted under the provisions of Section 8.11; (f) Liens incurred in the transfer of an interest in accounts or notes receivable which is permitted pursuant to Section 8.5(vi); and (g) Liens in existence on the date hereof and listed on Schedule 6, provided, that (i) no such Lien is extended to cover additional property after the date hereof (except to the extent required by the terms of the Debt secured thereby or any other agreement governing such Lien as such terms are in effect on the date hereof), (ii) no such Lien secures any Debt other than Debt and other obligations secured by it on the date hereof and refinancings, refundings, renewals or extensions of such Debt or other obligations and (iii) the amount of Debt or other obligations secured by such Lien is not increased. 8.7. Acquisitions. The Company shall not, and shall not permit its Subsidiaries to (whether in one transaction or a series of transactions), purchase or acquire any capital stock or other ownership interests of, or the business or assets of, any Person; provided, that this Section 8.7 shall not prohibit (a) the acquisition of inventory, supplies and materials in the ordinary course of business of the Company and its Subsidiaries as conducted on the date of this Agreement or (b) any other purchase or acquisition if after giving effect to such transaction, no Default shall exist hereunder. 8.8. Lines of Business. The Company will not, nor will it permit any of its Subsidiaries to, engage to any substantial extent in any line of business other than the business of distributing and selling hardware and related services. 8.9. No Change in Subordination Terms, etc. The Company covenants that (a) no certificate representing Patronage Indebtedness will be amended or re-issued with the effect of eliminating or in any way altering the subordination language appearing therein, (b) no amendment shall be adopted to its by- laws or any other governing document, and no agreement shall be entered into with any of its stockholders, which would entitle a stockholder, upon termination of his or its franchise in any of the circumstances described in Section 12(a) of Article XVI of the by-laws of the Company, as in effect on the date of this Agreement, to receive consideration for his or its shares in a form other than a promissory note of the Company with a term of, or in excess of, four years and providing for payments in equal annual principal installments, except to the extent specifically provided in clauses (7) and (8) of Section 12(b) of Article XVI of the by-laws of the Company as in effect on the date of this Agreement and (c) notwithstanding the foregoing clause (b), in no fiscal year shall cash payments in excess of $10,000,000 be made under circumstances described in clauses (7) and (8) of Section 12(b) of Article XVI of the by-laws of the Company as in effect on the date of this Agreement. 8.10 Use of Proceeds. The Company will use the proceeds of the Loans to refinance the Refinanced Debt, for general working capital purposes and for commercial paper liquidity purposes. 8.11 Financial Covenants. (a) Fixed Charge Coverage Ratio. The Company will not permit, on the last day of each fiscal quarter of the Company, the Fixed Charge Coverage Ratio for the four fiscal quarter period ending on such date to be less than 1.75 to 1.0. (b) Maximum Debt Ratio. The Company will not permit the ratio on a consolidated basis of (i) Debt to (ii) EBITDA as of the last day of each fiscal quarter for the four fiscal quarter period ending on such date to exceed 3.0 to 1.0 on or before the last day of the fiscal year of the Company for fiscal year 2002 and 2.5 to 1.0 at any time thereafter. For purposes of this Section 8.11(b), Debt shall not include the indebtedness of any partnership or joint venture of which the Company or any Subsidiary is a partner or member and which indebtedness is consolidated with the indebtedness of the Company under GAAP if and only if such indebtedness is non-recourse to the Company or such Subsidiary. 8.12 Restrictions on Transactions with Affiliates. The Company will not, and will not permit any Subsidiary to, directly or indirectly, purchase, acquire or lease any property from, or sell, transfer or lease any property (other than shares of stock of Company) to, or otherwise deal with, in the ordinary course of business or otherwise (a) any Affiliate, or (b) any corporation in which an Affiliate or the Company (either directly or through Subsidiaries) owns 10% or more of the outstanding Voting Stock, except that (i) any such Affiliate may be a director, officer or employee of the Company or any Subsidiary and may be paid reasonable compensation in connection therewith and (ii) such acts and transactions prohibited by this Section 8.12 may be performed or engaged in if (A) specifically authorized by the Company's Board of Directors (exclusive of any Affiliate who is a director and who has a direct or indirect interest in such transaction) or pursuant to any unrescinded general resolution of such Board or the By-laws of the Company or (B) upon terms not less favorable to the Company or a Subsidiary (as the case may be) than if no such relationship described in clauses (a) and (b) above existed. 8.13 Issuance of Stock by Subsidiaries. The Company will not permit any Subsidiary (either directly, or indirectly by the issuance of rights or options for, or securities convertible into, such shares) to issue, sell or otherwise dispose of any shares of any class of its stock (other than directors' qualifying shares) except (a) to the Company or another Subsidiary or (b) any such issuance, sale or other disposition if, after giving effect thereto, the Company continues to own, directly or indirectly, at least a majority of the issued and outstanding capital of stock of each class of such Subsidiary. 8.14 Compliance with ERISA. The Company will not, and will not permit any Subsidiary to, engage in any transaction in connection with which the Company or any Subsidiary could be subject to either a civil penalty assessed pursuant to Section 502(i) of ERISA or a tax imposed by Section 4975 of the Code, terminate or withdraw from any Plan (other than a Multiemployer Plan) in a manner, or take any other action with respect to any such Plan (including, without limitation, a substantial cessation of operations within the meaning of Section 4062(f) of ERISA), which could result in any liability of the Company or any Subsidiary to the PBGC, to a trust established pursuant to Section 4041(c)(3)(B)(ii) or (iii) or 4042(i) of ERISA, or to a trustee appointed under Section 4042(b) or (c) of ERISA, incur any liability to the PBGC on account of a termination of a Plan under Section 4064 of ERISA, fail to make full payment when due of all amounts which, under the provisions of any Plan, the Company or any Subsidiary is required to pay as contributions thereto, or permit to exist any accumulated funding deficiency, whether or not waived, with respect to any Plan (other than a Multiemployer Plan), if, in any such case, such penalty or tax or such liability, or the failure to make such payment, or the existence of such deficiency, as the case may be, could have a material adverse effect on the business, condition (financial or otherwise) or operations of Company and its Subsidiaries taken as a whole. 8.15 Cooperative Status. The Company will at all times maintain its status as a cooperative for purposes of Subchapter T of the Code. Section 9. Events of Default. If one or more of the following events (each, an "Event of Default") shall occur and be continuing: (a) The Company shall default in the payment when due of any principal of or interest on any Loan or of any fees or other amounts payable by it hereunder and, in the case of interest, fees and other amounts only, such failure shall continue for three Business Days; or (b) The Company or any of its Subsidiaries shall default in the payment when due of any principal of or interest on any of its other Debt in the aggregate amount of $25,000,000 or more; or any event specified in any note, agreement, indenture or other document creating, evidencing or securing any such Debt shall occur if the effect of such event is to cause, or to permit the holder or holders of such Debt to cause, such Debt to become due, or to be prepaid in full, prior to its stated maturity; or (c) Any representation, warranty or certification made or deemed made herein, or in any certificate or other writing furnished to any Bank or the Agent pursuant to the provisions hereof, shall prove to have been false or misleading as of the time made or furnished in any material respect; or (d) The Company shall default in the performance of any of its obligations under Section 8.1(e), 8.3, 8.5, 8.6, 8.7, 8.9, 8.10, 8.11, 8.12, 8.13, 8.14 or 8.15 hereof; or (e) The Company shall default in the performance of any of its other obligations in this Agreement and such default shall continue unremedied for a period of 30 days after notice thereof to the Company by the Agent or any Bank (through the Agent); or (f) The Company or any of its Subsidiaries shall admit in writing its inability to, or be generally unable to, pay its debts as such debts become due; or (g) The Company or any of its Subsidiaries shall (i) apply for or consent to the appointment of, or the taking of possession by, a receiver, custodian, trustee or liquidator of itself or of all or a substantial part of its property, (ii) make a general assignment for the benefit of its creditors, (iii) commence a voluntary case under the Bankruptcy Code (as now or hereafter in effect), (iv) file a petition seeking to take advantage of any other law relating to bankruptcy, insolvency, reorganization, winding-up, or composition or readjustment of debts, (v) fail to controvert in a timely and appropriate manner, or acquiesce in writing to, any petition filed against it in an involuntary case under the Bankruptcy Code, or (vi) take any corporate action for the purpose of effecting any of the foregoing; or (h) A proceeding or case shall be commenced, without the application or consent of the Company or any of its Subsidiaries, in any court of competent jurisdiction, seeking (i) its liquidation, reorganization, dissolution or winding-up, or the composition or readjustment of its debts, (ii) the appointment of a trustee, receiver, custodian, liquidator or the like of the Company or such Subsidiary or of all or any substantial part of its assets, or (iii) similar relief in respect of the Company or such Subsidiary under any law relating to bankruptcy, insolvency, reorganization, winding-up, or composition or adjustment of debts; and such proceeding or case shall continue undismissed, or an order, judgment or decree approving or ordering any of the foregoing shall be entered and continue unstayed and in effect, for a period of 60 or more days (provided that during such period the Banks shall have no obligation to make any new Loans or Convert Alternate Base Rate Loans to Eurodollar Loans); or an order for relief against the Company or such Subsidiary shall be entered in an involuntary case under the Bankruptcy Code; or (i) A final judgment in an amount in excess of $25,000,000 in the aggregate is rendered against the Company or any Subsidiary and, within 60 days after the entry thereof, such judgment is not discharged or execution thereof stayed pending appeal, or within 60 days after the expiration of any such stay, such judgment is not discharged; or (j) An event or condition specified in Section 7.8(b) shall occur or exist with respect to any Plan or Multiemployer Plan if as a result of such event or condition, together with all other such events or conditions, the Company or any ERISA Affiliate shall incur or in the opinion of the Majority Banks shall be reasonably likely to incur a liability to a Plan, a Multiemployer Plan or the PBGC (or any combination of the foregoing) which is, in the determination of the Majority Banks, material in relation to the consolidated financial condition, business, operations or prospects taken as a whole of the Company; or (k) A Change in Control shall occur; THEREUPON: (i) in the case of an Event of Default (other than one referred to in paragraph (g) or (h) of this Section 9), the Agent, upon request of the Majority Banks, may, by notice to the Company, cancel the Commitments and/or declare the principal amount then outstanding of, and the accrued interest on, the Loans and all other amounts payable by the Company hereunder and under the Notes, if any (including, without limitation, any amounts payable under Section 5.5 hereof), to be forthwith due and payable, whereupon such amounts shall be immediately due and payable without presentment, demand, protest or other formalities of any kind, all of which are hereby expressly waived by the Company; and (ii) in the case of the occurrence of an Event of Default referred to in paragraph (g) or (h) of this Section 9, the Commitments shall automatically be canceled and the principal amount then outstanding of, and the accrued interest on, the Loans and all other amounts payable by the Company hereunder and under the Notes, if any (including, without limitation, any amounts payable under Section 5.5 hereof), shall automatically become immediately due and payable without presentment, demand, protest or other formalities of any kind, all of which are hereby expressly waived by the Company. Section 10. The Agent. 10.1 Appointment, Powers and Immunities. Each Bank hereby irrevocably appoints and authorizes the Agent to act as its agent hereunder with such powers as are specifically delegated to the Agent by the terms of this Agreement, together with such other powers as are reasonably incidental thereto. The Agent: (a) shall not have any duties or responsibilities except those expressly set forth in this Agreement, and shall not by reason of this Agreement be a trustee for any Bank; (b) shall not be responsible to the Banks for any recitals, statements, representations or warranties contained in this Agreement, or in any certificate or other documents referred to or provided for in, or received by any of them under, this Agreement or any document delivered in connection herewith, or for the value, validity, effectiveness, genuineness, enforceability or sufficiency of this Agreement, any Note, if any, or any other document referred to or provided for herein or for any failure by the Company or any other Person to perform any of its obligations hereunder or thereunder; (c) shall not be required to initiate or conduct any litigation or collection proceedings hereunder; and (d) shall not be responsible for any action taken or omitted to be taken by it hereunder or under any other document or instrument referred to or provided for herein or in connection herewith, except for its own gross negligence or willful misconduct. The Agent may employ agents and attorneys-in-fact and shall not be responsible for the negligence or misconduct of any such agents or attorneys-in-fact selected by it in good faith. The Agent may deem and treat the payee of any Note, if any, as the holder thereof for all purposes hereof unless and until a written notice of the assignment or transfer thereof shall have been consented to in accordance with Section 11.6. 10.2 Reliance by Agent. The Agent shall be entitled to rely upon any certification, notice or other communication (including any thereof by telephone or telecopy) believed by it to be genuine and correct and to have been signed or sent by or on behalf of the proper Person or Persons, and upon advice and statements of legal counsel, independent accountants and other experts selected by the Agent. As to any matters not expressly provided for by this Agreement, the Agent shall in all cases be fully protected in acting, or in refraining from acting, hereunder in accordance with instructions signed by the Majority Banks or all the Banks if required in accordance with Section 11.4, and such instructions of the Majority Banks or all the Banks, as applicable, and any action taken or failure to act pursuant thereto shall be binding on all of the Banks. 10.3 Defaults. The Agent shall not be deemed to have knowledge or notice of the occurrence of a Default unless the Agent has received notice from a Bank or the Company specifying such Default and stating that such notice is a "Notice of Default." In the event that the Agent receives such a notice of the occurrence of a Default, the Agent shall give prompt notice thereof to the Banks. The Agent shall (subject to Section 10.1 and Section 10.7 hereof) take such action with respect to such Default as shall be directed by the Majority Banks, provided, that, unless and until the Agent shall have received such directions, the Agent may (but shall not be obligated to) take such action, or refrain from taking such action, with respect to such Default as it shall deem advisable in the best interest of the Banks. 10.4 Rights as a Bank. With respect to its Commitments and the Loans made by it, The Northern Trust Company in its capacity as a Bank hereunder shall have the same rights and powers hereunder as any other Bank and may exercise the same as though it were not acting as the Agent, and the term "Bank" or "Banks" shall, unless the context otherwise indicates, include The Northern Trust Company in its individual capacity. The Northern Trust Company and its respective affiliates may (without having to account therefor to any Bank) accept deposits from, lend money to and generally engage in any kind of banking, trust or other business with the Company (and any of its Affiliates) as if it were not acting as the Agent, and The Northern Trust Company and its respective affiliates may accept fees and other consideration from the Company for services in connection with this Agreement or otherwise without having to account for the same to the Banks. 10.5 Indemnification. The Banks agree to indemnify the Agent (to the extent not reimbursed under Section 11.3 or 11.15 hereof, but without limiting the obligations of the Company under said Section 11.3 or 11.15), ratably in accordance with the aggregate principal amount of the Loans made by the Banks (or, if no Loans are at the time outstanding, ratably in accordance with their respective Commitments), for any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind and nature whatsoever which may be imposed on, incurred by or asserted against the Agent in any way relating to or arising out of this Agreement or any other documents contemplated by or referred to herein or the transactions contemplated hereby (including, without limitation, the costs and expenses which the Company is obligated to pay under Section 11.3 hereof but excluding, unless a Default has occurred and is continuing, normal administrative costs and expenses incident to the performance of its agency duties hereunder) or the enforcement of any of the terms hereof or of any such other documents, provided, that no Bank shall be liable for any of the foregoing to the extent they arise from the gross negligence or willful misconduct of the Agent. 10.6 Non-Reliance on Agent and other Banks. Each Bank agrees that it has, independently and without reliance on the Agent or any other Bank, and based on such documents and information as it has deemed appropriate, made its own credit analysis of the Company and its Subsidiaries and decision to enter into this Agreement and that it will, independently and without reliance upon the Agent or any other Bank, and based on such documents and information as it shall deem appropriate at the time, continue to make its own analysis and decisions in taking or not taking action under this Agreement. The Agent shall not be required to keep itself informed as to the performance or observance by the Company of this Agreement or any other document referred to or provided for herein or to inspect the properties or books of the Company or any of its Subsidiaries. Except for notices, reports and other documents and information expressly required to be furnished to the Banks by the Agent hereunder, the Agent shall not have any duty or responsibility to provide any Bank with any credit or other information concerning the affairs, financial condition or business of the Company or any of its Subsidiaries (or any of their Affiliates) which may come into the possession of the Agent or any of its affiliates. 10.7 Failure to Act. Except for action expressly required of the Agent hereunder, the Agent shall in all cases be fully justified in failing or refusing to act hereunder unless it shall receive further assurances to its satisfaction from the Banks of their indemnification obligations under Section 10.5 hereof against any and all liability and expense which may be incurred by it by reason of taking or continuing to take any such action. 10.8 Resignation or Removal of Agent. Subject to the appointment and acceptance of a successor Agent as provided below, the Agent may resign at any time by giving 30 days' notice thereof to the Banks and the Company, and the Agent may be removed at any time with or without cause by the Majority Banks. Upon any such resignation or removal, the Majority Banks shall have the right to appoint a successor to the resigning or removed Agent, subject to the approval of the Company which shall not be withheld unreasonably. If no successor to such Agent shall have been so appointed by the Majority Banks and shall have accepted such appointment within 30 days after the Agent's giving of notice of resignation or the Majority Banks' removal of the Agent, then the resigning or removed Agent may, on behalf of the Banks, appoint a successor Agent, which shall be a bank which has an office in Chicago, Illinois and having capital and retained earnings of at least $100,000,000. Upon the acceptance of any appointment as an Agent hereunder by a successor Agent, such successor Agent shall thereupon succeed to and become vested with all the rights, powers, privileges and duties of the resigning or removed Agent, and the resigning or removed Agent shall be discharged from its duties and obligations hereunder. After the Agent's resignation or removal hereunder, the provisions of this Section 10 shall continue in effect for its benefit in respect of any actions taken or omitted to be taken by it while it was acting as the Agent. 10.9 Documentation and Syndication Agent. There shall be no rights, obligations or liabilities afforded to or imposed upon the Documentation Agent or Syndication Agent by virtue of their status as such. Section 11. Miscellaneous. 11.1 Waiver. No failure on the part of the Agent or any Bank to exercise, no delay in exercising, and no course of dealing with respect to, any right, power or privilege under this Agreement or any Note, if any, shall operate as a waiver thereof, nor shall any single or partial exercise thereof preclude any other or further exercise thereof or the exercise of any other right, power or privilege. The remedies provided herein are cumulative and not exclusive of any remedies provided by law. 11.2 Notices. All notices and other communications provided for herein shall be given or made in writing and telecopied, mailed or delivered, in the case of the Company or the Agent, to its respective address or telecopy number set forth on the signature pages hereof, and in the case of a Bank, to its notice address or telecopy number specified in Schedule 1 hereto or, as to any party, at such other address as shall be designated by such party in a notice to each other party. Except as otherwise provided in this Agreement, all such communications shall be deemed to have been duly given when properly transmitted by telecopier or personally delivered or, in the case of a mailed notice, three Business Days after being deposited in the mail, first class postage prepaid, in each case given or addressed as aforesaid; provided, that notices to the Agent shall be effective only upon actual receipt. 11.3 Expenses, Etc. The Company agrees to pay or reimburse each of the Banks (in the case of clauses (b) and (c) below) and the Agent for: (a) all reasonable out- of-pocket costs and expenses of the Agent (including, without limitation, the reasonable fees and expenses of Gardner, Carton & Douglas, special counsel to the Agent), in connection with (i) the negotiation, preparation, execution and delivery of this Agreement and the Notes, if any, and the making of the Loans hereunder, (ii) any amendment, modification or waiver of any of the terms of this Agreement or any of the Notes, if any, and (iii) any examination and inspection of the Company by the Agent pursuant to Section 8.3(f) hereof; (b) all reasonable costs and expenses of the Banks and the Agent (including reasonable counsels' fees, which counsel may be employees of such Bank or the Agent) in connection with any Default and any enforcement or collection proceedings resulting therefrom; and (c) all transfer, stamp, documentary or other similar taxes, assessments or charges levied by any governmental or revenue authority in respect of this Agreement, the Notes, if any, or any other document referred to herein. 11.4 Amendments, Etc. Except as otherwise expressly provided in this Agreement, any provision of this Agreement may be waived, amended or modified only by an instrument in writing signed by the Company, the Agent and the Majority Banks; provided, that no amendment, modification or waiver shall, unless by an agreement signed by the Agent and all of the Banks: (i) increase or extend the term, or extend the time or waive any requirement for the reduction or termination, of any of the Commitments (except as specifically provided in Section 2.4), (ii) extend the date fixed for the payment of principal of or interest on any Loan or the payment of any fees, (iii) reduce the amount of any payment of principal thereof or the rate at which interest is payable thereon or any fee is payable hereunder, (iv) alter the terms of Section 2.4 or of this Section 11.4, (v) amend the definition of the term "Majority Banks" or (vi) waive any condition precedent set forth in Section 6 hereof. 11.5 Successors and Assigns. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and permitted assigns. 11.6 Assignments and Participations. (a) The Company may not assign its rights or obligations hereunder or under the Notes, if any, without the prior written consent of all of the Banks and the Agent. (b) Any Bank may, in the ordinary course of its business and in accordance with applicable law, at any time sell to one or more banks or other financing entities or investment funds ("Participants") participating interests in any Loan owing to such Bank, the Note, if any, held by such Bank, the Commitment of such Bank or any other interest of such Bank. Each Bank shall promptly provide notice of the identity of each Participant to the Company and the Agent. In the event of any such sale by a Bank of participating interests to a Participant, such Bank shall remain solely responsible to the other parties hereto for the performance of such obligations, such Bank shall remain the holder of its Notes, if any, for all purposes hereunder, all amounts payable by the Company under this Agreement shall be determined as if such Bank had not sold such participating interest, and the Company and the Agent shall continue to deal solely and directly with such Bank in connection with such Bank's rights and obligations hereunder. (c) Each Bank shall retain the sole right to approve, without the consent of any Participant, any amendment, modification or waiver of any provision hereunder other than any amendment, modification or waiver of any provision hereunder with respect to any Loan or Commitment in which such Participant has an interest which forgives principal, interest or fees or reduces the interest rate or fees payable with respect to any such Loan or Commitment, postpones any date fixed for any regularly-scheduled payment of principal of, or interest or fees on, any such Loan or Commitment, releases any guarantor, if any, of any such Loan or releases any substantial portion of collateral, if any, securing any such Loan. (d) The Company agrees that each Participant shall be deemed to have the right of setoff provided in Section 4.7 in respect of its participating interest in amounts owing hereunder to the same extent as if the amount of its participating interest were owing directly to it as a Bank hereunder, provided, that each Bank shall retain the right of setoff provided in Section 4.7 with respect to the amount of participating interests sold to each Participant. The Banks agree to share with each Participant, and each Participant, by exercising the right of setoff provided in Section 4.7, agrees to share with each Bank, any amount received pursuant to the exercise of its right of setoff, such amounts to be shared in accordance with Section 4.7 as if each Participant were a Bank. (e) Any Bank may, in the ordinary course of its business and in accordance with applicable law, at any time assign to one or more banks or other financing entities or investment funds ("Purchaser") all or any part of its rights and obligations hereunder. Each such assignment shall be pursuant to an Assignment Agreement substantially in the form of Exhibit I hereto. The consent of the Company and the Agent shall be required prior to any assignment becoming effective with respect to the Purchaser which is not a Bank or an affiliate thereof; provided, however, that if a Default has occurred and is continuing, the consent of the Company shall not be required. The consent of the Company and the Agent shall not be unreasonably withheld or delayed. The Banks agree to provide the Company notice of any assignment to a Bank or an affiliate thereof. Each such assignment shall be in an amount not less than the lesser of (i) $10,000,000 or (ii) the remaining amount of the assigning Bank's Commitment (calculated as the date of such assignment). (f) Upon (i) the delivery to the Agent of a notice of assignment, substantially in the form attached as Exhibit "I" to Exhibit I hereto (a "Notice of Assignment"), together with any consents required by paragraph (e) above, and (ii) payment of a $3,000 fee to the Agent for processing such assignment, such assignment shall become effective on the effective date specified in such Notice of Assignment. The Notice of Assignment shall contain a representation by the Purchaser to the effect that none of the consideration used to make the purchase of the Commitment and Loans under the applicable Assignment Agreement are "plan assets" as defined under ERISA and that the rights and interests of the Purchaser in and under this Agreement will not be "plan assets" under ERISA. On and after the effective date of such assignment, such Purchaser shall for all purposes be a Bank party to this Agreement and shall have all rights and obligations of a Bank hereunder, to the same extent as if it were an original party hereto, and no further consent or action by the Company, the Banks or the Agent shall be required to release the transferor Bank with respect to the percentage of its Commitment and Loans assigned to such Purchaser. Upon the consummation of any assignment to a Purchaser pursuant to this Section 11.6, if requested by the Purchaser, the transferor Bank, the Agent and the Company shall make appropriate arrangements so that a replacement Note is issued to such transferor Bank and a new Note or, as appropriate, a replacement Note, is issued to such Purchaser, in each case in principal amounts reflecting their Commitment, as adjusted pursuant to such assignment. (g) The Company authorizes each Bank to disclose to any Participant or Purchaser or any other Person acquiring an interest hereunder by operation of law (each a "Transferee") and any prospective Transferee any and all information in such Bank's possession concerning the creditworthiness of the Company and its Subsidiaries; provided, that each Transferee and prospective Transferee agrees to be bound by Section 11.10 of this Agreement. (h) The Company hereby agrees that each Bank and each Purchaser shall have the unrestricted right at any time and from time to time, and without the consent of or notice to the Company, to pledge all or any portion of its rights under this Agreement or the Notes, if any, to any of the twelve (12) Federal Reserve Banks organized under Section 4 of the Federal Reserve Act, 12 U.S.C. Section 341, provided, that no such pledge or enforcement thereof shall release such Bank or Assignee from its obligations hereunder or thereunder. 11.7 Survival. The obligations of the Company under Sections 5.1, 5.5, 11.3 and 11.15 hereof shall survive the repayment of the Loans and the termination of the Commitments. 11.8 Captions. The table of contents and captions and section headings appearing herein are included solely for convenience of reference and are not intended to affect the interpretation of any provision of this Agreement. 11.9 Counterparts. This Agreement may be executed in any number of counterparts, all of which taken together shall constitute one and the same instrument, and any of the parties hereto may execute this Agreement by signing any such counterpart. 11.10 Confidentiality. Each Bank and the Agent agree to use reasonable precautions to keep confidential, in accordance with their customary procedures for handling confidential information of this nature and in accordance with safe and sound banking practices, any non-public information supplied to it by the Company pursuant to this Agreement which, at the time it is so supplied, is clearly identified as non-public information by a notice in writing; provided, that nothing herein shall limit the disclosure of any such information (a) to the extent required by statute, rule, regulation or judicial process, (b) to counsel for or other professional advisors to any of the Banks or the Agent, (c) to bank examiners, auditors or accountants, (d) to any other Bank, (e) in connection with any litigation to which any one or more of the Agent or Banks is a party, (f) to any affiliate of the Agent or any Bank, or (g) pursuant to Section 11.6(g). 11.11 Governing Law. THIS AGREEMENT AND THE NOTES, IF ANY, SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF ILLINOIS. 11.12 Waiver of Jury Trial. THE COMPANY, THE AGENT AND THE BANKS HEREBY IRREVOCABLY WAIVE, TO THE FULLEST EXTENT PERMITTED BY LAW, ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY. 11.13 No Fiduciary Relationship. The Company acknowledges and agrees that the lending relationship hereby created with the Banks is and has been conducted on an open and arm's-length basis in which no fiduciary relationship exists between the Company and any Bank or the Agent and that the Company has not relied and is not relying on any such fiduciary relationship in consummating the transactions contemplated hereby. 11.14 Consent To Jurisdiction. THE COMPANY HEREBY ABSOLUTELY AND IRREVOCABLY CONSENTS AND SUBMITS TO THE JURISDICTION OF THE COURTS OF THE STATE OF ILLINOIS OR THE UNITED STATES OF AMERICA FOR THE NORTHERN DISTRICT OF ILLINOIS IN CONNECTION WITH ANY SUITS, ACTIONS OR PROCEEDINGS BROUGHT AGAINST THE COMPANY BY THE AGENT OR ANY BANK ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE NOTES, IF ANY, AND IRREVOCABLY AGREES THAT ALL CLAIMS IN RESPECT OF ANY SUCH SUIT, ACTION OR PROCEEDING MAY BE HEARD AND DETERMINED IN ANY SUCH COURT. THE COMPANY HEREBY WAIVES AND AGREES NOT TO ASSERT IN SUCH SUIT, ACTION OR PROCEEDING, IN EACH CASE, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY CLAIM THAT (A) THE COMPANY IS NOT PERSONALLY SUBJECT TO THE JURISDICTION OF ANY SUCH COURT; (B) THE COMPANY IS IMMUNE FROM SUIT OR ANY LEGAL PROCESS (WHETHER THROUGH SERVICE OR NOTICE, ATTACHMENT PRIOR TO JUDGMENT, ATTACHMENT IN AID OF EXECUTION, EXECUTION OR OTHERWISE) WITH RESPECT TO IT OR ITS PROPERTY; (C) ANY SUCH SUIT, ACTION OR PROCEEDING IS BROUGHT IN AN INCONVENIENT FORUM; (D) THE VENUE OF ANY SUCH SUIT, ACTION OR PROCEEDING IS IMPROPER; OR (E) THIS AGREEMENT OR THE NOTES, IF ANY, MAY NOT BE ENFORCED IN OR BY ANY SUCH COURT. NOTHING CONTAINED HEREIN SHALL AFFECT ANY RIGHT THAT THE AGENT OR ANY BANK MAY HAVE TO BRING ANY SUIT, ACTION OR PROCEEDING RELATING TO THIS AGREEMENT OR THE NOTES, IF ANY, AGAINST THE COMPANY OR ITS PROPERTY IN THE COURTS OF ANY OTHER JURISDICTION. 11.15 Company Indemnification. Whether or not the transactions contemplated hereby are consummated, the Company shall indemnify and hold the Agent, its affiliates, each Bank and each of their respective officers, directors, employees, counsel, agents and attorneys-in-fact (each, an "Indemnified Person") harmless from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, charges, expenses and disbursements (including attorneys fees and disbursements, which attorneys may be employees of such Indemnified Person) of any kind or nature whatsoever which may at any time (including at any time following repayment of the Loans and the termination, resignation or replacement of the Agent or replacement of any Bank) be imposed on, incurred by or asserted against any such Indemnified Person in any way relating to or arising out of this Agreement or any document contemplated by or referred to herein, or the transactions contemplated hereby, or any action taken or omitted by any such Indemnified Person under or in connection with any of the foregoing, including with respect to any investigation, litigation or proceeding (including any insolvency proceeding or appellate proceeding) related to or arising out of this Agreement or the Loans or the use of the proceeds thereof, whether or not any Indemnified Person is a party thereto (all the foregoing, collectively, the "Indemnified Liabilities"); provided, that the Company shall have no obligation hereunder to any Indemnified Person with respect to (a) Indemnified Liabilities resulting solely from the gross negligence or willful misconduct of such Indemnified Person, (b) disputes amongst the Banks and/or the Banks and the Agent, (c) litigation between the Company and the Agent and/or the Banks where the Company is the prevailing party on the merits pursuant to a final non-appealable order or (d) expenses of the type described in Section 11.3(a) to the extent incurred by a Person other than the Agent. The agreements in this Section shall survive payment of all other obligations. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed as of the day and year first above written. ACE HARDWARE CORPORATION By:___LORI L. BOSSMANN____________________ Name:_Lori L. Bossmann____________________ Title:_Vice President, Finance____________ Address: 2200 Kensington Court Oak Brook, Illinois 60523-2100 Attention: Treasurer Telecopy No.: (630) 572-6389 THE NORTHERN TRUST COMPANY, individually and as Administrative Agent By:_________________________________ Name:___________________________ Title: Vice President Address: 50 South LaSalle Street Chicago, Illinois 60675 Telecopy No.: (312) 444-5055 Attention: Tracy Toulouse BANK OF AMERICA, NATIONAL ASSOCIATION, individually and as Syndication Agent By:_____TRACY TOULOUSE______________ Name:___Tracy J. Toulouse___________ Title:__Vice President______________ SUNTRUST BANK, individually and as Documentation Agent By:_________________________________ Name:___________________________ Title:__________________________ BANKS: ------ BANK ONE, NA (Main Office Chicago) By:____JOHN J. COMPERTH_________ Name:__John J. Comperth_________ Title:_Sr. Vice President_______ PNC BANK, NATIONAL ASSOCIATION By:____MARGARET A. JACKETIO_____ Name:__Margaret A. Jacketio_____ Title:_Vice President___________ EX-10 15 0015.txt FORT WORTH LEASE 10-A-12 CB Richard Ellis, Inc. North Texas Commercial Association Of Realtorsr COMMERCIAL LEASE AGREEMENT TABLE OF CONTENTS EXHIBITS AND ADDENDA. Any exhibit or addendum attached Article Page to this Lease is incorporated as a part of this Lease for all purposes. 1. Defined Terms 1 Any term not specifically defined in the Addenda shall have the same 2. Lease and Lease Term 2 meaning given to it in the body of this Lease. to the extend any 3. Rent and Security Deposit 2 provisions in the body of this Lease conflict with the Addenda, the 4. Taxes 3 Addenda shall control. 5. Insurance and Indemnity 3 6. Use of Demised Premises 4 [Check all boxes which apply. Boxes not checked do not apply.] 7. Property Condition, Maintenance, Repairs and Alterations 5 X Exhibit A Survey and/or Legal Description of the Property 8. Damage or Destruction 6 X Exhibit B Floor Plan and/or Site Plan 9. Condemnation 7 10. Assignment and Subletting 7 X Addendum A Expense Reimbursement 11. Default and Remedies 7 X Addendum B Renewal Options 12. Landlord's Contractual Lien 9 Addendum C Right of First Refusal for Additional Space 13. Protection of Lenders 9 Addendum D Percentage Rental/Gross Sales Reports 14. Environmental Representations and Indemnity 10 Addendum E Guarantee 15. Professional Service Fees 10 X Addendum F Construction of Improvements 16. Miscellaneous 11 Addendum G Rules and Regulations 17. Additional Provisions 13 Addendum H Other IN CONSIDERATION of the terms, provisions and agreements contained in this Lease, the parties agree as follows: ARTICLE ONE: DEFINED TERMS. As used in this Commercial Lease Agreement (the "Lease"), the terms set forth in this Article One have the following respective meanings: 1.01. Effective Date: The last date beneath the signatures of Landlord and Tenant on page 13 below. 1.02. Landlord: Stag Properties, LLC Address: 3838 Oak Lawn, Suite 1500, Dallas, Texas 75219 Telephone: 214-522-6400 Fax: 214-522-6103 1.03. Tenant: Ace Hardware Corporation Address: 2200 Kensington Court, Oak Brook, IL 60523-2100 Telephone: 630-990-6545 Fax: 630-571-2186 1.04. Demised Premises: A. Street Address: 2620 McIvey, Fort Worth, Texas 76111 in Tarrant County, Texas. B. Legal Description: The property on which the Demised Premises is situated (the "Property") is more particularly described as: See Exhibit A or is described on Exhibit A, SURVEY AND/OR LEGAL DESCRIPTION. C. Floor Plan or Site Plan: Being a floor area of approximately 10,915 square feet and being approximately N/A feet by N/A feet (measured to the exterior of outside walls and to the center of the interior walls) and being more particularly shown in outline form on Exhibit B, FLOOR PLAN AND/OR SITE PLAN. D. Tenant's pro rata share of the Property is 100 %. [See Addendum A, EXPENSE REIMBURSEMENT, if applicable] 1.05. Lease Term: 5 years and 0 months beginning on See addendum F (The "Commencement Date") and ending on December 31st, 2005 (the "Expiration Date"). 1.06. Base Rent: $510,000.00 total Base Rent for the Lease Term payable in monthly installments of $8,500.00 per month in advance. (The total amount of Rent is defined in Section 3.01.) 1.07. Percentage Rental Rate: N/A %. [See Addendum D, PERCENTAGE RENTAL/GROSS SALES REPORTS, if applicable] 1.08. Security Deposit: [Intentionally Left Blank] 1.09. Permitted Use: Trucking, warehousing, general office, and incidental uses thereto . [See Section 6.01] 1.10. Party to whom Tenant is to deliver payments under this Lease [check one]:Landlord, Principal Broker, or Other Landlord may designate in writing the party authorized to act on behalf of Landlord to enforce this Lease. Any such authorization will remain in effect until it is revoked by Landlord in writing. 1.11. Principal Broker: Kennedy-Wilson, acting as [check one]: agent for Landlord exclusively, agent for Tenant exclusively, an intermediary. Principal Broker's Address: 9400 N. Central Expressway, Dallas, Texas 75231 Telephone: 214-871-6666 Fax: 214-871-6655 1.12. Cooperating Broker: CB Richard Ellis, Inc., acting as [check one]: agent for Landlord exclusively, agent for Tenant exclusively, an intermediary. Cooperating Broker's Address: 5400 LBJ Freeway, Suite 1100, Dallas, Texas 75240 Telephone: 972-458-4800 Fax: 972-702-8315 1.13. The Fee: The Professional Service Fee shall be as set forth in [check one]: Paragraph A, or Paragraph B of Section 15.01. A. The percentage applicable for leases in Sections 15.01 and shall be six and one-half percent ( 6.5 %). B. The percentage applicable in Section 15.04 in the event of a sale shall be percent ( %). 1.14. Acceptance: The number of days for acceptance of this offer is days. [See Section 16.14] ARTICLE TWO: LEASE AND LEASE TERM 2.01. Lease of Demised Premises for Lease Term. Landlord leases the Demised Premises to Tenant and Tenant leases the Demised Premises from Landlord for the Lease Term stated in Section 1.05. The Commencement Date is the date specified in Section 1.05, unless advanced or delayed under any provision of this Lease. 2.02. Delay in Commencement. Landlord shall not be liable to Tenant if Landlord does not deliver possession of the Demised Premises to Tenant on the Commencement Date specified in Section 1.05 above. Landlord's non-delivery of possession of the Demised Premises to Tenant on the commencement Date will not affect this Lease or the obligations of Tenant under this Lease. However, the Commencement Date shall be delayed until possession of the Demised Premises is delivered to Tenant. The Lease Term shall be extended for a period equal to the delay in delivery of possession of the Demised Premises to Tenant, plus the number of days necessary for the Lease Term to expire on the last day of a month. If Landlord does not deliver possession of the Demised Premises to Tenant within sixty (60) days after the Commencement Date specified in Section 1.05, Tenant may cancel this Lease by giving written notice to Landlord within ten (10) days after the 60-day period ends. If Tenant gives such notice, this Lease shall be canceled effective as of the date of its execution, and no party shall have any obligations under this Lease except that the Landlord shall return the first months rent to the Tenant per 3.02. If Tenant does not give such notice within the time specified, Tenant shall have no right to cancel this Lease, and the Lease Term shall commence upon the delivery of possession of the Demised Premises to Tenant. If delivery of possession of the Demised Premises to Tenant is delayed, Landlord and Tenant shall, upon such delivery, execute an amendment to this Lease setting forth the revised Commencement Date of the Lease Term. except that the Landlord shall return the first months rent to the Tenant per 3.02. 2.03. Early Occupancy. If Tenant occupies the Demised Premises prior to the Commencement Date, Tenant's occupancy of the Demised Premises shall be subject to all of the provisions of this Lease. Early occupancy of the Demised Premises shall not advance the Expiration Date. Unless otherwise provided herein, Tenant shall pay Base Rent and all other charges specified in this Lease for the period of occupancy. 2.04. Holding Over. Tenant shall vacate the Demised Premises immediately upon the expiration of the Lease Term or earlier termination of this Lease. Tenant shall reimburse Landlord for and Indemnify Landlord against all damages incurred by Landlord as a result of any delay by Tenant in vacating the Demised Premises. If Tenant does not vacate the Demised Premises upon the expiration of the Lease Term or earlier termination of this Lease, Tenant's occupancy of the Demised Premises shall be a day- to-day tenancy, subject to all of the terms of this Lease, except that the Base Rent during the holdover period shall be increased to an amount which is one-and-one-half (1-1/2) times the Base Rent in effect on the expiration or termination of this Lease, computed on a daily basis for each day of the holdover period, plus all additional sums due under this Lease. This paragraph shall not be construed as Landlord's consent for Tenant to hold over or to extend this Lease. ARTICLE THREE: RENT AND SECURITY DEPOSIT 3.01. Manner of Payment. All sums payable under this Lease by Tenant (the "Rent") shall be made to the Landlord at the address designated in Section 1.02, unless another person is designated in Section 1.10, or to any other party or address as Landlord may designate in writing. Any and all payments made to a designated third party for the account of the Landlord shall be deemed made to Landlord when received by the designated third party. All sums payable by Tenant under this Lease, whether or not expressly denominated as rent, shall constitute rent for the purposes of Section 502(b)(6) of the Bankruptcy Code and for all other purposes. The Base Rent is the minimum rent for the Demised Premises and is subject to the terms and conditions contained in this Lease, together with the attached Addenda, if any. 3.02. Time of Payment. Upon execution of this Lease, Tenant shall pay the installment of Base Rent for the first month of the Lease Term. On or before the first day of the second month of the Lease Term and of each month thereafter, the installment of Base Rent and other sums due under this Lease shall be due and payable, in advance, without off-set deduction or prior demand. Tenant shall cause payments to be properly mailed or otherwise delivered so as to be actually received by the party identified in 1.10 above on or before the due date (and not merely deposited in the mail). If the Lease Term commences or ends on a day other than the first or last day of a calendar month, the rent for any fractional calendar month following the Commencement Date or preceding the end of the Lease Term shall be prorated by days. 3.03. Late Charges. Tenant's failure to promptly pay sums due under this Lease may cause Landlord to incur unanticipated costs. The exact amount of those costs is impractical or extremely difficult to ascertain. The costs may include, but are not limited to, processing and accounting charges and late charges which may be imposed on Landlord by any ground lease or deed of trust encumbering the Demised Premises. Payments due to Landlord under this Lease are not an extension of credit. Therefore, if any payment under the Lease is not actually received on or before five (5) days after the due date (and not merely deposited in the mail), Landlord may, at Landlord's option and to the extent allowed by applicable law, impose a Late Charge on any late payments in an amount equal to one-half of one percent (.5%) of the amount of the past due payment (the "Late Charge") per day for each day after the due date, until the past due amount in Good Funds is received by Landlord, up to a maximum of ten percent (10%) of the past due amount. A Late Charge may be imposed only once on each past due payment. Any Late Charge will be in addition to Landlord's other remedies for nonpayment of rent. If any check tendered to Landlord by Tenant under this Lease is dishonored for any reason, Tenant shall pay to the party receiving payments under this Lease a fee of twenty-five dollars ($25.00), plus (at Landlord's option) a Late Charge as provided above until good funds are received by Landlord. The parties agree that any Late Charge and dishonored check fee represent a fair and reasonable estimate of the costs Landlord will incur by reason of the late payment or dishonored check. Payments received from Tenant shall be applied first to any Late Charges, second to Base Rent, and last to other unpaid charges or reimbursements due to Landlord. Notwithstanding the foregoing, Landlord will not impose a Late Charge as to the first late payment in any calendar year, unless Tenant fails to pay the late payment to Landlord within three (3) business days after the delivery of a written notice from Landlord to Tenant demanding the late payment be paid. However, Landlord may impose a Late Charge without advance notice to Tenant on any subsequent late payment in the same calendar year. 3.04 [Intentionally Left Blank] 3.05 Good Funds Payments. If, for any reason whatsoever, any two or more payments by check from Tenant to Landlord for Rent are dishonored and returned unpaid, thereafter Landlord may, at Landlord's sole option, upon written notice to Tenant, require that all future payments of Rent for the remaining term of the Lease must be made by cash, certified check, cashier's check, or money order ("Good Funds") and that the delivery of Tenant's personal or corporate check will no longer constitute payment of Rent under this Lease. Any acceptance by Landlord of a payment for Rent by Tenant's personal or corporate check thereafter shall not be construed as a waiver of Landlord's right to insist upon payment by Good Funds as set forth herein. ARTICLE FOUR: TAXES 4.01. Payment by Landlord. Landlord shall pay the real estate taxes on the Demised Premises during the Lease Term. 4.02. Improvements by Tenant. If the real estate taxes levied against the Demised Premises for the real estate tax year in which the Lease Term commences are increased as a result of any alterations, additions or improvements made by Tenant or by Landlord at the request of Tenant, Tenant shall pay to Landlord upon demand the amount of the increase and continue to pay the increase during the Lease Term. Landlord shall use reasonable efforts to obtain from the tax assessor or assessors a written statement of the total amount of the increase. 4.03. Joint Assessment. If the real estate taxes are assessed against the Demised Premises jointly with other property not constituting a part of the Demised Premises, the real estate taxes applicable to the Demised Premises shall be equal to the amount bearing the same proportion to the aggregate assessment that the total square feet of building area in the Demised Premises bears to the total square feet of building area included in the joint assessment. 4.04. Personal Property Taxes. Tenant shall pay all taxes assessed against trade fixtures, furnishings, equipment, inventory, products or any other personal property belonging to Tenant. Tenant shall use reasonable efforts to have Tenant's property taxed separately from the Demised Premises. If any of Tenant's property is taxed with the Demised Premises, Tenant shall pay the taxes for its property to Landlord within fifteen (15) days after Tenant receives a written statement from Landlord for the property taxes. ARTICLE FIVE: INSURANCE AND INDEMNITY 5.01. Casualty Insurance. During the Lease Term, Landlord shall maintain policies of insurance covering loss of or damage to the Demised Premises in an amount or percentage of replacement value as Landlord deems reasonable in relation to the age, location, type of construction and physical condition of the Demised Premises and the availability of insurance at reasonable rates. The policies shall provide protection against all perils included within the classification of fire and extended coverage and any other perils which Landlord deems necessary. Landlord may, at Landlord's option, obtain insurance coverage for Tenant's fixtures, equipment or building improvement installed by Tenant in or on the Demised Premises. Tenant shall, at Tenant's expense, maintain insurance on its fixtures, equipment and building improvements as Tenant deems necessary to protect Tenant's interest. Tenant shall not do or permit to be done anything which invalidates any insurance policies. Any casualty insurance carried by Landlord or Tenant shall be for the sole benefit of the party carrying the insurance and under its sole control. 5.02. Increase in Premiums. Tenant shall not permit any operation or activity to be conducted, or storage or use of any volatile or any other materials, on or about the Demised Premises that would cause suspension or cancellation of any fire and extended coverage insurance policy carried by Landlord, or increase the premiums therefore, without the prior written consent of Landlord. If Tenant's use and occupancy of the Demised Premises causes an increase in the premiums for any fire and extended coverage insurance policy carried by Landlord, Tenant shall pay to Landlord, as additional rent, the amount of the increase within ten days after demand and presentation by Landlord of written evidence of the increase. 5.03. Liability Insurance. During the Lease Term, Tenant shall maintain a commercial general liability policy of insurance, at Tenant's expense, insuring Landlord against liability arising out of the ownership, use, occupancy, or maintenance of the Demised Premises. The initial amounts of the insurance must be at least; $1,000,000 for Each Occurrence, $2,000,000 General Aggregate per policy year, $100,000 Property Damage for the Demised Premises, and $10,000 Medical Expense; plus a $5,000,000 commercial general liability umbrella; and shall be subject to periodic increases based upon economic factors as Landlord may determine, in Landlord's discretion, exercised in good faith. However, the amounts of the insurance shall not limit Tenant's liability nor relieve Tenant of any obligation under this Lease. The policies must contain cross-liability endorsements, if applicable, and must insure Tenant's performance of the indemnity provisions of Section 5.04. the policies must contain a provision which prohibits cancellation or modification of the policy except upon thirty (30) days' prior written notice to Landlord. Tenant may discharge Tenant's obligations under this Section by naming Landlord as an additional insured under a comprehensive policy of commercial general liability insurance maintained by Tenant and containing the coverage and provisions described in this Section. Tenant shall deliver a copy of the policy or certificate (or a renewal) to Landlord prior to the commencement Date and prior to the expiration of the policy during the Lease Term. If Tenant fails to maintain the policy, Landlord may elect to maintain the insurance at Tenant's expense. Tenant may, at Tenant's expense, maintain other liability insurance as Tenant deems necessary. 5.04. Indemnity. Landlord shall not be liable to Tenant or to Tenant's employees, agents, invitees or visitors, or to any other person, for any injury to persons or damage to property on or about the Demised Premises or any adjacent area owned by Landlord caused by the negligence or misconduct of Tenant, Tenant's employees, subtenants, agents, licensees or concessionaires or any other person entering the Demised Premises under express or implied invitation of Tenant, or arising out of the use of the Demised Premises by Tenant and the conduct of Tenant's business, or arising out of any breach or default by Tenant in the performance of Tenant's obligations under this Lease; and Tenant hereby agrees to indemnify and hold Landlord harmless from any loss, expense or claims arising out of such damage or injury. Tenant shall not be liable for any injury or damage caused by the negligence or misconduct of Landlord, or Landlord's employees or agents, and Landlord agrees to indemnify and hold Tenant harmless from any loss, expense or damage arising out of such damage or injury. 5.05. Comparative Negligence. Tenant and Landlord hereby unconditionally and irrevocably agree to indemnify, defend and hold each other and their officers, agents, directors, subsidiaries, partners, employees, licenses and counsel harmless, to the extent of each party's comparative negligence, if any, from and against any and all loss, liability, demand, damage, judgment, suit, claim, deficiency, interest, fee, charge, cost or expense (including, without limitation, interest, court costs and penalties, reasonable attorney's fees and disbursements and amounts paid in settlement, or liabilities resulting from any change in federal, state or local law or regulation or interpretation of this Lease) of whatever nature, on a comparative negligence basis, even when caused in part by Landlord's or Tenant's negligence or the joint or concurring negligence of Landlord, Tenant, and any other person or entity, which may result or to which Landlord or Tenant and/or any of their officers, agents, directors, employees, subsidiaries, partners, licensees and counsel may sustain, suffer, incur or become subject to in connection with or arising in any way whatsoever out of the leasing, operation, promotion, management, maintenance, repair, use or occupation of the Demised Premises, or any other activity of whatever nature in connection therewith, or arising out of or by reason of any investigation, litigation or other proceedings brought or threatened, arising out of or based upon the leasing, operation, promotion, management, maintenance, repair, use or occupancy of the Demised Premises, or any other activity on the Demised Premises. This provision shall survive the expiration or termination of this Lease. 5.06. Waiver of Subrogation. Each party to this Lease waives any and every claim which arises or may arise in its favor against the other party during the term of this Lease or any renewal or extension of this Lease for any and all loss of, or damage to, any of its property located within or upon, or constituting a part of, the Demised Premises, which loss or damage is covered by valid and collectible fire and extended coverage insurance policies, to the extent that such loss or damage is recoverable under such insurance policies. These mutual waivers shall be in addition to, and not in limitation or derogation of, any other waiver or release contained in this Lease with respect to any loss of, or damage to, property of the parties. Inasmuch as these mutual waivers will preclude the assignment of any aforesaid claim by way of subrogation or otherwise to an insurance company (or any other person), each party hereby agrees to give immediately to each insurance company (which has issued to such party policies of fire and extended coverage insurance) written notice of the terms of such mutual waivers, and to cause such policies to be properly endorsed to prevent the invalidation of the insurance coverage by reason of these waivers. ARTICLE SIX: USE OF DEMISED PREMISES 6.01. Permitted Use. Tenant may use the Demised Premises only for the Permitted Use stated in Section 1.09. The parties to this Lease acknowledge that the current use of the Demised Premises or the improvements located on the Demised Premises, or both, may or may not conform to the city zoning ordinance with respect to the permitted use, height, setback requirements, minimum parking requirements, coverage ratio of improvements to total area of land, and other matters which may have a significant economic impact upon the Tenant's intended use of the Demised Premises. Tenant acknowledges that Tenant has or will independently investigate and verify to Tenant's satisfaction the extent of any limitations or non-confirming uses of the Demised Premises. Tenant further acknowledges that Tenant is not relying upon any warranties or representations of Landlord or the Brokers who are participating in the negotiation of this Lease concerning the Permitted Use of the Demised Premises, or with respect to any uses of the improvements locate on the Demised Premises. 6.02. Compliance with Law. Tenant shall comply with all governmental laws, ordinances and regulations applicable to the use of the Demised Premises, and shall promptly comply with all governmental orders and directives for the correction, prevention and abatement of nuisances and other activities in or upon, or connected with the Demised Premises, except for ADA compliance. 6.03. Certificate of Occupancy. If required, Tenant shall obtain a Certificate of Occupancy from the municipality in which the Property is located prior to occupancy of the Demised Premises. Tenant may apply for a Certificate of Occupancy prior to the Commencement Date and, if Tenant is unable to obtain a Certificate of Occupancy, Tenant shall have the right to terminate this Lease by written notice to Landlord if unable to obtain a Certificate of Occupancy, Tenant shall have the right to terminate this Lease by written notice to Landlord if Landlord or Tenant is unwilling or unable to cure the defects which prevented the issuance of the Certificate of Occupancy. Landlord may, but has no obligation to, cure any such defects, including any repairs, installations, or replacements of any items which are not presently existing on the Demised Premises, or which have not been expressly agreed upon by Landlord in writing. 6.04. Signs. Any signs installed by Tenant must conform with applicable laws, deed restrictions on the Property, and other applicable requirements. Tenant must remove all signs, decorations and ornaments at the expiration or termination of this Lease and must repair any damage and close any holes caused by the removal. 6.05. Utility Services. Tenant shall pay the cost of all utility services, including but not limited to initial connection charges, all charges for gas, water, sewerage, storm water disposal, communications and electricity used on the Demised Premises, and for replacing all electric lights, lamps and tubes. 6.06. Landlord's Access. Landlord and Landlord's agents shall have the right to, during normal business hours and upon reasonable advance notice, and without unreasonably interfering with Tenant's business, enter the Demised Premises: (a) to inspect the general condition and state of repair of the Demised Premises, (b) to make repairs required or permitted under this Lease, (c) to show the Demised Premises or the Property to any prospective tenant or purchaser, and (d) for any other reasonable purpose. If Tenant changes the locks on the Demised Premises, Tenant must provide Landlord with a copy of each separate key. During the final one hundred fifty (150) days of the Lease Term, Landlord and Landlord's agents may erect and maintain on or about the Demised Premises signs advertising the Demised Premises for lease or for sale. 6.07. Possession. If Tenant pays the rent, properly maintains the Demised Premises, and complies with all other terms of this Lease, Tenant may occupy and enjoy the Demised Premises for the full Lease Term, subject to the provisions of this Lease. 6.08. Exemptions From Liability. Landlord shall not be liable for any damage or injury to the persons, business (or any loss of income), goods, inventory, furnishings, fixtures, equipment, merchandise or other property of Tenant, Tenant's employees, invitees, customers or any other person in or about the Demised Premises, whether the damage or injury is caused by or results from: (a) fire, steam, electricity, water, gas or wind; (b) the breakage, leakage, obstruction or other defects of pipes, sprinklers, wires, appliances, plumbing, air conditioning or lighting fixtures or any other cause; (c) conditions arising on or about the Demised Premises or upon other portions of any building of which the Demised Premises is a part, or from other sources or places; or (d) any act or omission of any other tenant of any building on the Property. Landlord shall not be liable for any damage or injury even though the cause of or the means of repairing the damage or injury are not accessible to Tenant. The provisions of this Section 6.08 shall not, however, exempt Landlord from liability for Landlord's gross negligence or willful misconduct. ARTICLE SEVEN: PROPERTY CONDITION, MAINTENANCE, REPAIRS AND ALTERATIONS 7.01. Property Condition. Except as disclosed in writing by Landlord to Tenant contemporaneously with the execution of this Lease, to the best of Landlord's actual knowledge the Demised Premises has no known latent structural defects, construction defects of a material nature, and to the best of Landlord's actual knowledge none of the improvements has been constructed with materials known to be a potential health hazard to occupants of the Demised Premises. Tenant acknowledges that neither the Principal Broker nor any Cooperating Broker has made any warranty or representation to Tenant with respect to the condition of the Demised Premises, and that Tenant is relying exclusively upon Tenant's own investigations and the representations of Landlord, if any, with respect to the condition of the Demised Premises. Landlord and Tenant agree to hold the Brokers harmless of and from any and all damages, claims, costs and expenses of every kind and character resulting from or related to Landlord's furnishing to the Brokers any false, incorrect or inaccurate information with respect to the Demised Premises, or Landlord's concealing any material information with respect to the condition of the Demised Premises. Other than as expressly set forth in this Lease, Landlord represents that on the Commencement Date (and for a period of thirty (30) days thereafter) the building fixtures and equipment, plumbing and plumbing fixtures, electrical and lighting system, any fire protection sprinkler system, ventilating equipment, heating system, air conditioning equipment, roof, skylights, doors, overhead doors, windows, dock levelers, elevations, and the interior of the Demised Premises in general are in good operating condition. Tenant shall have a period of thirty (30) days following the Commencement Date in which to inspect the Demised Premises and to notify Landlord in writing of any defects and maintenance, repairs or replacements required to the above named equipment, fixtures, systems and interior. Within a reasonable period of time after the timely receipt of any such written notice from Tenant, Landlord shall, at Landlord's expense, correct the defects and perform the maintenance, repairs and replacements. 7.02. Acceptance of Demised Premises. [Intentionally Left Blank] 7.03. Maintenance and Repair. Except as otherwise provided in this Lease, Landlord shall be under no obligation to perform any repair, maintenance or management service in the Demised Premises or adjacent common areas. Tenant shall be fully responsible, at its expense, for all repair, maintenance and management services other than those which are expressly assumed by Landlord. A. Landlord's Obligation. (1) Subject to the provisions of Article Eight (Damage or Destruction) and Article Nine (Condemnation) and except for damage caused by any act or omission of Tenant, Landlord at Landlord's sole cost and expense, shall keep the roof, skylights, foundation, structural components and the structural portions of exterior walls of the Demised Premises in good order, condition and repair. Landlord shall not be obligated to maintain or repair windows, doors, overhead doors, plate glass or the surfaces of walls. In addition, Landlord shall not be obligated to make any repairs under this Section until a reasonable time after receipt of written notice from Tenant of the need for repairs. If any repairs are required to be made by Landlord, Tenant shall, at Tenant's sole cost and expense, promptly remove Tenant's furnishings, fixtures, inventory equipment and other property, to the extent required to enable Landlord to make repairs. Landlord's liability under this Section shall be limited to the cost of those repairs or corrections. Tenant waives the benefit of any present or future law which might give Tenant the right to repair the Demised Premises at Landlord's expense or to terminate the Lease because of the condition. (2) All repair, maintenance, management and other services to be performed by Landlord or Landlord's agents involve the exercise of professional judgment by service providers, and Tenant expressly waives any claims for breach of warranty arising from the performance of those services. B. Tenant's Obligation. (1) Subject to the provisions of Section 7.01, Section 7.03.A, Article Eight (Damage or Destruction) and Article Nine (Condemnation), Tenant shall, at all times, keep all other portions of the Demised Premises in good order, condition and repair, ordinary wear and tear excepted, including but not limited to maintenance, repairs and all necessary replacements of the windows, plate glass, doors, overhead doors, heating system, ventilating equipment, air conditioning equipment, electrical and lighting systems, fire protection sprinkler system, dock levelers, elevators, interior and exterior plumbing, the interior of the Demised Premises in general, pest control and extermination, down spouts, gutters, paving railroad siding, care of landscaping and regular mowing of grass, and including the exterior of the Demised Premises. In addition, Tenant shall, at Tenant's expense, repair any damage to any portion of the Property, including the roof, skylights, foundation, or structural components and exterior walls of the Demised Premises, caused by Tenant's acts or omissions. If Tenant fails to maintain and repair the Property as required by this Section, Landlord may, on ten (10) day's prior written notice, enter the Demised Premises and perform the maintenance or repair on behalf of Tenant, except that no notice is required in case of emergency, and Tenant shall reimburse Landlord immediately upon demand for all costs incurred in performing the maintenance or repair, plus a reasonable service charge. (2) HVAC Service. Tenant shall, at Tenant's own cost and expense, enter into a regularly scheduled preventative maintenance and service contract for all refrigeration, heating, ventilating, and air conditioning systems and equipment within the Demised Premises during the Lease Term. If Tenant fails to enter into such a service contract acceptable to Landlord, Landlord may do so on Tenant's behalf and Tenant agrees to pay Landlord the cost and expense thereof, plus a reasonable service charge, regularly upon demand. 7.04. Alterations, Additions and Improvements. Tenant shall not create any openings in the roof or exterior walls, or make any alterations, additions or improvements to the Demised Premises without the prior written consent of Landlord. Consent for non-structural alterations, additions or improvements shall not be unreasonably withheld by Landlord. Tenant may erect or install trade fixtures, shelves, bins, machinery, heating, ventilating and air conditioning equipment and, provide that Tenant complies with all applicable governmental laws, ordinances, codes, and regulations. At the expiration or termination of this Lease, Tenant shall, subject to the restrictions of Section 7.05 below, have the right to remove items installed by Tenant, provided Tenant is not in default at the time of the removal and provided further that Tenant shall, at the time of removal of the items, repair in a good and workmanlike manner any damage caused by the installation or removal. Tenant shall pay for all costs incurred or arising out of alterations, additions or improvements in or to the Demised Premises and shall not permit any mechanic's or materialman's lien to be filed against the Demised Premises or the Property. Upon request by Landlord, Tenant shall deliver to Landlord proof of payment reasonably satisfactory to Landlord of all costs incurred or arising out of any alterations, additions or improvements. 7.05. Condition Upon Termination. Upon the expiration or termination of this Lease, Tenant shall surrender the Demised Premises to Landlord broom clean and in the same condition as received, except for ordinary wear and tear which Tenant is not otherwise obligated to remedy under any provision of this Lease. Tenant shall not be obligated to repair any damage which Landlord is required to repair under Article Seven (Property Condition) or Article Eight (Damage or Destruction). In addition, Landlord may require Tenant to remove any alterations, additions or improvements (whether or not made with Landlord's consent) prior to the expiration or termination of this Lease and to restore the Demised Premises to its prior condition, all at Tenant's expense. All alterations, additions and improvements which Landlord has not required Tenant to remove shall become Landlord's property and shall be surrendered to Landlord upon the expiration or termination of this Lease. In no event, however, shall Tenant remove any of the following materials or equipment without Landlord's prior written consent; (i) electrical wiring or power panels; (ii) lighting or lighting fixtures; (iii) wall coverings, drapes, blinds or other window coverings; (iv) carpets or other floor coverings; (v) heating, ventilating, or air conditioning equipment; (vi) fencing or security gates; or (vii) any other fixtures, equipment or items which, if removed, would affect the operation or the appearance of the Property. ARTICLE EIGHT: DAMAGE OR DESTRUCTION 8.01. Notice. If any buildings or other improvements situated on the Property are damaged or destroyed by fire, flood, windstorm, tornado or other casualty, Tenant shall immediately give written notice of the damage or destruction to Landlord. 8.02. Partial Damage. If the building or other improvements situated on the Demised Premises are damaged by fire, tornado, or other casualty, but not to such an extent that rebuilding or repairs cannot reasonably be completed within one hundred twenty (120) days from the date Landlord receives written notification by Tenant of the occurrence of the damage, this Lease shall not terminate, but Landlord shall proceed with reasonable diligence to rebuild or repair the building and other improvements on the Demised Premises (other than leasehold improvements made by Tenant or any assignee, subtenant or other occupant of the Demised Premises) to substantially the condition in which they existed prior to the damage. If the casualty occurs during the final eighteen (18) months of the Lease Term, Landlord shall not be required to rebuild or repair the damage unless Tenant exercises Tenant's renewal option (if any) within fifteen (15) days after the date of receipt by Landlord of the notification of the occurrence of the damage. If Tenant does not exercise its renewal option, or if there is no renewal option contained in this Lease, Landlord may, at Landlord's option, terminate this Lease by promptly delivering a written termination notice to Tenant, in which event the Rent shall be abated for the unexpired portion of the Lease Term, effective from the date of receipt by Landlord of the written notification of the damage. To the extent the Demised Premises cannot be occupied (in whole or in part) following the casualty, the Rent payable under this Lease during the period in which the Demised Premises cannot be fully occupied shall be adjusted equitably. 8.03. Substantial or Total Destruction. If the building or other improvements situated on the Demised Premises are substantially or totally destroyed by fire, tornado, or other casualty, or so damaged that rebuilding or repairs cannot reasonably be completed within one hundred twenty (120) days from the date Landlord receives written notification by Tenant of the occurrence of the damage, either Landlord or Tenant may terminate the Lease by promptly delivering a written termination notice to the other party, in which event the monthly installments of Rent shall be abated for the unexpired portion of the Lease Term, effective from the date of the damage or destruction. If neither party promptly terminates this Lease, Landlord shall proceed with reasonable diligence to rebuild and repair the building and other improvements (except that Tenant shall rebuild and repair Tenant's fixtures and improvements in the Demised Premises). To the extent the Demised Premises cannot be occupied (in whole or in part) following the casualty, the Rent payable under this Lease during the period in which the Demised Premises cannot be fully occupied shall be adjusted equitably. ARTICLE NINE: CONDEMNATION If, during the Lease Term or any extension thereof, all or a substantial part of the Demised Premises are taken for any public or quasi-public use under any governmental law, ordinance or regulation or by right of eminent domain, or are conveyed to the condemning authority under threat of condemnation, this Lease shall terminate and the monthly installments of Rent shall be abated during the unexpired portion of the Lease Term, effective from the date of the taking. If less than a substantial part of the Demised Premises is taken for public or quasi-public use under any governmental law, ordinance or regulation, or by right of eminent domain, or is conveyed to the condemning authority under threat of condemnation, Landlord, at its option, may by written notice terminate this Lease. If Landlord does not terminate this Lease, Landlord shall promptly, at Landlord's expense, restore and reconstruct the buildings and improvements (other than leasehold improvements made by Tenant or any assignee, subtenant or other occupant of the Demised Premises) situated on the Demised Premises in order to make the same reasonably tenantable and suitable for the use for which the Demised Premises is leased as defined in Section 6.01. The monthly installments of Rent payable under this Lease during the unexpired portion of the Lease Term shall be adjusted equitably. Landlord and Tenant shall each be entitled to receive and retail such separate awards and portions of lump sum awards as may be allocated to their respective interests in any condemnation proceeding. The termination of this Lease shall not affect the rights of the parties to such awards. ARTICLE TEN: ASSIGNMENT AND SUBLETTING Tenant shall not, without the prior written consent of Landlord, which consent shall not be unreasonably withheld, assign this Lease or sublet the Demised Premises or any portion thereof. Any assignment or subletting shall be expressly subject to all terms and provisions of this Lease, including the provisions of Section 6.01 pertaining to the use of the Demised Premises. In the event of any assignment or subletting, Tenant shall remain fully liable for the full performance of all Tenant's obligations under this Lease. Tenant shall not assign its rights under this Lease or sublet the Demised Premises without first obtaining a written agreement from the assignee or sublessee whereby the assignee or sublessee agrees to assume the obligations of Tenant under this Lease and to be bound by the terms of this Lease. If an event of default occurs while the Demised Premises is assigned or sublet, Landlord may, at a Landlord's option, in addition to any other remedies provided in this Lease or by law, collect directly from the assignee or subtenant all rents becoming due under the terms of the assignment or subletting and apply the rent against any sums due to Landlord under this Lease. No direct collection by Landlord from any assignee or subtenant will release Tenant from Tenant's obligations under this Lease. ARTICLE ELEVEN: DEFAULT AND REMEDIES 11.01. Default. Each of the following events is an event of default under this Lease: A. Failure of Tenant to pay any installment of the Rent or other sum payable to Landlord under this Lease on the date that it is due and the continuance of that failure for a period of five (5) days after Landlord delivers written notice of the failure to Tenant. This clause shall not be construed to permit or allow a delay in paying Rent beyond the due date and shall not affect Landlord's right to impose a Late Charge as permitted in Section 3.03. B. Failure of Tenant to comply with any term, condition or covenant of this Lease, other than the payment of Rent or other sum of money, and the continuance of that failure for a period of thirty (30) days after Landlord delivers written notice of the failure to Tenant; C. Failure of Tenant or any guarantor of Tenant's obligations under this Lease to pay its debts as they become due or an admission in writing of inability to pay its debts, or the making of a general assignment for the benefit of creditors; D. The commencement by Tenant or any guarantor of Tenant's obligations under this Lease of any case, proceeding or other action seeking reorganization, arrangement, adjustment, liquidation, dissolution or composition of it or its debts under any law relating to bankruptcy, insolvency, reorganization or relief of debtors, or seeking appointment of a receiver, trustee, custodian or other similar official for it or for all or any substantial part of its property; E. The commencement of any case, proceeding or other action against Tenant or any guarantor of Tenant's obligations under this Lease seeking to have an order for relief entered against it as debtor, or seeking reorganization, arrangement, adjustment, liquidation, dissolution or composition of it or its debts under any law relating to bankruptcy, insolvency, reorganization or relief of debtors, or seeking appointment of a receiver, trustee, custodian or other similar official for it or for all or any substantial part of its property, and Tenant or any guarantor; (i) fails to obtain a dismissal of such case, proceeding, or other action within sixty (60) days of its commencement; or (ii) converts the case from one chapter of the Federal Bankruptcy code to another chapter; or (iii) is the subject of an order of relief which is not fully stayed within seven (7) business days after the entry thereof; and F. Vacancy or abandonment by Tenant of any substantial portion of the Demised Premises or cessation of the use of the Demised Premises for the purpose leased. 11.02. Remedies. Upon the occurrence of any of the events of default listed in Section 11.01, Landlord shall have the option to pursue any one or more of the following remedies without any prior notice or demand. A. Terminate this Lease, in which event Tenant shall immediately surrender the Demised Premises to Landlord. If Tenant fails to so surrender the Demised Premises, Landlord may, without prejudice to any other remedy which it may have for possession of the Demised Premises or Rent in arrears, enter upon and take possession of the Demised Premises and expel or remove Tenant and any other person who may be occupying the Demised Premises or any part thereof, by force if necessary, without being liable for prosecution or any claim for damages. Tenant shall pay to Landlord on demand the amount of all loss and damage which Landlord may suffer by reason of the termination, whether through inability to re-let the Demised Premises on satisfactory terms or otherwise. B. Enter upon and take possession of the Demised Premises, by force if necessary, without terminating this Lease and without being liable for prosecution or for any claim for damages, and expel or remove Tenant and any other person who may be occupying the Demised Premises or any part thereof. Landlord may re-let the Demised Premises and receive the rent therefore. Tenant agrees to pay to Landlord monthly or on demand from time to time any deficiency that may arise by reason of any such re-letting. In determining the amount of the deficiency, the professional service fees, attorneys' fees, court costs, remodeling expenses and other costs of re- letting shall be subtracted from the amount of rent received under the re- letting. C. Enter upon the Demised Premises, by force if necessary, without terminating this Lease and without being liable for prosecution or for any claim for damages, and do whatever Tenant is obligated to do under the terms of this Lease. Tenant agrees to pay Landlord on demand for expenses which Landlord may incur in thus effecting compliance with Tenant's obligations under this Lease, together with interest thereon at the rate of twelve percent (12%) per annum from the date expended until paid. Landlord shall not be liable for any damages resulting to Tenant from such action, whether caused by negligence of Landlord or otherwise. D. [Intentionally Left Blank] E. In addition to the foregoing remedies, Landlord shall have the right to change or modify the locks on the Demised Premises in the event Tenant fails to pay the monthly installment of Rent when due. Landlord shall not be obligated to provide another key to Tenant or allow Tenant to regain entry to the Demises Premises unless and until Tenant pays Landlord all Rent which is delinquent. Tenant agrees that Landlord shall not be liable for any damages resulting to the Tenant from the lockout. At such time that Landlord changes or modifies the lock, Landlord shall post a "Notice of Change of Locks" on the front of the Demised Premises. Such Notice shall state that: (1) Tenant's monthly installment of Rent is delinquent, and therefore, under authority of Section 11.02.E of Tenant's Lease, the Landlord has exercised its contractual right to change or modify Tenant's door locks; (2) The Notice has been posted on the Tenant's front door by a representative of Landlord and Tenant should make arrangements with the representative to pay the delinquent installments of Rent when Tenant picks up the key; and (3) The failure of Tenant to comply with the provisions of the Lease and the Notice and/or tampering with or changing the door lock(s) by Tenant may subject Tenant to legal liability. F. No re-entry or taking possession of the Demised Premises by Landlord shall be construed as an election to terminate this Lease, unless a written notice of that intention is given to Tenant. Notwithstanding any such re- letting or re-entry or taking possession, Landlord may, at any time thereafter, elect to terminate this Lease for a previous default. Pursuit of any of the foregoing remedies shall not preclude pursuit of any other remedies provided by law, nor shall pursuit of any remedy provided in this Lease constitute a forfeiture or waiver of any monthly installment of Rent due to Landlord under this Lease or of any damages accruing to Landlord by reason of the violation of any of the terms, provisions and covenants contained in this Lease. Failure of Landlord to declare any default immediately upon its occurrence, or failure to enforce one or more of Landlord's remedies, or forbearance by Landlord to enforce one or more of Landlord's remedies upon an event of default shall not be deemed or construed to construed to constitute a waiver of default or waiver of any violation or breach of the terms of this Lease. Pursuit of any one of the above remedies shall not preclude pursuit by Landlord of any of the other remedies provided in this Lease. The loss or damage that Landlord may suffer by reason of termination of this Lease or the deficiency from any re- letting as provide for above shall include the expense of repossession and any repairs or remodeling undertaken by Landlord following possession. If Landlord terminates this Lease at any time for any default, in addition to other Landlord's remedies, Landlord may recover from Tenant all damages Landlord may incur by reason of the default, including the cost of recovering the Demised Premises and the Rent then remaining unpaid. 11.03. Notice of Default. Tenant shall give written notice of any failure by Landlord to perform any of Landlord's obligations under this Lease to Landlord and to any ground lessor, mortgagee or beneficiary under any deed of trust encumbering the Demised Premises whose name and address have been furnished to Tenant in writing. Landlord shall not be in default under this Lease unless Landlord (or such ground lessor, mortgagee or beneficiary) fails to cure the nonperformance within thirty (30) days after receipt of Tenant's notice. However, if the nonperformance reasonably requires more than thirty (30) days to cure, Landlord shall not be in default if the cure is commenced within the 30-day period and is thereafter diligently pursued to completion. 11.04. Limitation of Landlord's Liability. As used in this Lease, the term "Landlord" means only the current owner or owners of the fee title to the Demised Premises or the leasehold estate under a ground lease of the Demised Premises at the time in question. Each Landlord is obligated to perform the obligations of Landlord under this Lease only during the time such Landlord owns such interest or title. Any Landlord who transfers its title or interest is relieved of all liability with respect to the obligations of Landlord under this Lease accruing on or after the date of transfer, and Tenant agrees to recognize the transferee as Landlord under this Lease. However, each Landlord shall deliver to its transferee the Security Deposit held by Landlord if such Security Deposit has not been applied under the terms of this Lease. ARTICLE TWELVE: LANDLORD'S CONTRACTUAL LIEN [Intentionally Left Blank] ARTICLE THIRTEEN: PROTECTION OF LENDERS 13.01. Subordination and Attornment. Landlord shall have the right to subordinate this Lease to any future ground Lease, deed of trust or mortgage encumbering the Demised Premises, and advances made on the security thereof and any renewals, modification, consolidations, replacements or extensions thereof, whenever made or recorded. Landlord's right to obtain such a subordination is subject to Landlord's providing Tenant with a written Subordination, Non-disturbance and Attornment Agreement from the ground lessor, beneficiary or mortgagee wherein Tenant's right to peaceable possession of the Demised Premises during the Lease Term shall not be disturbed if Tenant pays the Rent and performs all of Tenant's obligations under this Lease and is not otherwise in default, in which case Tenant shall attorn to the transferee of or successor to Landlord's interest in the Demised Premises and recognize the transferee or successor as Landlord under this Lease. If any ground lessor, beneficiary or mortgagee elects to have this Lease superior to the lien of its ground lease, deed of trust or mortgage and gives Tenant written notice thereof, this Lease shall be deemed superior to the ground lease, deed of trust or mortgage or the date of recording thereof. Tenant's rights under this Lease, unless specifically modified at the time this Lease is executed, are subordinated to any existing ground lease, deed of trust or mortgage encumbering the Demised Premises. 13.02. Signing of Documents. Tenant shall sign and deliver any instruments or documents necessary or appropriate to evidence any attornment or subordination or any agreement to attorn or subordinate. If Tenant fails to do so within ten (10) days after written request, Tenant hereby makes, constitutes and irrevocably appoints Landlord, or any transferee or successor of Landlord, the attorney-in-fact of Tenant to execute and deliver the attornment or subordination document or agreement. 13.03. Estoppel Certificates. A. Upon Landlord's written request, Tenant shall execute and deliver to Landlord a written statement certifying: (1) whether Tenant is an assignee or subtenant; (2) the expiration date of the Lease; (3) the number of renewal options under the Lease and the total period of time covered by the renewal option(s); (4) that none of the terms or provisions of the Lease have been changed since the original execution of the Lease, except as shown on attached amendments or modifications; (5) that no default by Landlord exists under the terms of the Lease (or if Landlord is claimed to be in default, stating why); (6) that the Tenant has no claim against the Landlord under the Lease and has no defense or right of offset against collection of Rent or other charges accruing under the Lease; (7) the amount and date of the last payment of Rent; (8) the amount of any security deposits and other deposits, if any; and (9) the identity and address of any guarantor of the Lease. Tenant shall deliver the statement to Landlord within ten (10) days after Landlord's request. Landlord may forward any such statement to any prospective purchaser or lender of the Demised Premises. The purchaser or lender may rely conclusively upon the statement as true and correct. B. If Tenant does not deliver the written statement to Landlord within the ten (10) day period, Landlord, and any prospective purchaser or lender, may conclusively presume and rely upon the following facts: (1) that the terms and provisions of this Lease have not been changed except as otherwise represented by Landlord; (2) that this Lease has not been canceled or terminated except as otherwise represented by Landlord; (3) that not more than one monthly installment of Base Rent and other charges have been paid in advance; (4) there are no claims against Landlord nor any defenses or rights of offset against collection of Rent or other charges; and (5) that Landlord is not in default under this Lease. In such event, Tenant shall be estopped from denying the truth of the presumed facts. 13.04. Tenant's Financial Condition. Within ten (10) days after written request from Landlord, Tenant shall deliver to Landlord its most recent financial statement to verify the net worth of Tenant, or any assignee, subtenant, or guarantor of Tenant. In addition, Tenant shall deliver to any lender designated by Landlord its most recent financial statement required by the lender to facilitate the financing or refinancing of the Demised Premises. Tenant represents and warrants to Landlord that each financial statement is a true, complete, and accurate statement as of the date of the statement. All financial statements shall be confidential and shall be used only for the purposes set forth in this Lease. ARTICLE FOURTEEN: ENVIRONMENTAL REPRESENTATIONS AND INDEMNITY 14.01. Tenant's Compliance with Environmental Laws. Tenant, at Tenant's expense, shall comply with all laws, rules, orders ordinances, directions, regulations and requirements of Federal, State, county and municipal authorities pertaining to Tenant's use of the Property and with the recorded covenants, conditions and restrictions, regardless of when they become effective, including, without limitation, all applicable Federal, State and local laws, regulations or ordinances pertaining to air and water quality, Hazardous Materials (as defined in Section 14.05), waste disposal, air emissions and other environmental matters, all zoning and other land use matters, and with any direction of any public officer or officers, pursuant to law, which impose any duty upon Landlord or Tenant with respect to the use or occupancy of the Property. 14.02. Tenant's Indemnification. If the presence of Hazardous Materials on the Property caused or permitted by Tenant results in contamination of the Property or any other property, or if contamination of the Property or any other property by Hazardous Materials otherwise occurs for which Tenant is legally liable to Landlord for damage resulting therefrom, then Tenant shall indemnify, defend and hold Landlord harmless from any and all claims, judgments, damages, penalties, fines, costs, liabilities or losses (including without limitation, diminution in value of the Property, damages for the loss or restriction on use of rentable or unusable space or of any amenity or appurtenance of the Property, damages arising from any adverse impact on marketing of building space or land area, sums paid in settlement of claims, reasonable attorneys' fees, court costs, consultant fees and expert fees) which arise during or after the Lease Term as a result of the contamination. This indemnification of Landlord by Tenant includes, without limitation, costs incurred in connection with any investigation of site conditions or any clean-up, remedial work, removal or restoration work required by any Federal, State or local government agency because of Hazardous Materials present in the soil or ground water on or under the Property. Without limiting the foregoing, if the presence of any Hazardous Materials on the Property (or any other property) caused or permitted by Tenant results in any contamination of the Property, Tenant shall promptly take all actions at Tenant's sole expense as are necessary to return the Property to the condition existing prior to the introduction of any such Hazardous Materials, provided that Landlord's approval of such actions is first obtained. The foregoing indemnity shall survive the expiration or termination of this Lease. 14.03. Landlord's Representations and Warranties. Landlord represents and warrants, to the best of Landlord's actual knowledge, that (i) any handling, transportation, storage, treatment or usage of Hazardous Materials that has occurred on the Property to date has been in compliance with all applicable Federal, State, and local laws, regulations and ordinances; and (ii) no leak, spill, release, discharge, emission or disposal of Hazardous Materials has occurred on the Property to date and that the soil or groundwater on or under the Property is free of Hazardous Materials as of the Commencement Date, unless expressly disclosed by Landlord to Tenant in writing. 14.04. Landlord's Indemnification. Landlord hereby indemnifies, defends and holds Tenant harmless from any claims, judgments, damages, penalties, fines, costs, liabilities, (including sums paid in settlements of claims) or loss, including, without limitation, attorneys' fees, court costs, consultant fees, and expert fees, which arise during or after the term of this Lease from or in connection with the presence or suspected presence of Hazardous Materials in the soil or groundwater on or under the Property, unless the Hazardous Material is released by Tenant or is present solely as a result of the negligence or willful conduct of Tenant. Without limiting the generality of the foregoing, the indemnification provided by this Section 14.04 shall specifically cover costs incurred in connection with any investigation of site conditions or any clean-up, remedial work, removal or restoration work required by any Federal, State or local governmental authority. 14.05. Definition. For purposes of this Lease, the term "Hazardous Materials" means any one or more pollutant, toxic substance, hazardous waste, hazardous material, hazardous substance, solvent or oil as defined in or pursuant to the Resource Conservation and Recovery Act, as amended, the Comprehensive Environmental Response, Compensation and Liability Act, as amended, the Federal Clean Water Act, as amended, or any other Federal, State or local environmental law, regulation, ordinance, or rule, whether existing as of the date of this Lease or subsequently enacted. 14.06. Survival. The representations and indemnities contained in the Article 14 shall survive the expiration or termination of this Lease. ARTICLE FIFTEEN: PROFESSIONAL SERVICE FEES 15.01. Amount and Manner of Payment. Professional service fees due to the Principal Broker shall be calculated and paid as follows: A. [Internally Left Blank] B. Landlord agrees to pay to the Principal Broker a lump sum professional service fee (the "Fee") for negotiating this Lease, plus any applicable sales taxes, equal to the percentage stated in Section 1.13.A of the total Rent to become due to Landlord during the Lease Term. The Fee shall be paid to the Principal Broker (i) one-half on the date of final execution of this Lease, and (ii) the balance on the commencement Date of this Lease. 15.02. Other Brokers. Both Landlord and Tenant represent and warrant to the other party that they have had no dealings with any person, firm or agent in the negotiation of the Lease other than the Broker(s) named in this Lease, and no other broker, agent, person, firm or entity other than the Broker(s) is entitled to any commission or fee in connection with this Lease. 15.03. Payments on Renewal, Expansion, Extension or New Lease. If during the Lease Term (as may be renewed or extended) or within ten (10) years from the Commencement Date, whichever is the greater period of time, Tenant, Tenant's successors or assigns: (a) exercises any right or option to renew or extend the Lease Term (whether contained in this Lease or in any amendment, supplement or other agreement pertaining to this Lease) or enters into a new lease or rental agreement with Landlord covering the Demised Premises; or (b) enters into any lease, extension, renewal, expansion or other rental agreement with Landlord demising to Tenant any premises located on or constituting all or part of any tract or parcel of real property adjoining, adjacent to or contiguous to the Demised Premises and owned by Landlord on the Commencement Date, Landlord shall pay to the Broker an additional Fee covering the full period of the renewal, extension, lease, expansion or other rental agreement which shall be due on the date of exercise of a renewal option, or the date of execution in the case of an extension, new lease, expansion or other agreement provided that the Broker provides evidence of tenant representation. The additional Fee shall be computed under Section 15.01A or 15.01.B above (whichever has been made applicable under Section 1.13), as if a new lease had been made for such period of time. 15.04. Payments on Sale. If Tenant, Tenant's successors or assigns, purchases the Demised Premises at any time, pursuant to a purchase option contained in this Lease (or any lease, extension, renewal, expansion or other rental agreement) or, in the absence of any purchase option or exercise thereof, purchases the Demised Premises within ten (10) years from the Commencement Date, Landlord shall pay to the Principal Broker a Professional Service Fee in cash equal to the percentage stated in Section 1.13.B of the purchase price, payable at closing. Upon closing of a sale to Tenant, all monthly lease Fees shall terminate upon payment of the Professional Service Fee on the sale. 15.05. Landlord's Liability. If this Lease is negotiated by Principal Broker in cooperation with another broker, Landlord shall be liable for payment of all Professional Service Fees to Principal Broker only, whereupon Landlord shall be protected from any claims from a Cooperating Broker. The Principal Broker may pay a portion of the Fee to any Cooperating Broker pursuant to a separate agreement between the Brokers. 15.06. Joint Liability of Tenant. If Tenant enters into any new lease, extension, renewal, expansion, or other agreement to rent, occupy, or purchase any property described in Section 15.03 within the time specified in that Section, the agreement must be handled by the Principal Broker, otherwise Tenant shall be severally liable with Landlord for any payments due or to become due to the Principal Broker. 15.07. Assumption on Sale. In the event of a sale of the Demised Premises or the assignment of this Lease by Landlord, Landlord shall obtain from the purchaser or assignee an Assumption Agreement in recordable form whereby the purchaser or assignee agrees to pay the Principal Broker all Professional Service Fees payable under this Lease and shall deliver a fully executed original counterpart thereof to Principal Broker on the date of closing of the sale of the Demised Premises or assignment of this Lease. Landlord shall be released from personal liability for subsequent payments only upon the delivery to Principal Broker of that counterpart of the Assumption Agreement. 15.08. Termination. The termination of this Lease by the mutual agreement of Landlord and Tenant shall not affect the right of the Principal Broker to continue to receive the Fees agreed to be paid under this Lease, just as if Tenant had continued to occupy the Demised Premises and had paid the Rent during the entire Lease Term. Termination of this Lease under Article Eight or Article Nine shall not terminate the Principal Broker's right to collect the Fees. 15.09. [Intentionally Left Blank] ARTICLE SIXTEEN: MISCELLANEOUS 16.01. Disclosure. Landlord and Tenant understand that a real estate broker is qualified to advise on matters concerning real estate and is not expert in matters of law, tax, financing, surveying, hazardous materials, engineering, construction, safety, zoning, land planning, architecture or the ADA. The Brokers hereby advise Tenant to seek expert assistance on such matters. Brokers do not investigate a property's compliance with building codes, governmental ordinances, statutes and laws that relate to the use or condition of a property and its construction, or that relate to its acquisition. If Brokers provide names of consultants or sources for advice or assistance, Tenant acknowledges that the Brokers do not warrant the services of the advisors or their products and cannot warrant the suitability of property to be acquired or leased. Furthermore, the Brokers do not warrant that the Landlord will disclose any or all property defects, although the Brokers will disclose to Tenant any actual knowledge possessed by Brokers regarding defects of the Demised Premises and the Property. In this regard, Tenant agrees to make all necessary and appropriate inquiries and to use diligence in investigating the Demised Premises and the Property before consummating this Lease. Landlord and Tenant hereby agree to indemnify, defend, and hold the Brokers harmless of and from any and all liabilities, claims, debts, damages, costs, or expenses, including but not limited to reasonable attorneys' fees and court costs, related to or arising out of or in any way connected to representations concerning matters properly the subject of advice by experts. In addition, to the extent permitted by applicable law, the Brokers' liability for errors or omissions, negligence, or otherwise, is limited to the return of the Fee, if any, paid to the Brokers pursuant to this Lease. 16.02. Force Majeure. If performance by Landlord of any term, condition or covenant in this Lease is delayed or prevented by any Act of God, strike, lockout, shortage of material or labor, restriction by any governmental authority, civil riot, flood, or any other cause not within the control of Landlord, the period for performance of the term, condition or covenant shall be extended for a period equal to the period Landlord is so delayed or prevented. 16.03. Interpretation. The captions of the Articles or Sections of this Lease are to assist the parties in reading this Lease and are not a part of the terms or provisions of this Lease. Tenant shall be responsible for the conduct, acts and omissions of Tenant's agents, employees, customers, contractors, invitees, agents, successors or others using the Demised Premises with Tenant's expressed or implied permission. Whenever required by the context of this Lease, the singular shall include the plural and the plural shall include the singular, and the masculine, feminine and neuter genders shall each include the other. 16.04. Waivers. All waivers to provisions of the Lease must be in writing and signed by the waiving party. Landlord's delay or failure to enforce any provisions of this Lease or its acceptance of late installments of Rent shall not be a waiver and shall not prevent Landlord from enforcing that provision or any other provision of this Lease in the future. No statement on a payment check from Tenant or in a letter accompanying a payment check shall be binding on Landlord. Landlord may, with or without notice to Tenant, negotiate, cash, or endorse the check without being bound to the conditions of any such statement. 16.05. Severability. A determination by a court of competent jurisdiction that any provision of this Lease is invalid or unenforceable shall not cancel or invalidate the remainder of that provision or this Lease, which shall remain in full force and effect. 16.06. Joint and Several Liability. All parties signing this Lease as Tenant shall be jointly and severally liable for all obligations of Tenant. 16.07. Amendments or Modifications. This Lease is the only agreement between the parties pertaining to the lease of the Demised Premises and no other agreements are effective unless made a part of this Lease. All amendments to this Lease must be in writing and signed by all parties. Any other attempted amendment shall be void. 16.08. Notices. All notices and other communications required or permitted under this Lease must be in writing and shall be deemed delivered, whether actually received or not, on the earlier of: (i) actual receipt if delivered in person or by messenger with evidence of delivery; or (ii) receipt of an electronic facsimile transmission ("Fax") with confirmation of delivery; or (iii) upon deposit in the United States Mail as required below. Notices may be transmitted by Fax to the Fax telephone numbers specified in Article One on the first page of this Lease, if any. Notices delivered by mail must be deposited in the U.S. Postal Service, first class postage prepaid, and properly addressed to the intended recipient as set forth in Article One. After possession of the Demised Premises by Tenant, Tenant's address for notice purposes will be the address of the Demised Premises unless Tenant notifies Landlord in writing of a different address to be used for that purpose. Any party may change its address for notice by delivering written notice of its new address to all other parties in the manner set forth above. Copies of all notices should also be delivered to the Principal Broker, but failure to notify the Principal Broker will not cause an otherwise properly delivered notice to be ineffective. 16.09. Attorneys' Fees. If on account of any breach or default by any party to this Lease in its obligations to any other party to this Lease (including but not limited to the Principal Broker), it becomes necessary for a party to employ an attorney to enforce or defend any of its rights or remedies under this Lease, the non-prevailing party agrees to pay the prevailing party its reasonable attorneys' fees and court costs, if any, whether or not suite is instituted in connection with the enforcement or defense. 16.10. Venue. All obligations under this Lease, including but not limited to the payment of Fees to the Principal Broker, shall be performed and payable in the county in which the Property is located. The laws of the State of Texas shall govern this Lease. 16.11. Survival. All obligations of any party to this Lease which are not fulfilled at the expiration or the termination of this Lease shall survive such expiration or termination as continuing obligations of the party. 16.12. Binding Effect. This Lease shall inure to the benefit of, and be binding upon, each of the parties to this Lease and their respective heirs, representatives, successors and assigns. However, Landlord shall not have any obligation to Tenant's successors or assigns unless the rights or interests of the successors or assigns are acquired in accordance with the terms of this Lease. 16.13. Consult an Attorney. This Lease is an enforceable, legally binding agreement. Read it carefully. The Brokers involved in the negotiation of this Lease cannot give you legal advice. The parties to this Lease acknowledge that they have been advised by the Brokers to have this Lease reviewed by competent legal counsel of their choice before signing this Lease. By executing this Lease, Landlord and Tenant each agree to the provisions, terms, covenants and conditions contained in this Lease. 16.14. Offer: The execution of this Lease by the first party to do so constitutes an offer to lease the Demised Premises. Unless within the number of days stated in Section 1.14 above after the date of its execution by the first party to do so, this Lease is signed by the other party and a fully executed copy is delivered to the first party, such offer to lease shall be automatically withdrawn and terminated. ARTICLE SEVENTEEN: ADDITIONAL PROVISIONS A. At Tenant's expense, a videotape of the leased Premises shall be taken at the commencement of the Lease Term, a copy of which will be held by Tenant and Landlord. Tenant will notify Landlord as to when the videotape is to be made, and Landlord may be in attendance at that time. This video will be used to document any deficiencies in the condition of the Premises and its improvements, and will be used in lieu of a written description or list of deficiencies. It is understood by Landlord that the Tenant shall have no responsibility or liability with respect to repair or replacement of any such deficiency, unless the same shall have been repaired or replaced by Landlord during the Term hereof. B. Not withstanding anything to the contrary in exhibit A (Survey), Landlord represents and warrants to Tenant that there are no underground fuel tanks on the Demised Premises. LANDLORD TENANT By [Signature]: SHERI KUYKENDALL By [Signature]: DAVID F. MEYER Name: Sheri Kuykendall Name: David F. Meyer Title: Vice President Title: Sr. VP, Retail Support and Logistics Date of Execution: 11/27/00 Date of Execution: 11/22/00 PRINCIPAL BROKER COOPERATING BROKER By [Signature]: ALLEN GUMP By [Signature]: M. FINNEY FOR LORCH Name: Allen Gump Name: Jay W. Lorch, SIOR Title: Director of Industrial Title: First Vice President Copyright Notice: This form is provided for the use of members of the North Texas Commercial Association of Realtors, Inc. Permission is hereby granted to make limited copies of this form for use in a particular Texas real estate transaction. Contact the NTCAR office to confirm that you are using the current version of this form. CB Richard Ellis, Inc. North Texas Commercial Association Of Realtorsr ADDENDUM A TO LEASE EXPENSE REIMBURSEMENT Demised Premises/Address: [Check all boxes which apply. Boxes not checked do not apply to this Lease.] A. Expense Reimbursement. Tenant shall pay the Landlord as additional Rent a portion of the following expenses (collectively the "Reimbursement") which are incurred by or assessed against the Demised Premises [check all that are to apply]: X Ad Valorem Taxes; X Insurance Premiums; Common Area Maintenance (CAM) Expenses; Operating Expenses; Roof and Structural Maintenance Expenses; B. Expense Reimbursement Limitations. The amount of Tenant's Reimbursement shall be determined by one of the following methods as described in Section 4 below [check only one]: Base Year/Expense Stop Adjustment; Pro Rata Adjustment; Fixed Amount Adjustment; X Net Lease C. Expense Reimbursement Payments. Tenant agrees to pay any end-of-year lump sum Reimbursement within thirty (30) days after receiving an invoice from Landlord. Any time during the Lease Term (or any renewals or extensions) Landlord may direct Tenant to pay monthly an estimated portion of the projected future Reimbursement amount. Any such payment directed by Landlord shall be due and payable monthly on the same day that the Base Rent is due. Landlord may, at Landlord's option and to the extent allowed by applicable law, impose a Late Charge on any Reimbursement payments which are not actually received by Landlord on or before the due date, in the amount and manner set forth in Section 3.03 of this Lease. Any Reimbursement relating to partial calendar years shall be prorated accordingly. Tenant's Pro Rata Share of such Reimbursements shall be based on the square footage of useable area contained in the Demised Premises in proportion to the square footage of useable building area of the Property. Tenant may audit or examine those items of expense in Landlord's records which relate to Tenant's obligations under this Lease. Landlord shall promptly refund to Tenant any overpayment which is established by an audit or examination. If the audit or examination reveals an error of more than five percent (5%) over the figures billed to Tenant, Landlord shall pay the reasonable cost of the audit or examination. D. Definitions. 1. Ad Valorem Taxes. All general real estate taxes, general and special assessments, parking surcharges, rent taxes, and other similar governmental charges levied against the Property for each calendar year. 2. Insurance Premiums. All Landlord's insurance premiums attributable to the Property, including but not limited to insurance for fire, casualty, general liability, property damage, medical expenses, and extended coverage, and loss of rents coverage for six months' Rent. E. Gross-Up Provisions. [Check this only if applicable.] If the Property is a multi-tenant building and is not fully occupied during the Base Year or any portion of the Lease Term, an adjustment shall be made in computing the variable costs for each applicable calendar year. Variable costs shall include only those items of expense that vary directly proportionately to the occupancy of the Property. Variable costs which are included in the CAM and Operating Expenses shall be increased proportionately to the amounts that, in Landlord's reasonable judgment, would have been incurred had ninety percent (90%) of the useable area of the Property been occupied during those years. CB Richard Ellis, Inc. North Texas Commercial Association Of Realtorsr ADDENDUM B TO LEASE RENEWAL OPTIONS Demised Premises/Address: 2620 McIvey, Ft. Worth, Texas A. Option to Extend Term. Landlord grants to Tenant One option(s) (the "Option") to extend the Lease Term for an additional term of 60 months each (the "Extension"), on the same terms, conditions and covenants set forth in this Lease, except as provided below. Each Option may be exercised only by written notice delivered to the Landlord no earlier than Two hundred forty ( 240 ) days before, and no later than One hundred eighty ( 180 ) days before, the expiration of the Lease Term or the preceding Extension of the Lease Term, whichever is applicable. If Tenant fails to deliver Landlord written notice of the exercise of an Option within the prescribed time period, such Option and any succeeding Options shall lapse, and there shall be no further right to extend the Lease Term. Each Option may only be exercised by Tenant on the express condition that, at the time of the exercise, Tenant is not in default under any of the provisions of this Lease. The foregoing Options are personal to Tenant and may not be exercised by an assignee or subtenant without Landlord's written consent. B. Calculation of Rent. The Base Rent during the Extension(s) shall be determined by one of the following methods [check one]: 1. Consumer Price Index Adjustment. The monthly Base Rent during the Extension shall be determined by multiplying the monthly installment of Base Rent during the last month of the Lease Term by a fraction determined as follows: a. The numerator shall be the Latest Index which means either [check one]: (1) the Index published for the nearest calendar month preceding the first day of the Extension, or (2) the Index for the month of N/A preceding the Extension. b. The denominator shall be the Initial Index which means either [check one]: (1) the Index published for the nearest calendar month preceding the Commencement Date, or (2) the Index for the month of N/A preceding the Commencement Date. [If no blanks are filled in above, the choice (1) including the phrase, "the nearest calendar month preceding", shall apply.] c. The Index means the Consumer Price Index (CPI) for All Urban Consumers (All Items) U.S. City Average (unless this box is checked in which case the CPI for the Dallas/Fort Worth Consolidated Metropolitan Statistical Area shall be used) published by the U.S. Department of Labor, Bureau of Labor Statistics (Base Index of 1982-84 = 100). If the Index is discontinued or revised, the new index or computation which replaces the Index shall be used in order to obtain substantially the same result as would have been obtained if it had not been discontinued or revised. If such computation would reduce the Rent for the particular Extension, it shall be disregarded, and the Rent during the immediately preceding period shall apply instead. X 2. Fair Market Rental Value. The Base Rent during the Extension shall be the Fair Market Rental determined as follows: a. The "Fair Market Rental" of the Demised Premises means the price that a ready and willing tenant would pay as of the commencement of the Extension as monthly rent to a ready and willing landlord of demised premises comparable to the Demised Premises if the property were exposed for lease on the open market for a reasonable period of time, and taking into account the term of the Extension, the amount of improvements made by Tenant at its expense, the creditworthiness of the Tenant, and all of the purposes for which the property may be used and not just the use proposed to be made of the Demised Premises by Tenant. Upon proper written notice by Tenant to Landlord of Tenant's election to exercise the renewal Option, Landlord shall within fifteen (15) days thereafter notify Tenant in writing of Landlord's proposed Fair Market Rental amount and Tenant shall thereupon notify Landlord of Tenant's acceptance or rejection of Landlords proposed amount. Failure of Tenant to reject Landlord's Fair Market Rental amount within fifteen (15) days after receipt of Landlord's notice shall be deemed Tenant's acceptance of Landlord's proposed Fair Market Rental amount. b. If Landlord and Tenant have not been able to agree on the Fair Market Rental amount prior to the date the option is required to be exercised, the rent for the Extension shall be determined as follows: Within thirty (30) days following the exercise of the option, Landlord and Tenant shall endeavor in good faith to agree upon a single Appraiser (defined below). If Landlord and Tenant are unable to agree upon a single Appraiser within the thirty day period, each shall then appoint one Appraiser by written notice to the other, given within ten (10) days after the thirty day period. Within ten (10) days after the two Appraisers are appointed, the two Appraisers shall appoint a third Appraiser. If either Landlord or Tenant fails to appoint its Appraiser within the prescribed time period the single Appraiser appointed shall determine the Fair Market Rental amount of the Demised Premises. Each party shall bear the cost of the appraiser appointed by it and the parties shall share equally the cost of the third appraiser. The term "Appraiser" means a State Certified Real Estate Appraiser licensed by the State of Texas to value commercial property. c. The Fair Market Rental Value of the Demised Premises shall be the average of two of the three appraisals which are closest in amount as described below, and the third appraisal shall be disregarded. In no event shall the Rent be reduced by reason of such computation. If the Fair Market Rental is not determined prior to the commencement of the Extension, then Tenant shall continue to pay to Landlord the Rent applicable to the Demised Premises immediately prior to the Extension until the Fair Market Rental amount is determined, and when it is determined, Tenant shall pay to Landlord within ten (10) days after receipt of such notice the difference between the Rent actually paid by Tenant to Landlord and the new Rent determined under this Lease. C. Fixed Rental Adjustments. The monthly Base Rent shall be increased beginning on the following dates to these amounts: Date: N/A Amount: N/A Date: N/A Amount: N/A Date: N/A Amount: N/A Date: N/A Amount: N/A CB Richard Ellis, Inc. North Texas Commercial Association Of Realtorsr ADDENDUM F TO LEASE CONSTRUCTION OF IMPROVEMENTS Demised Premises/Address: A. Construction of Improvements. 1. Landlord agrees to construct (or complete) a building and interior finishes and other improvements upon the Demised Premises in accordance with detailed Plans and Specifications to be promptly prepared by Landlord and delivered to Tenant. Upon approval by Tenant, two or more sets of the Plans and Specifications shall be signed by both parties, with one signed set retained by Tenant. Changes to the Plans and Specifications may be made only by written addenda signed by both parties. The floor covering allowance will not exceed $12 per square yard 2. Upon approval of the Plans and Specifications, Landlord shall promptly begin construction and pursue the construction to its completion with reasonable diligence and in a good and workmanlike manner. B. Completion Date. 1. It is estimated by Landlord that the building and other improvements will be completed within 6 weeks of Lease execution . 2. Landlord shall notify Tenant in writing within two (2) days of the Date of Completion. Tenant shall then promptly inspect the building and other improvements, and if they have in fact been completed in accordance with the Plans and Specifications, the Lease Term shall begin upon the Date of Completion or on the Commencement Date, whichever is later. If Tenant reasonably determines that the improvements have not been completed in accordance with the Plans and Specifications, Tenant may deliver a written objection to Landlord specifying the deficiencies. If Tenant does not, within ten (10) days after Landlord's notice of completion, deliver to Landlord either a written objection or a written Letter of Acceptance of the improvements, then Tenant shall be deemed to have approved the improvements as constructed and the date of Landlord's notice of completion shall be the Date of Completion. 3. If the building and other improvements have not in fact been completed in accordance with the Plans and Specifications, and Tenant has delivered to Landlord a written objection specifying the items deemed incomplete, then Landlord shall promptly proceed to finish the incomplete items, and the Lease Term shall begin upon the date that the items are in fact complete. 4. Completion, as used in this Addendum, means substantial completion. Substantial completion will be deemed to have occurred when (i) Landlord obtains a Certificate of Occupancy issued by the local municipal authorities whose jurisdiction includes the Demised Premises, and (ii) the construction is sufficiently complete in accordance with the Plans and Specifications so that the Tenant is able to occupy or utilize the Demised Premises for its intended use, except for minor "punch list" items remaining to be completed. C. Letter of Acceptance. Upon completion of the improvements to the Demised Premises, Tenant agrees to execute and deliver to Landlord, with a copy to the Principal Broker, a Letter of Acceptance, addressed to Landlord signed by Tenant (or its authorized representative) acknowledging that construction has been completed in accordance with the Plans and Specifications, acknowledging acceptance of the improvements (subject to "punch list" items being completed), acknowledging the Date of Completion, and acknowledging the Commencement Date of the Lease Term. D. Taking of Possession. The taking of possession of the Demised Premises by Tenant shall be deemed conclusively to be acknowledgment by Tenant that construction has been completed in accordance with Plans and Specifications (except for latent defects and "punch list" items) whether or not a Certificate of Occupancy has been obtained, and that the Lease Term has begun as of the Date of Completion. E. Failure to Complete. If the building and other improvements have not been completed in accordance with the Plans and Specifications by February 25th, 2001 , or by such date as extended by application of Section 16.02, Tenant shall have the right and option to terminate this Lease by giving written notice of Tenant's intention to terminate as of a certain date specified by Tenant in the notice of termination (the "Termination Date"). The notice must be given to Landlord not less than fifteen (15) days prior to the Termination Date. If the building and other improvements have not been completed by the Termination Date, this Lease shall terminate, unless further extended by Tenant in writing, with no further liability of one party to the other. CB Richard Ellis, Inc. North Texas Commercial Association Of Realtorsr ADDENDUM F TO LEASE CONSTRUCTION OF IMPROVEMENTS Demised Premises/Address: A. Construction of Improvements. Landlord agrees to provide the following improvements to the above Demised Premises: RE: McIvey, Fort Worth 1 Electrical 5,413.68 Replace all 2' x 4' fixtures Replace all plugs & switches Repair all dock lighting Replace vent/lights in restrooms Repair all electrical to working order 2 Plumbing 2,357.00 Replace two (2) water coolers Rebuild all plumbing fixtures check & clean all drains as required for working order 3 Painting 6,575.00 Patch & prep all interior walls as required Paint all walls & door trim Prep & paint all restroom partitions Clean & paint all ceiling grids Power wash all dock areas 4 Replace all ceiling tile & insulation 2,684.90 5 HVAC 3,072.00 Replace all grills Change all filters Check & clean system 6 Floor covering (allowance) 1,850.00 Demo existing flooring & base Install new carpet in existing carpet areas Install new VCT in all remaining areas Install new cove base on all walls 7 Repair all overhead doors (allowance) 1,850.00 8 Construction cleaning & trash haul off 475.00 9 Final cleaning 350.00 Total Labor & Materials24,647.58 15% Overhead & Profit3,697.14 Total 28,344.72 EXHIBIT "B" DRAWINGS RETAINED BY PROPERTY DEPARTMENT EX-10 16 0016.txt OAK BROOK LEASE 10-A-13 LEASE _______________________ ZFO Properties, LLC, a Delaware limited liability company, Landlord and ACE HARDWARE CORPORATION, a Delaware corporation, Tenant TABLE OF CONTENTS ARTICLE PAGE 1. USE AND RESTRICTIONS ON USE 1 2. TERM. 1 3. RENT. 1 4. TAXES 2 5. SECURITY DEPOSIT 2 6. ALTERATIONS 2 7. REPAIR 3 8. LIENS 4 9. ASSIGNMENT AND SUBLETTING 4 10. INDEMNIFICATION 5 11. INSURANCE 5 12. WAIVER OF SUBROGATION 6 13. SERVICES AND UTILITIES. 6 14. HOLDING OVER 6 15. SUBORDINATION 6 16. REENTRY BY LANDLORD 6 17. DEFAULT 7 18. REMEDIES 7 19. TENANT'S BANKRUPTCY OR INSOLVENCY 9 20. QUIET ENJOYMENT 9 21. DAMAGE BY FIRE, ETC 10 22. EMINENT DOMAIN 10 23. SALE BY LANDLORD 11 24. ESTOPPEL CERTIFICATES 11 25. SURRENDER OF PREMISES. 11 26. NOTICES 11 27. TAXES PAYABLE BY TENANT 11 28. DEFINED TERMS AND HEADINGS 12 29. TENANT'S AUTHORITY 12 30. COMMISSIONS 12 31. TIME AND APPLICABLE LAW 12 32. SUCCESSORS AND ASSIGNS 12 33. ENTIRE AGREEMENT 12 34. EXAMINATION NOT OPTION 12 35. RECORDATION 12 36. TERMINATION OPTION 13 37. RENT SCHEDULE 13 38. DATA TUBES 13 39. PRIVATE DRIVEWAY 13 40. LIMITATION OF LANDLORD'S LIABILITY 15 EXHIBIT A - PREMISES EXHIBIT B - INITIAL ALTERATIONS EXHIBIT C - LOCATION OF DATA TUBES SINGLE TENANT INDUSTRIAL LEASE REFERENCE PAGE LOCATION OF BUILDINGS: 1220 and 1300 Kensington Road Oak Brook, IL 60523-2100 LANDLORD: ZFO Properties, LLC, a Delaware limited liability company LANDLORD'S ADDRESS: 105 Revere Drive, Suite G, Northbrook, IL 60602 LEASE REFERENCE DATE: April 1, 2000 TENANT: Ace Hardware Corporation, a Delaware corporation TENANT'S ADDRESS: 2200 Kensington Court Oak Brook, IL 60523-2100 BUILDINGS RENTABLE AREA: Approximately 70,508 sq. ft. USE: General Offices (with personal computer set-up and configuration) COMMENCEMENT DATE: Date on which Landlord acquires the Buildings TERMINATION DATE: September 30, 2009 TERM OF LEASE Approximately nine (9) years, beginning on the Commencement Date and ending on the Termination Date (unless sooner terminated pursuant to the Lease) INITIAL ANNUAL RENT (Article 3): $951,858.00 INITIAL MONTHLY INSTALLMENT OF ANNUAL RENT (Article 3): $79,321.50 ASSIGNMENT/SUBLETTING FEE $500.00 SECURITY DEPOSIT: $0.00 REAL ESTATE BROKER DUE COMMISSION: None The Reference Page information is incorporated into and made a part of the Lease. In the event of any conflict between any Reference Page information and the Lease, the Lease shall control. This Lease includes Exhibits A and C, all of which are made a part of this Lease. LANDLORD: TENANT: ZFO PROPERTIES, LLC, a ACE HARDWARE CORPORATION, a Delaware limited liability Delaware corporation company 666 PARTNERS, L.L.C., an Illinois limited liability company, its Member By: DAVID F. HODNIK Title: President and CEO By: Charles E. Frank, Dated: July 31, 2000 Managing Member Dated: 7/26 , 2000 LEASE By this Lease Landlord leases to Tenant and Tenant leases from Landlord two (2) office buildings, containing approximately 70,508 square feet (collectively referred to herein as the "Building" or the "Premises") depicted in Exhibit A attached hereto. The Reference Page, including all terms defined thereon, is incorporated as part of this Lease. 1. USE AND RESTRICTIONS ON USE. 1.1 The Premises are to be used solely for the purposes stated on the Reference Page. Tenant shall not do or permit anything to be done in or about the Premises which will in any way obstruct or interfere with the rights of other tenants or occupants of the Building or injure, annoy, or disturb them or allow the Premises to be used for any improper, immoral, unlawful, or objectionable purpose. Tenant shall not do, permit or suffer in, on, or about the Premises the sale of any alcoholic liquor without the written consent of Landlord first obtained, or the commission of any waste. Tenant shall comply with all governmental laws, ordinances and regulations applicable to the use of the Premises and its occupancy and shall promptly comply with all governmental orders and directions for the correction, prevention and abatement of any violations in or upon, or in connection with, the Premises, all at Tenant's sole expense. Tenant shall not do or permit anything to be done on or about the Premises or bring or keep anything into the Premises which will in any way increase the rate of, invalidate or prevent the procuring of any insurance protecting against loss or damage to the Building or any of its contents by fire or other casualty or against liability for damage to property or injury to persons in or about the Building or any part thereof. 1.2 Tenant shall not, and shall not direct, suffer or permit any of its agents, contractors, employees, licensees or invitees to at any time handle, use, manufacture, store or dispose of in or about the Premises or the Building any (collectively "Hazardous Materials") flammables, explosives, radioactive materials, hazardous wastes or materials, toxic wastes or materials, or other similar substances, petroleum products or derivatives or any substance subject to regulation by or under any federal, state and local laws and ordinances relating to the protection of the environment or the keeping, use or disposition of environmentally hazardous materials, substances, or wastes, presently in effect or hereafter adopted, all amendments to any of them, and all rules and regulations issued pursuant to any of such laws or ordinances (collectively "Environmental Laws"), nor shall Tenant suffer or permit any Hazardous Materials to be used in any manner not fully in compliance with all Environmental Laws, in the Premises or the Building and appurtenant land or allow the environment to become contaminated with any Hazardous Materials. Notwithstanding the foregoing, and subject to Landlord's prior consent, Tenant may handle, store, use or dispose of products containing small quantities of Hazardous Materials (such as aerosol cans containing insecticides, toner for copiers, paints, paint remover and the like) to the extent customary and necessary for the use of the Premises for general office purposes; provided that Tenant shall always handle, store, use, and dispose of any such Hazardous Materials in a safe and lawful manner and never allow such Hazardous Materials to contaminate the Premises, Building and appurtenant land or the environment. Tenant shall protect, defend, indemnify and hold Landlord harmless from and against any and all loss, claims, liability or costs (including court costs and attorney's fees) incurred by reason of any actual or asserted failure of Tenant to fully comply with all applicable Environmental Laws, or the presence, handling, use or disposition in or from the Premises of any Hazardous Materials (even though permissible under all applicable Environmental Laws or the provisions of this Lease), or by reason of any actual or asserted failure of Tenant to keep, observe, or perform any provision of this Section 1.2. 2. TERM. The Term of this Lease shall begin on the Commencement Date as shown on the Reference Page. Landlord shall tender possession of the Premises with all the work, if any, to be performed by Landlord pursuant to Exhibit B to this Lease substantially completed. Landlord and Tenant shall execute a memorandum setting forth the actual Commencement Date and Termination Date. 3. RENT. 3.1 Tenant agrees to pay to Landlord the Annual Rent in effect from time to time by paying the Monthly Installment of Rent then in effect on or before the first day of each full calendar month during the Term, except that the first month's rent shall be paid upon the execution of this Lease. The Monthly Installment of Rent in effect at any time shall be one-twelfth of the Annual Rent in effect at such time. Rent for any period during the Term which is less than a full month shall be a prorated portion of the Monthly Installment of Rent based upon a thirty (30) day month. Said rent shall be paid to Landlord, without deduction or offset and without notice or demand, at the Landlord's address, as set forth on the Reference Page, or to such other person or at such other place as Landlord may from time to time designate in writing. 3.2 Tenant recognizes that late payment of any rent or other sum due under this Lease will result in administrative expense to Landlord, the extent of which additional expense is extremely difficult and economically impractical to ascertain. Tenant therefore agrees that if rent or any other sum is not paid when due and payable pursuant to this Lease, a late charge shall be imposed in an amount equal to the greater of: (a) Fifty Dollars ($50.00), or (b) a sum equal to five percent (5%) per month of the unpaid rent or other payment. The amount of the late charge to be paid by Tenant shall be reassessed and added to Tenant's obligation for each successive monthly period until paid. The provisions of this Section 3.2 in no way relieve Tenant of the obligation to pay rent or other payments on or before the date on which they are due, nor do the terms of this Section 3.2 in any way affect Landlord's remedies pursuant to Article 18 in the event said rent or other payment is unpaid after date due. Notwithstanding the foregoing, Tenant shall be entitled, not more than once per calendar year, to a five-day grace period before a late charge may be assessed. 4. TAXES. 4.1 Tenant shall pay as additional rent all Taxes incurred on the Building which accrue during the Term. Tenant acknowledges and agrees that Taxes are payable on an accrual basis and, accordingly, Tenant shall be liable for all taxes which accrue from and after the Commencement Date and thereafter throughout the Term of this Lease, without regard to the date or dates on which installments for Taxes may, in fact, be due. Taxes shall be defined as real estate taxes and any other taxes, charges and assessments which are levied with respect to the Building or the land appurtenant to the Building, or with respect to any improvements, fixtures and equipment or other property of Landlord, real or personal, located in the Building and used in connection with the operation of the Building and said land, any payments to any ground lessor in reimbursement of tax payments made by such lessor; and all fees, expenses and costs incurred by Landlord in investigating, protesting, contesting or in any way seeking to reduce or avoid increase in any assessments, levies or the tax rate pertaining to any Taxes to be paid by Landlord in any Lease Year. Taxes shall not include any corporate franchise, or estate, inheritance or net income tax, or tax imposed upon any transfer by Landlord of its interest in this Lease or the Building. 4.2 Prior to the actual determination thereof, Landlord may from time to time estimate Tenant's liability for Taxes under Section 4.1, Article 6 and Article 27 for the lease year or portion thereof. Landlord will give Tenant written notification of the amount of such estimate and Tenant agrees that it will pay, by increase of its Monthly Installments of Rent due in such lease year, additional rent in the amount of such estimate. Any such increased rate of Monthly Installments of Rent pursuant to this Section 4.2 shall remain in effect until further written notification to Tenant pursuant hereto. 4.3 When the above mentioned actual determination of Tenant's liability for Taxes is made in any lease year and when Tenant is so notified in writing, then: 4.3.1 If the total additional rent Tenant actually paid pursuant to Section 4.2 is less than Tenant's liability for Taxes, then Tenant shall pay to Landlord as additional rent in one lump sum within thirty (30) days of receipt of Landlord's bill therefor such deficiency; and 4.3.2 If the total additional rent Tenant actually paid pursuant to Section 4.2 is more than Tenant's liability for Taxes, then Landlord shall credit the difference against the then next due payments to be made by Tenant under this Article 4. 4.4 If the Commencement Date is other than January 1 or if the Termination Date is other than December 31, Tenant's liability for Taxes for the year in which said Date occurs shall be prorated based upon a three hundred sixty-five (365) day year. 4.5 Even though the Term has expired and Tenant has vacated the premises, when the final determination is made of Tenant's liability for Taxes for the year in which the Lease terminated, Tenant shall pay any difference due over the estimated Taxes paid; and conversely any overpayment, less any amounts due Landlord under this Lease, shall be rebated to Tenant. 5. SECURITY DEPOSIT. Intentionally Deleted. 6. ALTERATIONS. 6.1 Tenant shall not make or suffer to be made any alterations, additions, or improvements, including, but not limited to, the attachment of any fixtures or equipment in, on, or to the Premises or any part thereof or the making of any improvements as required by Article 7, without the prior written consent of Landlord. When applying for such consent, Tenant shall, if requested by Landlord, furnish complete plans and specifications for such alterations, additions and improvements. Landlord's consent shall not be required (but Tenant shall notify Landlord) with respect to alterations which (i) are not structural in nature, (ii) are not visible from the exterior of the Building, and (iii) do not affect or require modification of the Building's electrical, mechanical, plumbing, HVAC or other systems. 6.2 In the event Landlord consents to the making of any such alteration, addition or improvement by Tenant, the same shall be made using a contractor reasonably approved by Landlord, at Tenant's sole cost and expense. If Tenant shall employ any Contractor other than Landlord's Contractor and such other Contractor or any Subcontractor of such other Contractor shall employ any non-union labor or supplier, Tenant shall be responsible for and hold Landlord harmless from any and all delays, damages and extra costs suffered by Landlord as a result of any dispute with any labor unions concerning the wage, hours, terms or conditions of the employment of any such labor. In any event Landlord may charge Tenant a reasonable charge to cover its actual out of pocket expenses as it relates to such proposed work. 6.3 All alterations, additions or improvements proposed by Tenant shall be constructed in accordance with all government laws, ordinances, rules and regulations and Tenant shall, prior to construction, provide the additional insurance required under Article 11 in such case, and also all such assurances to Landlord, including but not limited to, waivers of lien, surety company performance bonds and personal guaranties of individuals of substance as Landlord shall require to assure payment of the costs thereof and to protect Landlord and the Building and appurtenant land against any loss from any mechanic's, materialmen's or other liens. 6.4 All alterations, additions, and improvements in, on, or to the Premises made or installed by Tenant after the Commencement Date, including carpeting, and the Data Tubes (as defined in Section 38) shall be and remain the property of Tenant during the Term but, excepting furniture, furnishings, movable partitions of less than full height from floor to ceiling and other trade fixtures, shall become a part of the realty and belong to Landlord without compensation to Tenant upon the expiration or sooner termination of the Term, at which time title shall pass to Landlord under this Lease as by a bill of sale, unless Landlord elects otherwise. Upon such election by Landlord, Tenant shall upon demand by Landlord, at Tenant's sole cost and expense, forthwith and with all due diligence remove the Data Tubes and any such alterations, additions or improvements which are designated by Landlord to be removed, and Tenant shall forthwith and with all due diligence, at its sole cost and expense, repair and restore the Premises to their original condition, reasonable wear and tear and damage by fire or other casualty excepted. 6.5 Tenant shall pay in addition to any sums due pursuant to Article 4, any increase in real estate taxes attributable to any such alteration, addition or improvement for so long, during the Term, as such increase is ascertainable; at Landlord's election said sums shall be paid in the same way as sums due under Article 4. 7. REPAIR. 7.1 Landlord shall have no obligation to alter, remodel, improve, repair, decorate or paint the Premises. By taking possession of the Premises, Tenant accepts them as being in good order, condition and repair and in the condition in which Landlord is obligated to deliver them. It is hereby understood and agreed that no representations respecting the condition of the Premises or the Building have been made by Landlord to Tenant. Landlord shall not be liable for any failure to make any repairs or to perform any maintenance. 7.2 Tenant shall at its own cost and expense keep and maintain all parts of the Premises in good condition, promptly making all necessary repairs and replacements, ordinary or extraordinary, with materials and workmanship of the same character, kind and quality as the original (including, but not limited to, repair and replacement of all fixtures installed by Tenant, water heaters serving the Premises, windows, glass and plate glass, doors, exterior stairs, skylights, roof of the Building, any special office entries, interior walls and finish work, floors and floor coverings, heating and air conditioning systems, electrical systems and fixtures, Data Tubes, sprinkler systems, dock boards, truck doors, dock bumpers, parking lots, driveways, landscaping, tuckpointing, rail tracks serving the Premises, plumbing work and fixtures, and performance of regular removal of trash and debris). Tenant, as part of its obligations hereunder, shall keep the Premises in a clean and sanitary condition. Tenant will keep all such parts of the Premises from deterioration due to ordinary wear and from falling temporarily out of repair, and upon termination of this Lease in any way Tenant will yield up the Premises to Landlord in good condition and repair, loss by fire or other casualty excepted (but not excepting any damage to glass). Notwithstanding the above, Tenant shall not be required to repair or replace any portion of the foundation or structural elements of the Building except that Tenant shall be required to repair the roof; if Landlord determines that any repair to the foundation or structural elements of the Building is required, Landlord shall perform and pay for such repair. Tenant shall repair (but not be required to replace) the roof, parking lot, driveways or major components of the heating and air conditioning systems. If Landlord determines that the roof, parking lot, driveways or a major component of the heating and air conditioning requires replacement, Landlord shall perform and pay for such replacement except that the cost of such replacement shall be amortized on a straight line basis over the useful life of the replacement (pursuant to generally accepted accounting principles) with interest at nine percent (9%) per annum and one twelfth of such annual amount shall be paid by Tenant to Landlord, as additional rent, concurrently with the payment of Base Rent. In no event will Landlord have any responsibility for the maintenance, repair or replacement of the Data Tubes. 7.3 Except as provided in Article 21, there shall be no abatement of rent and no liability of Landlord by reason of any injury to or interference with Tenant's business arising from the making of any repairs, alterations or improvements in or to any portion of the Building, the Data Tubes or the Premises or to fixtures, appurtenances and equipment in the Building. 7.4 Tenant shall, at its own cost and expense, enter into a regularly scheduled preventive maintenance/service contract with a maintenance contractor approved by Landlord for the servicing of all heating and air conditioning systems, equipment serving the Premises and the roof of the Premises, if necessary (and a copy of all such contracts shall be furnished to Landlord). Each service contract must include all services suggested by the equipment manufacturer in the operation/maintenance manual and must become effective within thirty (30) days of the date Tenant takes possession of the Premises. Landlord may, upon notice to Tenant, enter into such a maintenance/service contract on behalf of Tenant, or perform the work and in either case, charge Tenant the cost thereof along with a reasonable amount for Landlord's overhead. 7.5 Landlord shall, at the sole cost and expense of Tenant, have the right to inspect the Premises on a semi-annual basis to confirm that Tenant is complying with the maintenance, repair and replacement obligations set forth in this Section 7 (collectively, the "Obligations"). Tenant shall reimburse Landlord for any reasonable fees attributable to the cost of the inspection of the Premises, which costs will be immediately due after presentation of appropriate bills and back-up documentation. During the inspection, Landlord or Landlord's representative will make a list of all the Obligations, if any, which, in the reasonable discretion of Landlord, Tenant has failed to fully perform. Within thirty (30) days after written notice to Tenant of such Obligations, Tenant must promptly and professionally complete said Obligations (unless the performance of the Obligations cannot be completed in said time period, in which event Tenant must have commenced the Obligations during such period and diligently pursue the same). If Tenant fails to promptly commence and perform the Obligations, Landlord may (but shall not be required to) perform the same on behalf of Tenant and Tenant must reimburse Landlord for all of the costs and expenses therefor immediately after presentation of appropriate bills and back-up documentation. 8. LIENS. Tenant shall keep the Premises, the Building and appurtenant land and Tenant's leasehold interest in the Premises free from any liens arising out of any services, work or materials performed, furnished, or contracted for by Tenant, or obligations incurred by Tenant. In the event that Tenant shall not, within ten (10) days following the imposition of any such lien, either cause the same to be released of record or provide Landlord with insurance against the same issued by a major title insurance company or such other protection against the same as Landlord shall accept, Landlord shall have the right to cause the same to be released by such means as it shall deem proper, including payment of the claim giving rise to such lien. All such sums paid by Landlord and all expenses incurred by it in connection therewith shall be considered additional rent and shall be payable to it by Tenant on demand. 9. ASSIGNMENT AND SUBLETTING. 9.1 Tenant shall not have the right to assign or pledge this Lease or to sublet the whole or any part of the Premises whether voluntarily or by operation of law, or permit the use or occupancy of the Premises by anyone other than Tenant, and shall not make, suffer or permit such assignment, subleasing or occupancy without the prior written consent of Landlord, not to be unreasonably withheld, and said restrictions shall be binding upon any and all assignees of the Lease and subtenants of the Premises. In the event Tenant desires to sublet, or permit such occupancy of, the Premises, or any portion thereof, or assign this Lease, Tenant shall give written notice thereof to Landlord at least thirty (30) days but no more than one hundred eighty (180) days prior to the proposed commencement date of such subletting or assignment, which notice shall set forth the name of the proposed subtenant or assignee, the relevant terms of any sublease or assignment and copies of financial reports and other relevant financial reports and other relevant financial information of the proposed subtenant or assignee. 9.2 Notwithstanding any assignment or subletting, permitted or otherwise, Tenant shall at all times remain directly, primarily and fully responsible and liable for the payment of the rent specified in this Lease and for compliance with all of its other obligations under the terms, provisions and covenants of this Lease. Upon the occurrence of an Event of Default, if the Premises or any part of them are then assigned or sublet, Landlord, in addition to any other remedies provided in this Lease or provided by law, may, at its option, collect directly from such assignee or subtenant all rents due and becoming due to Tenant under such assignment or sublease and apply such rent against any sums due to Landlord from Tenant under this Lease, and no such collection shall be construed to constitute a novation or release of Tenant from the further performance of Tenant's obligations under this Lease. 9.3 In addition to Landlord's right to approve of any subtenant or assignee, Landlord shall have the option, in its sole discretion, in the event of any proposed subletting or assignment, to terminate this Lease, or in the case of a proposed subletting of less than the entire Premises, to recapture the portion of the Premises to be sublet, as of the date the subletting or assignment is to be effective. The option shall be exercised, if at all, by Landlord giving Tenant written notice given by Landlord to Tenant within thirty (30) days following Landlord's receipt of Tenant's written notice as required above. If this Lease shall be terminated with respect to the entire Premises pursuant to this Section, the Term of this Lease shall end on the date stated in Tenant's notice as the effective date of the sublease or assignment as if that date had been originally fixed in this Lease for the expiration of the Term. If Landlord recaptures under this Section only a portion of the Premises, the rent to be paid from time to time during the unexpired Term shall abate proportionately based on the proportion by which the approximate square footage of the remaining portion of the Premises shall be less than that of the Premises as of the date immediately prior to such recapture. Tenant shall, at Tenant's own cost and expense, discharge in full any outstanding commission obligation on the part of Landlord with respect to this Lease, and any commissions which may be due and owing as a result of any proposed assignment or subletting, whether or not the Premises are recaptured pursuant to this Section 9.3 and rented by Landlord to the proposed tenant or any other tenant. 9.4 In the event that Tenant sells, sublets, assigns or transfers this Lease, Tenant shall pay to Landlord as additional rent an amount equal to fifty percent (50%) of any Increased Rent (as defined below) when and as such Increased Rent is received by Tenant. As used in this Section, "Increased Rent" shall mean the excess of (i) all rent and other consideration which Tenant is entitled to receive by reason of any sale, sublease, assignment or other transfer of this Lease less Tenant's reasonable costs of assignment or subletting (e.g., leasing commissions and remodeling), over (ii) the rent otherwise payable by Tenant under this Lease at such time. For purposes of the foregoing, any consideration received by Tenant in form other than cash shall be valued at its fair market value as determined by Landlord in good faith. 9.5 Notwithstanding any other provision hereof, Tenant shall have no right to make (and Landlord shall have the absolute right to refuse consent to) any assignment of this Lease or sublease of any portion of the Premises if at the time of either Tenant's notice of the proposed assignment or sublease or the proposed commencement date thereof, there shall exist any uncured default of Tenant or matter which will become a default of Tenant with passage of time unless cured; or if the proposed assignee or sublessee is an entity: (a) with which Landlord is already in negotiation as evidenced by the issuance of a written proposal; (b) is already an occupant of the Building unless Landlord is unable to provide the amount of space required by such occupant; (c) is a governmental agency; (d) is incompatible with the character of occupancy of the Building; or (e) would subject the Premises to a use which would: (i) involve increased personnel or wear upon the Building; (ii) violate any exclusive right granted to another tenant of the Building; (iii) require any addition to or modification of the Premises or the Building in order to comply with building code or other governmental requirements; or, (iv) involves a violation of Section 1.2. Tenant expressly agrees that Landlord shall have the absolute right to refuse consent to any such assignment or sublease and that for the purposes of any statutory or other requirement of reasonableness on the part of Landlord such refusal shall be reasonable. 9.6 Upon any request to assign or sublet, Tenant will pay to Landlord the Assignment/Subletting Fee plus, on demand, a sum equal to all of Landlord's costs, including attorney's fees, incurred in investigating and considering any proposed or purported assignment or pledge of this Lease or sublease of any of the Premises, regardless of whether Landlord shall consent to, refuse consent, or determine that Landlord's consent is not required for, such assignment, pledge or sublease. Any purported sale, assignment, mortgage, transfer of this Lease or subletting which does not comply with the provisions of this Article 9 shall be void. 9.7 If Tenant is a corporation, partnership or trust, any transfer or transfers of or change or changes within any twelve month period in the number of the outstanding voting shares of the corporation, the general partnership interests in the partnership or the identity of the persons or entities controlling the activities of such partnership or trust resulting in the persons or entities owning or controlling a majority of such shares, partnership interests or activities of such partnership or trust at the beginning of such period no longer having such ownership or control shall be regarded as equivalent to an assignment of this Lease to the persons or entities acquiring such ownership or control and shall be subject to all the provisions of this Article 9 to the same extent and for all intents and purposes as though such an assignment. 10. INDEMNIFICATION. None of the Landlord Entities (as defined in Article 28) shall be liable and Tenant hereby waives all claims against them for any damage to any property or any injury to any person in or about the Premises by or from any cause whatsoever (including without limiting the foregoing, rain or water leakage of any character from the roof, windows, walls, basement, pipes, plumbing works or appliances, the Premises not being in good condition or repair, gas, fire, oil, electricity or theft), except to the extent caused by or arising from the gross negligence or willful misconduct of Landlord or its agents, employees or contractors. Tenant shall protect, indemnify and hold the Landlord Entities harmless from and against any and all loss, claims, liability or costs (including court costs and attorney's fees) incurred by reason of (a) any damage to any property (including but not limited to property of any Landlord Entity) or any injury (including but not limited to death) to any person occurring in, on or about the Premises to the extent that such injury or damage shall be caused by or arise from any actual or alleged act, neglect, fault, or omission by or of Tenant, its agents, servants, employees, invitees, or visitors to meet any standards imposed by any duty with respect to the injury or damage; (b) the conduct or management of any work or thing whatsoever done by the Tenant in or about the Premises or from transactions of the Tenant concerning the Premises; (c) Tenant's failure to comply with any and all governmental laws, ordinances and regulations applicable to the condition or use of the Premises or its occupancy; or (d) any breach or default on the part of Tenant in the performance of any covenant or agreement on the part of the Tenant to be performed pursuant to this Lease. The provisions of this Article shall survive the termination of this Lease with respect to any claims or liability accruing prior to such termination. 11. INSURANCE. 11.1 Tenant shall keep in force throughout the Term: (a) a Commercial General Liability insurance policy or policies to protect the Landlord against any liability to the public or to any invitee of Tenant or a Landlord incidental to the use of or resulting from any accident occurring in or upon the Premises with a limit of not less than $1,000,000.00 per occurrence and not less than $2,000,000.00 in the annual aggregate, or such larger amount as Landlord may prudently require from time to time but in no event shall such amount exceed 2,000,000.00 per occurrence and not less than $5,000,000.00 in the annual aggregate, covering bodily injury and property damage liability and $1,000,000 products/completed operations aggregate; (b) Business Auto Liability covering owned, non-owned and hired vehicles with a limit of not less than $1,000,000 per accident; (c) insurance protecting against liability under Worker's Compensation Laws with limits at least as required by statute; (d) Employers Liability with limits of $500,000 each accident, $500,000 disease policy limit, $500,000 disease--each employee; (e) All Risk or Special Form coverage protecting Tenant against loss of or damage to Tenant's alterations, additions, improvements, carpeting, floor coverings, panelings, decorations, fixtures, inventory and other business personal property situated in or about the Premises to the full replacement value of the property so insured; and, (f) Leaseholders Interest Endorsement to Tenant's property insurance policy that will protect Landlord against loss of rental income for at least six (6) months. 11.2 Tenant shall maintain all insurance policies relating in any manner to the protection, preservation or operation of the Premises, including but not limited to, standard fire and extended coverage insurance covering the Premises in an amount not less than one hundred percent (100%) of the replacement cost thereof insuring against the perils of fire and lightning and including extended coverage or, at Landlord's option, all risk coverage and, if Landlord so elects, earthquake, flood and wind coverages and rent loss insurance for twelve (12) months. Such insurance shall be for the sole benefit of Landlord and under its sole control. Tenant shall not take out separate insurance concurrent in form or contributing in the event of loss with that required to be maintained hereunder unless Landlord is included as a loss payee thereon. Tenant shall immediately notify Landlord whenever any such separate insurance is taken out and shall promptly deliver to Landlord the policy or policies of such insurance. 11.3 Each of the aforesaid policies shall (a) be provided at Tenant's expense; (b) name the Landlord as additional insured; (c) be issued by an insurance company with a minimum Best's rating of "A:VII" during the Term; and (d) provide that said insurance shall not be canceled unless thirty (30) days prior written notice (ten days for non-payment of premium) shall have been given to Landlord; and said policy or policies or certificates thereof shall be delivered to Landlord by Tenant upon the Commencement Date and at least thirty (30) days prior to each renewal of said insurance. 11.4 Whenever Tenant shall undertake any alterations, additions or improvements in, to or about the Premises ("Work") the aforesaid insurance protection must extend to and include injuries to persons and damage to property arising in connection with such Work, without limitation including liability under any applicable structural work act, and such other insurance as Landlord shall require; and the policies of or certificates evidencing such insurance must be delivered to Landlord prior to the commencement of any such Work. 12. WAIVER OF SUBROGATION. So long as their respective insurers so permit, Tenant and Landlord hereby mutually waive their respective rights of recovery against each other for any loss insured by fire, extended coverage, All Risks or other insurance now or hereafter existing for the benefit of the respective party but only to the extent of the net insurance proceeds payable under such policies. Each party shall obtain any special endorsements required by their insurer to evidence compliance with the aforementioned waiver. 13. SERVICES AND UTILITIES. Tenant shall pay for all water, gas (if any), heat, light, power, telephone, sewer, sprinkler system charges and other utilities and services used on or from the Premises, including without limitation, the cost of any central station signaling system installed in the Premises together with any taxes, penalties, and surcharges or the like pertaining thereto and any maintenance charges for utilities. Any such charges paid by Landlord and assessed against Tenant shall be immediately payable to Landlord on demand and shall be additional rent hereunder. Landlord shall in no event be liable for any services provided to the Premises or for any interruption or failure of utility services on or to the Premises. 14. HOLDING OVER. Tenant shall pay Landlord for each day Tenant retains possession of the Premises or part of them after termination of this Lease by lapse of time or otherwise at the rate ("Holdover Rate") which shall be 150% of the amount of the Annual Rent for the last period prior to the date of such termination plus all Rent Adjustments under Article 4 prorated on a daily basis, and also pay all damages sustained by Landlord by reason of such retention. If Landlord gives notice to Tenant of Landlord's election to that effect, such holding over shall constitute renewal of this Lease for a period from month to month at the Holdover Rate, but if the Landlord does not so elect, no such renewal shall result notwithstanding acceptance by Landlord of any sums due hereunder after such termination; and instead, a tenancy at sufferance at the Holdover Rate shall be deemed to have been created. In any event, no provision of this Article 14 shall be deemed to waive Landlord's right of reentry or any other right under this Lease or at law. 15. SUBORDINATION. Without the necessity of any additional document being executed by Tenant for the purpose of effecting a subordination, this Lease shall be subject and subordinate at all times to ground or underlying leases and to the lien of any mortgages or deeds of trust now or hereafter placed on, against or affecting the Building, Landlord's interest or estate in the Building, or any ground or underlying lease; provided, however, that if the lessor, mortgagee, trustee, or holder of any such mortgage or deed of trust elects to have Tenant's interest in this Lease be superior to any such instrument, then, by notice to Tenant, this Lease shall be deemed superior, whether this Lease was executed before or after said instrument. Notwithstanding the foregoing, Tenant covenants and agrees to execute and deliver upon demand such further instruments evidencing such subordination or superiority of this Lease as may be required by Landlord. At Tenant's request, Landlord shall request a reasonable and customary non-disturbance letter from its mortgagee, but the failure to obtain such non-disturbance letter shall not be a breach of this Lease. 16. REENTRY BY LANDLORD. 16.1 Landlord reserves and shall at all reasonable times and except in an emergency, upon prior notice, have the right to re- enter the Premises to inspect the same, to show said Premises to prospective purchasers, mortgagees or tenants, and to alter, improve or repair the Premises and any portion of the Building, without abatement of rent, and may for that purpose erect, use and maintain scaffolding, pipes, conduits and other necessary structures and open any wall, ceiling or floor in and through the Building and Premises where reasonably required by the character of the work to be performed, provided entrance to the Premises shall not be blocked thereby, and further provided that the business of Tenant shall not be interfered with unreasonably. 16.2 Tenant hereby waives any claim for damages for any injury or inconvenience to or interference with Tenant's business, any loss of occupancy or quiet enjoyment of the Premises, and any other loss occasioned by any action of Landlord authorized by this Article 16. Tenant agrees to reimburse Landlord, on demand, as additional rent, for any expenses which Landlord may incur in thus effecting compliance with Tenant's obligations under this Lease. 16.3 Landlord shall have the right to use any and all means which Landlord may deem proper to open said doors in an emergency to obtain entry to any portion of the Premises and the cost of repairing any damage occurring in doing so shall be borne by Tenant and paid to Landlord as additional rent upon demand. 17. DEFAULT. 17.1 Except as otherwise provided in Article 19, the following events shall be deemed to be Events of Default under this Lease: 17.1.1 Tenant shall fail to pay when due any sum of money becoming due to be paid to Landlord under this Lease, whether such sum be any installment of the rent reserved by this Lease, any other amount treated as additional rent under this Lease, or any other payment or reimbursement to Landlord required by this Lease, whether or not treated as additional rent under this Lease, and such failure shall continue for a period of five days after written notice that such payment was not made when due, but if any such notice shall be given, for the twelve month period commencing with the date of such notice, the failure to pay within five days after due any additional sum of money becoming due to be paid to Landlord under this Lease during such period shall be an Event of Default, without notice. 17.1.2 Tenant shall fail to comply with any term, provision or covenant of this Lease which is not provided for in another Section of this Article and shall not cure such failure within twenty (20) days (forthwith, if the failure involves a hazardous condition) after written notice of such failure to Tenant. 17.1.3 Tenant shall fail to vacate the Premises immediately upon termination of this Lease, by lapse of time or otherwise, or upon termination of Tenant's right to possession only. 17.1.4 Tenant shall become insolvent, admit in writing its inability to pay its debts generally as they become due, file a petition in bankruptcy or a petition to take advantage of any insolvency statute, make an assignment for the benefit of creditors, make a transfer in fraud of creditors, apply for or consent to the appointment of a receiver of itself or of the whole or any substantial part of its property, or file a petition or answer seeking reorganization or arrangement under the federal bankruptcy laws, as now in effect or hereafter amended, or any other applicable law or statute of the United States or any state thereof. 17.1.5 A court of competent jurisdiction shall enter an order, judgment or decree adjudicating Tenant bankrupt, or appointing a receiver of Tenant, or of the whole or any substantial part of its property, without the consent of Tenant, or approving a petition filed against Tenant seeking reorganization or arrangement of Tenant under the bankruptcy laws of the United States, as now in effect or hereafter amended, or any state thereof, and such order, judgment or decree shall not be vacated or set aside or stayed within thirty (30) days from the date of entry thereof. 18. REMEDIES. 18.1 Except as otherwise provided in Article 19, upon the occurrence of any of the Events of Default described or referred to in Article 17, Landlord shall have the option to pursue any one or more of the following remedies without any notice or demand whatsoever, concurrently or consecutively and not alternatively: 18.1.1 Landlord may, at its election, terminate this Lease or terminate Tenant's right to possession only, without terminating the Lease. 18.1.2 Upon any termination of this Lease, whether by lapse of time or otherwise, or upon any termination of Tenant's right to possession without termination of the Lease, Tenant shall surrender possession and vacate the Premises immediately, and deliver possession thereof to Landlord, and Tenant hereby grants to Landlord full and free license to enter into and upon the Premises in such event and to repossess Landlord of the Premises as of Landlord's former estate and to expel or remove Tenant and any others who may be occupying or be within the Premises and to remove Tenant's signs, the Data Tubes and other evidence of tenancy and all other property of Tenant therefrom without being deemed in any manner guilty of trespass, eviction or forcible entry or detainer, and without incurring any liability for any damage resulting therefrom, Tenant waiving any right to claim damages for such re-entry and expulsion, and without relinquishing Landlord's right to rent or any other right given to Landlord under this Lease or by operation of law. 18.1.3 Upon any termination of this Lease, whether by lapse of time or otherwise, Landlord shall be entitled to recover as damages, all rent, including any amounts treated as additional rent under this Lease, and other sums due and payable by Tenant on the date of termination, plus as liquidated damages and not as a penalty, an amount equal to the sum of: (a) an amount equal to the then present value of the rent reserved in this Lease for the residue of the stated Term of this Lease including any amounts treated as additional rent under this Lease and all other sums provided in this Lease to be paid by Tenant, minus the fair rental value of the Premises for such residue; (b) the value of the time and expense necessary to obtain a replacement tenant or tenants, and the estimated expenses described in Section 18.1.4 relating to recovery of the Premises, preparation for reletting and for reletting itself; and (c) the cost of performing any other covenants which would have otherwise been performed by Tenant. 18.1.4 Upon any termination of Tenant's right to possession only without termination of the Lease: 18.1.4.1 Neither such termination of Tenant's right to possession nor Landlord's taking and holding possession thereof as provided in Section 18.1.2 shall terminate the Lease or release Tenant, in whole or in part, from any obligation, including Tenant's obligation to pay the rent, including any amounts treated as additional rent, under this Lease for the full Term, and if Landlord so elects Tenant shall pay forthwith to Landlord the sum equal to the entire amount of the rent, including any amounts treated as additional rent under this Lease, for the remainder of the Term plus any other sums provided in this Lease to be paid by Tenant for the remainder of the Term. 18.1.4.2 Landlord may, but need not, relet the Premises or any part thereof for such rent and upon such terms as Landlord, in its sole discretion, shall determine (including the right to relet the premises for a greater or lesser term than that remaining under this Lease, the right to relet the Premises as a part of a larger area, and the right to change the character or use made of the Premises). In connection with or in preparation for any reletting, Landlord may, but shall not be required to, make repairs, alterations and additions in or to the Premises and redecorate the same to the extent Landlord deems necessary or desirable, and Tenant shall, upon demand, pay the cost thereof, together with Landlord's expenses of reletting, including, without limitation, any broker's commission incurred by Landlord. If Landlord decides to relet the Premises or a duty to relet is imposed upon Landlord by law, Landlord and Tenant agree that nevertheless Landlord shall at most be required to use only the same efforts Landlord then uses to lease premises in the Building generally and that in any case that Landlord shall not be required to give any preference or priority to the showing or leasing of the Premises over any other space that Landlord may be leasing or have available and may place a suitable prospective tenant in any such other space regardless of when such other space becomes available. Landlord shall not be required to observe any instruction given by Tenant about any reletting or accept any tenant offered by Tenant unless such offered tenant has a credit-worthiness acceptable to Landlord and leases the entire Premises upon terms and conditions including a rate of rent (after giving effect to all expenditures by Landlord for tenant improvements, broker's commissions and other leasing costs) all no less favorable to Landlord than as called for in this Lease, nor shall Landlord be required to make or permit any assignment or sublease for more than the current term or which Landlord would not be required to permit under the provisions of Article 9. 18.1.4.3 Until such time as Landlord shall elect to terminate the Lease and shall thereupon be entitled to recover the amounts specified in such case in Section 18.1.3, Tenant shall pay to Landlord upon demand the full amount of all rent, including any amounts treated as additional rent under this Lease and other sums reserved in this Lease for the remaining Term, together with the costs of repairs, alterations, additions, redecorating and Landlord's expenses of reletting and the collection of the rent accruing therefrom (including attorney's fees and broker's commissions), as the same shall then be due or become due from time to time, less only such consideration as Landlord may have received from any reletting of the Premises; and Tenant agrees that Landlord may file suits from time to time to recover any sums falling due under this Article 18 as they become due. Any proceeds of reletting by Landlord in excess of the amount then owed by Tenant to Landlord from time to time shall be credited against Tenant's future obligations under this Lease but shall not otherwise be refunded to Tenant or inure to Tenant's benefit. 18.2 Landlord may, at Landlord's option, enter into and upon the Premises if Landlord determines in its sole discretion that Tenant is not acting within a commercially reasonable time to maintain, repair or replace anything for which Tenant is responsible under this Lease and correct the same, without being deemed in any manner guilty of trespass, eviction or forcible entry and detainer and without incurring any liability for any damage or interruption of Tenant's business resulting therefrom. If Tenant shall have vacated the Premises, Landlord may at Landlord's option re-enter the Premises at any time during the last six months of the then current Term of this Lease and make any and all such changes, alterations, revisions, additions and tenant and other improvements in or about the Premises as Landlord shall elect, all without any abatement of any of the rent otherwise to be paid by Tenant under this Lease. 18.3 If, on account of any breach or default by Tenant in Tenant's obligations under the terms and conditions of this Lease, it shall become necessary or appropriate for Landlord to employ or consult with an attorney concerning or to enforce or defend any of Landlord's rights or remedies arising under this Lease, Tenant agrees to pay all Landlord's attorney's fees so incurred. Tenant expressly waives any right to: (a) trial by jury; and (b) service of any notice required by any present or future law or ordinance applicable to landlords or tenants but not required by the terms of this Lease. 18.4 Pursuit of any of the foregoing remedies shall not preclude pursuit of any of the other remedies provided in this Lease or any other remedies provided by law (all such remedies being cumulative), nor shall pursuit of any remedy provided in this Lease constitute a forfeiture or waiver of any rent due to Landlord under this Lease or of any damages accruing to Landlord by reason of the violation of any of the terms, provisions and covenants contained in this Lease. 18.5 No act or thing done by Landlord or its agents during the Term shall be deemed a termination of this Lease or an acceptance of the surrender of the Premises, and no agreement to terminate this Lease or accept a surrender of said Premises shall be valid, unless in writing signed by Landlord. No waiver by Landlord of any violation or breach of any of the terms, provisions and covenants contained in this Lease shall be deemed or construed to constitute a waiver of any other violation or breach of any of the terms, provisions and covenants contained in this Lease. Landlord's acceptance of the payment of rental or other payments after the occurrence of an Event of Default shall not be construed as a waiver of such Default, unless Landlord so notifies Tenant in writing. Forbearance by Landlord in enforcing one or more of the remedies provided in this Lease upon an Event of Default shall not be deemed or construed to constitute a waiver of such Default or of Landlord's right to enforce any such remedies with respect to such Default or any subsequent Default. 18.6 Intentionally Deleted. 18.7 Any and all property which may be removed from the Premises by Landlord pursuant to the authority of this Lease or of law, to which Tenant is or may be entitled, may be handled, removed and/or stored, as the case may be, by or at the direction of Landlord but at the risk, cost and expense of Tenant, and Landlord shall in no event be responsible for the value, preservation or safekeeping thereof. Tenant shall pay to Landlord, upon demand, any and all expenses incurred in such removal and all storage charges against such property so long as the same shall be in Landlord's possession or under Landlord's control. Any such property of Tenant not retaken by Tenant from storage within thirty (30) days after removal from the Premises shall, at Landlord's option, be deemed conveyed by Tenant to Landlord under this Lease as by a bill of sale without further payment or credit by Landlord to Tenant. 19. TENANT'S BANKRUPTCY OR INSOLVENCY. 19.1 If at any time and for so long as Tenant shall be subjected to the provisions of the United States Bankruptcy Code or other law of the United States or any state thereof for the protection of debtors as in effect at such time (each a "Debtor's Law"): 19.1.1 Tenant, Tenant as debtor-in-possession, and any trustee or receiver of Tenant's assets (each a "Tenant's Representative") shall have no greater right to assume or assign this Lease or any interest in this Lease, or to sublease any of the Premises than accorded to Tenant in Article 9, except to the extent Landlord shall be required to permit such assumption, assignment or sublease by the provisions of such Debtor's Law. Without limitation of the generality of the foregoing, any right of any Tenant's Representative to assume or assign this Lease or to sublease any of the Premises shall be subject to the conditions that: 19.1.1.1 Such Debtor's Law shall provide to Tenant's Representative a right of assumption of this Lease which Tenant's Representative shall have timely exercised and Tenant's Representative shall have fully cured any default of Tenant under this Lease. 19.1.1.2 Tenant's Representative or the proposed assignee, as the case shall be, shall have deposited with Landlord as security for the timely payment of rent an amount equal to the larger of: (a) three months' Rent and other monetary charges accruing under this Lease; and (b) any sum specified in Article 5; and shall have provided Landlord with adequate other assurance of the future performance of the obligations of the Tenant under this Lease. Without limitation, such assurances shall include, at least, in the case of assumption of this Lease, demonstration to the satisfaction of the Landlord that Tenant's Representative has and will continue to have sufficient unencumbered assets after the payment of all secured obligations and administrative expenses to assure Landlord that Tenant's Representative will have sufficient funds to fulfill the obligations of Tenant under this Lease; and, in the case of assignment, submission of current financial statements of the proposed assignee, audited by an independent certified public accountant reasonably acceptable to Landlord and showing a net worth and working capital in amounts determined by Landlord to be sufficient to assure the future performance by such assignee of all of the Tenant's obligations under this Lease. 19.1.1.3 The assumption or any contemplated assignment of this Lease or subleasing any part of the Premises, as shall be the case, will not breach any provision in any other lease, mortgage, financing agreement or other agreement by which Landlord is bound. 19.1.1.4 Landlord shall have, or would have had absent the Debtor's Law, no right under Article 9 to refuse consent to the proposed assignment or sublease by reason of the identity or nature of the proposed assignee or sublessee or the proposed use of the Premises concerned. 20. QUIET ENJOYMENT. Landlord represents and warrants that it has full right and authority to enter into this Lease and that Tenant, while paying the rental and performing its other covenants and agreements contained in this Lease, shall peaceably and quietly have, hold and enjoy the Premises for the Term without hindrance or molestation from Landlord subject to the terms and provisions of this Lease. Landlord shall not be liable for any interference or disturbance by other tenants or third persons, nor shall Tenant be released from any of the obligations of this Lease because of such interference or disturbance. 21. DAMAGE BY FIRE, ETC. 21.1 In the event the Premises or the Building are damaged by fire or other cause and in Landlord's reasonable estimation such damage can be materially restored within one hundred eighty (180) days, Landlord shall forthwith repair the same and this Lease shall remain in full force and effect, except that Tenant shall be entitled to a proportionate abatement in rent from the date of such damage. Such abatement of rent shall be made pro rata in accordance with the extent to which the damage and the making of such repairs shall interfere with the use and occupancy by Tenant of the Premises from time to time. Within forty-five (45) days from the date of such damage, Landlord shall notify Tenant, in writing, of Landlord's reasonable estimation of the length of time within which material restoration can be made, and Landlord's determination shall be binding on Tenant. For purposes of this Lease, the Building or Premises shall be deemed "materially restored" if they are in such condition as would not prevent or materially interfere with Tenant's use of the Premises for the purpose for which it was being used immediately before such damage. 21.2 If such repairs cannot, in Landlord's reasonable estimation, be made within one hundred eighty (180) days, Landlord and Tenant shall each have the option of giving the other, at any time within sixty (60) days after such damage, notice terminating this Lease as of the date of such damage. In the event of the giving of such notice, this Lease shall expire and all interest of the Tenant in the Premises shall terminate as of the date of such damage as if such date had been originally fixed in this Lease for the expiration of the Term. In the event that neither Landlord nor Tenant exercises its option to terminate this Lease, then Landlord shall repair or restore such damage, this Lease continuing in full force and effect, and the rent hereunder shall be proportionately abated as provided in Section 21.1. 21.3 Landlord shall not be required to repair or replace any damage or loss by or from fire or other cause to any panelings, decorations, partitions, additions, railings, ceilings, floor coverings, office fixtures or any other property or improvements installed on the Premises or belonging to Tenant. Any insurance which may be carried by Landlord or Tenant against loss or damage to the Building or Premises shall be for the sole benefit of the party carrying such insurance and under its sole control. 21.4 In the event that Landlord should fail to complete such repairs and material restoration within sixty (60) days after the date estimated by Landlord therefor as extended by this Section 21.4, Tenant may at its option and as its sole remedy terminate this Lease by delivering written notice to Landlord, within fifteen (15) days after the expiration of said period of time, whereupon the Lease shall end on the date of such notice or such later date fixed in such notice as if the date of such notice was the date originally fixed in this Lease for the expiration of the Term; provided, however, that if construction is delayed because of changes, deletions or additions in construction requested by Tenant, strikes, lockouts, casualties, Acts of God, war, material or labor shortages, government regulation or control or other causes beyond the reasonable control of Landlord, the period for restoration, repair or rebuilding shall be extended for the amount of time Landlord is so delayed. 21.5 Notwithstanding anything to the contrary contained in this Article: (a) Landlord shall not have any obligation whatsoever to repair, reconstruct, or restore the Premises when the damages resulting from any casualty covered by the provisions of this Article 21 occur during the last twelve (12) months of the Term or any extension thereof, but if Landlord determines not to repair such damages Landlord shall notify Tenant and if such damages shall render any material portion of the Premises untenantable Tenant shall have the right to terminate this Lease by notice to Landlord within fifteen (15) days after receipt of Landlord's notice; and (b) in the event the holder of any indebtedness secured by a mortgage or deed of trust covering the Premises or Building requires that any insurance proceeds be applied to such indebtedness, then Landlord shall have the right to terminate this Lease by delivering written notice of termination to Tenant within fifteen (15) days after such requirement is made by any such holder, whereupon this Lease shall end on the date of such damage as if the date of such damage were the date originally fixed in this Lease for the expiration of the Term. 21.6 In the event of any damage or destruction to the Building or Premises by any peril covered by the provisions of this Article 21, it shall be Tenant's responsibility to properly secure the Premises and upon notice from Landlord to remove forthwith, at its sole cost and expense, such property belonging to Tenant or its licensees from such portion of the Building or Premises as Landlord shall request. 22. EMINENT DOMAIN. If all or any substantial part of the Premises shall be taken or appropriated by any public or quasi- public authority under the power of eminent domain, or conveyance in lieu of such appropriation, either party to this Lease shall have the right, at its option, of giving the other, at any time within thirty (30) days after such taking, notice terminating this Lease, except that Tenant may only terminate this Lease by reason of taking or appropriation, if such taking or appropriation shall be so substantial as to materially interfere with Tenant's use and occupancy of the Premises. If neither party to this Lease shall so elect to terminate this Lease, the rental thereafter to be paid shall be adjusted on a fair and equitable basis under the circumstances. In addition to the rights of Landlord above, if any substantial part of the Building shall be taken or appropriated by any public or quasi-public authority under the power of eminent domain or conveyance in lieu thereof, and regardless of whether the Premises or any part thereof are so taken or appropriated, Landlord shall have the right, at its sole option, to terminate this Lease. Landlord shall be entitled to any and all income, rent, award, or any interest whatsoever in or upon any such sum, which may be paid or made in connection with any such public or quasi-public use or purpose, and Tenant hereby assigns to Landlord any interest it may have in or claim to all or any part of such sums, other than any separate award which may be made with respect to Tenant's trade fixtures and moving expenses; Tenant shall make no claim for the value of any unexpired Term. 23. SALE BY LANDLORD. In event of a sale or conveyance by Landlord of the Building, the same shall operate to release Landlord from any future liability upon any of the covenants or conditions, expressed or implied, contained in this Lease in favor of Tenant, and in such event Tenant agrees to look solely to the responsibility of the successor in interest of Landlord in and to this Lease. Except as set forth in this Article 23, this Lease shall not be affected by any such sale and Tenant agrees to attorn to the purchaser or assignee. If any security has been given by Tenant to secure the faithful performance of any of the covenants of this Lease, Landlord shall transfer or deliver said security, as such, to Landlord's successor in interest and thereupon Landlord shall be discharged from any further liability with regard to said security. 24. ESTOPPEL CERTIFICATES. Within ten (10) days following any written request which Landlord may make from time to time, Tenant shall execute and deliver to Landlord or mortgagee or prospective mortgagee a sworn statement certifying: (a) the date of commencement of this Lease; (b) the fact that this Lease is unmodified and in full force and effect (or, if there have been modifications to this Lease, that this lease is in full force and effect, as modified, and stating the date and nature of such modifications); (c) the date to which the rent and other sums payable under this Lease have been paid; (d) the fact that there are no current defaults under this Lease by either Landlord or Tenant except as specified in Tenant's statement; and (e) such other matters as may be reasonably requested by Landlord. Landlord and Tenant intend that any statement delivered pursuant to this Article 24 may be relied upon by any mortgagee, beneficiary or purchaser and Tenant shall be liable for all loss, cost or expense resulting from the failure of any sale or funding of any loan caused by any material misstatement contained in such estoppel certificate. Tenant irrevocably agrees that if Tenant fails to execute and deliver such certificate within such ten (10) day period Landlord or Landlord's beneficiary or agent may execute and deliver such certificate on Tenant's behalf, and that such certificate shall be fully binding on Tenant. 25. SURRENDER OF PREMISES. 25.1 Tenant shall, at least thirty (30) days before the last day of the Term, arrange to meet Landlord for a joint inspection of the Premises. In the event of Tenant's failure to arrange such joint inspection to be held prior to vacating the Premises, Landlord's inspection at or after Tenant's vacating the Premises shall be conclusively deemed correct for purposes of determining Tenant's responsibility for repairs and restoration. 25.2 At the end of the Term or any renewal of the Term or other sooner termination of this Lease, Tenant will peaceably deliver up to Landlord possession of the Premises, together with all improvements or additions upon or belonging to the same, by whomsoever made, in the same conditions received or first installed, broom clean and free of all debris, excepting only ordinary wear and tear and damage by fire or other casualty. Tenant may, and at Landlord's request shall, at Tenant's sole cost, remove upon termination of this Lease, any and all furniture, furnishings, movable partitions of less than full height from floor to ceiling, trade fixtures and other property installed by Tenant, title to which shall not be in or pass automatically to Landlord upon such termination, repairing all damage caused by such removal. Property not so removed shall, unless requested to be removed, be deemed abandoned by the Tenant and title to the same shall thereupon pass to Landlord under this Lease as by a bill of sale. All other alterations, additions and improvements in, on or to the Premises shall be dealt with and disposed of as provided in Article 6. 25.3 All obligations of Tenant under this Lease not fully performed as of the expiration or earlier termination of the Term shall survive the expiration or earlier termination of the Term. In the event that Tenant's failure to perform prevents Landlord from releasing the Premises, Tenant shall continue to pay rent pursuant to the provisions of Article 14 until such performance is complete. Upon the expiration or earlier termination of the Term, Tenant shall pay to Landlord the amount, as estimated by Landlord, necessary to repair and restore the Premises as provided in this Lease and/or to discharge Tenant's obligation for unpaid amounts due or to become due to Landlord. All such amounts shall be used and held by Landlord for payment of such obligations of Tenant, with Tenant being liable for any additional costs upon demand by Landlord, or with any excess to be returned to Tenant after all such obligations have been determined and satisfied. 26. NOTICES. Any notice or document required or permitted to be delivered under this Lease shall be addressed to the intended recipient, shall be transmitted personally, by fully prepaid registered or certified United States Mail return receipt requested, or by reputable independent contract delivery service furnishing a written record of attempted or actual delivery, and shall be deemed to be delivered when tendered for delivery to the addressee at its address set forth on the Reference Page, or at such other address as it has then last specified by written notice delivered in accordance with this Article 26, or if to Tenant at either its aforesaid address or its last known registered office, whether or not actually accepted or received by the addressee. 27. TAXES PAYABLE BY TENANT. In addition to rent and other charges to be paid by Tenant under this Lease, Tenant shall reimburse to Landlord, upon demand, any and all taxes payable by Landlord (other than net income taxes) whether or not now customary or within the contemplation of the parties to this Lease: (a) upon, allocable to, or measured by or on the gross or net rent payable under this Lease, including without limitation any gross income tax or excise tax levied by the State, any political subdivision thereof, or the Federal Government with respect to the receipt of such rent; (b) upon or with respect to the possession, leasing, operation, management, maintenance, alteration, repair, use or occupancy of the Premises or any portion thereof, including any sales, use or service tax imposed as a result thereof; (c) upon or measured by the Tenant's gross receipts or payroll or the value of Tenant's equipment, furniture, fixtures and other personal property of Tenant or leasehold improvements, alterations or additions located in the Premises; or (d) upon this transaction or any document to which Tenant is a party creating or transferring any interest of Tenant in this Lease or the Premises. In addition to the foregoing, Tenant agrees to pay, before delinquency, any and all taxes levied or assessed against Tenant and which become payable during the term hereof upon Tenant's equipment, furniture, fixtures and other personal property of Tenant located in the Premises. 28. DEFINED TERMS AND HEADINGS. The Article headings shown in this Lease are for convenience of reference and shall in no way define, increase, limit or describe the scope or intent of any provision of this Lease. Any indemnification or insurance of Landlord shall apply to and inure to the benefit of all the following "Landlord Entities", being Landlord, Landlord's investment manager, and the trustees, boards of directors, officers, general partners, beneficiaries, stockholders, employees and agents of each of them. Any option granted to Landlord shall also include or be exercisable by Landlord's trustee, beneficiary, agents and employees, as the case may be. In any case where this Lease is signed by more than one person, the obligations under this Lease shall be joint and several. The terms "Tenant" and "Landlord" or any pronoun used in place thereof shall indicate and include the masculine or feminine, the singular or plural number, individuals, firms or corporations, and their and each of their respective successors, executors, administrators and permitted assigns, according to the context hereof. The term "rentable area" shall mean the rentable area of the Premises or the Building as calculated by the Landlord on the basis of the plans and specifications of the Building including a proportionate share of any common areas. Tenant hereby accepts and agrees to be bound by the figures for the rentable space footage of the Premises and Tenant's Proportionate Share shown on the Reference Page. 29. TENANT'S AUTHORITY. If Tenant signs as a corporation each of the persons executing this Lease on behalf of Tenant represents and warrants that Tenant has been and is qualified to do business in the state in which the Building is located, that the corporation has full right and authority to enter into this Lease, and that all persons signing on behalf of the corporation were authorized to do so by appropriate corporate actions. If Tenant signs as a partnership, trust or other legal entity, each of the persons executing this Lease on behalf of Tenant represents and warrants that Tenant has complied with all applicable laws, rules and governmental regulations relative to its right to do business in the state and that such entity on behalf of the Tenant was authorized to do so by any and all appropriate partnership, trust or other actions. Tenant agrees to furnish promptly upon request a corporate resolution, proof of due authorization by partners, or other appropriate documentation evidencing the due authorization of Tenant to enter into this Lease. 30. COMMISSIONS. Each of the parties represents and warrants to the other that it has not dealt with any broker or finder in connection with this Lease, except as described on the Reference Page. 31. TIME AND APPLICABLE LAW. Time is of the essence of this Lease and all of its provisions. This Lease shall in all respects be governed by the laws of the state in which the Building is located. 32. SUCCESSORS AND ASSIGNS. Subject to the provisions of Article 9, the terms, covenants and conditions contained in this Lease shall be binding upon and inure to the benefit of the heirs, successors, executors, administrators and assigns of the parties to this Lease. 33. ENTIRE AGREEMENT. This Lease, together with its exhibits, contains all agreements of the parties to this Lease and supersedes any previous negotiations. There have been no representations made by the Landlord or understandings made between the parties other than those set forth in this Lease and its exhibits. This Lease may not be modified except by a written instrument duly executed by the parties to this Lease. 34. EXAMINATION NOT OPTION. Submission of this Lease shall not be deemed to be a reservation of the Premises. Landlord shall not be bound by this Lease until it has received a copy of this Lease duly executed by Tenant and has delivered to Tenant a copy of this Lease duly executed by Landlord, and until such delivery Landlord reserves the right to exhibit and lease the Premises to other prospective tenants. Notwithstanding anything contained in this Lease to the contrary, Landlord may withhold delivery of possession of the Premises from Tenant until such time as Tenant has paid to Landlord any security deposit required by Article 5, the first month's rent as set forth in Article 3 and any sum owed pursuant to this Lease. 35. RECORDATION. Landlord, at Tenant's request, shall enter into a memorandum of this Lease prepared by Tenant and reasonably acceptable to Landlord and its counsel, which memorandum may be recorded by Tenant at its sole cost and expense, after the recordation of any financing documents of Landlord's mortgagee. Tenant shall pay all charges and taxes incident to the recording of the memorandum. Upon expiration or the earlier termination of this Lease, Tenant shall release of record such memorandum, and Tenant irrevocably agrees that if Tenant fails to execute and deliver such release within ten (10) days after Landlord's demand, Landlord or Landlord's beneficiary or agent may execute and deliver such release on Tenant's behalf, and that such release shall be fully binding on Tenant. 36. TERMINATION OPTION. Provided that Tenant has complied with all of its covenants and agreements under the Lease (including, but not limited to, the Termination Requirements (defined in this Section 36)), the Lease shall terminate as of September 30, 2005 (the "Early Termination Date") in the same manner and with the same effect as if that date had been originally fixed in the Lease for the expiration of the Term. The "Termination Requirements" are defined as the requirements set forth in Section 36.1 though 36.3 hereof: 36.1 Tenant must deliver written notice to Landlord (the "Termination Notice") of Tenant's election to terminate the Lease as of the early Termination Date no later than December 31, 2004; 36.2 The Termination Notice must be accompanied by a wire transfer to Landlord of immediately available funds in the amount of $700,000; and 36.3 Tenant must, prior to the Early Termination Date, pay to Landlord all rent and other charges as specified in the Lease through the Early Termination Date. Any charges which cannot be ascertained prior to the Early Termination Date shall be reasonably estimated by Landlord and Tenant shall pay such estimated amounts. All such amounts shall be used and held by Landlord for payment of such obligations of Tenant, with Tenant being liable for any additional costs upon demand by Landlord, or with any excess to be returned to Tenant after all such obligations have been determined and satisfied. If Tenant fails to comply with any of the Termination Requirements, Tenant's option to terminate as of the Early Termination Date shall be null and void and the Lease shall remain in full force and effect until the Termination Date (as set forth on the Reference Page). If Tenant validly complies with all of the Termination Requirements, Tenant must deliver the Premises to Landlord as of the Early Termination Date free and clear of all of Tenant's personal property, equipment and trade fixtures and in broom clean condition and in the condition required by Tenant as of the normal expiration of the Term of this Lease; otherwise Landlord's rights and remedies shall be as set forth in this Lease and Landlord may treat Tenant as a "hold- over tenant" pursuant to the terms of Section 14. 37. RENT SCHEDULE. Rentable Rent Per Annual Rent Monthly Period Square Footage Square Foot Installment ____________ ______________ ___________ ________________ ___________ Commencement Date-09/30/01 70,508 13.50 951,858.00 79,321.50 10/1/2001-09/30/2002 70,508 13.91 980,413.74 81,701.15 10/1/2002-09/30/2003 70,508 14.32 1,009,826.15 84,152.18 10/1/2003-09/30/2004 70,508 14.75 1,040,120.94 86,676.74 10/1/2004-09/30/2005 70,508 15.19 1,071,324.56 89,277.05 10/1/2005-09/30/2006 70,508 15.65 1,103,464.30 91,955.36 10/1/2006-09/30/2007 70,508 16.12 1,136,568.23 94,714.02 10/1/2007-09/30/2008 70,508 16.60 1,170,665.28 97,555.44 10/1/2008-09/30/2009 70,508 17.10 1,205,785.24 100,482.10
38. DATA TUBES. Landlord acknowledges Tenant's exclusive right to access and utilize two (2) underground PVC data tubes (collectively, the "Data Tubes"), which connect the Buildings to Tenant's data center located at 2200 Kensington Court, Oak Brook, Illinois. Tenant represents and warrants that Exhibit C accurately describes and depicts the location of the Data Tubes. Landlord will not interfere with or change the location of the Data Tubes during the term of this Lease. If such interference or relocation is required by any governmental authority or because of an emergency (collectively the "Data Tube Issues"), Landlord will give immediate notice thereof to Tenant, whereupon Tenant will bear full responsibility for the prompt resolution of the Data Tube Issues and will indemnify Landlord for any and all costs borne by Landlord resulting from Tenant's breach of this obligation. Any such costs shall be immediately due and payable to Landlord as additional rent under this Lease. However, if such interference or relocation is requested by Landlord, subject to Tenant's consent which shall not be unreasonably withheld, for reasons other than a governmental requirement or an emergency (the "Landlord Data Tube Issues") and Tenant consents, Tenant will bear full responsibility for prompt resolution of the Landlord Data Tube Issues, and Landlord will reimburse Tenant for any and all costs borne by Tenant in resolving the Landlord Data Tube Issues. 39. PRIVATE DRIVEWAY. In addition to leasing the Premises, Tenant is currently leasing the property located to the north of the Premises (the "Northern Property") pursuant to that certain lease dated September 30, 1992 (the "Other Lease"). Tenant hereby acknowledges that Tenant is using a private driveway on the north end of the Premises (and depicted on Exhibit A attached hereto) to gain access from the Premises to the Northern Property (the "Private Driveway"). None of the Landlord Entities shall be liable and Tenant hereby waives all claims against them for any damage to any property or any injury to any person in or about the Premises or the Northern Property by or from any cause whatsoever relating to the Private Driveway, except to the extent caused by or arising from the gross negligence or willful misconduct of Landlord, its agent, employees or contractors. Furthermore, Tenant shall protect, indemnify and hold the Landlord Entities harmless from and against any and all losses, claims, liabilities or costs incurred in connection with the Private Driveway. At the earlier to occur of (a) the end of the Term or other sooner termination of the Lease, or (b) the end of the term of the Other Lease or other sooner termination of the Other Lease, Tenant shall, at Tenant's sole cost and expense, remove the Private Driveway and close up the shared access point from the Premises to the Northern Property such that the Private Driveway will no longer be visible and such closed area shall be substantially similar to the other curbs enclosing the Premises (the "Closure of the Private Driveway"). In the event Tenant does not perform the Closure of the Private Driveway, Landlord may perform such work and Tenant shall promptly reimburse Landlord for any and all fees related thereto. Tenant's obligations set forth in this Section 39 shall survive the expiration or earlier termination of the Lease. (THE 1NEXT ARTICLE IS ARTICLE 40) 40. LIMITATION OF LANDLORD'S LIABILITY. Redress for any claim against Landlord under this Lease shall be limited to and enforceable only against and to the extent of Landlord's interest in the Building. The obligations of Landlord under this Lease are not intended to and shall not be personally binding on, nor shall any resort be had to the private properties of, any of its trustees or board of directors and officers, as the case may be, its investment manager, the general partners thereof, or any beneficiaries, stockholders, employees, or agents of Landlord or the investment manager. LANDLORD: TENANT: ZFO PROPERTIES, LLC, a ACE HARDWARE CORPORATION, a Delaware limited liability Delaware corporation company 666 PARTNERS, L.L.C., an Illinois limited liability company, its Member By: By: DAVID F. HODNIK Charles E. Frank, Managing Member Title: President and CEO Dated: 7/26 , 2000 Dated: July 31, 2000 EXHIBIT B attached to and made a part of Lease bearing the Lease Reference Date of April 1, 2000 between ZFO Properties, LLC, as Landlord, and Ace Hardware Corporation, as Tenant INITIAL ALTERATIONS Tenant agrees to accept the Premises in its AS-IS WHERE-IS condition with no obligation on Landlord to perform any improvements. EXHIBIT C attached to and made a part of Lease bearing the Lease Reference Date of April 1, 2000 between ZFO Properties, LLC, as Landlord, and Ace Hardware Corporation, as Tenant LOCATION AND DEPICTION OF DATA TUBES There are two 4" plastic pipes that traverse E/W between the 1220 and 1300 Buildings at the north end of each Building that are tied into the respective telephone closets within each Building. These same pipes exit the north end of the 1300 Building via an underground vault that connects to two additional 4" pipes that run parallel along the side walk that leads to the service road at the far north boundary of the property line. These pipes contain low voltage alarm, video, and communications wiring, plus several strands of fiber optic cables that provide networking of all personal computers within both Buildings and Tenant's main frame computer located within the 2200 Kensington Court Building in Oak Brook, Illinois. _______________________________ 1Delete this line if near bottom page! EX-10 17 0017.txt LLC AGREEMENT FOR RETAIL VENTURES 10-A-14 LIMITED LIABILITY COMPANY AGREEMENT OF _____________________________________, LLC THIS LIMITED LIABILITY COMPANY AGREEMENT (the "Agreement") of _____________________, LLC, a Delaware limited liability company (the "Company") is made as of ____________, 2000 by and between ACE HARDWARE CORPORATION, a Delaware corporation ("Ace") and ______________________________, a __________ ("______") (Ace and ________ are referred to collectively as "Members" and individually as "Member"). RECITALS WHEREAS, the Members have formed the Company for the purpose of acquiring a minimum of _______________ (__) Ace Hardwarer affiliated stores in _____________. WHEREAS, the Members hereby desire to set forth the rights and obligations of the Members and the Manager (as hereinafter defined) and operate this limited liability company in accordance with the terms of, and subject to the condition set forth in, this Agreement. COVENANTS In consideration of the mutual covenants and agreements hereinafter set forth, the parties hereby agree as follows: ARTICLE I Section 1.1 Definitions. When used in this Agreement the following terms shall have the meanings set forth below: "Act" means the Delaware Limited Liability Company Act, as amended and as in effect from time to time. "Advisory Committee" shall have the meaning ascribed to it in Section 8.3. "Affiliate" means, with respect to any Person, any other Person directly or indirectly controlling, controlled by, or under common control with, such Person; for purposes of this definition, "control" of a Person shall mean the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of such Person, whether through the ownership of voting securities or otherwise. "Agreement" means this Limited Liability Company Agreement, as from time to time amended in accordance with the terms herein. "Assignee" means a person to whom an interest in the Company has been transferred in accordance with the provisions of this Agreement but who has not been admitted as a substitute or additional Member. "Available Cash" means, with respect to any fiscal year, the sum of (i) all cash receipts of the Company during such fiscal year (excluding for this purpose Capital Contributions), and (ii) all reductions made by the Manager during such fiscal year in reserves established as hereinafter provided, less the sum of (i) all cash operating expenditures and all cash debt service payments (including payments of principal, interest and penalties, if any), (ii) current portion of any trade payable owed to any Member and (iii) all additions to reserves during such fiscal year deemed reasonably appropriate by the Manager, including reserves for capital expenditures, working capital and contingent liabilities. "Bankruptcy" has the meaning given it in Section 18-101 of the Act. "Budget" means the annual operational and capital expenditures budget prepared by the Manager and approved by the Members in accordance with Section 8.2. "Capital Account" of a Member means the Capital Account established for such Member under Section 4.4. "Capital Contribution" means, with respect to any Member or Assignee, the amount of cash and the net fair market value of any property other than cash contributed by the Member or Assignee (or its predecessor in interest) to the Company. "Cause" means with respect to the Manager or any Member employed by the Company or any Affiliate thereof: (i) any misappropriation of funds or property of the Company by the Manager, Member or any action that results or is intended to result directly or indirectly in gain for or personal enrichment of the Manager, Member or other person at the expense of the Company (ii) any conviction of a felony or any crime involving moral turpitude; including, fraud or embezzlement or dishonesty committed by the Manager, Member or other Person; (iii) any misconduct on the part of the Member or any Affiliate that impairs the Member's ability to effectively perform his duties and discharge his responsibilities hereunder (including, but not limited to, sexual harassment of employees, recurring insubordination, chronic unexcused absences, improper treatment of subordinates or intoxication while performing his duties hereunder); (iv) the Manager is grossly negligent in the supervision of its employees who engage in any activity described in clause (i), (ii) or (iii); (v) any material breach of any provision contained in this Agreement by the Member; provided, however, such grossly negligent supervision or material breach shall not constitute "Cause" unless the Company has given the Member written notice of such grossly negligent supervision or material breach and such grossly negligent supervision or material breach remains uncured for a period of five (5) business days. "Code" means the Internal Revenue Code of 1986, as amended. "Company" means the limited liability company formed pursuant to this Agreement and the limited liability company continuing the business of this Company in the event of dissolution as herein provided. "Company Minimum Gain" has the meaning of "partnership minimum gain" as set forth in Sections 1.704-2(b)(2) and 1.704- 2(d) of the Treasury Regulations. "Covered Capacities" has the meaning ascribed to it in Section 8.6. "Current Ratio" means current assets divided by current liabilities in accordance with GAAP. "Depreciation" means, for each fiscal year or other period, an amount equal to the depreciation, amortization or other cost recovery deduction allowable with respect to an asset for such year or other period, except that if the Gross Asset Value of an asset differs from its adjusted basis for federal income tax purposes at the beginning of such year or other period, Depreciation shall be an amount which bears the same ratio to such beginning Gross Asset Value as the federal income tax depreciation, amortization or other cost recovery deduction for such year or other period bears to such beginning adjusted tax basis. "Dissolution" of the Manager which is not a natural person means that such Manager has terminated its existence, wound up its affairs and dissolved in accordance with applicable laws. "Distribution" means, with respect to any Member, the amount of cash and the net fair market value of any property other than cash distributed by the Company to the Member. "EBIT" means the Company's net income on a consolidated basis plus: (a) income taxes paid or accrued during the applicable period; and (b) interest expenses paid or accrued in determining net income for such period. "EBITDA" means the Company's net income on a consolidated basis plus: (a) income taxes paid or accrued during the applicable period, (b) interest expenses paid or accrued; and (c) amortization and depreciation deducted in determining net income for such period. "Equity" means the sum of all Capital Contributions, plus retained earnings, less any losses of the Company. "Fair Market Value " means, the fair market value of the Units of the Company as of any date as determined in good faith by the Manager with the Required Approval of the Advisory Committee. If the Manager and the Advisory Committee are unable to agree on the Fair Market Value of the Units, the "Fair Market Value" of such Units shall be the value of such Units as of such date as determined by an independent appraiser having the MAI designation and not less than ten (10) years' experience appraising retail stores similar to the Stores who is employed by a nationally recognized appraisal or accounting firm (the "Minimum Qualifications") selected by the Manager (the cost of which shall be borne by the Company); provided, however, that if any member of the Advisory Committee does not agree with the Fair Market Value as so determined with respect to the Units, the Advisory Committee may obtain a second appraisal for each such property from an independent appraiser having at least the Minimum Qualifications (the cost of which shall be paid by the Company) and if such second appraisal indicates a valuation within ten percent (10%) of the value indicated by the first appraisal, the "Fair Market Value" of such Units shall mean the average of the valuations indicated by the two appraisals; provided further, that if such appraisals indicate valuations that differ by 10% or more then the Manager and the Advisory Committee shall jointly designate a third appraiser having at least the Minimum Qualifications (the cost of which shall be borne by the Company) who shall provide a third appraisal for such Units and the "Fair Market Value" for such Units shall be the average valuation based on the two closest of the three appraisals. The "Fair Market Value" of a Unit of the Company shall be the aggregate Fair Market Value of all Units as determined above, divided by the total outstanding Units of the Company. "Fixed Charge Coverage Ratio" means EBIT divided by Interest Expense. "Gross Asset Value" means, with respect to any asset, the adjusted basis for Federal income tax purposes of such asset, except as follows: (i) The initial Gross Asset Value of any asset contributed by a Member to the Company shall be the gross fair market value of such asset, as determined by the contributing Member and the Company, set forth on Schedule A and approved by the Members in accordance with Section 8.2; (ii) The Gross Asset Value of all Company assets shall be adjusted to equal their respective gross fair market values, as determined by the Manager, as of the following times: (a) the acquisition of an additional interest in the Company by any new or existing Member in exchange for more than a de minimis Capital Contribution; (b) the distribution by the Company to a Member of more than a de minimis amount of property as consideration for an interest in the Company; and (c) the liquidation of the Company within the meaning of Section 1.704-1(b)(2)(ii)(g) of the Treasury Regulations; provided, however, that adjustments pursuant to clauses (a) and (b) above shall be made only if the Manager reasonably determines that such adjustments are necessary or appropriate to reflect the relative economic interests of the Members; (iii) The Gross Asset Value of any Company asset distributed to any Member shall be the gross fair market value of such asset on the date of distribution; and (iv) The Gross Asset Value of Company assets shall be increased (or decreased) to reflect any adjustments to the adjusted basis of such assets pursuant to Section 734(b) or Section 743(b) of the Code, but only to the extent that such adjustments are taken into account in determining Capital Accounts pursuant to Section 1.704-1(b)(2)(iv)(m) of the Treasury Regulations and Section 5.4(b); provided, however, that Gross Asset Value shall not be adjusted pursuant to this Subsection (iv) to the extent the Manager determines that an adjustment pursuant to Subsection (ii) hereof is necessary or appropriate in connection with a transaction that would otherwise result in an adjustment pursuant to this clause Subsection. If the Gross Asset Value of an asset has been determined or adjusted pursuant to clauses (i), (ii) or (iv), above, such Gross Asset Value shall thereafter be adjusted in the same manner as would the asset's basis for federal income tax purposes except that in lieu of regular depreciation, the Company shall take deductions for Depreciation. "Interest Expense" means the interest expense of the Company on a consolidated basis determined for the applicable period in accordance with GAAP. "Major Decisions" shall have the meaning ascribed to it in Section 8.2. "Majority Interest" means, with respect to any group of Members as of any particular time, Members in such group whose Units at such time exceed one-half of the outstanding Units of all Members in such group at such time. If no distinction is made with respect to the group of Units in the context so used, the term Majority Interest shall mean as of any particular time, Members whose Units at such time exceed one-half of the outstanding Units of all Members owning Units at such time. "Manager" means, as of any particular time, _________________________, a ____________ or such other Person who is at such time the Manager of the Company, whose authority is defined in Section 8.1. "Membership Agreement" means any membership agreement between Ace and the Company, as amended, including any agreement contributed and assigned to, and assumed by the Company, and "Membership Agreements" means all such agreements from time to time in effect. "Membership Interest" means a Member's entire right, title and interest in the Units in the Company owned by such Member and may include a Member's right to share in the Profits and Losses, the right to receive distributions of Company assets and the right to participate in the management of the business and affairs of the Company, to the extent permitted by this Agreement, including the right to vote on, consent to, or otherwise participate in any decision or action of or by the Members granted pursuant to this Agreement and the Act. "Member Nonrecourse Debt" has the meaning set forth in Section 1.704-2(b)(4) of the Treasury Regulations. "Member Nonrecourse Deductions" has the meaning set forth in Section 1.704-2(i)(2) of the Treasury Regulations. "Offer" shall have the meaning ascribed to it in Section 4.7. "Offer Note" shall have the meaning ascribed to it in Section 4.7. "Operating Cash Flow" means, for any period, the Company's net income or loss, determined in accordance with general accepted accounting principles (after deduction for each of (i) federal and state income taxes, (ii) any non-cash income, and (iii) all such capital expenditures made during such period and not financed) plus or minus each of the following items, (x) depreciation, (y) amortization and other non-cash charges, (z) interest expense paid or accrued. "Other Business Entity" has the meaning given it in Section 18-209 of the Act. "Person" means an individual, corporation, partnership, limited liability company, association, trust, joint venture, unincorporated organization, other entity or group. "Profits" or "Losses" means, for each fiscal year or other period, an amount equal to the Company's taxable income or loss for such year or period, determined in accordance with Section 703(a) of the Code (for this purpose, all items of income, gain, loss, or deduction required to be stated separately pursuant to Section 703(a)(1) of the Code shall be included in taxable income or loss), with the following adjustments: (i) any income of the Company that is exempt from federal income tax and not otherwise taken into account in computing Profits or Losses pursuant to this definition shall be added to such taxable income or loss; (ii) any expenditures of the Company described in Code Section 705(a)(2)(B) or treated as Section 705(a)(2)(B) expenditures pursuant to Section 1.704-1(b)(2)(iv)(i) of the Treasury Regulations and not otherwise taken into account in computing Profits or Losses pursuant to this definition shall be subtracted from such taxable income or loss; (iii) in the event the Gross Asset Value of any Company asset is adjusted pursuant to (ii) or (iii) of the definition of "Gross Asset Value," the amount of such adjustment shall be taken into account as gain or loss from the disposition of such asset for purposes of computing Profits or Losses; (iv) gain or loss resulting from any disposition of any property of the Company with respect to which gain or loss is recognized for federal income tax purposes shall be computed by reference to the Gross Asset Value of the property disposed of, notwithstanding that the adjusted tax basis of such property differs from its Gross Asset Value; and (v) in lieu of the depreciation, amortization and other cost recovery deductions taken into account in computing such taxable income or loss, there shall be taken into account Depreciation for such fiscal year or other period, computed in accordance with the definition of "Depreciation." "Purchasing Members" shall have the meaning ascribed to it in Section 4.6. "Required Approval" means, unless otherwise specified in this Agreement, a majority of the votes entitled to be cast by all members of the Advisory Committee. "Regulatory Allocations" shall have the meaning ascribed to it in Section 5.2. "Stores" means the stores developed, opened and operated as Ace Hardwarer affiliated stores, which have executed Membership Agreements. "Tax Distributions" has the meaning ascribed to it in Section 6.2(a). "Tax Matters Partner" has the meaning ascribed to it in Section 8.7. "Total Debt" means current liabilities plus long term liabilities less accounts payable determined for the applicable period in accordance with GAAP. "Transfer" has the meaning ascribed to it in Section 7.5. "Treasury Regulations" means the Income Tax Regulations, including Temporary Regulations, promulgated under the Code, as such regulations may be amended from time to time. "Triggering Event" shall have the meaning ascribed to it in Section 4.6. "Units" refers to the interest of a Member in the Profits, Losses, income, deductions and credits of the Company and Distributions by the Company. The number of Units held by each person admitted to the Company as a Member and by each Assignee shall be as set forth on Schedule A hereto. ARTICLE II Section 2.1 Formation of Company. Pursuant to this Agreement and the Certificate of Formation, the Members do hereby form a limited liability company pursuant to the Act and the provisions of this Agreement and, for that purpose, have caused the Certificate of Formation to be prepared, executed and filed with the Secretary of State of Delaware on _______________,2000. Except as herein otherwise expressly stated, the rights and liabilities of the Members shall be as provided in the Act. Section 2.2 Company Name. The business of the Company shall be conducted under the name "__________ Ace Hardware, LLC" or under such other name as the Members may from time to time determine. Section 2.3 Purposes of Company. (a) The Company's purpose is to acquire, develop, own and operate Stores under a Membership Agreement with Ace and its successors and assigns under the trade name of "_________ Ace Hardware" or such other trade name as the Manager may from time to time determine. The Company has all the powers now or hereafter conferred by the laws of the State of Delaware on limited liability companies formed under the Act and, subject to the limitations of this Agreement, may do any and all lawful acts or things that are necessary, appropriate, incidental or convenient for the furtherance and accomplishment of the purpose and business of the Company. In addition, the Members hereby authorize and direct the Manager to take all such actions and to prepare, execute, deliver and file all such agreements, instruments, documents and certificates (including the execution of all agreements with Ace and ________) in the name and on behalf of the Company and to incur and pay all such fees and expenses as it shall deem necessary, proper or advisable in order to carry out and effectuate fully the purpose of the Company set forth in this Section 2.3. Section 2.4 Company Property. Title to Company property shall be held in the name of the Company or its nominee. Section 2.5 Registered Office; Principal Place of Business. The name of the Company's registered agent for service of process is The Corporation Trust Company, and the address of the Company's registered office in the State of Delaware is 1209 Orange Street, Wilmington, Delaware 19801. The principal place of business of the Company shall be at _______________________________________. The Manager may change the Company's registered agent or the location of the Company's registered office or principal place of business as the Manager may from time to time determine. Section 2.6 Qualifications in Other Jurisdictions. The Manager shall cause the Company to be qualified, formed or registered under assumed or fictitious names statutes or similar laws in any jurisdiction in which the Company transacts business. The Manager, as an authorized person, within the meaning of the Act, may execute, deliver and file any certificates and any amendments and/or restatements thereof necessary for the Company to do business in a jurisdiction in which the Company may wish to conduct such business. The Manager shall prepare, execute and cause to be filed such original or amended certificates evidencing the formation and operation of the Company whenever the same may be required under the laws of ___________ and ______________ and any other state where the Company may do business. ARTICLE III Section 3.1 Term of Company. The term of the Company commenced upon the filing of the Certificate in the office of the Secretary of State of the State of Delaware, and shall continue in perpetuity or until terminated pursuant to the terms of this Agreement. ARTICLE IV Section 4.1 Capital Contributions of the Members. (a) In connection with the execution of this Agreement, the Members are making Capital Contributions equal to the amount as set forth opposite each of their names on Schedule A attached hereto. The form in which the Capital Contributions shall be contributed is set forth in Schedule B attached hereto. Following such contribution and the issuance of such Units, each Member will have made such contributions, and been issued the number of Units set forth opposite such Member's name on Schedule A attached hereto. (b) The Members acknowledge that, for federal income tax purposes, any disparity between the fair market value and the adjusted basis of the assets being contributed by the Members shall be subject to the provisions of Section 704(c) of the Code, as provided in Section 5.4 hereof. Section 4.2 Withdrawal and Return of Capital. No Member shall have the right to withdraw or to demand a return of any of its Capital Contribution, and except upon dissolution and winding up of the Company in accordance with the terms of Section 9.3. Subject to the limitations contained in the Act, any return of such Capital Contribution shall be made solely from the assets of the Company (including the Capital Contributions of the Members) and only in accordance with the terms hereof, and no Member shall have personal or other liability for the return of any other Member's Capital Contribution. Under circumstances requiring a return of any Capital Contribution, no Member shall have the right to receive property other than cash except as may be specifically provided herein, and to the extent any monies which any Member is entitled to receive pursuant to Article 6 hereof or any other provision of this Agreement would constitute a return of capital, each of the Members consents to the withdrawal of such capital. Section 4.3 Interest on Capital. No interest shall accrue or be paid on any Capital Contribution made to the Company. Section 4.4 Capital Accounts. The Company shall create upon its books and records a capital account ("Capital Account") for each Member, which shall be maintained in accordance with the following provisions: (i) To each Member's Capital Account there shall be credited such Member's Capital Contributions, such Member's distributive share of Profits and any items in the nature of income or gain which are specially allocated pursuant to Section 5.2, 5.3, or 5.4, the amount of any Company liabilities which are assumed by such Member or which are secured by any property distributed to such Member, and the Member's share of any increase in Gross Asset Value pursuant to its definition. (ii) To each Member's Capital Account there shall be debited the amount of cash and the Gross Asset Value of any property distributed to such Member pursuant to any provision of this Agreement, such Member's distributive share of Losses and any items in the nature of deductions or losses which are specially allocated pursuant to Section 5.2, 5.3 or 5.4, and the amount of any liabilities of such Member which are assumed by the Company or which are secured by any property contributed by such Member to the Company, and the Member's share of any decrease in Gross Asset Value pursuant to its definition. (iii) In the event all or a portion of an interest in the Company is transferred in accordance with the terms of this Agreement, the transferee shall succeed to the Capital Account of the transferor to the extent it relates to the transferred interest. (iv) In determining the amount of any liability for purposes of clauses (i) and (ii), above, there shall be taken into account Section 752(c) of the Code and any other applicable provisions of the Code and Treasury Regulations. Section 4.5 Company's Purchase Right. (a) The termination of employment by the Company or any Affiliate thereof of any natural Person who is a Member shall entitle, but not obligate, the Company to repurchase such Member's Units at the time of such termination and any Units held by such Person's spouse, children or trusts for their benefit under the terms of this Section, regardless of the reason for termination. The removal of the Manager for Cause shall entitle, but not obligate, the Company to repurchase such Manager's Units and any Units held by such Manager's shareholders or employees under the terms of this Section. For the purposes of this Section 4.5, "removal of the Manager for Cause" shall not include removal of the Manager pursuant to Section 8.9(i) through (v). If terminated for any reason other than Cause, the purchase price for the Units shall be the Fair Market Value thereof at the time of termination. If terminated or removed for Cause, the purchase price for the Units shall be the book value thereof at the time of termination or removal. (b) The Company may exercise its purchase right at any time within ninety (90) days after the date of termination of employment or removal by written notice to the terminated Member or removed Manager. Such notice shall set forth the number of Units being purchased and the purchase price for each and shall be accompanied by tender of the aggregate purchase price. The terminated Member or removed Manager will have ten (10) days from the giving of the purchase notice by the Company within which to dispute, by written notice to the Company, the purchase price to be paid for his Units. If the terminated Member or removed Manager either accepts the amount tendered or fails to send a notice of dispute within such ten (10) day period, the purchase price shall conclusively be deemed to have been agreed upon. If the terminated Member or removed Manager disputes the amount of the purchase price for his Units, such price shall be determined by binding arbitration in the manner set forth below, regardless of when such dispute arises. Upon the resolution of such dispute, by arbitration, agreement or otherwise, the Company shall pay the purchase price so determined for the terminated Member's or removed Manager's Units, in cash if the purchase price is less than or equal to the amount of Capital Contribution previously contributed to the Company by such Member. If the purchase price is greater than the amount of Capital Contribution previously contributed to the Company by such Member, that amount shall be paid in cash and the remainder, together with interest on the unpaid balance at the applicable federal rate, determined in accordance with Section 1274 of the Code, in thirty-six (36) equal monthly installments of principal and interest, or during such shorter period as the Manager may elect. Such obligation shall be evidenced by the Company's unsecured promissory note in a form reasonably satisfactory to the seller. Notwithstanding the foregoing, the terms of the payment of the purchase price are subject to the approval of the Company's lender, if any, which the Company agrees to use reasonable efforts to obtain. In all events, the purchase and sale transaction for the Units shall be deemed to have been consummated on the date of the giving of the Company's purchase notice. Effective on that date, the terminated Member or removed Manager shall cease to be a Member of the Company, and all of such Person's interest in Profits, Losses, income, gains or distributions of Available Cash shall cease and terminate. (c) The terminated Member's or removed Manager's acceptance of the purchase price for its Units shall constitute a complete release of the Company, the Manager, the Members, and their Affiliates of all claims or rights arising out of, or on account of, the Member's employment or ownership of Units. All notices required by this Section shall be given and deemed delivered in the manner set forth in Section 11.1 of this Agreement. (d) The provisions of this Section 4.5 shall supersede those in Section 7.5 with respect to transfers of Units to which this Section applies and shall be subject to any contractual arrangements entered into by the Company, a Member or any of their Affiliates with any individual employee or the Manager. (e) Any dispute or controversy which arises out of or relates to the Company's purchase right described in this Section 4.5 shall be settled and determined by binding arbitration in Chicago, Illinois in accordance with the commercial rules of the American Arbitration Association then in effect, and judgment upon the award rendered by the arbitrator(s) may be entered in, and specifically enforced by, any court of competent jurisdiction. The expenses of the arbitration shall be borne equally by the parties to the arbitration, provided that each party shall pay for and bear the cost of his or her own experts, evidence and legal counsel, unless ruled otherwise by the arbitrator(s). (f) The Company shall have the right to set-off any and all amounts owing to the Company from such terminated Member or removed Manager against the purchase price determined pursuant to this Section 4.5. Section 4.6 Member's Right to Purchase Other Member's Units. (a) Any of the Members (the "Purchasing Member") shall have the right, at any time to purchase all but not less than all of such Unit held by any of the other Member ("Selling Member") (hereafter the "Offer"). The Purchasing Member shall give five (5) business day notice ("Section 4.7 Offer Notice") to such Selling Member of his intent to purchase such Selling Member's Units and the price per Unit to be paid. Such Selling Member shall have ten (10) business days to elect to: (i) sell at the price contained in the Section 4.7 Offer Notice; or (ii) elect to purchase the Purchasing Member's Units at the price contained in the Section 4.7 Offer Notice. If the Selling Member accepts the offer to sell its Units, the offer price for the Selling Member's Units shall be paid by the Purchasing Member in cash with 30 days of receipt by the Selling Member of the Section 4.7 Offer Notice. Effective on the date of payment of the offer price of such Units, the Selling Member shall cease to be a Member of the Company with respect to such purchased Units, and all of its interest in the Profits, Losses, income, gains or Distributions with respect to such Units shall cease and terminate. If the Selling Member chooses to purchase the Purchasing Member's Units, the offer price for the Purchasing Member's shall be paid by the Selling Member, in cash, within 30 days of receipt by the Purchasing Member of the Selling Member's intent to purchase such Member's Units. Effective on the date of payment of the offer price of such Member's Units, such Member shall cease to be a Member of the Company with respect to such purchased Units, and all of its interest in the Profits, Losses, income, gains or Distributions with respect to such Units shall cease and terminate. (b) Upon the purchase of Ace's Units, _________ and Ace shall execute and cause the Company to execute a redemption agreement, substantially in the form attached hereto as Schedule C. Effective on the date of payment of the Redemption Price, Ace shall cease to be a Member of the Company with respect to such purchased Units, and all of its interest in the Profits, Losses, income, gains or Distributions with respect to such Units shall cease and terminate. Section 4.7 Additional Capital. (a) Except for the issuance of Units pursuant to this Agreement, if the Company proposes to issue any Units or rights to acquire such Units, the Company will first offer to sell to each Member holding Units a portion of such Units equal to the quotient determined by dividing (1) the number of Units held (directly or indirectly) by such Member by (2) the total number of Units outstanding. Each Member will be entitled to purchase such Units at the offered price and on the terms as determined by the Manager as such Units are to be offered to any other Persons. (b) In order to exercise its purchase rights hereunder, a Member must, within fifteen (15) days after receipt of written notice from the Company describing in reasonable detail the Units being offered, the purchase price thereof, the payment terms and such Member's percentage allotment, deliver a written notice to the Company describing its election hereunder. If all of the Units are not fully subscribed by such Members, the remaining Units will be reoffered by the Company to the Members purchasing their full allotment upon the terms set forth in this paragraph, except that such Members must exercise their purchase rights within five (5) days after receipt of such reoffer. (c) Upon the expiration of the offering periods described above, the Company will be entitled to sell such Units which Members have not elected to purchase at any time or from time to time during the 120 days following such expiration on terms and conditions no more favorable to the purchasers thereof than those offered to such Members. Any Units offered or sold by the Company after such 120-day period must be reoffered to the Members pursuant to the terms of this paragraph. (d) The Members hereby consent to the admission of any Person acquiring Units pursuant to this Section 4.8 and who did not previously own Units of the Company and who executes this Agreement. (e) If Ace is required, pursuant to its guarantee of certain leases, to make payment under such guarantee, such amount of payment shall be deemed an additional Capital Contribution by Ace. The Company shall be obligated to issue additional Units at the lesser of (i) $100 per Unit or (ii) their respective Fair Market Value, as determined in accordance with its definition. ARTICLE V Section 5.1 Allocation of Profits and Losses. After giving effect to the Special Allocations in Section 5.2 hereof, Profits and Losses of the Company for any fiscal year shall be allocated as follows: (a) Profits for any fiscal year shall be allocated in the following order of priority: (i) First, to all Members, in proportion to the deficit balances (if any) in their Capital Accounts, in an amount necessary to eliminate any deficits in the Members' Capital Accounts and restore such Capital Accounts to zero; (ii) Thereafter, to the Members holding Units in proportion to their Units. (b) Losses for any fiscal year shall be allocated in the following order of priority: (i) First, to the Members in proportion to their Units until the Capital Account balances of such Members have been reduced to zero; (ii) Thereafter, to the Members in proportion to their Units. Section 5.2 Special Allocations. Notwithstanding Sections 5.1, the following special allocations shall be made in the following order: (a) Profits and Losses and items thereof will be allocated as though this Agreement contained (and there is hereby incorporated herein by reference): (i) a minimum gain chargeback provision that complies with the requirements of Section 1.704- 2(f) of the Treasury Regulations; (ii) a nonrecourse debt minimum gain chargeback provision that complies with the requirements of Section 1.704-2(i)(4) of the Treasury Regulations; and (iii) a qualified income offset provision that complies with the requirements of Section 1.704-1(b)(2)(ii)(d) of the Treasury Regulations. (b) Any Member Nonrecourse Deductions for any fiscal year or other period will be specially allocated to the Member who bears the economic risk of loss with respect to the Member Nonrecourse Debt to which such Member Nonrecourse Deductions are attributable in accordance with Regulations Section 1.704-2(i)(1) and (2). (c) To the extent an adjustment to the adjusted tax basis of any Company asset pursuant to Section 734(b) or section 743(b) of the Code is required, pursuant to Section 1.704-1(b)(2)(iv)(m) of the Treasury Regulations, to be taken into account in determining Capital Accounts, the amount of such adjustment to the Capital Accounts shall be treated as an item of gain (if the adjustment increases the basis of the asset) or loss (if the adjustment decreases such basis) and such gain or loss shall be specially allocated to the Members and Assignees in a manner consistent with the manner in which their Capital Accounts are required to be adjusted pursuant to such Section of the Regulations. (d) The allocations set forth in this Section 5.2 (the "Regulatory Allocations") are intended to comply with certain provisions of Sections 1.704-1 and 1.704-2 of the Treasury Regulations. Notwithstanding any other provisions of this Agreement, the Regulatory Allocations shall be taken into account in allocating Profits and Losses and other items of income and deduction among the Members and Assignees so that, to the extent possible, the net amount of such allocations of Profits and Losses, other items of income, gain, loss and deduction, and the Regulatory Allocations to each Member or Assignee shall be equal to the net amount that would have been allocated to each Member or Assignee if the Regulatory Allocations had not occurred. Section 5.3 Allocation of Tax Credits. All tax credits allowed in connection with any depreciable property shall be allocated in the same manner as deductions for Depreciation of such property, and all tax credits allowed in connection with other expenditures shall be allocated in the same manner as deductions arising out of such other expenditures. Section 5.4 Section 704(c) Allocations. (a) In accordance with Section 704(c) of the Code and the Treasury Regulations thereunder, income, gain, loss, and deduction with respect to any property contributed to the capital of the Company shall be allocated among the Members so as to take account of any variation between the adjusted basis of such property to the Company for federal income tax purposes and its initial fair market value. (b) In the event the Gross Asset Value of any asset is adjusted pursuant to the definition of "Gross Asset Value," subsequent allocations of income, gain, loss, and deduction with respect to such asset shall take account of any variation between the adjusted basis of such asset for federal income tax purposes and the value at which such asset is reflected in the Capital Accounts of the Members, to the extent such variation was not previously taken into account pursuant to Section 5.4(a), in the same manner as under Section 704(c) of the Code and the Treasury Regulations thereunder. (c) Allocations pursuant to Sections 5.4(a) and (b) shall be determined by the Manager using any permissible method under Section 704(c) of the Code and the Treasury Regulations thereunder. (d) Allocations pursuant to Sections 5.4(a) and (b) are solely for purposes of federal, state, and local income taxes and notwithstanding any other provision of this Agreement, such allocations shall not affect, or in any way be taken into account in computing, any Member's Capital Account or share of Profits, Losses, other items, or Distributions pursuant to any provision of this Agreement. Section 5.5 Certain Other Allocation Rules. (a) For purposes of determining the Profits, Losses, or any other items allocable to any period, Profits, Losses, and any such other items shall be determined on a daily, monthly or other basis, as determined by the Manager in its sole discretion using any permissible method under Section 706 of the Code and the Treasury Regulations thereunder. Notwithstanding the foregoing, the Member purchasing Units pursuant to Section 4.7 shall have the right to require the Company to close its books as of the day prior to the date of such transfer of such Units for purposes of allocating Profits and Losses to the periods before and after the date of such issuance. (b) Except as otherwise provided in this Agreement, all items of Company income, gain, loss, deduction, and credit, for any fiscal year or other period, and any other allocations not otherwise provided for shall be divided among the Members in the same proportions as they share Profits or Losses, as the case may be, for such year or other period. Section 5.6 Recapture Responsibility. In making the allocation of Profit among the Members, the ordinary income portion, if any, of such Profit caused by the recapture of cost recovery or any other deductions shall be allocated among those Members who were previously allocated the cost recovery or any other deductions in proportion to the amount of such deductions previously allocated to them. It is intended that the Members, as between themselves, shall be allocated the proportionate recapture income as a result of any cost recovery or other deductions which were previously allocated to them, in proportion to the amount of such deductions which have been allocated to them, notwithstanding that a Member's share of profits, losses or liabilities may increase or decrease from time to time. Nothing in this Section 5.6, however, shall cause the Members to be allocated more or less gain or profit than would otherwise be allocated to them pursuant to this Article 5. ARTICLE VI Section 6.1 Distributions. (a) Except as otherwise provided in Section 6.2, which shall be paid when due, Distributions of Available Cash shall be made at such time or times and in such amounts as may be determined by the Manager. (b) Except as provided in Section 6.3 and Section 9.3 regarding distributions in liquidation of the Company, Distributions of Available Cash shall be made to the Members in proportion to their Units. Section 6.2 Distributions for Tax Purposes. (a) The Manager shall cause the Company to make Distributions out of Available Cash within 75 days after the end of any fiscal year of the Company, beginning with the fiscal year ending in December____, to each of the Members, in an amount equal to (i) the excess of (A) the total amount of taxable income allocated to such Members for such fiscal year, over (B) the amount, if any, by which the sum of all items of deduction and loss allocated to such Members from the Company for all prior fiscal years exceeds the sum of all items of taxable income allocated to such Members for all prior fiscal years, multiplied by (ii) a tax rate reasonably selected by the Manager (the "Tax Distributions"); provided, however, that subsequent Distributions to the Members made during such fiscal year and subsequent fiscal years shall be adjusted as necessary to ensure that, over the period of time since the date of this Agreement, the aggregate cash distributed to a Member shall be equal to the amount to which such Member would have been entitled had there been no Tax Distributions. In the event that in any fiscal year Available Cash is insufficient to permit the payment in full of the Tax Distributions computed as set forth above, then in any fiscal year in which Available Cash exceeds required Tax Distributions, the Tax Distributions payable under this Section 6.2(a) shall be increased (but not in excess of Available Cash) until such deficiency has been recouped. (b) The Manager may cause the Company to make periodic Distributions to the Members during each fiscal year based on its reasonable estimate of the amount that will be required to be distributed pursuant to Section 6.2(a) for such fiscal year in order to provide funds to the Members for the payment of quarterly estimated taxes by them. In the event any such periodic Distributions are made for any fiscal year, the amount of the Distribution made after the end of the fiscal year shall be appropriately adjusted so that the total amount distributed to each Member (taking into account periodic Distributions made pursuant to this Section 6.2(b)) is equal to the amount such Member would have been entitled to receive pursuant to Section 6.2(a) had no such periodic Distributions been made. Section 6.3 Payment and Withholding of Certain Taxes. Notwithstanding anything to the contrary herein, to the extent that the Company is required, pursuant to any applicable law, (i) to pay tax (including estimated tax) on a Member's allocable share of Company items of income or gain, whether or not distributed, or (ii) to withhold and pay over to the tax authorities any portion of a Distribution otherwise distributable to a Member, the Company may pay over such tax or such withheld amount to the tax authorities, and such amount shall be treated as a Distribution to such Member at the time it is paid to the tax authorities. For purposes of this Section 6.3, the Company may assume that any Member who fails to provide to the Company satisfactory evidence of his tax status for United States federal income tax purposes is a foreign person. Section 6.4 Right of Offset. Notwithstanding anything to the contrary contained in the foregoing provisions of this Article 6 or any other provisions of this Agreement, the Members acknowledge and agree that the Company shall have the right to setoff any and all amounts owing to the Company by a Member or its Affiliates, including any amounts arising under any claims for indemnification and all costs and expenses (including attorneys' fees) incurred by the Company, in connection with any such claims, against any distributions otherwise payable to such Member under this Agreement; provided, however, that there shall be no right of offset with respect to any Tax Distribution made under Section 6.2. ARTICLE VII Section 7.1 Powers of Members. The Members shall have the power to exercise any and all rights or powers granted to the Members pursuant to the express terms of this Agreement. The Members shall also have the power to authorize the Manager, by vote of the Majority Interest of the Members, to possess and exercise any right or power not already vested in the Manager pursuant to Section 8.1. Except in the capacity as Manager, as specifically provided in Article 8, no Member, acting alone, shall have the authority to act for, in the name of, or as a representative of the Company, or to deal with the Company's assets in any way, or to undertake or assume any obligation, debt, duty or responsibility on behalf of any other Member or the Company. Any violation of this Section 7.1 shall be deemed to constitute wilful misconduct. Section 7.2 Partition. Each Member waives, until termination of the Company, any and all rights that it may have to maintain an action for partition of the Company's property. Section 7.3 Resignation of Members. No Member shall have the right to resign or withdraw from the Company as a Member (except that this restriction shall not prevent any Member from transferring its interest in the Company to the extent permitted in Section 7.5). Section 7.4 Conduct of Other Business Activities by the Members. The Members may generally engage in any business or profession or possess an interest in other businesses or professions of every nature and description, independently or with others, including but not limited to, all phases of the hardware business. Neither the Company nor the Members shall, under the terms of this Agreement or by virtue of the existence of the Company or the relation created among the Members, have any rights in or to any independent venture of any other Member or its Affiliates, or the income or profits thereof, whether or not any such venture is, or may be deemed to be, competitive with the Company. Section 7.5 Assignment by Members and Assignees. (a) Except as otherwise provided in Section 4.6 or 4.7, and subject to Section 7.6, a Member or Assignee may not assign, pledge, mortgage, hypothecate, sell, or otherwise dispose or encumber (hereinafter referred to as a "Transfer") all or any part of his Units in the Company to any Assignee (and no such Transfer, whether voluntary or involuntary, whether by operation of law or otherwise and whether or not for value, shall be effective) unless: (i) such Transfer shall be made by means of an assignment in such form as shall be reasonably satisfactory to the Manager; (ii) the Company shall have received advice of counsel satisfactory to the Manager to the effect: (a) that the proposed Transfer is permissible under the Securities Act of 1933, as amended, the rules and regulations of the Securities and Exchange Commission thereunder and all applicable state securities laws; (b) that the proposed Transfer will not adversely affect the classification of the Company as a partnership for federal income tax purposes; and (c) that the proposed Transfer will not result in a termination of the Company as a partnership under Section 708(b) of the Code; (iii) the assignor and Assignee, and, if deemed necessary by the Manager, all other Members, shall have executed all such certificates and other documents and performed all such acts as the Manager reasonably deems necessary or appropriate to effect a valid transfer of the Units being transferred, and to preserve the rights, status and existence of the Company. (b) The Company shall, after the effective date of any Transfer pursuant to the provisions of this Section 7.5, pay all Distributions on account of the Units so transferred to the Assignee; provided, however, that if instructed to do so in writing by the assignor and the Assignee, the Manager shall cause the Company to pay to the assignor a portion of the Tax Distribution provided for in Section 6.2 that would otherwise have been payable to the Assignee for the year in which the Transfer occurs, equal to the amount that would have been payable under Section 6.2 with respect to the Units transferred if the period beginning on the first day of the fiscal year in which the Transfer occurred and ending on the effective date of the Transfer had been a separate fiscal year of the Company. Any such Distribution paid to the assignor shall be treated as if paid to the Assignee for purposes of determining the Capital Account balance of the Assignee. (c) Any Member who Transfers all of its Units in the Company shall, upon the effective date of such Transfer, cease to be a Member for all purposes, except that no assignment of all or any portion of its Units in the Company shall relieve the assignor of its obligations under this Agreement, whether arising prior to or subsequent to such Transfer. (d) An Assignee who has not become a substitute or additional Member in the manner provided in this Agreement shall have no rights whatsoever in respect of the Company except the right to receive the distributions, profits and losses to which the Assignee Member would be entitled, and such other rights specifically accorded him by the terms of this Agreement. The provisions of this Agreement shall be binding on all Assignees. (e) No Assignee of a Member shall have the right to become a substitute or additional Member unless the conditions set forth in Section 7.5(a)(i) through (iii) have been satisfied and the Assignee shall have paid to the Company the costs and expenses (including attorneys' fees and filing costs) incurred in effecting the substitution or addition. (f) Notwithstanding anything to the contrary herein, (and except with respect to any public offering of equity that may be undertaken by the Company), (i) the Manager shall not cause or permit Units to become traded on an established securities market and (ii) the Manager shall withhold its consent to any Transfer that, to the Manager's knowledge after reasonable inquiry, would otherwise be accomplished by a trade on a secondary market (or the substantial equivalent thereof). For purposes of this subsection the terms "traded on an established securities market" and "secondary market (or the substantial equivalent thereof)" shall have the meanings set forth in Sections 469(k)(2) and 7704 of the Code and any regulations promulgated thereunder that are in effect at the time of the proposed Transfer. (g) Any Member (the "Transferring Member") may Transfer its Units, or any portion thereof, to any Permitted Transferee (as hereafter defined) who agrees in a writing in form and substance satisfactory to the Company delivered to the Company to be bound by the terms of this Agreement (including, but not limited to, the restrictions on Transfers specified in this Section) for all purposes in the same manner as such Permitted Transferee's Transferring Member and to assume the obligations of such Transferring Member hereunder with respect to the Units. For purposes of this Agreement, "Permitted Transferees" means: (i) with respect to a Member who is a natural person, the spouse or lineal descendants (but not minor children) of such Member, any trust created solely for the benefit of such Member, the spouse or lineal descendants of such Member or such Member's estate, any individual retirement account or other tax-deferred account solely for the benefit of such Member, the spouse or lineal descendants of such Member or such Member's estate, any corporation or partnership in which such Member, the spouse or lineal descendants of such Member are the direct and beneficial owners of all of the equity interests (provided such Member, spouse and lineal descendants agree in writing to remain the direct and beneficial owners of all such equity interests), or the personal representative of such Member upon such Member's death for purposes of administration of such Member's estate or upon such Member's Incapacity for purposes of the protection and management of the assets of such Member; and (ii) with respect to a Member who is not a natural person, its Affiliates. The Members do hereby consent to the Transfer of Ace's Units to a wholly-owned subsidiary and the Members hereby consent to the substitution of such Assignee as Member of the Company. Section 7.6 Transfers and Other Dispositions - Right of First Refusal (a) In the event either of the Members, or their successor in interest, desire to Transfer its Units, or any portion thereof, the Members, or their successor in interest, shall give written notice (the "Section 7.6 Offer Notice") to the other Member, indicating its desire to sell its Units, or such portion thereof, and offering to sell its Units, or such portion thereof, to the other Member, at the price and on the other terms stipulated in the Section 7.6 Offer Notice. (b) At any time within ten (10) days after the Section 7.6 Offer Notice is given to the Member (the "Offer Date"), the other Member may accept the Offer (in whole but not in part) to purchase such Units at the price and upon the terms stipulated in the Section 7.6 Offer Notice by giving written notice to that effect to the other Member, or their successor in interest, prior to the expiration of the aforementioned ten (10) day period. Any such acquisition of the offered Units by such Member shall close on a date mutually agreed upon by the Members, or their successor in interest, within forty (40) days after the Offer Date and otherwise in accordance with the terms set forth in the Section 7.6 Offer Notice. (c) If the Member does not agree to the purchase of the offered Units of the other Member, or their successor in interest, referred to in the Section 7.6 Offer Notice within the period prescribed herein, the Member, or their successor in interest, may sell all of the offered Units described in the Offer within 180 days after the Offer Date and otherwise in accordance with the terms set forth in the Section 7.6 Offer Notice to one or more purchasers (who need not be Members of the Company at the time of such offer and sale) who agree in writing in form and substance satisfactory to the Manager to be bound by the terms of this Agreement as an Assignee of the Member; provided, however, the Assignee and assignor agree to comply with the conditions of Section 7.5(a)(i) through (iii). Any proposed sale (i) in a transaction which closes more than 180 days after the Offer Date or (ii) on terms that differ from those in the Section 7.6 Offer Notice cannot be consummated without again complying with the provisions of this Section 7.6. Section 7.7 Limitation of Liability. For each Member, liability shall be limited as set forth in this Agreement, the Act, and other applicable law. A Member will not be personally liable for any debts or losses of the Company beyond its respective Capital Contribution; provided, however, that any Member who receives a distribution or the return in whole or in part of its Capital Contribution is liable to the Company only to the extent provided by the Act. ARTICLE VIII Section 8.1 Management of the Company. (a) Subject to the limitations set forth in Section 8.2, the business and affairs of the Company shall be managed by the Manager and the Manager shall have full authority to act for and with the Company in all matters in connection with or relating to the Company's business. On behalf of the Company and in furtherance of the business of the Company, the Manager shall have the authority to perform all acts which the Company is authorized to perform, without the consent of the Members, except as specifically provided herein, including the authority to: (i) purchase or otherwise acquire, outright or by lease, at such time or times, for such prices and on such terms as it deems desirable, real or personal property, tangible or intangible, of all types for use in the Company's business, which property may be owned at the time of such purchase by the Manager or their Affiliates; (ii) execute and deliver such documents, instruments or agreements as the Manager may deem necessary or desirable for the acquisition, operation and disposition of the Company's business and the investment, management and maintenance of its assets, or for other Company purposes, and amendments, revisions and substitutions to any of the foregoing, including without limitation, the Membership Agreements; (iii) enter into leases, licenses, sublicenses, franchises or other agreements with respect to all or any portion of the Company's property, whether or not such leases, licenses or agreements (including renewal or option terms) shall extend beyond the date of termination of the Company, upon such terms as it deems proper; (iv) compromise, submit to arbitration, sue on, or defend all claims in favor of or against the Company; (v) do all acts it deems necessary or appropriate for the protection and preservation of the Company's assets, including insuring the business and assets of the Company in such amounts and against such risks as the Manager deems advisable; (vi) finance any assets or activities of the Company or refinance, increase, modify, consolidate, prepay or extend any debts, mortgages or other security obligations of the Company; borrow money (including borrowings from the Manager or any other Member or their Affiliates, there being no obligation, however, for the Manager or any of its Affiliates to make any such loan) on a secured or unsecured basis and grant or pledge Company assets as security for any such loan and confess a judgment against the Company in connection therewith; (vii) hold the Company assets in the Company name or the name of one or more nominees; (viii) open one or more bank accounts in the name of the Company or in any other name in which the Company's funds are to be held, make deposits therein, draw funds therefrom and deal in or with the Company's funds in such manner as it may deem appropriate; and (ix) make distributions of Company funds or assets to the Members as provided for by this Agreement. (b) Subject to Section 8.2, the Manager may, on behalf of the Company, employ, engage, retain or deal with any persons, corporations or other entities (including its Affiliates) to act in such capacities as the Manager may determine; provided, however, if such services are provided by Members' Affiliates, such fees must be no higher than those customarily charged by non- Affiliates service providers. (c) With respect to third parties, the signature of the Manager on any agreement, contract, mortgage, deed of trust, promissory note, instrument or other document shall be sufficient to bind the Company in respect thereof and shall conclusively evidence the authority of the Manager with respect thereto, and no Person need look to any other evidence or require joinder or consent of any other Person. (d) In the event that the Manager proposes a merger or consolidation of the Company with or into any Other Business Entity or a sale of substantially all of the assets of the Company, such merger, consolidation or sale shall require the approval of a Majority Interest of the Units owned by Members. (e) Any approval, consent, vote or other action of the Members required or contemplated by this Agreement may be taken without a meeting, without prior notice and without a vote, if a consent or consents in writing, setting forth the approval, consent, vote or other action so taken is signed by Members holding the requisite number of Units and delivered to the Manager. Any failure to give notice of any such approval, consent, vote or other action to the Members not executing a consent shall not effect the validity of the approval, consent, vote or other actions. Section 8.2 Major Decisions. (a) Notwithstanding anything to the contrary contained in Section 8.1, the Manager shall not take any action with respect to any of the matters enumerated below ("Major Decisions") without the Required Approval of the Advisory Committee: (i) issue new Units in the Company unless such Units are offered to all Member in accordance with Section 4.7; (ii) exchange the Units for equity interests in another Other Business, whether such exchange is a taxable or non- taxable transaction; (iii) enter into any material modification, amendment or restructuring of any Membership Agreement; (iv) enter into any transaction with, contract with, or otherwise compensate any Member or an Affiliate which is in excess of $10,000, per calendar year, or enter into any material modification, amendment or restructuring of any transaction or contract with any Member or Affiliate; (v) incur any additional indebtedness for borrowed funds in excess of the lesser of (A) $300,000 or (B) which would cause the Company to have a debt-to-equity ratio greater than 2 to 1, except for trade payables incurred in the ordinary course of business; (vi) create any option plan for employees or other persons; (vii) dissolve the Company and wind up and liquidate the business and assets; (viii) guarantee any obligations of a third party; (ix) amend the purpose of the Company; (x) entering, directly or indirectly, into, or approving the terms of, any transaction with any Member or any affiliate of any Member including any employment of such Member or its shareholder or employees, other than as specifically provided in this Agreement including any contributions of property; (xi) purchasing stock or securities of, extending credit to or making investments in, becoming liable as surety for, or guarantee or endorsing any obligations of, any person, except investments in direct obligations of the United States and commercial bank deposit; (xii) creating or permitting to exist any subsidiaries of the Company; (xiii) making any material modification to any supply or vendor contract to which the Company is a party; (xiv) determining the Fair Market Value of the Units; (xv) acquiring, and making all decisions relating to, any interests of the Company in any corporation, partnership, limited liability company, joint venture, or other entity, including, without limitation, decisions relating to: (A) the execution of subscription, shareholders', partnership, operating, limited liability company or joint venture agreements, voting agreements, or the like having such terms as the Manager, in its sole discretion, shall determine or consent to; (B) the operation, financing or acquisition or sale of properties of such entity; and (C) the sale of the Company's interest in the entity; or (xvi) agree to do any of the foregoing. (b) The Required Approval of the Advisory Committee (which approval shall include the approval of the Ace Members as defined below) shall be obtained before the Manager and the Company engage in: (i) implementation any operating and capital budgets for any fiscal year of the Company; (ii) the development of any Stores or permanently closing any Stores of the Company; (iii) the approval of any expenditure in excess of $50,000.00 other than the purchase of inventory in the ordinary course of business; (iv) enter into any sale, exchange or contribution of all or substantially all of the assets of the Company; (v) recapitalizing the Company's organizational structure, or causing the Company to consolidate or merge with any other entity, acquire any business, acquire stock of any corporation, or enter into any partnership or joint venture; (vi) file for Bankruptcy; (v) the amendment of this Section 8.2(b); (vi) entering into any agreement contemplated in Section 8.2(a)(xv); (vii) enter into leases, licenses, sublicenses, franchises or other agreements with respect to all or any portion of the Company's property, the term of which is greater than one (1) year, or under which the aggregate payments to be made exceed $350,000; or (viii) compromise, submit to arbitration, sue on or defend claims in favor of or against the Company where the amount in controversy exceeds $50,000. (c) The Manager shall give the Advisory Committee written notice of any Major Decision which it requests to be made and shall, at the expense of the Company, furnish to the Advisory Committee such documents and information as may be reasonably necessary in order to enable the Advisory Committee to make the Major Decisions set forth above. (d) Notwithstanding 8.2(b)(ii), prior to the Manager causing the Company to close or sell any Stores of the Company, the Manager shall first give notice to Ace of the Company's desire to sell or close such Store. Such notice shall include the price and other terms of the sale of such Store. Ace shall have ten (10) business days to elect to purchase such Store at the purchase price contained in the notice. Ace shall have fifteen (15) business days after receipt of the Manager's intent to sell or close such Store to deliver the purchase price to the Company and execute all documents, as determined by the Manager, evidencing the transfer of such Store. Section 8.3 Advisory Committee. (a) There shall be an Advisory Committee of the Company (the "Advisory Committee") which shall consist of up to five members selected in accordance with the provisions of Section 8.3(b). The Advisory Committee shall perform all of the actions set forth in this Agreement, including, but not limited to, the following: (i) review and approve or disapprove any Major Decisions proposed by the Manager, as more fully described above; and (ii) review the determination of Fair Market Value. The Manager will meet with the Advisory Committee annually to review the performance of the Company. (b) The initial Advisory Committee shall consist of five members, two members selected by __________, and two members selected by Ace. The fifth member will be selected by the Members and shall be individuals who are not employed by the Members or any of their Affiliates. All members of the initial Advisory Committee shall serve until (i) the death; (ii) or adjudicated incompetency of such member or is removed pursuant to this Agreement. The fifth member to the Advisory Committee shall serve for a period of two (2) years, such first term to initiate after selection by _________ and Ace. Thereafter, such fifth member shall be elected by the Members. A member of the Advisory Committee may designate an alternate to act for him or her at any meeting or for any period of time. An alternate so designated shall, when acting for an Advisory Committee member, be deemed a member of the Advisory Committee for purposes of this Agreement. (c) An Advisory Committee member may resign from the Advisory Committee for any reason. Such resignation shall be effective, at the discretion of the resigning member, upon receipt by the Company of a letter of resignation or any time up to thirty days following the receipt of such letter. If such member of the Advisory Committee is an employee of the Company whose employment is terminated for Cause, such member shall be removed effective upon the termination of his employment. Otherwise, Ace may remove any of the Advisory Committee members selected by Ace pursuant to subsection (b) and ______ may remove any of the Advisory Committee members selected by ______pursuant to subsection (b). The fifth Advisory Committee member may be removed upon the consent of both Ace and ______. (d) If an Advisory Committee member has resigned or has been removed in accordance with this Agreement, such successor shall be elected by the Member(s) who originally selected such Advisory Committee member pursuant to subsection (b). (e) The Advisory Committee shall not act unless there are members present and voting on such action which represent a majority of the votes entitled to be cast. Each member of the Advisory Committee shall be entitled to cast one vote with respect to any matter on which the Advisory Committee acts or approves or proposes to act or approve. Any member of the Advisory Committee may abstain from acting upon any matter. Meetings of the Advisory Committee may be held in person at a location set by the Manager or telephonically. Any action of the Advisory Committee may be taken by unanimous written consent. Members of the Advisory Committee shall be entitled to reimbursement from the Company for their reasonable travel and other out-of-pocket expenses in connection with the performance of their duties as members of the Advisory Committee, but shall not be entitled to any fees, remuneration, or other reimbursements from the Company or any of the Members. Notwithstanding, the fifth member shall be compensated for each meeting at a rate determined by the Manager and approved by the initial Advisory Committee. (f) (i) The Members hereby acknowledge that each Advisory Committee member or any Member whose representative is an Advisory Committee member, (A) is not an agent of the Members and (B) may give or withhold its approval in its sole discretion and may consider only such interests or factors as such member desires and may consider such member's own interests and not the interests of the other Members when voting on matters before the Advisory Committee and shall have no duty or obligation to give any consideration to any interests of or factors affecting the Company, the Manager, the other Members when voting on matters before the Advisory Committee. The provisions of this Agreement, to the extent that they restrict the duties and liabilities of any member of the Advisory Committee or any Member whose representative is a member of the Advisory Committee otherwise existing at law or in equity, are agreed by the Members to replace such other duties and liabilities of such Person. (ii) No Advisory Committee member or any Member whose representative is an Advisory Committee member shall have any liability to the Company or to any Member for any loss suffered by the Company or any Member which arises out of any decision made in good faith by such member. Each Advisory Committee member (including any former member) and any Member whose representative is an Advisory Committee member or former member shall be indemnified by the Company for all costs (including reasonable attorneys' fees), judgments, fines and amounts paid in settlement, damages, losses or expenses incurred by such Person in defending any claim brought against such Person based upon an alleged breach of duties of such Person or such Person's representative as a member of the Advisory Committee or based upon any other reason arising out of such Person's or such Person's representative's activities as an Advisory Committee member; provided that if it is determined in any final judicial proceeding that such member did not act in good faith with respect to the matter on which such claim is based, the Company shall have no indemnity obligation to such member or Member on account of such claim and such member or Members shall promptly reimburse the Company for any payment previously made to such Person under this Section by the Company. (iii) To the fullest extent permitted by law, expenses (including legal fees) incurred by an Advisory Committee member or any Member whose representative is an Advisory Committee member in defending any claim, demand, action, suit or proceeding shall, from time to time, be advanced by the Company prior to the final disposition of such claim, demand, action, suit or proceeding upon receipt by the Company of an undertaking by or on behalf of such Person to repay such amount if it shall be determined that such Person is not entitled to be indemnified as authorized in this Section 8.3(e). Section 8.4 Certain Obligations of Manager. (a) The Manager shall: (i) arrange for Company records and books of account to be maintained in which shall be entered fully and accurately all transactions and other matters relative to the Company business; (ii) make available to any Member, at such Member's request, during normal business hours and at the principal place of business of the Company, all books and records of the Company required to be maintained by this Section 8.4, and such other financial information as shall be reasonably requested by any Member; provided, that the Manager shall not be required to disclose to any Member information regarding the Company if such information is acquired by the Company or the Manager under circumstances where the disclosure thereof to a Member may be in violation of any fiduciary duty of the Company or the Manager or in violation of a confidentiality agreement to which the Company or the Manager is subject; (iii) use its best efforts to provide, or cause to be provided, to all Members at least the following reports, within the time period specified below: (A) within twenty (20) days after the end of each fiscal accounting month end, based on a 4/4/5 accounting cycle, a statement of operations for such fiscal accounting month and a balance sheet as of the end of such calendar month; (B) within twenty (20) days after the end of each fiscal year, a statement of operations for such calendar year, a balance sheet or any other statement required under generally accepted accounting principals, as of the end of such calendar year, which shall be prepared in accordance with generally accepted accounting principles and audited by a firm of independent certified public accountants; (C) within twenty (20) days after the end of each fiscal year, a declaration that the Company is in full compliance with its affirmative or negative covenants contained in any third party financing documents and is in full compliance with the covenants contained in Section 8.9; (D) within twenty (20) days after the end of each fiscal year, the information necessary for Members to prepare so much of their federal and all applicable state income tax returns as relates to the Company; and (E) as soon as practicable after the end of each quarter (as determined for federal estimated tax purposes), such information relating to the Company as is reasonably necessary for each Member (or its constituent Members or shareholders) to determine its (or their) quarterly federal and state estimated tax liability; (iv) cause the Company to timely file all required Company federal, state, tax and information returns; and (v) subject to (b), cause the Company to be duly qualified in each jurisdiction in which it proposes to commence business if such qualification is necessary to avoid subjecting Members to additional liability. (b) The Company shall hire the independent accountant chosen by the Manager and approved by the Advisory Committee. The Manager shall provide Ace, for its review, a copy of all tax returns to be filed by the Company no later than seventy five (75) days after the close of the Company's tax year. Ace shall have the right to approve or disapprove any and all elections made with respect to each return, such approval or disapproval shall not be unreasonably withheld by Ace. Section 8.5 Liability of Manager; Omissions. The doing of any act or the failure to do any act by the Manager, the effect of which may cause or result in loss or damage to the Company, shall not subject the Manager to any liability to the Members if the Manager acted in good faith and in a manner the Manager reasonably believed to be in or not opposed to the best interests of the Company. Section 8.6 Indemnification. (a) To the fullest extent permitted under the Act, the Company shall indemnify any Person who was or is a party, or is threatened to be made a party, to any threatened, pending or completed action, suit, or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the Company) by reason of the fact that he is or was a Manager or Member of the Company, or a director, management committee or advisory member or officer (or Person serving in any capacity equivalent to any of the foregoing) of the Company or of the Manager, or is or was serving at the request of the Company as a director, management or advisory committee member or officer (or in any capacity equivalent to any of the foregoing) of another corporation, company, joint venture, trust or other enterprise (all of the foregoing being herein collectively referred to as "Covered Capacities"), against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit, or proceeding if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Company, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement, conviction, or pleas of nolo contendere or its equivalent, shall not of itself create a presumption that the person did not act in good faith or did not act in a manner which he reasonably believed to be in and not opposed to the best interests of the Company, and with respect to any criminal action or proceeding, had reasonable cause to believe that his conduct was unlawful. (b) To the fullest extent permitted under the Act, the Company shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending, or completed action or suit by or in the right of the Company to procure a judgment in its favor by reason of the fact that he is or was serving in any of the Covered Capacities, against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with the defense or settlement of such action or suit if he acted in good faith and in a manner he reasonably believed to be in, or not opposed to, the best interests of the Company and except that no indemnification shall be made in respect to any claim, issue or matter as to which such action or suit alleges misconduct in the performance of his duty to the Company unless, and then only to the extent that, the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability, and in view of all the circumstances of the case, such person is fairly and reasonably entitled to be indemnified for such expenses which the court shall deem proper. (c) Anything in Sections 8.6(a) or (b) to the contrary notwithstanding, to the extent that any person referred to therein has been successful on the merits or otherwise in defense of any action, suit or proceeding referred to therein or in defense of any claim, issue or matter therein, he shall be indemnified against expenses (including attorneys' fees) actually and reasonably incurred by him in connection therewith. (d) Any indemnification under Sections 8.6(a) or (b) (unless ordered by a court) shall be made by the Company only as authorized in the specific case upon a determination that indemnification is proper in the circumstances because the indemnitee has met the applicable standard of conduct set forth in Sections 8.6(a) or (b). Such determination shall be made by the Manager. (e) Expenses incurred in defending a civil or criminal action, suit or proceeding may be paid by the Company in advance of the final disposition of such action, suit or proceeding, as authorized by the Manager in the specific case upon receipt of any undertaking by or on behalf of the indemnitee to repay such amount unless it shall ultimately be determined that be is entitled to be indemnified by the Company. (f) The indemnification provided by this Section 8.6 shall not be deemed exclusive of any other rights to which those seeking indemnification may be entitled under any statute, agreement, or otherwise, and shall continue as to a person who has ceased to serve in a Covered Capacity and shall inure to the benefit of his successors in interest, including, but not limited to, his trustees, heirs, executors, and administrators. (g) The Company shall have the power to purchase and maintain insurance on behalf of any person who is or was serving in any of the Covered Capacities and incurred by him in any such capacity or arising out of his status as such, whether or not the Company would have the power to indemnity him against such liability under the provisions of this Section. (h) Each Person who is or was an employee or agent of the Company or an employee or agent of a Manager, or who is or was serving at the request of the Company as an employee or agent of another corporation, company, joint venture, trust or other enterprise may be indemnified (or covered by insurance), in the manner and to the extent provided in this Section 8.5 for persons acting in Covered Capacities, at the discretion of the Manager. (i) The Company shall have the right to assume the defense of any action, suit or proceeding in connection with which any Person is entitled to indemnification under this Section 8.5 and to select counsel for such purpose. No Person entitled to indemnification hereunder shall consent to entry of any judgment or enter into any settlement in connection with any such action, suit or proceeding without the consent of the Company, and the Company shall not, without the consent of each such Person that is entitled to indemnification, consent to entry of any judgment or enter into any settlement in connection with such action, suit or proceeding which does not include as an unconditional term thereof the giving by the claimant or plaintiff to such Person of a release from all liability in respect to such claim or litigation. (j) Indemnification under this Section 8.6 shall not be available to any Person in the case of any action, suit or proceeding brought against the Company by or on behalf of such Person. Section 8.7 Tax Matters Partner. (a) Ace is hereby appointed the "Tax Matters Partner" of the Company for all purposes pursuant to the Code and the Treasury Regulations. As Tax Matters Partner, Ace will (i) furnish to each Member or Assignee affected by an audit of the Company income tax returns a copy of each notice or other communication received from the Internal Revenue Service or applicable state authority, (ii) keep each such Member and Assignee informed of any administrative or judicial proceeding for the adjustment at the Company level of any "Company items," and (iii) allow each such Member and Assignee an opportunity to participate in all such administrative and judicial proceedings. (b) The Manager shall have the authority conferred on a Tax Matters Partner by the Code and the Treasury Regulations. (c) The Company is not obligated to pay any fees or other compensation to the Tax Matters Partner in its capacity as such. However, the Company will reimburse the Tax Matters Partner for any and all out-of-pocket costs and expenses (including reasonable attorneys' and other professional fees), including an allocated portion of actual costs of Ace's employees and personnel to perform services to the Company, incurred by it in its capacity as Tax Matters Partner. Each Member who elects to participate in Company, administrative tax proceedings will be responsible for its own expenses incurred in connection with such participation. In addition, the cost of any adjustments to a Member and the cost of any resulting audits or adjustments of a Member's tax return will be borne solely by the affected Member. (d) The Company will indemnify, defend and hold the Tax Matters Partner harmless from and against any loss, liability, damage, cost or expense (including reasonable attorneys' and other professional fees) sustained or incurred as a result of any act or decision concerning Company tax matters and within the scope of such Member's responsibilities as Tax Matters Partner, so long as such act or decision was not made fraudulently or in bad faith and did not constitute willful or wanton misconduct or gross negligence. Section 8.8 Resignation. Any Manager of the Company may resign at any time by giving written notice to the Members of the Company. The resignation of any Manager shall take effect upon receipt of notice thereof or at such later date specified in such notice. Unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective. The resignation of a Manager who is also a Member shall not affect the Manager's rights as a Member and shall not constitute a withdrawal of a Member. Section 8.9 Removal. Ace may remove the Manager, at any time, provided that any of the following occur: (i)the Company's Current Ratio is less than 1.5 to 1.0; (ii) the Company's Fixed Charge Coverage Ratio is less than 2.0 to 1.0; (iii) the Company's Total Debt to EBITDA ratio is more than 3.0 to 1.0; (iv) the Company's net income before taxes, for any fiscal quarter, is less than 80% of the projected net income before taxes, as set forth in the approved operating budget; (v) the Company defaults under the Membership Agreements or any material lease or contract entered into by the Company which default continues beyond any applicable cure period or (vi) the Manager or Members engage in an activity of Cause; provided, however, for the purpose of (i) through (iv) or such other financial covenants as established or modified in the annual operating budgets and approved by the Members, Ace's right to remove the Manager shall be effective only if the conditions remain uncured for two (2) successive quarters. Other than a removal for Cause, the removal of a Manager who is also a Member shall not affect the Manager's rights as a Member and shall not constitute a withdrawal of a Member. Section 8.10 Vacancies. Any vacancy occurring for any reason in the office of Manager of the Company may be filled by the unanimous vote of Members. ARTICLE IX Section 9.1 Dissolution of Company. The Company shall be dissolved upon the happening of either of the following events: (a) the vote of the Members holding not less than the Majority Interest of the Members to dissolve the Company; (b) the entry of a decree of judicial dissolution under 18- 802 of the Act. A Member shall not take any voluntary action which directly causes a Dissolution of the Company. Section 9.2 Final Accounting. Upon dissolution and termination of the Company, an accounting shall be made of the accounts of each Member and of the Company's assets, liabilities and operations, from the date of the last previous accounting to the date of such termination at the Company's expense. Section 9.3 Liquidation; Distribution. In the event of the dissolution of the Company, the Manager (or in the event the dissolution is caused by the Dissolution or Bankruptcy of the Manager, a person selected by the Advisory Committee) shall act in an orderly manner as liquidating trustee and, in an orderly manner, shall wind up the affairs of the Company and, after paying all debts and liabilities of the Company, including all costs of dissolution, shall distribute the remaining assets in the following order of priority: (i) first, to the establishment of any reserves which the liquidating trustee may deem reasonably necessary for any contingent or unforeseen liabilities or obligations of the Company arising out of or in connection with the Company, which reserves may, at the option of the liquidating trustee, be paid over by the liquidating trustee to an escrow agent, to be held by it for the purpose of disbursing such reserves in payment of any of the aforementioned contingencies, and, at the expiration of such period as the liquidating trustee shall deem advisable, for distributing the balance thereunder remaining in the manner hereinafter provided; (ii) thereafter, to the holders Units in accordance with their positive Capital Account balances, after taking into account all Capital Account adjustments for the taxable year during which the liquidation occurs, in compliance with Treasury Regulation Section 1.704-1(b)(2)(ii)(b)(2). Section 9.4 Termination. A reasonable time shall be allowed for the orderly liquidation of the assets of the Company and the discharge of liabilities to creditors so as to enable the Manager or liquidating trustee to minimize the normal losses attendant upon a liquidation. Each of the Members shall be furnished with a statement prepared by the Company's then certified public accountant, which shall set forth the assets and liabilities of the Company as at the date of complete liquidation. Upon compliance with the distribution plan set forth in Section 9.3 (including any payment over to any escrowee if there are sufficient funds therefor), the Members shall cease to be such, and the Manager or the Liquidating trustee shall execute, acknowledge, and cause to be filed a certificate of cancellation of the Company. Upon completion of the dissolution, winding up, liquidation and distribution of the liquidation proceeds the Company shall terminate. ARTICLE X Section 10.1 Notices. Except as otherwise provided herein, all notices and other written communications required or permitted to be given under this Agreement shall be in writing and shall be sent by Federal Express or other reliable courier, transmitted by facsimile, personally delivered or mailed by certified or registered mail, return receipt requested. Any notices to be given to the Members shall be given or delivered to the addresses set forth on Schedule A hereto or such other address of which a Member may notify the Manager and the other Members in writing. Any notices to be given to the Company shall be sent or delivered to the office of the Company as specified herein or at such other address as the Manager may specify in a notice to all of the Members. Notices sent for next day delivery by Federal Express or other reliable courier shall be deemed given the next business day after sending, notices transmitted by facsimile or personally delivered shall be deemed given when so transmitted or delivered, respectively, and notices sent by certified or registered mail shall be deemed given on the third business day after sending. Section 10.2 Governing Law. This Agreement shall be governed by and construed in accordance with the Act. Section 10.3 Amendments. (a) Subject to the provisions of this Section 10.3, this Agreement may be amended only in writing with the written consent of Members owning at least seventy-five percent (75%) of the then outstanding Units. (b) Amendments to this Agreement which are of a clerical or inconsequential nature or which may be required to comply with the Act or the terms of this Agreement, and which do not adversely affect the Members in any material respect or which are required or contemplated by this Agreement, including, without limitation, amendments necessary to reflect the admission, substitution or withdrawal of a Member that is otherwise permitted by this Agreement or the change in the name of the registered agent, the address of the registered office or the address of the office at which Company records are kept, may be made by the Manager, after notice to the Members, and the Members agree to execute an amendment reflecting such change. (c) No amendment shall increase the liability of any Member, decrease the Capital Account of any Member, decrease the number of Units of any Member or affect the right of any Member to receive Distributions and Profits, except in each case with the written consent of the Member adversely affected thereby. (d) No amendment shall alter the rights of Members as a class so as to affect them adversely without the written consent of Members owning at least seventy-five percent (75%) of the then outstanding Units; provided, however, that any such amendment shall also require the written consent of each Member that is adversely affected thereby if the amendment would effect any change described in Section 10.3(c), unless (A) the amendment is required by changes in law (including without limitation changes in any statute, ordinance or regulation or in judicial or administrative law) or (B) the amendment is of a type permitted by Section 10.3(b). Section 10.4 Successors and Assigns. This Agreement shall be binding upon and inure to the benefit of the Members, the Assignees and their respective legal representatives, heirs, successors and assigns. Section 10.5 Counterparts. This Agreement may be executed in multiple counterparts, each of which shall be an original, but all of which shall constitute one instrument. Section 10.6 Fiscal Year; Method of Accounting. The fiscal year of the Company shall be the fiscal year based on a 4/4/5 accounting cycle. The Company shall use the same method of accounting for tax and financial reporting purposes. Section 10.7 Modifications to be in Writings. This Agreement constitutes the entire understanding of the parties hereto with respect to the subject matter hereof and no amendment, modification or alteration of the terms hereof shall be binding unless the same be in writing and adopted in accordance with the provisions of Section 10.3. Section 10.8 Action for Partition or Distribution in Kind. Each of the parties hereto irrevocably waives any right which it may have to partition Company property or maintain an action for distribution of Company property in kind. Section 10.9 Captions. The captions herein are inserted for convenience of reference only and shall not affect the construction of this Agreement. Section 10.10 Pronouns and Plurals. Whenever the context may require, any pronoun used in this Agreement shall include the corresponding masculine, feminine or neuter forms, and the singular form of nouns, pronouns and verbs shall include the plural and vice versa. Section 10.11 Validity and Severability. If any provision herein shall be held invalid or unenforceable, such decision shall not affect the validity or enforceability of any other provisions hereof, all of which other provisions shall, in such case, remain in full force and effect. Section 10.12 Statutory References. Each reference in this Agreement to a particular statute or regulation, or a provision thereof, shall, at any particular time, be deemed to be a reference to such statute or regulation, or provision thereof, or to any similar or superseding statute or regulation, or provision thereof, as at such time in effect. Section 10.13 Additional Documents. Each Member shall execute such additional documents and take such actions as are reasonably requested by the Company in order to complete or confirm the transactions contemplated by this Agreement. Section 10.14 Time. Time is of the essence with respect to this Agreement. Section 10.15 Third Party Beneficiaries. The provisions of this Agreement are intended solely for the benefit of the Members and shall create no rights or obligations enforceable by any third party, including third party creditors of the Company, except as explicitly provided herein or by applicable law. Section 10.16 Specific Performance. Each Member acknowledges that the other Members may be irreparably damaged if any of the provisions of this Agreement are not performed in accordance with their specific terms, and that monetary damages may not provide an adequate remedy. Accordingly, each Member agrees that in addition to any other remedy at law or in equity, each Member may be entitled to seek injunctive relief to prevent breaches of this Agreement or to enforce the terms and provisions of this Agreement. Section 10.17 Entire Agreement. This Agreement and other document to be furnished pursuant to the provisions hereof embody the entire agreement and understanding of the Members as to the subject matter hereof. There are no restrictions, promises, representations, warranties, covenants or undertakings other than those expressly set forth or referred to herein. This Agreement and such documents supersede all prior agreements and understandings among the Members with respect to the subject matter hereof. IN WITNESS WHEREOF, the undersigned have executed this Limited Liability Company Agreement of ______________, LLC as of the date first above written. MEMBERS: ACE HARDWARE CORPORATION By:___________________________ Its: ______________________ ________________________________ By:___________________________ Its: ______________________ SIGNATURE PAGE TO THE LIMITED LIABILITY COMPANY AGREEMENT OF ________________________, LLC SCHEDULE A Member Capital Account Number of Balance Units ACE HARDWARE CORPORATION $ 2200 Kensington Court, Oak Brook, IL 60523 Oak Brook, Illinois 60523 Attention: Treasurer with a copy to the General Counsel $ TOTAL $ EXHIBIT A REDEMPTION AGREEMENT This Redemption Agreement (the "Agreement") is made and entered into as of the ___ day of _____________, ______ by and between _______________________________, a _______________________ corporation ("_________________") and ACE HARDWARE CORPORATION, a Delaware corporation (the "Holder"). Recitals A. ______________ and the Holder are members of ______________ Ace Hardware, LLC, a Delaware limited liability company (the "Company") pursuant to a certain Limited Liability Company Agreement of ______________ Ace Hardware, LLC dated as of ________________, 1998 (the "Company Agreement"), pursuant to which ______________ is the owner of __________ units of the Company and the Holder is the owner of _________ units of the Company (the "Redemption Units"). B. Pursuant to the Company Agreement, ______________ desires to redeem all of the Redemption Units from the Holder and the Holder desires to sell the Redemption Units to ______________, on the terms and conditions hereinafter set forth. Covenants In consideration of the mutual representations, warranties and covenants and subject to the conditions herein contained, the parties hereto agree as follows: 1.0 Definitions All capitalized terms used but not elsewhere defined in this Agreement shall have the respective meanings ascribed to such terms in the Company Agreement. 2.0 Redemption 2.1 The Holder hereby sells, transfers, assigns and conveys to ______________ and ______________ hereby purchases and accepts from the Holder, on the terms and subject to the conditions set forth in this Agreement, the Redemption Units, free and clear of all liens, claims, charges, security interests, restrictions on transfer (other than restrictions under federal and state securities laws), options, warrants, voting trusts and any other encumbrances of any kind whatsoever ("Encumbrances"). 2.2 As consideration for the Redemption Units being acquired by ______________, ______________ agrees, on the terms and subject to the conditions set forth in this Agreement, to pay to the Holder the Redemption Price. 2.3 The Redemption Units transferred to ______________ are hereby canceled and all of the Holder's rights thereto are hereby extinguished. 3.0 Representations and Warranties of the Holders In order to induce ______________ to enter into this Agreement and to redeem the Redemption Units, the Holder represents and warrants to ______________ as follows: 3.1 The Holder has the power to execute, deliver, and perform its obligations under the terms of this Agreement, and has taken all necessary action to authorize the execution and delivery and performance of this Agreement and the transactions contemplated hereby. This Agreement has been duly executed and delivered by the Holder and is a valid and legally binding obligation of the Holder, enforceable in accordance with its terms. 3.2 Neither the execution, delivery and performance of this Agreement by the Holder nor the consummation by it of the transactions contemplated hereby, will (a) to the best of its knowledge, violate any applicable law or regulation, or any order, writ, injunction, or decree of the United States or any court, arbitrator, or governmental or regulatory official, body, subdivision, instrumentality, agency or authority, whether federal, state or local ("Governmental Body"), or (b) conflict or be inconsistent with or result in any breach of any of the terms, covenants, conditions or provisions of, or constitute a default under, any agreement to which the Holder is a party or by which it is bound, or result in the creation of any Encumbrance upon any of the property or assets of the Holder or result in the acceleration of, create in any party the right to accelerate, terminate, modify or cancel, or require any notice under, the terms of any license, permit, mortgage, deed of trust, lease, agreement or other instrument to which the Holder is a party or by which it is bound. No permit, consent, approval, or authorization of, or declaration to or filing with, any Governmental Body or any other person is necessary for the execution and delivery by the Holder of this Agreement or for the consummation by the Holder of the transactions contemplated hereby. 3.3 There are no actions, suits, investigations or proceedings pending or threatened (in the case of "threatened," to the best of its knowledge) against or affecting the Holder or it's assets by or before any Governmental Body or any other tribunal that could have a material adverse effect on the consummation of the transactions contemplated hereby. 3.4 The Holder does not have any obligation to pay any fees or commissions to any investment banker, broker, finder or agent with respect to the transactions contemplated by this Agreement. 4.0 Representations and Warranties of ______________ In order to induce the Holder to enter into this Agreement and to sell the Redemption Units, each of ______________ represent and warrant as follows: 4.1 Each of ______________ have the power to execute, deliver and perform their obligations under the terms of this Agreement, and have taken all necessary action to authorize the execution, delivery and performance of this Agreement and the transactions contemplated hereby. This Agreement has been duly executed and delivered by each Partner and is a valid and legally binding obligation of each Partner, enforceable in accordance with its terms. 4.2 Neither the execution and delivery of this Agreement by ______________ nor the consummation by them of the transactions contemplated hereby, will violate any applicable law or regulation, or any order, writ, injunction, or decree of any Governmental Body, or will conflict or be inconsistent with or result in any breach of any of the terms, covenants, conditions or provisions of, or constitute a default under, any agreement to which either Partner is a party or by which he is bound, or result in the acceleration of, create in any party the right to accelerate, terminate, modify or cancel, or require any notice under, the terms of any license, permit, mortgage, deed of trust, lease, agreement or other instrument to which either Partner is a party or by which he is bound. No permit, consent, approval or authorization of, or declaration to or filing with, any Governmental Body or any other person is required in connection with the execution and delivery of this Agreement by ______________ and the consummation by them of the transactions contemplated hereby. 4.3 There are no actions, suits, investigations or proceedings pending or threatened against or affecting ______________ or its assets by or before any Governmental Body or any other tribunal that could have a material adverse effect on the consummation of the transactions contemplated hereby. 4.4 ______________ has no obligation to pay any fees or commissions to any investment banker, broker, finder or agent with respect to the transactions contemplated by this Agreement. 5.0 Restrictive Covenant 5.1 As an inducement for the Holder to enter into this Agreement and as additional consideration for the consideration to be paid to the Holder under this Agreement, ______________, a member of the Company, agrees that for a period of seven (7) years following the date of this Agreement, it (i) will not terminate any Membership Agreement between the Company (or its successors- in-interest) and the Holder, unless a material breach of such agreement by Ace gives rise to a right to terminate such agreement, or, if required by Ace, cause the Company to execute a new Membership Agreement with the Holder and (ii) will continue to operate the Stores as Ace Hardwarer affiliated stores. 5.2 It is the desire and intent of the parties that the provisions of Section 5.1 shall be enforced to the fullest extent permissible under the laws and public policies applied in each jurisdiction in which enforcement is sought. Accordingly, if any particular portion of Section 5.1 shall be adjudicated to be invalid or unenforceable, Section 5.1 shall be deemed amended to delete therefrom the portion thus adjudicated to be invalid or unenforceable, and such deletion shall apply only with respect to the operation of Section 5.1 in the particular jurisdiction in which such adjudication was made. 5.3 If ______________ breach the covenants set forth in Section 5.1 herein, in addition to its right to damages and any other rights it may have, the Holder will be entitled to obtain injunctive or other equitable relief to restrain any breach or threatened breach or otherwise to specifically enforce the provisions of Section 5.1 of this Agreement, it being agreed that money damages alone would be inadequate to compensate the Holder and would be an inadequate remedy for such breach. The rights and remedies of the parties to this Agreement are cumulative and not alternative. 6.0 Indemnification 6.1 The Holder agrees to indemnify, defend and hold harmless ______________ and their manager, employees, members, partners and agents, (collectively, the "______________ Indemnified Persons"), from and against all losses, claims, damages, liabilities, expenses (including legal fees and expenses), judgments, fines, settlements and other amounts incurred or suffered by ______________ or ______________ Indemnified Persons and arising out of the inaccuracy of any of the representations and warranties made by the Holder in this Agreement or any breach by the Holder of this Agreement. ______________ agree that neither they nor ______________ Indemnified Persons shall seek against the Holder or the Holder Indemnified Persons, nor shall the Holder or the Holder Indemnified Persons be liable for, any consequential, punitive, special or exemplary damages for any breach of this Agreement or the agreements and transactions contemplated hereby. 6.2 ________________ agrees to indemnify, defend and hold harmless the Holder and its managers, employees, members, agents, and partners, (collectively, the "Holder Indemnified Persons"), from and against all losses, claims, damages, liabilities, expenses (including legal fees and expenses), judgments, fines, settlements and other amounts incurred or suffered by the Holder or the Holder Indemnified Persons and arising out of the inaccuracy of any of the representations and warranties made by ______________ in this Agreement or any breach by ______________ of this Agreement. The Holder agrees that it shall seek not against ______________ or ______________ Indemnified Persons, nor shall ______________ or ______________ Indemnified Persons be liable for, any consequential, punitive, special or exemplary damages for any breach of this Agreement or the agreements and transactions contemplated hereby. 6.3 Any party entitled to indemnification hereunder will give prompt written notice to the indemnifying party of any claim with respect to which it seeks indemnification and, unless in such indemnified party's reasonable judgment a conflict of interest between such indemnified and indemnifying parties may exist with respect to such claim, permit such indemnifying party to assume the defense of such claim with counsel reasonably satisfactory to the indemnified party. If such defense is assumed, the indemnifying party will not be subject to any liability for any settlement made by the indemnified party without its consent (but such consent will not be unreasonably withheld). An indemnifying party who is not entitled to, or elects not to, assume the defense of a claim will not be obligated to pay the fees and expenses of more than one counsel for all parties indemnified by such indemnifying party with respect to such claim, unless in the reasonable judgment of such counsel a conflict of interest may exist between such indemnified party and any other of such indemnified parties with respect to such claim. 7.0 Miscellaneous 7.1 The representations, warranties, covenants and indemnification agreements contained herein are continuing in nature and shall survive the execution and delivery of this Agreement, regardless of any investigation made by or on behalf of any party to this Agreement. 7.2 The parties hereto may amend, modify and supplement this Agreement in such manner as may be agreed upon by them in writing. 7.3 This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns. 7.4 Any reference herein to this Agreement shall be deemed to include the schedules and exhibits attached hereto. 7.5 The descriptive headings in this Agreement are inserted for convenience only and do not constitute a part of this Agreement. 7.6 This Agreement may be executed in any number of counterparts, each of which shall be deemed an original. 7.7 All notices provided for in this Agreement shall be in writing, duly signed by the party giving such notice, and shall be sent by Federal Express or other reliable overnight courier, sent by fax or mailed by registered or certified mail, return receipt requested, as follows: If to ______________, addressed to: _______________________________ _______________________________ _______________________________ Attention: ______________________ If to the Holder, addressed to: Ace Hardware Corporation 2200 Kensington Court Oak Brook, Illinois 60523 Attn: General Counsel With a copy to its Treasurer Each notice shall be deemed to have been given upon the earlier of the receipt of such notice by the intended recipient thereof, two (2) days after it is sent by Federal Express or other reliable overnight courier or sent by confirmed fax, or five (5) days after it is mailed by registered or certified mail, return receipt requested. 7.8 This Agreement shall be governed by and construed in accordance with the laws of the State of Delaware applicable to contracts made and to be performed therein. IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed as of the day and year first above written. ______________: ________________________________________ By:_____________________________________ Its:____________________________________ HOLDER: ACE HARDWARE CORPORATION By:_____________________________________ Its:____________________________________ EX-10 18 0018.txt RESTATED NOT PURCHASE AND PSA 10-A-15 September 25, 2000 Ace Hardware Corporation 2200 Kensington Court Oak Brook, Illinois 60521 Ladies and Gentlemen: Reference is made to (a) the Note Purchase and Private Shelf Agreement dated as of September 27, 1991 (the "1991 Note Agreement") between Ace Hardware Corporation (the "Company") and The Prudential Insurance Company of America ("Prudential") pursuant to which the Company issued and sold and Prudential purchased the Company's 8.47% Senior Notes in the original principal amount of $20,000,000 due July 1, 2003 and (b) the Amended and Restated Note Purchase and Private Shelf Agreement dated as of September 22, 1993, as amended and restated on August 23, 1996 (the "1996 Note Agreement", together with the 1991 Note Agreement, the "Note Agreements") between the Company and Prudential pursuant to which the Company issued and sold and Prudential purchased the Company's (i) 6.47% Senior Series A Notes in the original principal amount of $30,000,000 due June 22, 2008; (ii) 7.49% Senior Series B Notes in the original principal amount of $20,000,000 due June 15, 2011; (iii) 7.55% Senior Series C Notes in the original principal amount of $20,000,00, due March 25, 2009 and; (iv) 6.61% Senior Series D Notes in the original principal amount of $20,000,000 due February 9, 2010. Capitalized terms used and not otherwise defined herein shall have the meanings assigned to such terms in the 1996 Note Agreement. Pursuant to the request of the Company and in accordance with the provisions of paragraph 11C of each Note Agreement, the parties hereto agree as follows: SECTION 1. Amendments to 1996 Note Agreement. From and after the date this letter becomes effective in accordance with its terms, the 1996 Note Agreement is amended as follows: 1.1 Paragraph 6A of the 1996 Note Agreement is reinstated and shall read as follows: "6A. Fixed Charge Ratio. The Company will not permit, on the last day of each fiscal quarter of the Company, the Fixed Charge Coverage Ratio for the four fiscal quarter period ending on such date to be less than 1.75 to 1.0." 1.2 Paragraph 6B(2) of the 1996 Note Agreement is amended by deleting subclauses (iv) and (v) in their respective entireties and substituting therefor the following: "(iv) additional Debt of the Company provided that the ratio on a consolidated basis of (i) Debt to (ii) EBITDA as of the last day of each fiscal quarter for the four fiscal quarter period ending on such date shall not exceed 3.0 to 1.0 on or before the last day of the fiscal year of the Company for fiscal year 2002 and 2.5 to 1.0 at any time thereafter (the "Maximum Debt Ratio"). For purposes of this paragraph 6B(2), Debt shall not include the indebtedness of any partnership or joint venture of which the Company or any Subsidiary is a partner or member and which indebtedness is consolidated with the indebtedness of the Company under generally accepted accounting principles if and only if such indebtedness is non- recourse to the Company or such Subsidiary. Notwithstanding the foregoing, upon the Company's written notice to Prudential that the Revolving Credit Facility has been amended to increase the permissible Maximum Debt Ratio applicable thereunder after December 31, 2002 from 2.5 to 1.0 to a level equal to or less than 3.0 to 1.0, then the Maximum Debt Ratio set forth in this Paragraph 6B(2) shall be automatically amended accordingly, provided that no Default or Event of Default shall have occurred or be continuing at such time or after giving effect to such amended Maximum Debt Ratio." 1.3 Paragraph 6B(4) of the 1996 Note Agreement is amended (a) to insert the following language in the introductory paragraph immediately after the phrase "36- month rolling period": "(excluding items described in clauses (ii), (iii) and (v) below and Excluded Asset Dispositions)"; and (b) to delete the word "and" at the end of clause (iii), insert "; and" at the end of clause (iv) and insert the following clause (v) immediately thereafter: "(v) the Company or any Subsidiary may transfer an interest in accounts or notes receivable on a non- recourse or a limited recourse basis, provided, that the transfer qualifies as a sale under generally accepted accounting principles and that the amount of the financing does not exceed $200,000,000 at any one time outstanding." 1.4 Paragraph 6B(5) of the 1996 Note Agreement is amended to delete the figure "5%" therein and replace it with "10%". 1.5 Paragraph 6E of the 1996 Note Agreement is amended to delete the figure "$5,000,000" therein and replace it with "$10,000,000." 1.6 Paragraph 6 of the 1996 Note Agreement is amended to add a new paragraph 6G as follows: "6G. Most Favored Lender. Unless otherwise specified in writing by the Required Holder(s), the Company will not, and will not permit any Subsidiary to, agree to, with or for the benefit of the holder(s) of any other Debt of the Company or any Subsidiary or with or for the benefit of Persons with commitments to provide loans or other financial accommodations to the Company or any Subsidiary, any financial or restrictive covenants or events of default which are more restrictive than, or in addition to, the financial or negative covenants or Events of Default contained in this Agreement, unless the Company has entered into, or has caused such Subsidiary to enter into, an agreement with the holders of the Notes, in form and substance reasonably satisfactory to the holders of the Notes, whereby such financial or negative covenants or events of default are added to this Agreement for the benefit of the Notes, and any conditions precedent to the effectiveness of such agreement have been satisfied." 1.7 Paragraph 7A of the 1996 Note Agreement is amended to (a) delete the figure "$3,000,000" appearing in subclause (iii) and replace it with the figure "$25,000,000" and (b) delete the figure "$10,000,000" appearing in subclause (xiii) and replace it with the figure "$25,000,000". 1.8 Paragraph 8E of the 1996 Note Agreement is amended and restated in its entirety as follows: "8E. Environmental Compliance. The Company and its Subsidiaries and all of their respective properties and facilities have complied at all times and in all respects with all federal, state, local and regional statutes, laws, ordinances and judicial and administrative orders, judgments, rulings and regulations relating to protection of the environment except, in any such case, where failure to comply could not reasonably be expected to have a material adverse effect on the business, condition (financial or otherwise) or operations of the Company and its Subsidiaries taken as a whole." 1.9 Paragraph 10B of the 1996 Note Agreement is amended to add the following definitions in appropriate alphabetical order therein: "'Excluded Asset Dispositions' means the Company's (a) fee simple sale or sale and leaseback pursuant to an operating lease of (i) the Company's headquarters, consisting of two buildings with a common address of 1220 Kensington Court and 1300 Kensington Court, respectively, in Oak Brook, Illinois and (ii) retail support centers located in Hanover, Maryland, Huntersville, North Carolina and Rocklin, California only; (b) sale or other disposition of its stock ownership in OurHouse, Inc.; (c) sales of retail locations owned by the Company if and only if the cash proceeds of such sale received by the Company equal or exceed the Company's net investment in each such sold retail location; and (d) sales or transfers of its entire ownership position in any joint venture in which the Company is an investor if and only if the cash proceeds of such sale received by the Company equal or exceed the Company's net investment in such joint venture. 'Fixed Charge Coverage Ratio' shall mean, for the period of determination, the ratio of (a) its Adjusted Net Earnings for such period to (b) the sum of interest expense, lease expense and scheduled principal payments made by the Company and its Subsidiaries on a consolidated basis on all Debt and Patronage Indebtedness for such period, all determined in accordance with generally accepted accounting principles. 'Maximum Debt Ratio' shall have the meaning set forth in paragraph 6B(2). 'Revolving Credit Facility' shall mean the Revolving Credit Facility Agreement dated as of May 2, 2000 between the Company, The Northern Trust Company, as Administrative Agent and the lenders therein." SECTION 2. Amendments to 1991 Note Agreement. The covenants set forth in paragraphs 5 and 6 and the Events of Default set forth in paragraph 7 of the 1991 Note Agreement are hereby amended in their entireties so as to read as set forth, respectively, in paragraphs 5, 6 and 7 of the 1996 Note Agreement, as amended hereby, shall be deemed to have the respective meanings ascribed thereto in, and to refer to paragraphs in the 1996 Note Agreement; provided, however, that any references to a "Note" or "Notes" in the 1991 Note Agreement, as amended hereby, shall mean the Notes issued under and pursuant to the 1991 Note Agreement. No termination of the 1996 Note Agreement in whole or in part or any modification thereof, shall affect the continued applicability of this paragraph and the covenants referred to herein to the 1991 Note Agreement. SECTION 3. Condition Precedent. This letter shall become effective as of the date hereof upon the return by the Company to Prudential of a counterpart hereof duly executed by the Company. This letter should be returned to: Prudential Capital Group, Two Prudential Plaza, Suite 5600, Chicago, Illinois 60601, Attn.: Kira E.Druyan. SECTION 4. Reference to and Effect on Note Agreements. Upon the effectiveness of this letter, each reference to either Note Agreement in any other document, instrument or agreement shall mean and be a reference to such Note Agreement as modified by this letter. Except as specifically set forth in Section 1 and 2 hereof, each Note Agreement shall remain in full force and effect and is hereby ratified and confirmed in all respects. SECTION 5. Governing Law. THIS LETTER SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF LILLINOIS, WITHOUT REGARD TO PRINCIPLES OF CONFLICT OF LAWS OF SUCH STATE. SECTION 6. Counterparts; Section Titles. This letter may be executed in any number of counterparts, each of which when so executed and delivered shall be deemed to be an original and all of which taken together shall constitute but one and the same instrument. The section titles contained in this letter are and shall be without substance, meaning or content of any kind whatsoever and are not a part of the agreement between the parties hereto. Very truly yours, THE PRUDENTIAL INSURANCE COMPANY OF AMERICA By:_______________________________ Vice President Agreed and accepted: ACE HARDWARE CORPORATION By:__SANDRA K. BRANDT_____________ Title: Treasurer EX-23 19 0019.txt CONSENT OF KPMG LLP AUDITORS' CONSENT The Board of Directors Ace Hardware Corporation: We consent to the use of our report included herein. KPMG LLP Chicago, Illinois March 22, 2001 EX-24 20 0020.txt 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 RITA D. KAHLE, and each of them, his true and lawful attorneys-in-fact and agents, each with full power to act without the other, with full power of substitution, for him and in his name, place and stead, in any and all capacities, to sign the Annual Report on Form 10-K, 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 22nd day of March, 2001. JENNIFER C. ANDERSON D. WILLIAM HAGAN --------------------- ---------------- Jennifer C. Anderson D. William Hagan RICHARD F. BAALMANN, JR. RICHARD A. KARP ------------------------ --------------- Richard F. Baalmann, Jr. Richard A. Karp ERIC R. BIBENS II HOWARD J. JUNG ----------------- -------------- Eric R. Bibens II Howard J. Jung LAWRENCE R. BOWMAN MARIO R. NATHUSIAS ------------------ ------------------ Lawrence R. Bowman Mario R. Nathusius JAMES T. GLENN RICHARD W. STINE -------------- ---------------- James T. Glenn Richard W. Stine DANIEL L. GUST -------------- Daniel L. Gust -----END PRIVACY-ENHANCED MESSAGE-----