-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, MDK8LHrvxl+RvxtbMZhGc/gbPfkfmm5vaKGzvLJLTv2GwJ0b5/Ou01oFzQjys5az gAYCqMpCAkNryVys/ZTaMA== 0000002024-94-000013.txt : 19940414 0000002024-94-000013.hdr.sgml : 19940414 ACCESSION NUMBER: 0000002024-94-000013 CONFORMED SUBMISSION TYPE: POS AM PUBLIC DOCUMENT COUNT: 11 FILED AS OF DATE: 19940323 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ACE HARDWARE CORP CENTRAL INDEX KEY: 0000002024 STANDARD INDUSTRIAL CLASSIFICATION: 5070 IRS NUMBER: 360700810 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: POS AM SEC ACT: 1933 Act SEC FILE NUMBER: 033-46449 FILM NUMBER: 94517387 BUSINESS ADDRESS: STREET 1: 2200 KENSINGTON COURT CITY: OAK BROOK STATE: IL ZIP: 60521 BUSINESS PHONE: 7089906600 S-2/A 1 AMENDMENT # 2 FORM S-2 As filed with the Securities and Exchange Commission--subject to change. Registration No. 33-46449 SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 Post-Effective Amendment No. 2 To Form S-2 REGISTRATION STATEMENT Under THE SECURITIES ACT OF 1933 Ace Hardware Corporation (Exact name of registrant as specified in its charter) Delaware (State of Incorporation) 5070 (Primary Standard Industrial Classification Code No.) 36-0700810 (I.R.S. Employer Identification No.) 2200 Kensington Court Oak Brook, Illinois 60521 (708) 990-6600 (Address and telephone number of registrant's principal executive offices) David F. Hodnik Executive Vice President And Chief Operating Officer Ace Hardware Corporation 2200 Kensington Court Oak Brook, Illinois 60521 (708) 990-6600 (Name, address and telephone number of agent for service) Copies to: David W. League Vice President, General Counsel Ace Hardware Corporation 2200 Kensington Court Oak Brook, Illinois 60521 (708) 990-6600 Approximate date of commencement of proposed sale to the public: as soon as practicable after the effective date of this Post Effective Amendment of the Registration Statement. If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. X If the registrant elects to deliver its latest annual report to security holders, or a complete and legible facsimile thereof, pursuant to Item 11(a)(1) of this form, check the following box. ACE HARDWARE CORPORATION Cross Reference Sheet Pursuant to Item 501(b) of Regulation S-K Between Items in Part I of Form S-2 and the Prospectus Item Number and Caption Heading in Prospectus 1. Forepart of the Registration Statement and Outside Front Cover Page of Prospectus Outside Front Cover Page 2. Inside Front and Outside Back Cover Pages of Prospectus Inside Front and Outside Back Cover Pages 3. Summary Information, Risk Factors and Ratio of Earnings to Fixed Charges Factors To Be Considered; Summary 4. Use of Proceeds Use of Proceeds 5. Determination of Offering Price Not Applicable 6. Dilution Not Applicable 7. Selling Security Holders Not Applicable 8. Plan of Distribution Distribution Plan and Offering Terms 9. Description of Securities to be Registered Outside Front Cover Page; Description of Capital Stock 10. Interests of Named Experts and Counsel Opinions of Experts 11. Information with Respect to the Registrant The Company's Business; Properties; Index to Financial Statements; Selected Financial Data; Management's Discussion and Analysis of Financial Condition and Results of Operations; Management. 12. Incorporation of Certain Information by Reference Documents Incorporated by Reference 13. Disclosure of Commission Position on Indemnification for Securities Act Liabilities Indemnification Obligations of Company and S.E.C. Position on Securities Act Indemnification PROSPECTUS ACE HARDWARE CORPORATION 2200 Kensington Court Oak Brook, Illinois 60521 (708) 990-6600 925 Shares Class A (Voting) Stock, $1,000 par value 65,980 Shares Class C (Non-Voting) Stock, $100 par value Class A Stock is offered only in combination with Class C Stock to retailers of hardware and related or similar merchandise in connection with their initial business outlets that become members of the Company. Class C Stock is also offered separately to such retailers in connection with each additional business outlet that becomes a member of the Company. (See "Distribution Plan and Offering Terms" herein) There is no existing market for the Capital Stock offered hereunder, and there is no expectation that any market will develop. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. Underwriting Price to Discounts and Proceeds to Public Commissions (5) Company Class A Stock Per share(1)(2) $1,000 None $1,000 Total $925,000 None $925,000 Class C Stock Per Share(1)(3)(4)(6) $100 None $100 Total $6,598,000 None $6,598,000 (1) The shares are offered in a unit of $5,000 to each retail dealer, with 1 share of Class A Stock being included only in the unit offered to dealers having no retail business outlet that is already a member of the Company. (2) 1 share (with 40 shares of Class C Stock) to each retail dealer in connection with such dealer's first retail business outlet which becomes a member of the Company. (3) 40 shares (with 1 share of Class A Stock) to each retail dealer for such dealer's first member outlet. (4) 50 shares to each member dealer for each of such dealer's retail business outlets, over and above the first such outlet, which become a member of the Company. (5) There will be no underwriters. The subject stock will be offered for sale directly by the Company. Applicants for new memberships are charged $400 to defray estimated costs of processing their membership applications. Assuming the sale of all of the stock offered hereunder, and before deduction of approximately $28,000 estimated expenses in connection with this offering, the total proceeds will be as shown above. (6) All of the shares of Class C Stock included in this offering have been reserved for sale for cash but, unless the purchaser elects to prepay the purchase price, such price is to be paid in bi-weekly installments. However, the Company also intends to issue additional authorized shares of Class C Stock each year to its member dealers as a part of patronage dividends with respect to business done with dealers in 1993 and subsequent years. This offering is exempt from the registration provisions of the New York Franchise/Disclosure Statute. The Company's agent for service of process in connection with the offering pursuant to such exemption is C T Corporation, 1633 Broadway, New York, New York 10019. See back cover page regarding revocation rights of Florida purchasers. REFERENCE IS MADE TO FACTORS TO BE CONSIDERED ON PAGE 2 OF THIS PROSPECTUS. This is a continuous offering terminating not later than April 30, 1995. The date of this Prospectus is 1994 AVAILABLE INFORMATION The Company is subject to the informational requirements of Section 15(d) of the Securities Exchange Act of 1934. Accordingly, it files annual and quarterly reports and other information with the Securities and Exchange Commission. Such reports and other information can be inspected and copied at the public reference facilities maintained by the Commission at 450 5th Street, N.W., Judiciary Plaza, Washington, D. C. 20549, and copies of such material can be obtained from the Public Reference Section of the Commission, Washington, D. C. 20549 at prescribed rates. The material can also be inspected and copied at the following Regional Offices of the Commission: 219 South Dearborn Street, Room 1204, Chicago, Illinois 60604; 26 Federal Plaza, Room 1028, New York, New York 10278; and 5757 Wilshire Boulevard, Suite 500 East, Los Angeles, California 90036. REPORTS TO SECURITY HOLDERS Within a reasonable time following the end of each calendar year, the Company furnishes to its stockholders an annual report containing financial information that has been examined and reported upon, with an opinion expressed by, a certified public accounting firm. DOCUMENTS INCORPORATED BY REFERENCE The Company's Annual Report on Form 10-K for the year ended December 31, 1993 filed pursuant to Section 15(d) of the Exchange Act is incorporated herein by reference. The Company will provide without charge to each person to whom a Prospectus is delivered, upon written or oral request of such person, a copy of any and all of the documents incorporated by reference in the Registration Statement (other than exhibits to such documents unless such exhibits are specifically incorporated by reference into the documents that the Registration Statement incorporates). Requests for such copies should be directed to David F. Hodnik, Executive Vice President, Ace Hardware Corporation, 2200 Kensington Court, Oak Brook, Illinois 60521, (708) 990-6600. FACTORS TO BE CONSIDERED Limitations on Value and Marketability of Stock Although Ace Hardware Corporation ("the Company") is obligated to pay patronage dividends to its stockholders in proportion to the respective purchases of merchandise made by them from the Company, the payment of dividends on shares of the Company's capital stock is prohibited and transfer of the shares is limited so that no trading market for them exists. The shares can be sold only to another retail hardware dealer whom the Company has approved as a member for the retail outlet for which the shares were purchased or to the Company which must repurchase the shares if said retail outlet closes down or if its Company membership is otherwise terminated. (See the heading "Description of Capital Stock".) However, no amounts to fund repurchase of shares by the Company are expressly set aside for such purpose and repurchases can be made only as permitted under the General Corporation Law of Delaware. (See the heading "Summary," subheading "Repurchase of Shares by Company".) Accordingly, except for the voting rights attached to the Class A Stock, the stock has value to a purchaser thereof only in the event of the liquidation of the Company or upon termination of the Company membership for the retail outlet for which the stock has been purchased. Income Tax Liability Incidental to Patronage Dividends A purchaser of shares will be required to report as gross income for federal income tax purposes the total amount of patronage dividends distributed by the Company to such purchaser, including shares of Class C Stock and patronage refund certificates distributed in the form of written notices of allocation at their stated dollar amounts. Patronage refund certificates are non-negotiable having a maturity date and bearing interest 2 at an annual rate to be determined by the Board of Directors prior to issuance. Although a minimum of 20% of each recipient's total annual patronage dividends is required to be paid in cash in all cases except those in which the cash portion has been applied against indebtedness owed to the Company by a stockholder whose Company membership has terminated and who has not requested payment of such 20% minimum portion in cash, the cash portion may be insufficient, depending upon the income tax bracket of each recipient, to provide funds for the full payment of the federal income tax liability incurred by the recipient with respect to such patronage dividends. (See the heading "The Company's Business", subheading "Federal Income Tax Treatment of Patronage Dividends".) Sale of All Shares Offered Not Assured Since the shares offered hereby are available for purchase only by retailers of hardware and related merchandise with respect to particular retail outlets for which a Company membership is approved, it is not certain that all of the shares offered will be sold. Company's First Lien Rights on Shares The shares held by any purchaser, including any shares of Class C Stock distributed as patronage dividends, will be subject to a first lien in favor of the Company for the amount of any indebtedness payable to the Company by such holder. (See the heading "Description of Capital Stock", subheading "Other Restrictions and Rights".) Any patronage refund certificates which are distributed as patronage dividends will also be subject to a similar first lien. (See the heading "The Company's Business", subheading "Forms of Patronage Dividend Distributions".) Full Payment Required for Issuance of Shares Unless a purchaser of shares chooses to prepay the purchase price of the shares, the purchase price is to be paid by charges added to the purchaser's bi-weekly billing statements from the Company for merchandise and services. A purchaser will receive a certificate for each class of stock included in his subscription for shares only upon the completion of payment of the purchase price for the share or shares of that class. (See the heading "Distribution Plan and Offering Terms".) By-law Provisions Constitute a Legal Contract with the Company It is provided in Article XXVI of the By-laws of the Company that said By-laws shall constitute a legal contract between the Company and its stockholders. A copy of the By-laws of the Company, as amended on January, 24, 1994, is attached to this Prospectus as Appendix A. Those By-law provisions having special significance with respect to the operations of the Company include Sections 5 through 12 of Article XVI which set forth limitations on the transfer of the Company's stock and the circumstances under which shares thereof will be repurchased by the Company;) Article XXIV entitled "Members' Patronage Dividends"; and Article XXV dealing with the membership rights and obligations of the Company's dealers. Documents Accompanying Prospectus The Company's most recent annual report to security holders and Company's current standard form of Membership Agreement accompany this Prospectus. (See the heading "The Company's Business," subheading "Membership Agreement.") SUMMARY The Company and Its Business The mailing address and telephone number of the Company's principal executive offices are: 2200 Kensington Court, Oak Brook, Illinois 60521, (708) 990-6600. 3 The Company is a wholesaler of hardware and related products, and manufactures paint products. Sales of such products are made almost exclusively to retail hardware dealers having Membership Agreements with the Company entitling them to purchase merchandise and services from it and to use the Company's marks as provided in the Membership Agreement. (See the heading "The Company's Business," subheading "Membership Agreement.") The number of retail business outlets for which Membership Agreements have been executed as of December 31, 1993 were 4,921. (See the heading "The Company's Business.") Basic Distinctions Between Classes of Stock The issued and outstanding shares of capital stock of the Company are divided into three classes. Class A Stock is the only class of stock having voting rights with respect to the election of directors and most other matters. Class B Stock had been offered to retail dealers with respect to each business outlet owned or controlled by them for which a membership was granted by the Company on or before February 20, 1974, but the offering of Class B Stock terminated on March 31, 1979 and no shares of such stock are being offered by this Prospectus. The Board of Directors has authority to redeem the whole or any part of the outstanding shares of Class B Stock, or the whole or any part of the outstanding shares of Class C Stock which have been issued to the Company's member dealers in partial payment of their patronage dividend distributions from the Company. In the event of the Company's liquidation, the outstanding shares of Class B Stock and Class C Stock have priority over the outstanding shares of Class A Stock in the distribution of the Company's net assets to the extent of an amount equal to the total amount which the Company would have been required to pay to purchase or redeem all of its outstanding shares of Class B Stock and Class C Stock. If the net assets of the Company exceed the total amount which the Company would have been required to pay for such purpose, such excess is to be distributed in equal portions to each holder of an outstanding share of Class A Stock up to an amount equal to the par value of the Class A Stock. Any net assets still remaining are to be distributed among the holders of all three classes of issued and outstanding stock of the Company. Each share of Class A Stock will participate in such distribution in the proportion which the par value of such share bears to the sum of the total par value of the outstanding shares of Class A Stock and the total amount which the Company would have been required to pay to purchase or redeem all of its outstanding shares of Class B Stock and Class C Stock. Each share of Class B Stock and Class C Stock will participate in such distribution in the proportion which the then applicable purchase or redemption prices thereof bear to the aforementioned sum. (See the heading "Description of Capital Stock", subheadings "Voting Rights","Liquidation Rights", and "Redemption Provisions.") By virtue of express prohibitions contained in the Company's Certificate of Incorporation and Bylaws, no dividends can be declared on any of the shares of any class of stock of the Company. (See the heading "Description of Capital Stock", subheading "Dividend Rights.") Basic Features of Offering The shares of the Company's stock being offered hereby are offered only to approved retail and other dealers in hardware and related products who submit applications for Ace Hardware Corporation memberships. The offering price for each share of Class A Stock is $1,000 and the offering price for each share of Class C Stock is $100. The offering enables dealers in hardware or similar merchandise to obtain membership in the Company. Membership entitles a dealer to use the Company's marks as provided in the Membership Agreement, to purchase merchandise from the Company under the various sales classes and programs described under the heading "The Company's Business," and also to receive patronage dividends based upon the dealer's purchases from the Company. 4 A dealer who applies for an initial Company membership must subscribe for a combination of 1 share of Class A Stock plus 40 shares of Class C Stock. If a membership is applied for with respect to an additional outlet owned or controlled by the same dealer, the dealer must subscribe for 50 shares of Class C Stock for such outlet. Any application for a membership must be accompanied by a $400 payment constituting a handling charge to defray the estimated cost of processing such application. The shares subscribed for by a dealer are to be paid for by means of charges to be added to the biweekly billing statements of the Company for merchandise and services purchased from it by its dealers. The dealer shall also have the right at any time to make prepayments on account of the purchase price. For a detailed explanation of the offering reference is made to the information set forth under the heading "Distribution Plan and Offering Terms". Repurchase of Shares by Company Upon termination of the Ace Hardware Corporation membership for any retail business outlet, all of the shares with respect to such outlet held by the dealer must be sold back to the Company, unless the shares are to be transferred to another party whom the Company agrees to accept as a member dealer with regard to such outlet. In any repurchase of its shares, the Company must pay a price equal to the $1,000 par value for Class A Stock, a price which cannot be less than twice the $1,000 par value for Class B Stock, and a price which cannot be less than the $100 par value for Class C Stock. (See the heading "Description of Capital Stock", subheading "Other Restrictions and Rights", paragraph (g).) A portion of the repurchase price to be paid by the Company will be paid by means of an interest-bearing 4-year installment note if the dealer's membership with the Company terminates in either of two basic types of situations. Reference is made to the heading "Description of Capital Stock", subheading "Other Restrictions and Rights", paragraph (h), of this Prospectus and to Section 12 of Article XVI of the By-laws, set forth in Appendix A of this Prospectus pp. A-15 to A-17, for further details concerning the situations in which part of such repurchase price will be paid by means of an installment note and the terms and conditions which will be applicable to such notes. As of December 31, 1993 the number of outstanding shares of the Company's stock is Class A stock - 3,946 shares, Class B stock - 3,416 shares and Class C stock - 1,531,549 shares. As of the completion of this offering, assuming that all Class A stock is sold, the number of outstanding shares of the Company's stock will be Class A stock - 4,871 shares, Class B stock - 3,416 shares and Class C stock - 1,597,529 shares. Under the applicable provisions of the General Corporation Law of Delaware, however, the Company would be prohibited from repurchasing any of its shares at any time when its assets are less than the amount represented by the aggregate outstanding shares of its capital stock or would be reduced below said amount as a result of a repurchase of its shares. The number of shares of stock repurchased by the Company and the price per share paid by it during each of the past three calendar years were as follows:
Class of Stock A B C No. of Purchase No. of Purchase No. of Purchase Aggregate Shares Price Shares Price Shares Price Cost Year ended December 31, 1993 271 $1,000 164 $2,000 72,359 $100 $7,834,900 Year ended December 31, 1992 329 $1,000 152 $2,000 72,600 $100 $7,893,000 Year ended December 31, 1991 366 $1,000 184 $2,000 72,126 $100 $7,946,600
5 Patronage Dividends and Income Tax Treatment Thereof The Company operates on a cooperative basis with respect to purchases of merchandise made from it by its member dealers who are either the owners of shares of its capital stock or who are subscribers for shares which are being paid for by charges added to the Company's bi-weekly billing statements for merchandise purchased from it, and makes annual distributions of patronage dividends to such dealers in proportion to the amount of purchases made by each of them during the year. Reference is made to the table under the heading "The Company's Business," subheading "Distribution of Patronage Dividends" for information as to the percentages of sales of merchandise made by the Company during the years 1991 through 1993 which were distributed as patronage dividends. Under the Company's patronage dividend plan which is currently in effect, a portion of such patronage dividends (which can never be less than 20% nor more than 49.9% of the total annual patronage dividends distributed to each eligible and qualifying dealer) will be paid in cash, except that the portion of any patronage dividends which would otherwise have been paid in cash to a dealer whose membership with the Company has terminated will instead be applied against any indebtedness owing by such dealer to the Company to the extent of such indebtedness unless a timely request for the payment of the minimum 20% cash portion thereof is submitted to the Company by the dealer. The entire remaining portion will be paid in the form of shares of Class C Stock of the Company or non-negotiable patronage refund certificates, or in a combination of Class C shares and such patronage refund certificates. Those dealers whose volume of purchases entitles them to larger total annual patronage dividend distributions will receive larger percentages of their patronage dividends in cash. (See the heading "The Company's Business", subheadings "Distribution of Patronage Dividends", "Patronage Dividend Determinations and Allocations", and "Forms of Patronage Dividend Distributions.") The amount of patronage dividends allocated over the past five fiscal years is set forth in Note (C) to Selected Financial Data. The cash payments and the stated dollar amounts of shares of the Company's Class C Stock and of any patronage refund certificates which are distributed by the Company as a part of patronage dividends must all be taken into the gross income of each of the recipients thereof for federal income tax purposes in the taxable years in which they are received. (See the heading "The Company's Business", subheading "Federal Income Tax Treatment of Patronage Dividends.") In the case of member dealers whose places of business are located in foreign countries or Puerto Rico (except for unincorporated Puerto Rico dealers owned by individuals having U.S. citizenship) who are subject to the special 30% U.S. income tax imposed on nonresident alien individuals and foreign corporations (not including certain Guam, American Samoa, Northern Mariana Islands, or U.S. Virgin Islands corporations) receiving fixed or determinable annual income from sources within the United States, the minimum portion of the annual patronage dividends to be distributed in cash is 30%, and that amount will be withheld by the Company for payment of the U.S. income tax imposed on such dealers. (See the heading "The Company's Business", subheadings "Forms of Patronage Dividend Distributions", and "Federal Income Tax Treatment of Patronage Dividends.") USE OF PROCEEDS The proceeds to be received from the shares of stock of the Company offered hereby will be used by the Company primarily for general working capital purposes (including the purchase of merchandise to be resold by the Company to its member dealers and the maintenance of adequate inventories of such merchandise) and also for capital expenditures as required in order to serve the retail business outlets having Membership Agreements with the Company. The Company has no current specific plan for the proceeds or a significant portion thereof. The Company has no plan if less than all shares offered are sold, as the principal reason for the offering is to enable the Company to accept new dealer outlets in accordance with the Company's By-laws. See the heading "The Company's Business," subheadings 6 "Patronage Dividend Determinations and Allocations" and "Forms of Patronage Dividend Distributions", for a description of the method by which the Company will obtain most of the balance of its operating capital. (See the heading "Factors to be Considered," subheading "Sale of All Shares Offered Not Assured.") DISTRIBUTION PLAN AND OFFERING TERMS Offering Made Through Company Officers Sales of each class of stock offered by the Company are made by the officers of the Company to dealers whose applications for Ace memberships have been accepted by the Company. The Company also employs approximately 141 district managers including management and retail development personnel whose duties include initial contact with potential new retail dealer outlets and promotion of the Company's business and the dealer services offered by it. The district managers, however, do not and are not empowered to accept new dealer outlets on behalf of the Company, nor are they authorized to make sales of any shares of the stock offered by the Company. Also, no commission, bonus or other separate compensation is to be paid to any officer, district manager, or other employee of the Company in connection with the sale of its stock. Limitation of Offering to Applicants for Ace Dealer Memberships The offering of the Company's stock being made by this Prospectus is limited to dealers in hardware or similar merchandise who submit membership applications to the Company with respect to designated retail outlets which are accepted by the Company. In connection with each such application with respect to any retail outlet owned or controlled by a dealer, there must be submitted to the Company: 1. A membership agreement executed by the applicant in the form submitted by the Company; 2. A check in the sum of $400 in payment of a processing charge which is imposed to defray the estimated cost of processing the application; and 3. An executed Subscription Agreement for the purchase of shares of the Company's stock. Offering Price and Terms of Payment Each retail dealer who applies for Ace membership privileges with respect to any retail business outlet must subscribe for shares of the Company's stock having a total purchase price of $5,000. In the case of a dealer who does not already have a Membership Agreement with the Company with respect to any retail outlet, the shares to be subscribed for on behalf of such dealer's first retail outlet will include 1 share of Class A Voting Stock at a price of $1,000 per share plus 40 shares of Class C Non-voting Stock at a price of $100 per share. The shares of stock to be subscribed for by a dealer on behalf of each additional retail outlet owned or controlled by the same dealer will consist entirely of 50 shares of Class C Non-voting Stock at a price of $100 per share. Unless the right of prepayment described below is exercised, the entire purchase price of all shares of stock of the Company subscribed for by a dealer for any retail business outlet owned or controlled by such dealer shall be paid by means of a stock subscription payment charge to be added to such outlet's bi-weekly billing statement from the Company in the amount of $40 or in an amount equal to 2% of the purchase price of the merchandise and services purchased by such outlet from the Company during each bi-weekly period (if such percentage amount is greater than $40). Such charge shall be continued until the full purchase price for all shares of the stock of the Company subscribed for with respect to such outlet has been paid. Upon the acceptance by the Company of the Membership Agreement and the Stock Subscription Agreement executed by a dealer for a prospective member outlet, such outlet will be entitled to participate in the patronage dividend distributions made by the Company even though the full purchase price for the shares of stock subscribed for has not yet been paid. 7 Right of Prepayment All dealers subscribing for shares of any class of stock of the Company shall also have the right at any time to pay all or any portion of the then unpaid balance of the purchase price payable by them for the shares of any class of the stock of the Company subscribed for by them with respect to any member business outlet. However, no interest or other finance charge shall accrue upon or be added to the unpaid balance so long as all payments are made when the same are due in accordance with the terms described above. Time of Issuance of Stock Certificates Immediately upon the completion of the payment by a dealer of the full purchase price of $1,000 for the 1 share of Class A Voting Stock of the Company subscribed for by such dealer, a certificate for such share will be issued to him. In the case of a dealer whose subscription for shares includes 1 share of Class A Stock, all payments made by him under his Stock Subscription Agreement will be applied first toward the $1,000 purchase price for such Class A Stock. No dealer shall have any voting rights until such share of Class A Voting Stock has been issued to him. Certificates for the shares of Class C Stock of the Company subscribed for by a dealer with respect to any member business outlet owned or controlled by such dealer will be issued to him only upon the completion of the payment by him of the full purchase price of all of the Class C shares subscribed for by him with respect to such outlet. If any store or other business outlet with respect to which a dealer has subscribed for shares of stock of the Company ceases to be a member business outlet of the Company before such shares have been issued and paid for in full, the amount paid in by such dealer on account of the purchase price of such shares will thereupon be refunded to him. Termination of Membership Upon Transfer or Repurchase of Shares Unless the Company expressly consents at such time to the continuation of such membership, the Ace Hardware Membership Agreement for any store or other business outlet shall automatically be deemed to have terminated as of the time when any of the shares of capital stock of the Company owned for such outlet by a dealer (regardless of whether the shares were purchased by the dealer or were received by him as patronage dividends) are transferred by him to another eligible holder or are purchased from him by the Company. Federal Income Tax Status of Class A and Class C Shares (See the Heading "Opinions of Experts"). If the Ace Hardware Corporation membership for a particular business outlet owned by a dealer who has only one member outlet is terminated, or if the memberships for all of a dealer's business outlets having memberships with the Company are terminated, and the shares of the Company's stock owned by such dealer are then repurchased by the Company, such dealer's 1 share of Class A Stock would be included among the shares so repurchased. Since the Class A Stock can never be repurchased by the Company at a price other than the $1,000 par value, no taxable income would be realized by a dealer upon the Company's repurchase of his share of Class A Stock. Upon the purchase by the Company of shares of Class C Stock previously sold or distributed to a dealer, taxable income would be realized by such dealer under the present provisions of the U.S. Internal Revenue Code to the extent that the price to be paid by the Company for such shares is established by the Board of Directors at some time in the future at a figure in excess of the $100 par value offering price of the shares. Unless the dealer whose shares of Class C Stock are purchased by the Company still owns shares of the Company's stock in connection with one or more other outlets that are members of the Company, the taxable income realized by such dealer at the time of the Company's purchase of Class C shares from him would probably qualify for capital gain treatment. 8 In the case of a dealer who continues to own shares of the Company's stock for one or more other member outlets after his shares with respect to a member outlet have been purchased or redeemed by the Company, the entire amount paid to such dealer for the shares purchased by the Company might be treated under applicable provisions of the Internal Revenue Code as a distribution essentially equivalent to a dividend which would be taxable to the dealer as ordinary income. In such case the income tax basis of the shares of the Company's stock still held by such dealer would be increased by an amount equal to the original basis of the shares purchased from him by the Company. The provisions of Section 483 of the U.S. Internal Revenue Code may be applicable to sales of the Company's stock to dealers who make payment for said shares in periodic installments extending more than 1 year after the date of the sale. In any such case, all payments which are due to be made by a dealer more than 6 months after the date of the sale may be deemed to include "unstated interest" which would be tax deductible by the dealer, but would also reduce the cost basis of his shares. "Unstated interest" constituting taxable income may be imputed under Section 483 of the U.S. Internal Revenue Code to a dealer whose Company membership is terminated and who receives a 4-year installment note (See the heading "Description of Capital Stock," subheading "Other Restrictions and Rights," paragraph (h)) in partial payment of the repurchase price of his Company stock if the sum of the total payments to be made to the dealer by the Company with respect to such repurchase exceeds the sum of the present values of such payments and the present values of any interest payments due under the note. For this purpose, the present value of a payment is to be determined by using a discount rate equal to the applicable Federal rate in effect as of the date of the note, compounded semi-annually. DESCRIPTION OF CAPITAL STOCK Dividend Rights The Company's Certificate of Incorporation and By-laws prohibit the declaration of dividends on any of the shares of any class of stock of the Company. However, the Company may distribute shares of its Class C Stock as a part of the annual patronage dividends to be paid to its eligible and qualifying dealers. (See the heading "The Company's Business," subheading "Forms of Patronage Dividend Distributions," as well as Note 5 to Financial Statements, and Note (C) to "Selected Financial Data.") Voting Rights All rights to vote and all voting powers are vested solely in the Class A Stock, provided, however, that holders of shares of $1,000 par value Class B Stock and shares of $100 par value Class C Stock shall be entitled to vote separately as a class upon any proposed amendment to the Company's Certificate of Incorporation which would increase or decrease the number of authorized shares of such class, increase or decrease the par value of the shares of such class, or alter or change the power, preferences or special rights of the shares of such class so as to affect them adversely. Each holder of any class of stock having the right to vote at any meeting of the stockholders of the Company shall be entitled to one vote for every share of such stock standing in the name of such holder on the books of the Company. Cumulative voting of shares with respect to the election of directors or otherwise is expressly prohibited. Liquidation Rights In the event of any liquidation or winding up of the affairs of the Company, whether voluntary or involuntary, the net assets of the Company shall be distributed among the holders of all classes of issued and outstanding stock of the Company. In such event, there shall first be distributed to the holders of outstanding shares of Class B Stock and Class C Stock amounts equal to the total amounts which the Company would have been required to pay to them to purchase or redeem all of their 9 outstanding shares of such stock in accordance with the purchase or redemption prices for said shares as last determined by the Board of Directors, but if the net assets are insufficient to pay such amounts to the holders of said shares, each outstanding share of Class B Stock and each outstanding share of Class C Stock shall share in the distribution of the Company's net assets in the proportion which its purchase or redemption price bears to such total amount. (See the subheading "Redemption Provisions" below). If the net assets exceed said total amount, the excess is to be distributed in equal portions to each holder of an outstanding share of Class A Stock, but the amount so distributed to each holder of a share of Class A Stock cannot exceed such share's $1,000 par value. Any net assets still remaining are to be distributed among the holders of all classes of issued and outstanding shares of stock of the Company pursuant to the following procedure: (a) there shall first be determined the sum of the total $1,000 par value of all of the outstanding shares of Class A Stock and the total amount which the Company would have been required to pay to purchase or redeem all of its outstanding shares of Class B Stock and Class C Stock in accordance with the purchase or redemption price thereof last determined by the Board of Directors; (b) each outstanding share of Class A Stock shall share in said remaining net assets in the proportion which the $1,000 par value thereof bears to the sum determined in the foregoing manner; and (c) each outstanding share of Class B Stock and each outstanding share of Class C Stock shall share in said remaining net assets in the proportion which the purchase or redemption prices thereof last determined by the Board of Directors bear to said sum. Preemptive Rights No stockholder of the Company shall, by reason of his holding shares of any class of stock of the Company, have any preemptive or preferential right to purchase or to subscribe to any shares of any class of the Company, now or to be hereafter authorized, or any notes, debentures, bonds or other securities convertible into or carrying options or warrants to purchase any shares of any class, now or hereafter to be authorized. Redemption Provisions There are no redemption provisions applicable to any of the shares of Class A Stock or to any of the shares of Class C Stock other than shares of Class C Stock which have been issued to the Company's member dealers in partial payment of their annual patronage dividends. The Company may, at the option of its Board of Directors, redeem the whole or any part of the outstanding shares of its Class B Stock or the whole or any part of the outstanding shares of its Class C Stock which have been issued as patronage dividend distributions. Such redemptions may be made at any time or from time to time. The redemption price in each instance shall be determined by the Board of Directors, but the redemption price to be paid for Class C Stock shall in no event be less than the $100 par value of such stock and the redemption price to be paid for Class B Stock shall at all times be no less than twice the $1,000 par value of the Class B Stock and shall always be equal to twenty times the per share price last established by the Board of Directors with respect to purchases or redemptions by the Company of its Class C Stock. Notice of any election to redeem shall be mailed to each holder of the class of stock so to be redeemed at his address as it appears on the books of the Company not less than 30 days prior to the date upon which the stock is to be redeemed. In case less than all of the outstanding shares of Class B Stock are redeemed, or in case less than all of the eligible outstanding shares of Class C Stock are redeemed, the number of shares to be redeemed and the method of effecting such redemption, whether by lot or prorata or otherwise, may be determined by the Board of Directors. 10 Other Restrictions and Rights (a) There are no conversion rights, sinking fund provisions, or liability to further calls or assessment by the Company in regard to any of its shares of stock. (b) As security for the payment of any indebtedness owing to the Company by any stockholder or any subscriber for shares of the Company's stock, the Company retains a first lien upon all shares of its stock held by each stockholder and upon all amounts which have been paid to the Company pursuant to a Stock Subscription agreement for shares to be issued upon the completion of payment of the purchase price of the shares. The interest of each holder of shares of the Company's stock in and to the shares issued to such holder and the interest of each subscriber for shares of the Company's stock in and to the funds paid to the Company by such subscriber shall at all times be deemed to be offset by the amount of any indebtedness payable to the Company by such holder or subscriber. In no event shall any transfer of the shares owned by any stockholder or any transfer of the stock subscription account of any subscriber for shares be made unless and until the stockholder whose shares are being transferred or the subscriber whose subscription account is being transferred is free from all indebtedness to the Company. If an installment note would be issuable in payment of a portion of the total purchase price to be paid by the Company for shares of its capital stock held by a dealer for a retail outlet whose Company membership is terminated in one of the situations described in paragraph (h) below, the cash portion of the purchase price of said shares will be applied first toward any indebtedness payable to the Company by such dealer and the portion of the purchase price which would otherwise be paid by the issuance of an installment note will then be applied against any such indebtedness which still remains. (c) From and after the date on which shares of the Company's stock are first issued to its member dealers who subscribe for such shares, ownership of the shares of all classes of stock of the Company shall be limited to approved retail or other dealers in hardware and related products having membership agreements with the Company, and ownership of shares of Class B Stock shall be limited to dealers having membership agreements with the Company which were entered into on or before February 20, 1974. No certificate representing any issued and outstanding share or shares of any class of stock of the Company shall be pledged, mortgaged, hypothecated, sold, assigned or transferred without the prior consent of the Board of Directors of the Company. In the event that the Board of Directors shall refuse to consent to any transfer or assignment of any certificate or certificates representing any share or shares of issued and outstanding stock of the Company of any class, then the Company shall have the right and shall be obligated to purchase such stock from its owner at a price determined in accordance with the provisions of paragraph (g) below. In no event shall any transfer or assignment of shares of any class of stock of the Company be made to any transferee who is not eligible to be a holder of such shares, that is, a dealer having a membership agreement with the Company. In the case of a proposed transfer of ownership of a store or other business outlet owned by a holder of shares of stock of the Company to a transferee which the Company has accepted or is willing to accept as a member Ace Hardware dealer, then the owner of such stock shall have the option of either (i) selling or otherwise transferring to such transferee such number of shares of stock of the Company of any class which the Company would otherwise have been required to offer to such transferee in connection with the membership granted to such transferee with respect to such store or other business outlet, or (ii) selling such shares to the Company. However, the following types of transfers of ownership of a store or other business outlet will not be recognized for purposes of determining the availability of the option of selling to the Company shares of its capital stock: (i) any transfer which is not complete, unconditional and irrevocable; (ii) any transfer to an entity in which the transferor retains an ownership interest; or (iii) any transfer to the spouse of the transferor. (d) Subject to the Company's first lien and set-off rights as described in paragraph (b) above, in the event of the termination of the Company membership granted for a retail hardware store or other business unit for which shares of stock of the Company are held, the Company shall be obligated to purchase such shares. The Company shall also be obligated to refund all amounts which have been paid to it pursuant to a Stock Subscription Agreement for the purchase of shares which have not as yet been issued to the subscriber, subject only to the Company's first lien and set-off rights as described in paragraph (b) above. Termination of the membership granted for a particular retail hardware store or other business 11 outlet shall include not only any termination pursuant to a formal notice of termination given by either the Company or the holder of the membership but shall also include each of the following situations which shall be deemed to constitute such a termination: (i) The closing down of the store or other business unit with respect to which such shares of stock of the Company are held, unless such store or other business unit is merely being moved, with the Company's consent and approval, to another location or is being acquired by another dealer which the Company has accepted or is willing to accept as a member dealer for operation pursuant to the same membership at another location; (ii) The death of an individual holder of the shares of stock of the Company held for such retail store or other business unit, or of a member of a partnership which is a holder of such shares, except in a case where the store or other business unit with respect to which such shares are held continues, with the approval of the officers of the Company (which approval shall not be unreasonably withheld), to be operated under a membership from the Company by the decedent's estate or by the person or persons to whom such shares are to be distributed by the decedent's estate or by the successor or successors to the decedent's interest in the partnership holding such shares (it being immaterial for this purpose that, in connection with such continuation of operation, the legal form of ownership of the member dealer has been changed from an individual proprietorship or partnership to a corporation or from a partnership to an individual proprietorship); (iii) An adjudication of the insolvency of the dealer or of the store or other business unit for which the shares of stock of the Company are held, or the making of an assignment for the benefit of creditors or the filing of a voluntary petition in bankruptcy or similar petition under the U. S. Bankruptcy Code by or on behalf of such dealer or retail business unit, or the filing of an involuntary petition in bankruptcy or similar petition under the U. S. Bankruptcy Code against the dealer or against said business unit. (e) A transfer of shares of stock of the Company requiring the consent of the Board of Directors shall not be deemed to have occurred upon the death of a person who is the holder of shares of stock of the Company jointly with one or more other persons under circumstances whereby ownership of such shares passes automatically by operation of law to the surviving holder or holders of such shares, nor shall the Company become obligated to purchase such shares upon the death of such person unless the store or other business outlet with respect to which such shares are held either (i) closes down, or (ii) ceases to be operated under a membership from the Company. (f) In any case where the holder or holders of 50% or more of the outstanding voting stock of a corporation having a membership from the Company for one or more business outlets, or the holder or holders of 50% or more of the outstanding voting stock of a corporation owning 80% or more of the outstanding stock of a corporation having such a membership, propose to sell or otherwise transfer all of the shares of capital stock (both voting and non-voting) of such corporation held by them, written notice of such proposal shall be given to the Company. Upon the consummation of such sale or transfer, the corporation whose shares have been sold or transferred shall have the option of either retaining all the shares of the capital stock of the Company then held by it with respect to each member business outlet operated by it or of selling such shares to the Company and having each Company membership held by it deemed to have been terminated by the voluntary action of said corporation, in which case no business unit for which said corporation has held a Company membership shall thereafter operate as a member of the Company unless said corporation submits a new application for a membership for such business unit and such application is accepted by the Company. However, the following types of transfers of ownership of shares of the capital stock of a corporation having a membership from the Company will not be recognized for purposes of determining the availability of the option of selling to the Company shares of its capital stock: (i) any transfer which is not complete, unconditional and irrevocable; (ii) any transfer to an entity in which the transferor retains an ownership interest; or (iii) any transfer to the spouse of the transferor. 12 (g) The price to be paid by the Company in connection with the purchase by it of any shares of its stock shall be as follows: (i) in the case of Class A Stock, the $1,000 par value of the shares; (ii) in the case of Class B Stock, an amount per share equal to the per share price last established by the Board of Directors as the price to be paid by the Company in the event of redemption of shares of its Class B Stock (currently $2,000 per share), which price shall in no event be less than twice the $1,000 par value of the Class B Stock and shall also at all times be equal to twenty times the per share purchase price last established by the Board of Directors with respect to purchases by it of shares of its Class C Stock; (iii) in the case of Class C Stock, an amount per share equal to the per share price last established by the Board of Directors as the purchase price to be paid by the Company for shares of its Class C Stock (currently $100 per share), which price shall in no event be less than the $100 par value thereof. (h) In case of the purchase by the Company of the shares of its stock held by a dealer for a business outlet whose Company membership is terminated in either of the following situations, a portion of the purchase price will be paid in the form of an installment note payable in four equal annual installments plus accrued interest: (i) voluntary termination of the membership by the dealer under circumstances whereby the member outlet continues to engage in substantially the same business and continues to be controlled to the extent of more than 50% by the same person, partnership or corporation; (ii) termination of the membership by the Company due to a delinquency on the dealer's part in paying for goods or services supplied by the Company or due to a default on the dealer's part in performing some other obligation under his membership agreement with the Company. Even in the above situations, though, the portion of the total purchase price represented by the amount actually paid in by the dealer under a Stock Subscription Agreement for Class A Stock, Class B Stock and Class C Stock will be paid in cash, and the entire remaining portion of the total purchase price for the shares being purchased by the Company from the dealer will also be paid in cash if such remaining portion is less that $5,000. Where such remaining portion of the total purchase price is $5,000 or more in any of the above situations, then only the amount actually paid in by the dealer under the dealer's Stock Subscription Agreement will be paid in cash and the entire remaining portion of the purchase price will be paid by means of an installment note as described above. The interest rate on any such installment note will be such rate as shall have been established by the Company's Board of Directors for such purpose as of the date of the issuance of the note, but the interest rate shall in no event be less than the latest interest rate established for patronage refund certificates to be issued as a part of the annual patronage dividends payable to the Company's dealers, nor shall the interest rate ever be less than 6% per annum. After considering the financial condition and requirements of the Company, the Company's Board of Directors may authorize that payment be made in cash of all or any portion of the total purchase price which would otherwise be payable by means of such an installment note if the Board determines that the installment payment method would impose an undue hardship on the dealer. (i) There is no restriction on the repurchase or redemption of any of its shares of stock by the Company in the event that the Company shall at any time be in arrears in making any sinking fund installment payments which it may hereafter incur an obligation to make. Since the Company is prohibited from paying dividends on any of its shares of stock, there can be no arrearage in the payment of any such dividends which would impose any restriction on the repurchase or redemption of any of its shares of stock by the Company. Under the General Corporation Law of Delaware, the Company cannot repurchase any of its shares at any time when its assets are less than the amount represented by the aggregate outstanding shares of its capital stock or would be reduced below said amount as a result of a repurchase of its shares. 13 OPINIONS OF EXPERTS The validity of shares of stock of the Company offered hereby will be passed upon for the Company by the Company's general counsel, David W. League. The statements made under the heading "Distribution Plan and Offering Terms," subheading "Federal Income Tax Status of Class A and Class C Shares," as well as those made under the subheading "Federal Income Tax Treatment of Patronage Dividends" are also based upon his opinions. The firm of Gatenbey, Law & League, of which Mr. League was previously a partner, has previously passed upon legal questions relating to the effect upon the surplus or retained earnings of the Company of the fact that, in the event of the involuntary liquidation of the Company, shares of its Class B stock will have a preference exceeding the par value of said shares in the distribution of the net assets of the Company. The financial statements of Ace Hardware Corporation as of December 31, 1993 and 1992 and for each of the years in the three-year period ended December 31, 1993, included herein and elsewhere in the Registration Statement have been included herein and in the Registration Statement in reliance upon the report of KPMG Peat Marwick, independent certified public accountants, appearing elsewhere herein and upon the authority of said firm as experts in accounting and auditing. THE COMPANY'S BUSINESS Ace Hardware Corporation was formally organized as a Delaware corporation in 1964. In 1973, by means of a corporate merger, it succeeded to the business of Ace Hardware Corporation, an Illinois corporation organized in 1928. Until 1973, the business now being engaged in by the Company had been conducted by the Illinois corporation. The Company's principal executive offices are located at 2200 Kensington Court, Oak Brook, Illinois 60521. Its telephone number is (708) 990-6600. The Company functions as a wholesaler of hardware and related products, and manufactures paint products. Sales of the products distributed by it are presently made primarily to individuals, partnerships or corporations who are engaged in business as dealers in hardware or related items and who have entered into Membership Agreements with the Company. The Membership Agreements entitle members to purchase merchandise and services from the Company and to use the Company's trademarks and trade names. (See the heading "Factors To Be Considered," subheading "Documents Accompanying Prospectus," and the heading "The Company's Business" subheading "Membership Agreement"). The Company operates on a cooperative basis and distributes patronage dividends to its eligible member dealers each year in proportion to the amount of their annual purchases of merchandise from it. (See the subheading "Distribution of Patronage Dividends"). At December 31, 1993 there were 4,921 retail business outlets with respect to which such Membership Agreements had been entered into. Those States having the largest concentration of member outlets are California (approximately 10%), Illinois and Texas (approximately 7% each), Florida (approximately 5%), and Michigan and Georgia (approximately 4% each). States into which were shipped the largest percentages of the merchandise sold by the Company in 1993 are California (approximately 12%), Illinois (approximately 9%), Florida and Texas (approximately 6% each) and Michigan and Georgia (approximately 4% each). Less than 3% of the Company's sales are made to outlets located outside of the United States or its territories. Information as to the number of the Company's member outlets during each of the past three calendar years is set forth in the following table:
1993 1992 1991 Member outlets at beginning of period 4,986 5,111 5,206 New member outlets 158 183 253 Member outlets terminated 223 308 348 Member outlets at end of period 4,921 4,986 5,111 Dealers having one or more member outlets at end of period 4,045 4,134 4,266
14 The Company services its dealers by purchasing merchandise in quantity lots, primarily from manufacturers, by warehousing substantial quantities of said merchandise and by selling the same in smaller lots to the dealers. Most of the products that the Company distributes to its dealers from its regional warehouses are sold at a 10% markup. In 1993 warehouse sales accounted for 61.7% of total sales and bulletin sales accounted for 3.4% of total sales with the balance of 34.9% representing direct shipment, including lumber and building material. The proportions in which the Company's total warehouse sales were divided among the various classes of merchandise sold by it during each of the past three calendar years are as follows:
Class of Merchandise 1993 1992 1991 Paint, cleaning and related supplies 19% 18% 18% Hand and power tools 14% 15% 14% Electrical supplies 12% 13% 12% Plumbing and heating supplies 15% 15% 16% General hardware 12% 12% 12% Housewares and appliances 7% 7% 8% Garden, rural equipment and related supplies 12% 11% 11% Sundry 9% 9% 9%
The Company sponsors two major conventions annually (one in the Spring and one in the Autumn) at various locations. Dealers and vendors are invited to attend, and dealers generally place substantial orders for delivery during the period prior to the next convention. During the convention regular merchandise, new merchandise and seasonal merchandise for the coming season are displayed to attending dealers. Lawn and garden supplies, building materials and exterior paints are seasonal merchandise in many parts of the country, as are certain sundries such as holiday decorations. Warehouse sales involve the purchase of merchandise from the Company that is maintained in inventory by the Company at its warehouses. Direct shipment sales involve the purchase of merchandise from the Company with shipment directly from the vendors. Bulletin sales involve the purchase of merchandise from the Company pursuant to special bulletin offers by the Company. Direct shipment sales are orders placed by dealers directly with vendors, using special purchase orders. Such vendors bill the Company for such orders, which are shipped directly to dealers. The Company, in turn, bills the ordering dealers at a markup. The markup on this category of sales varies with invoice amounts in accordance with the following schedule and is exclusive of sales under the LTL Plus program discussed below. Invoice Amount Handling Charge (Markup) $ 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 $2,999.00 1.50% $3,000.00 to $3,999.00 1.25% $4,000.00 to $4,999.00 1.00% $5,000.00 to $5,999.00 .75% $6,000.00 to $6,999.00 .50% $7,000.00 to $7,999.00 .25% $8,000.00 and over .00% Bulletin sales are made based upon notification from dealers of their participation in special bulletins offered by the Company. Generally, the Company will give notice to all members of its intention to purchase certain products for bulletin shipment and then purchases only so many of such products as the members order. When the bulletin shipment arrives at the Company, it is not warehoused, but is broken up into appropriate 15 quantities and delivered to members who placed orders. A 6% markup is generally applied to this category of sales. An additional markup of 3% is applied on the various categories of sales of merchandise exported to certain dealers located outside of the United States and its territories and possessions. The Company maintains inventories to meet only normal resupply orders. Resupply orders are orders from members for merchandise to keep inventories at normal levels. Generally, such orders are filled within one week of receipt. Bulletin orders (which are in the nature of resupply orders) may be for future delivery. The Company does not backlog normal resupply orders and, accordingly, no significant backlog exists at any point in time. The Company also has established special sales programs for lumber and building materials products and for products assigned from time to time to an "extreme competitive price sales" classification and for products purchased from specified vendors for delivery to certain of the Company's dealers on a direct shipment basis (LTL Plus Program). Under its lumber and building materials ("LBM") program, the Company imposes no handling charge, markup or national advertising assessment on direct shipment orders for such products. The LBM program also enables the Company's dealers to purchase these products at net invoice prices which pass on to them important cost savings resulting from the Company's closely monitored lumber and building materials purchasing procedures. Additionally, the LBM program offers dealers the opportunity to order less than truckload quantities of many lumber and building materials products at economical prices under the LTL warehouse redistribution procedure which the Company has established with certain major vendors. The Store Traffic Opportunity Program ("STOP") established by the Company is a program under which certain stockkeeping units of specific products assigned to an "extreme competitive price sales" classification are offered for sale to its dealers for delivery from designated Company retail support centers. Sales under this program are made without the addition of freight charges and with such handling charge or markup (if any) of not more than 5% as shall be specified for each item. The Company's officers have authority to add items to, and to withdraw items from, the STOP program from time to time and to establish reasonable minimum or multiple item purchase requirements for the items offered under the program. No allocations or distributions of patronage dividends are made with respect to sales under the STOP program. Purchases under the STOP program are, however, deemed to be warehouse purchases or bulletin purchases, as the case may be, for purposes of calculating the form of patronage dividend distributions. (See the heading "The Company's Business" subheading, "Forms of Patronage Dividend Distributions"). The LTL Plus Program established by the Company is a program under which full or partial truckloads of products are purchased by certain of the Company's dealers from specified vendors for delivery to such dealers on a direct shipment basis. No markup, handling charge or national advertising assessment is imposed by the Company on sales under the LTL Plus Program, and the maximum amount of patronage dividends allocated or distributed to the Company's dealers with respect to their purchases of products in the LTL Plus category is .5% of such sales. (See heading "The Company's Business," subheading "Patron age Dividend Determinations and Allocations".) The Company, in addition to conducting semi-annual and other conventions and product exhibits for its dealers, also provides them with numerous special services (on a voluntary basis and at a cost to cover its related expenses), such as inventory control systems, price and bin ticketing and an electronic ordering system. In order for them to have on hand current pricing and other information concerning the merchandise obtainable from the Company, the Company further provides to each of its dealers either a catalogue checklist service or a microfiche film service (whichever the dealer selects), for either of which services the dealer must pay a monthly charge. The Company also provides on a full participation basis videotapes and related materials for educational and training programs for which dealers must pay an established monthly charge. (See the heading "The 16 Company's Business," subheading "Special Charges and Assessments.") Through its wholly-owned subsidiary, Ace Insurance Agency, Inc., the Company makes available to its dealers a Group Dealer Insurance Program under which they can purchase a package of insurance coverages, including "all risk" property insurance and business interruption, crime, liability and workers' compensation coverages, as well as medical expense coverage for their employees. AHC Realty Corporation, another wholly-owned subsidiary of the Company, provides the services of a broker to those dealers who desire to sell or seek a new location for a presently owned store or to acquire an additional store. In addition, the Company offers to its dealers retail computer systems consisting of computer equipment, maintenance service and certain software programs and services. These are marketed by the Company under its registered service mark "PACE". The Company manufactures paint and related products at a facility owned by it in Matteson, Illinois. This facility now constitutes the primary source of such products offered for sale by the Company to its dealers. It is operated as a separate Division of the Company for accounting purposes. All raw materials used by the Company to manufacture paint are purchased from outside sources. The Company has had adequate sources of raw materials, and no shortages of any materials which would materially impact operations are currently anticipated. The manufacturing of paint is seasonal to the extent that greater paint sales are found in the months of April through September. Historically, compliance with federal, state and local provisions which have been enacted or adopted regulating the discharge of materials into the environment or otherwise relating to the protection of the environment have not had any material impact. The Company's business, either in hardware wholesaling or paint manufacturing activities is not dependent on any major suppliers and the Company feels that any seasonal fluctuations do not have a significant impact upon operations. For further discussion of Company's business, see the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations," which appears following the "Notes to Financial Statements" in this prospectus. Special Charges and Assessments The Company sponsors a national advertising program for which its dealers are currently assessed an amount equal to 1.25% of their purchases (exclusive of lumber, building materials, purchases of PACE computer systems (hardware and software), less than truckload lumber and building material program purchases and LTL Plus Program purchases (as described in previous paragraphs under the heading "The Company's Business") from the Company during each bi-weekly period with the current minimum annual assessment being $975.00 and with the maximum annual assessment being $4,750 for each member business location of any one dealer which has become a member of the Company. The total annual amount of advertising assessments payable by any one dealer is also subject to a further maximum limit which is determined by multiplying the number of such dealer's member retail store outlets serving the general public by $4,750. In the case of a dealer whose place of business is located outside the contiguous States of the United States, the Company's management has authority to determine the extent, if any, to which such dealer shall be required to pay the annual national advertising assessment based upon its evaluation of the amount and nature of the television broadcasts received in the dealer's area. The percentage of bi-weekly purchases to be assessed for the Company's national advertising program and the amount of the maximum annual assessment for such program are both subject to being changed from time to time by action of the Board of Directors of the Company. The Company also has the authority, effective January 1, 1993 to impose a regional advertising assessment (for select geographic regions) not to exceed 2% of annual purchases with the same minimum and maximum assessments imposed by the National Advertising assessment. 17 Each dealer must pay a low volume service charge if the dealer's purchases during the calendar year are less than the minimum purchase levels described below. Minimum purchase levels and the amount of the low volume service charge are subject to change from time to time by the Company's Board of Directors. Presently, the low volume service charge is $30.00 and applies beginning one (1) year after the granting of the membership, if the dealer's purchases from the Company (exclusive of carload lumber purchases) are less than $4,000.00 per bi-weekly billing period. If the dealer's purchases from the Company reach $104,000 during the calendar year, then the dealer receives credit on its next bi-weekly billing statement for all low volume service charges imposed on that account earlier in the same calendar year, and the account is not subject to any further low volume service charges for the rest of the calendar year. The low volume service charge is not billed on a bi-monthly basis to those accounts whose previous year's sales volume exceeded the minimum purchases level for the previous year, but the full annual low volume service charge will be billed at year end to those accounts if the minimum purchase level to avoid imposition of the charge has not been met for the current year. For the calendar year in which the first anniversary of the store's membership occurs, the $104,000 purchase requirement is pro-rated from the first billing statement after that anniversary through December 31, if less than a full calendar year. An Ace store that falls below minimum purchase levels is also subject to termination. A late payment service charge is added on any past due balance owing by a dealer to the Company for purchases of merchandise and services or for the purchase price of the capital stock of the Company subscribed for by the dealer. The late payment service charge currently in effect is an amount equal to .77% per bi-weekly statement period, except in Texas where the charge is .384% and Georgia where the charge is .692%. A past due balance is created whenever payment of the amounts shown as due on any such statement is not received by the Company within 10 days following the date of the statement. The percentage for determining the amount of the late payment service charge may be changed from time to time by the Company. Subscriptions to a retail training program consisting of video tapes and related course materials (the "S.T.A.R. Program") are mandatory for all stores located in the United States and U.S. Territories. The initial monthly assessment imposed on such stores for such subscriptions is $14.50 for each single store or parent store and $10.00 for each branch store. A single store or parent store is an initial retail outlet for which a dealer owns, or has subscribed for, one (1) share of Class A stock and forty (40) shares of Class C stock of the Company. A branch store is an additional retail outlet for which a dealer owns, or has subscribed for, fifty (50) shares of Class C stock of the Company. (See Article XXV, Section 2 of the By-laws, set forth in Appendix A). Branch stores may, upon request, be granted an exemption from the monthly subscription fee. Trademark and Service Mark Registrations The names "ACE HARDWARE" and "ACE" are used extensively by the Company and by its member-dealers in connection with the promotion, advertising and marketing of products and services sold by the Company. The Company also uses the names "Bright & Easy" and "Weather Shedder" for promotion of the sale of certain paints and paint primers, the name "Super Striker" for promotion of the sale of a packaged assortment containing fishing rods and lures (other than big game trolling lures) and the name "LUB-E" for the promotion of the sale of lubricant. In addition, the Company uses several service marks as an aid in the establishment and operation of stores owned and operated by its member-dealers and uses the service mark "Hardware University" for certain seminars and workshops conducted for its dealers and the service mark "PACE" for in-store computer systems which it markets for use by them in their store operations. The Company holds the following Trademark and Service Mark Registrations issued by the U.S. Patent and Trademark Office for the marks used by it for the above-described purposes: 18
Registration Description of Mark Type of Mark Number Expiration Date Name "ACE" in stylized lettering design Service Mark 1,464,025 November 3, 2007 Name "ACE Hardware" and winged emblem containing same Service Mark 840,176 December 5, 2007 "ACE Hardware-- The More Store" Service Mark 1,003,523 January 28, 1995 "ACE Is The Place With The Helpful Hardware Man" Service Mark 1,055,743 January 4, 1997 "The Helpful Hardware Man" Service Mark 1,055,741 January 4, 1997 "Ace Is the Place" Service Mark 1,602,715 June 19, 2000 "LUB-E" Trademark 1,615,386 October 2, 2000 "Ace Five Star" Trademark 1,627,887 December 18, 2000 "The Paintin' Place" Service Mark 1,138,654 August 12, 2000 "Hardware University" with design Service Mark 1,180,539 December 1, 2001 Name "PACE" with design Service Mark 1,208,887 September 14, 2002 Name "ACE Hardware" and winged emblem containing same Trademark 898,070 September 8, 2000 Name "ACE Hardware" and winged emblem containing same Trademark 1,277,581 May 15, 2004 "Super Striker" Trademark 1,182,330 December 15, 2001 "Bright & Easy" Trademark 1,058,117 February 8, 1997 "Weather Shedder" Trademark 1,053,816 December 7, 1996 Name "ACE Hardware" in slanted bar design Trademark 1,426,137 January 27, 2007 Name "ACE Hardware" in stylized lettering design Service Mark 1,486,528 April 26, 2008 Name "ACE Hardware and Garden Center" Service Mark 1,487,216 May 3, 2008 Name "ACE New Experience" in stylized lettering design Trademark 1,554,322 September 5, 2009 Name "ACE Seven Star" in stylized lettering design Trademark 1,556,389 September 19, 2009 Name "FLO-SOFT" Trademark 1,532,900 April 14, 2009 Name "ACE Best Buys" in circle design Service Mark 1,560,250 October 10, 2009 Name "PACER" Trademark 1,570,820 December 12, 1999 Name "ACENET" Service Mark 1,574,019 December 26, 1999 "ASK ACE" Service Mark 1,653,263 August 6, 2001 Name "ACE Three Star" in stylized lettering design Trademark 1,631,237 January 15, 2001 Name "ACE Pro" in stylized lettering design Trademark 1,632,078 January 22, 2001 Christmas Elves design Trademark 1,669,306 December 24, 2001 "ACE 2000" Service Mark 1,682,467 April 7, 2002 Name "ACE" in stylized lettering design Trademark 1,683,538 April 21, 2002 Name "HARMONY" in stylized lettering design Trademark 1,700,526 July 14, 2002 19 Seven Star Satisfaction Guaranteed Quality Ace Paints Design Service Mark 1,705,321 August 4, 2002 Name "THE OAK BROOK COLLECTION" in stylized lettering design Trademark 1,707,986 August 18, 2002 Name "THE OAK BROOK COLLECTION" in stylized lettering design Trademark 1,783,335 July 20, 2003 Name "ACE HARDWARE BROWN BAG BONANZA" with design Service Mark 1,761,277 April 13, 2003 Name "STORE 2000 THE STORE OF THE FUTURE" Trademark 1,811,032 December 14, 2003 Name "ENVIRO-CHOICE" Trademark 1,811,392 December 14, 2003 "ACE HARDWARE COMMITTED TO A QUALITY ENVIRONMENT" Service Mark 1,764,803 April 13, 2003
Currently the Company has a pending application before the U.S. Patent and Trademark Office for registration of "ACE RENTAL PLACE" in stylized lettering design for use in connection with the rental of equipment, merchandise and supplies. Competition The competitive conditions in the wholesale hardware industry can be characterized as intensive due to the fact that independent retailers are required to remain competitive with discount stores and chain stores, such as Wal-Mart, Home Depot and Sears, and with other mass merchandisers. The gradual shift of retail operations to high rent shopping center locations and the trend toward longer store hours have also intensified pressures to obtain low cost wholesale supply sources. The Company directly competes in several U.S. markets with Cotter & Company, Servistar Corporation, Hardware Wholesalers, Inc., Our Own Hardware Company, and United Hardware Distributing Co., all of which companies are also dealer-owned wholesalers. Of the aforementioned companies, only Cotter & Company, headquartered in Chicago, Illinois, has a larger sales volume than the Company. Employees The Company employs 3,405 full-time employees, of which 981 are salaried employees. Collective bargaining agreements, covering one truck drivers' bargaining unit and four warehouse bargaining units are currently in effect at certain of the Company's distribution warehouses. The Company's employee relations with both union and non-union employees are considered to be good, and the Company has experienced only one employee-related work stoppage in the past five years. All employees are covered either by negotiated or non-negotiated employee benefit plans which include hospitalization, death benefits and, with few exceptions, retirement benefits. Limitations on Ownership of Stock All of the issued and outstanding shares of capital stock of the Company are owned by its dealers. Only approved retail and other dealers in hardware and related products having Membership Agreements with the Company are eligible to own or purchase shares of any class of the Company's stock. No dealer, regardless of the number of member business outlets owned or controlled by him, shall be entitled to own more than 1 share of Class A Stock, which is the only class of voting stock which can be issued by the Company. This ensures that each stockholder-dealer will have an equal voice in the management of the Company. An unincorporated person or partnership shall be deemed to be controlled by another person, partnership or corporation if 50% or more of the assets or profit shares therein are owned (i) by such other person, partnership or corporation or (ii) by the owner or owners of 50% or more of the assets or profit shares of another unincorporated business firm or (iii) by the owner or owners of 50% or more of the capital stock of an incorporated business firm. A corporation shall 20 be deemed to be controlled by another person, partnership or corporation if 50% or more of the capital stock of said corporation is owned (i) by such person, partnership or corporation or (ii) by the owner or owners of 50% or more of the capital stock of another incorporated business firm or (iii) by the owner or owners of 50% or more of the assets or profit shares of an unincorporated business firm. Distribution of Patronage Dividends The Company operates on a cooperative basis with respect to purchases of merchandise made from it by those of its dealers who have become "members" of the Company as described below and in the Company's By-laws. In addition, the Company operates on a cooperative basis with respect to all dealers who have subscribed for shares but who have not as yet become "members" by reason of the fact that the payments made by them on account of the purchase price of their shares have not yet reached an amount equal to the $1,000 purchase price of 1 share of Class A Voting Stock. All member dealers falling into either of the foregoing classifications are entitled to receive patronage dividend distributions once each year from the Company in proportion to the amount of their annual purchases of merchandise from it. The patronage dividends distributed on wholesale warehouse, bulletin and direct shipment sales made by the Company and on total sales of products manufactured by the Paint Division represented the following percentages of each of said categories of sales during each of the past three calendar years: 1993 1992 1991 Warehouse Sales 4.94434% 5.26838% 4.99516% Bulletin Sales 2.0% 2.0% 2.0% Direct Shipment Sales 1.0% 1.0% 1.0% Paint Sales 7.9389% 8.9440% 8.6463% In addition to the dividends described above, patronage dividends are calculated separately and distributed on sales of lumber products, building material products and less-than-truckload (LTL) sales of lumber and building material products. Patronage dividends equal to .1763%, .1260% and .2098% of the total sales of these products (calculated separately by each of these three sales categories) were distributed to the Company's dealers who purchased these products in 1993, 1992 and 1991 respectively. Under the LTL Plus Program, patronage dividends are also calculated separately on sales of full or partial truckloads of products purchased by eligible dealers from specified vendors (see discussion of LTL Plus Program under the heading "The Company's Business.") The maximum amount of patronage dividends allocable to LTL Plus sales is .5% of such sales. The LTL Plus Program dividend was .5%, of such sales for 1993, 1992 and 1991. Patronage Dividend Determinations and Allocations The amounts distributed by the Company as patronage dividends consist of its gross profits on business done with dealers who qualify for patronage dividend distributions after deducting from said gross profits a proportionate share of the Company's expenses for administration and operations. Such gross profits consist of the difference between the price at which merchandise is sold to such dealers and the cost of such merchandise to the Company. All income and expenses associated with activities not directly related to patronage transactions are excluded from the computation of patronage dividends. Generally these include profits on business done with dealers who do not qualify for patronage dividend distributions and any income (loss) realized by the Company from the disposition of property and equipment (except that, to the extent that depreciation on such assets has been deducted as an expense during the time that the Company has been operating on a cooperative basis and is recaptured in connection with such a disposition, the income derived from such recapture would be included in computing patronage dividends). 21 The By-laws of the Company provide that, by virtue of a dealer being a "member" of the Company (that is, by virtue of his ownership of 1 share of Class A Voting Stock), he will be deemed to have consented to include in his gross income for federal income tax purposes for the dealer's taxable year in which they are received by him all patronage dividends distributed to him by the Company in connection with his purchases of merchandise from the Company. A dealer who has not yet paid an amount which at least equals the $1,000 purchase price of the 1 share of Class A Voting Stock subscribed for by him will also be required to include all patronage dividends distributed to him by the Company in his gross income for federal income tax purposes in the year in which they are received by him. This is required by virtue of a provision in the Subscription Agreement executed by him under which he expressly consents to take all such patronage dividends into his gross income for such purposes. The amount of the patronage dividends which must be included in a dealer's gross income includes both the portion of such patronage dividends received by him in cash or applied against indebtedness owing by him to the Company in accordance with Section 7 of Article XXIV of the Company's By-laws and the portion or portions thereof which he receives in shares of Class C Nonvoting Stock of the Company or in patronage refund certificates. Patronage dividends on each of the Company's three basic categories of sales (warehouse sales, bulletin sales and direct shipment sales) are allocated separately, as are patronage dividends under the LTL Plus Program. However, the maximum amount of patronage dividends allocable to the LTL Plus Program is an amount no greater than .5% of such sales, the maximum amount allocable to direct shipment sales exclusive of LTL Plus Program sales is an amount equal to 1% of such sales and the maximum amount of patronage dividends allocable to bulletin sales is an amount equal to 2% of that category of sales. All remaining patronage dividends resulting from sales made under these programs are allocated by the Company to warehouse sales. The Company feels that this allocation procedure provides a practical and understandable method for the distribution of these patronage dividends in a fair and equitable manner. Sales of lumber and building materials products are not included as part of warehouse sales, bulletin sales, or direct shipment sales for patronage dividend purposes. Patronage dividends are calculated separately and distributed to the Company's dealers with respect to their purchases within each of three sales categories involving these types of products. These three categories are (a) lumber products (other than less-than-truckload sales); (b) building materials products (other than less-than-truckload sales); and (c) less-than-truckload ("LTL") sales of lumber and building material products. Patronage dividends are also calculated separately and distributed to the Company's dealers for full and partial truckloads of products purchased under the LTL Plus program. (See the heading "The Company's Business", discussion of LTL Plus program, and the subheading "Forms of Patronage Dividend Distributions", subparagraphs 2(a)-(b).) Any manufacturing profit realized on intracompany sales of the products manufactured by the Company's Paint Division is allocated among and distributed as patronage dividends to those member dealers who are eligible to receive patronage dividends from the Company in proportion to their respective annual dollar purchases of paint and related products manufactured by said Division. The earnings realized by the Company on wholesale sales of such products made by it to its member dealers are distrib uted as patronage dividends to all of its dealers who are eligible to receive patronage dividends from it as part of the patronage dividends which they receive each year with respect to the basic patronage dividend categories established for warehouse sales, bulletin sales, and direct shipment sales. Under Section 8 of Article XXIV of the Company's By-laws, if the Paint Division's manufacturing operations for any year result in a net loss, rather than a profit, to the Paint Division, such loss would be netted against the earnings realized by the Company from its other activities during the year, with the result that the earnings available from such other activities for distribution as patronage dividends for such year would be correspondingly reduced. Forms of Patronage Dividend Distributions Patronage dividend distributions will be made to the eligible and qualified member dealers of the Company in cash, shares of the Company's Class C stock and patronage refund certificates in accordance with the 22 following plan which has been adopted by the Company's Board of Directors with respect to purchases of merchandise made by such dealers from the Company on or after January 1, 1993, and which will continue to be in effect until such time as the Board of Directors, in the exercise of their authority and discretion based upon business conditions from time to time and the requirements of the company, shall determine that such plan should be altered or amended: 1. With respect to each store owned or controlled by each eligible and qualifying dealer, such dealer shall receive a minimum cash distribution determined as follows: (a) an amount equal to 20% of the first $5,000 of the total patronage dividends allocated for distribution each year to such dealer in connection with the purchases made for such store; (b) an amount equal to 25% of the portion of the total patronage dividends allocated for distribution each year to such dealer for such store which exceeds $5,000 but does not exceed $7,500; (c) an amount equal to 30% of the portion of the total patronage dividends allocated for distribution each year to such dealer for such store which exceed $7,500 but does not exceed $10,000; (d) an amount equal to 35% of the portion of the total patronage dividends allocated for distribution each year to such dealer for such store which exceeds $10,000 but does not exceed $12,500; (e) an amount equal to 40% of the portion of the total patronage dividends allocated for distribution each year to such dealer for such store which exceeds $12,500. 2. The portion of the total annual distribution allocated to any such dealer for each store owned or controlled by such dealer in excess of the amount to be distributed to such dealer for such store in cash shall be distributed to him each year in the form of shares of Class C Non-voting Stock of Ace Hardware Corporation (par value $100 per share), valued at the par value thereof, until the total par value of all shares of all classes of capital stock of the corporation held by such dealer with respect to such store equals the greater of: (a) $20,000; or (b) a sum equal to the total of the following categories of purchases made by such dealer for such store during the most recent calendar year: (i) 10% 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) 13% 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 lumber and building material (excluding LTL) purchases, plus (v) 4% of the volume of LTL Plus purchases; provided, however, that no fractional shares of Class C Non-voting Stock shall be issued to any dealer and that any amount which would have otherwise been distributable as a fractional share of such stock shall instead be distributed to such dealer in cash. 3. The portion of the total patronage dividends allocated each year to any such dealer for each store owned or controlled by such dealer which exceeds the sum of (a) the amount to be distributed to such dealer for such store in cash pursuant to Paragraph 1. above and (b) any amount to be distributed to him in the form of shares of Class C Non-voting Stock of Ace Hardware Corporation (par value $100 per share) pursuant to Paragraph 2. above shall be distributed to such dealer in cash; provided, however, that in no event shall the total amount distributed under this plan to any such dealer for any such store in cash exceed 23 49.9% 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 49.9% of the total patronage dividends allocated for such store for such year, the distribution to be made under this Paragraph 3. shall instead be made in the form of a non-negotiable patronage refund certificate having such a maturity date and bearing interest at such an annual rate as shall be determined by the Board of Directors prior to the issuance thereof. With certain modifications, the above Plan is applied separately in determining the form in which patronage dividends accrued with respect to sales of lumber and building materials products are distributed. In this connection the combined patronage dividends allocated annually to a store from (a) sales of lumber products (other than LTL sales) to the store, (b) sales of building materials (other than LTL sales) to the store, and (c) LTL sales to the store are used in determining the minimum cash distribution percentages to be applied under Paragraph 1 of the above Plan. A store's patronage dividends from any other sales category with respect to which patronage dividends are distributed by the Company are not taken into account in determining either the minimum portion or any additional portion of the store's patronage dividends derived from its purchases of lumber and building materials products which is to be distributed in cash. Also, Paragraphs 2 and 3 of the above Plan are applied separately to patronage dividends on lumber and building materials sales and the requirements of Paragraph 2 of the Plan shall not be deemed to have been complied with in the cases of (a) purchases of lumber products (other than LTL purchases) or (b) purchases of building materials products (other than LTL purchases) until the store's holdings of Class C Non-voting Stock of the Company resulting from patronage dividends on the Company's sales to it within the particular one of those two sales categories for which a patronage dividend distribution is to be made equal 4% of the volume of the store's purchases within such category during the most recent calendar year. However, no such special Class C Stock requirement applies to patronage dividends accrued on LTL purchases. Notwithstanding the provisions of the above-described Plan, however, under Section 7 of Article XXIV of the Company's By-laws the portion of any patronage dividends which would otherwise be distributable in cash with respect to a retail dealer outlet which is a member of the Company will instead be applied against any indebtedness owing by the dealer to the Company to the extent of such indebtedness in any case where the membership for such outlet is cancelled or terminated prior to the distribution of such patronage dividends except that an amount equal to 20% of the dealer's total annual patronage dividends for such outlet will be paid in cash if a timely request for the payment of such amount in cash is sub mitted to the Company by the dealer. Because of the requirement of the U. S. Internal Revenue Code that the Company withhold 30% of the annual patronage dividends distributed to member dealers of the Company whose places of business are located in foreign countries or Puerto Rico (except in the case of unincorporated Puerto Rico dealers owned by individuals who are U.S. citizens and certain dealers incorporated in Guam, American Samoa, the Northern Mariana Islands, or the U.S. Virgin Islands, if less than 25% of its stock is owned by foreign persons, and at least 65% of the Corporation's gross income for the last three years has been effectively connected with the conduct of a trade or business in such possession or in the United States), the cash portion of the annual patronage dividends of such dealers shall in no event be less than 30%. It is anticipated that the terms of any patronage refund certificates issued pursuant to Paragraph 3. of the foregoing Plan would include provisions giving the Company a first lien thereon for the amount of any indebtedness owing to it at any time by the owner of any such certificate and provisions subordinating the certificates to all the rights and claims of secured, general and bank creditors against the Company. It is further anticipated that all such patronage refund certificates will have maturity dates which will be no later than five years from the dates of issuance thereof. 24 In order to aid the Company's dealers in acquiring and installing standardized exterior signs identifying the retail stores operated by them as member outlets supplied by the Company, the Board of Directors of the Company has authorized a program under which a dealer may borrow from the Company within a range of $100 to $20,000 the funds required for such purpose. A dealer who obtains a loan under this program may either repay the loan in twelve substantially equal payments billed on such dealer's regular bi-weekly billing statement, or may execute a direction to have the portion of the dealer's annual patronage dividends which would otherwise be distributed under the above plan in a form other than cash from no more than the next three annual distributions of such dividends applied toward payment of the principal and interest on the loan. In order to aid the Company's dealers in acquiring and installing PACE and PAINTMAKER computer systems purchased from the Company, the Board of Directors of the Company has also authorized programs under which the Company will finance qualified dealers, in the case of a PAINTMAKER computer, within the range of $1,000 to $15,000 repayable over a period of three (3) years, and in the case of a PACE computer, within the range of $5,000 to $50,000 repayable over a period of five (5) years, for such purpose. Dealers who obtain financing from the Company for these purposes direct the Company, during the financing term, to first apply toward the principal and interest due on such balances, the patronage dividends which would otherwise be payable in the form of patronage refund certificates for each year, and then to apply the patronage dividends which would otherwise be payable for the same year in the form of the Company's Class C stock. The aforementioned signage and computer financing programs may be revised or discontinued by the Board at any time. Federal Income Tax Treatment of Patronage Dividends (See Previous Heading "Opinions of Experts") Both the shares of Class C Non-voting Stock and the patronage refund certificates used by the Company to pay patronage dividends that accrue to its eligible and qualifying dealers constitute "qualified written notices of allocation" within the meaning of that term as used in Sections 1381 through 1388 of the U.S. Internal Revenue Code, which specifically provide for the income tax treatment of cooperatives and their patrons and which have been in effect since 1963. The stated dollar amounts of such qualified written notices of allocation must be taken into the gross income of each of the recipients thereof for the taxable years in which such written notices of allocation are received, notwithstanding the fact that the stated dollar amounts may not be received in such taxable years. In order for the Company to receive a deduction from its gross income for federal income tax purposes for the amount of any patronage dividends paid by it to a patron (that is, to one of its eligible and qualifying dealers) in the form of qualified written notices of allocation, it is necessary that the Company pay (or apply against indebtedness owing to the Company by such patron in accordance with Section 7 of Article XXIV of the Company's By-laws) not less than 20% of the total patronage dividends distributable to such patron in cash and that the patron consent to having the written notices of allocation, at their stated dollar amounts, included in his gross income for the taxable year in which they are received by him. It is also required under the Code that any patronage dividend distributions deducted by the Company on its federal income tax return with respect to business done by it with patrons during the year for which such deduction is taken must be made to the Company's patrons within 8 1/2 months after the end of such year. Dealers who have become "members" of the Company by owning 1 share of Class A Voting Stock are deemed under the U.S. Internal Revenue Code to have consented to take any written notices of allocation distributed to them into their gross income by their act of obtaining or retaining membership in the Company and by having received from the Company a written notification of the By-law provision providing that membership in the Company constitutes such consent. In accordance with another provision in the Internal Revenue Code, nonmember dealers who have subscribed for shares 25 of the Company's stock will also be deemed to have consented, by virtue of the consent provisions included in their Subscription Agreements, to take any written notices of allocation distributed to them into their gross income. A dealer receiving a patronage refund certificate as part of the dealer's patronage dividends in accordance with the last clause of Paragraph 3 of the patronage dividend distribution plan previously described under the heading "The Company's Business," subheading, "Forms of Patronage Dividend Distributions," may be deemed to have received interest income in the form of an original issue discount to the extent of any excess of the face amount of the certificate over the present value of the stated principal and interest payments to be made by the Company under the terms of the certificate. Such income would be taxable to the dealer ratably over the term of the certificate under Section 7872(b) (2) of the U.S. Internal Revenue Code. The present value for this purpose is to be determined by using a discount rate equal to the applicable Federal rate in effect as of the day of issuance of the certificate, compounded semi-annually. The Company will be required to withhold for federal income tax on the total patronage dividend distribution which is made to a payee who has not furnished his taxpayer identification number to the Company or as to whom the Company has notice of the fact that the number furnished to it is incorrect. A cooperative organization may also be required to withhold on the cash portion of each patronage dividend distribution made to a payee who becomes a member of the cooperative if the payee fails to certify to the cooperative that he is not subject to backup withholding. It is the opinion of counsel for the Company that this provision is not applicable to any patronage dividend distribution to a payee unless 50% or more of the total distribution is made in cash. Since all of the Company's patronage dividends for a given year are distributed at the same time and the Company's currently effective patronage dividend plan does not permit any store which is a member of the Company to receive more than 49.9% of its patronage dividends for the year in the form of cash, it is said counsel's further opinion that such a certification failure would ordinarily have no effect on the Company or any of its dealers. Patronage dividends distributed by a cooperative organization to its patrons who are located in foreign countries or certain U. S. possessions have been held to constitute fixed or determinable annual or periodic income on which such patrons are required to pay a tax of 30% of the amount received in accordance with the provisions of Sections 871(a)(1)(A) and 881(a) (1) of the Internal Revenue Code, as do patronage dividends distributed to patrons which are incorporated in Puerto Rico or who reside in Puerto Rico but have not become citizens of the United States. With respect to its dealers who are subject to such 30% tax, the Company is also obligated to withhold from their patronage dividends and pay over to the U. S. Internal Revenue Service an amount equal to the tax. The foregoing provisions do not apply to a corporation organized in Guam, American Samoa, the Northern Mariana Islands, or the U. S. Virgin Islands if less than 25% of its stock is owned by foreign persons and at least 65% of its gross income for the last three years has been effectively connected with the conduct of a trade or business in such possession or in the United States. The 20% minimum portion of the patronage dividends to be paid in cash to a patron with respect to whom the Company is neither required to withhold 30% of his total patronage dividend distribution nor permitted to apply such minimum portion against indebtedness owing to it by him may be insufficient, depending upon the income tax bracket of each individual patron, to provide funds for the full payment of the federal income tax for which such patron will be liable as a result of the receipt of the total patronage dividends distributed to him during the year, including cash, patronage refund certificates and/or Class C Non-voting Stock. In the opinion of the Company's management, payment in cash of not less than 20% of the total patronage dividends distributable each year to the Company's eligible and qualifying dealers will not have a material adverse effect on the operations of the Company or its ability to obtain adequate working capital for the normal requirements of its business. 26 Membership Agreement In addition to signing a Subscription Agreement for the purchase of shares of the Company's stock, each retail dealer who applies to become an Ace dealer (excluding firms which are "International Retail Merchants" as discussed below under the subheading "International Retail Merchants") must sign the Company's customary Membership Agreement. A payment of $400 must accompany the signed Membership Agreement to defray the Company's estimated costs of processing the membership application. If the application is accepted, copies of both the Membership Agreement and the Stock Subscription Agreement, signed on behalf of the Company to evidence its acceptance, are forwarded to the dealer. No royalties are payable at any time by a dealer for an outlet which the Company accepts for affiliation into its dealer network. Membership may be terminated upon various notice periods and for various reasons (including voluntary termination by either party) as prescribed in the Membership Agreement, except to the extent that special laws or regulations applicable to specific locations may limit the Company's right to terminate memberships, or may prescribe greater periods of advance notice under particular circumstances. International Retail Merchants In 1989, the Company's Board of Directors authorized the Company to affiliate International Retail Merchants, who operate retail businesses outside the United States, its territories and possessions. International Retail Merchants sign an International Retail Merchant Agreement in lieu of the Company's regular Membership Agreement and are generally granted a license to use certain of the Company's trademarks and service marks. They do not, however, sign stock subscription agreements or become shareholders of the Company by reason of their International Retail Merchant Agreements, nor do they receive distribution of patronage dividends. As of December 31, 1993, 1992 and 1991, International Retail Merchant volume accounted for less than 3% of the Company's total sales in each such year. 27 PROPERTIES The Company's general offices are located at 2200 Kensington Court, Oak Brook, lllinois 60521. Information with respect to the Company's principal properties follows:
Square Feet Owned Lease of Facility or Expiration Location (Land in Acres) Leased Date General Offices: Oak Brook, Illinois 206,030 Leased September 30, 2009 Oak Brook, Illinois (1) 70,508 Owned Distribution Warehouses: Lincoln, Nebraska 346,000 Leased October 31, 1996 Arlington, Texas 313,000 Leased July 31, 1996 Perrysburg, Ohio 396,000 Leased November 1, 2004 Tampa, Florida 391,760 Owned Harmans, Maryland 277,000 Owned Yakima, Washington 502,400 Owned Maumelle, Arkansas 350,000 Owned LaCrosse, Wisconsin 363,000 Owned Bloomfield, Connecticut(2) 449,820 Owned Huntersville, North Carolina 354,000 Owned Rocklin, California 470,000 Owned Gainesville, Georgia 478,000 Owned Prescott Valley, Arizona 633,000 Owned Princeton, Illinois 1,080,000 Owned Print Shop Facility: Downers Grove, Illinois 41,000 Leased January 31, 1995 Paint Manufacturing Facility: Matteson, Illinois 356,000 Owned Other Property (Land): Aurora, Illinois 72 acres Owned LaCrosse, Wisconsin(3) 3 acres Owned
(1) Includes 35,254 square feet leased to tenant until July 31, 1996. The subject property is adjacent to the Company's general offices. (2) Includes an 80,820 sq. ft. warehouse expansion project, scheduled for completion later in 1994. (3) This land is adjacent to the Company's LaCrosse, Wisconsin warehouse. The Company also leases a fleet of transportation equipment for the primary purpose of delivering merchandise from the Company's warehouses to its dealers. 28 INDEX TO FINANCIAL STATEMENTS Page Independent Auditors' Report 30 Balance Sheets as of December 31, 1993 and 1992 31 Statements of Earnings for the three years ended December 31, 1993 33 Statements of Member Dealers' Equity for the three years ended December 31, 1993 34 Statements of Cash Flows for the three years ended December 31, 1993 35 Notes to Financial Statements 36 29 INDEPENDENT AUDITORS' REPORT The Board of Directors Ace Hardware Corporation: We have audited the balance sheets of Ace Hardware Corporation as of December 31, 1993 and 1992, and the related statements of earnings, member dealers' equity, and cash flows for each of the years in the three-year period ended December 31, 1993. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Ace Hardware Corporation at December 31, 1993 and 1992, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 1993 in conformity with generally accepted accounting principles. KPMG PEAT MARWICK Chicago, Illinois January 31, 1994 30 ACE HARDWARE CORPORATION BALANCE SHEEET December 31, 1993 and 1992 ASSETS
1993 1992 (000's omitted) Current assets: Cash $ 4,142 $ 2,144 Receivables: Dealers 183,493 170,137 Others 29,831 24,287 213,324 194,424 Less Allowance for doubtful receivables (720) (700) Net receivables 212,604 193,724 Inventories (Note 2) 263,576 213,477 Prepaid expenses and other current assets 6,869 6,517 Total current assets 487,191 415,862 Property and equipment (Notes 4 and 9): Land 13,673 13,673 Buildings and improvements 131,794 128,838 Warehouse equipment 47,146 48,840 Office equipment 48,842 42,171 Manufacturing equipment 12,012 11,783 Transportation equipment 12,508 11,414 Leasehold improvements 6,553 6,495 Construction in progress 2,319 120 274,847 263,334 Less accumulated depreciation and amortization (108,710) (96,689) Net property and equipment 166,137 166,645 Other assets 14,160 12,169 $ 667,488 $ 594,676 See accompanying notes to financial statements.
31 ACE HARDWARE CORPORATION BALANCE SHEETS December 31, 1993 and 1992 LIABILITIES AND MEMBER DEALERS' EQUITY
1993 1992 (000's omitted) Current Liabilities: Current installments of long-term debt (Note 4) $ 10,707 $ 1,389 Short-term borrowings (Note 3) 38,500 56,000 Accounts payable 234,190 181,105 Patronage dividends payable in cash (Note 5) 25,766 27,538 Patronage refund certificates payable (Note 5) 11,059 17,198 Accrued expenses 33,682 28,680 Total current liabilities 353,904 311,910 Long-term debt (Note 4) 71,286 51,696 Patronage refund certificates payable (Note 5) 56,270 55,389 Member dealers' equity (Notes 5 and 8): Class A Stock of $1,000 par value 3,946 4,060 Class B Stock of $1,000 par value 6,499 6,499 Class C Stock of $100 par value 153,155 139,014 Class C Stock of $100 par value, issuable to dealers for patronage dividends 19,064 20,301 Additional stock subscribed, net 613 797 Retained earnings 5,622 7,553 Contributed capital 3,295 3,295 192,194 181,519 Less: Treasury stock, at cost (6,166) (5,838) Total member dealers' equity 186,028 175,681 Commitments (Notes 6 and 9) -- -- $ 667,488 $ 594,676 See accompanying notes to financial statements.
32 ACE HARDWARE CORPORATION STATEMENTS OF EARNINGS
Year Ended December 31, 1993 1992 1991 (000's omitted) Net sales $ 2,017,763 $ 1,870,625 $ 1,704,203 Cost of sales 1,867,326 1,723,017 1,569,871 Gross Profit 150,437 147,608 134,332 Operating expenses: Warehouse and distribution 31,650 32,291 28,981 Selling, general and administration 54,378 48,451 44,438 Total operating expenses 86,028 80,742 73,419 Operating income 64,409 66,866 60,913 Interest expense (Note 11) (9,798) (8,380) (7,010) Other income, net (Note 11) 2,481 2,281 5,254 Earnings before patronage dividends 57,092 60,767 59,157 Patronage dividends 59,023 63,207 57,729 Net earnings $ (1,931) $ (2,440) $ 1,428 See accompanying notes to financial statements.
33 ACE HARDWARE CORPORATION STATEMENTS OF MEMBER DEALERS' EQUITY Three Years Ended December 31, 1993 (000's omitted)
Class C Stock Issuable to Dealers for Additional Class A Class B Class C Patronage Stock Stock Stock Stock Dividends Subscribed* Balance at December 31, 1990 $ 4,244 $ 6,499 $ 119,496 $ 16,322 $ 1,308 Earnings before patronage dividends -- -- -- -- -- Net payments on subscriptions -- -- -- -- 1,526 Stock issued 287 -- 17,800 (16,322) (1,765) Stock repurchased -- -- -- -- -- Stock retired (366) -- (7,213) -- -- Stock issuable as patronage dividends -- -- -- 14,841 -- Patronage dividends payable -- -- -- -- -- Balance at December 31, 1991 $ 4,165 $ 6,499 $ 130,083 $ 14,841 $ 1,069 Earnings before patronage dividends -- -- -- -- -- Net payments on subscriptions -- -- -- -- 1,302 Stock issued 224 -- 16,191 (14,841) (1,574) Stock repurchased -- -- -- -- -- Stock retired (329) -- (7,260) -- -- Stock issuable as patronage dividends -- -- -- 20,301 -- Patronage dividends payable -- -- -- -- -- Balance at December 31, 1992 $ 4,060 $ 6,499 $ 139,014 $ 20,301 $ 797 Earnings before patronage dividends -- -- -- -- -- Net payments on subscriptions -- -- -- -- 1,049 Stock issued 157 -- 21,377 (20,301) (1,233) Stock repurchased -- -- -- -- -- Stock retired (271) -- (7,236) -- -- Stock issuable as patronage dividends -- -- -- 19,064 -- Patronage dividends payable -- -- -- -- -- Balance at December 31, 1993 $ 3,946 $ 6,499 $ 153,155 $ 19,064 $ 613
(Table Continued on following page) * Additional stock subscribed is comprised of the following amounts at December 31, 1991, 1992 and 1993:
1991 1992 1993 Class A Stock . . . . . . . . . $ 219 $ 185 $ 223 Class B Stock . . . . . . . . . -- -- -- Class C Stock . . . . . . . . . 2,876 2,184 1,952 3,095 2,369 2,175 Less unpaid portion . . . . . . 2,026 1,572 1,562 $1,069 $ 797 $ 613
Retained Contributed Treasury Earnings Capital Stock Total Balance at December 31, 1990 $ 8,565 $ 3,295 $ (5,166) $ 154,563 Earnings before patronage dividends 59,157 -- -- 59,157 Net payments on subscriptions -- -- -- 1,526 Stock issued -- -- -- -- Stock repurchased -- -- (7,947) (7,947) Stock retired -- -- 7,579 -- Stock issuable as patronage dividends -- -- -- 14,841 Patronage dividends payable (57,729) -- -- (57,729) Balance at December 31, 1991 $ 9,993 $ 3,295 $ (5,534) $ 164,411 Earnings before patronage dividends 60,767 -- -- 60,767 Net payments on subscriptions -- -- -- 1,302 Stock issued -- -- -- -- Stock repurchased -- -- (7,893) (7,893) Stock retired -- -- 7,589 -- Stock issuable as patronage dividends -- -- -- 20,301 Patronage dividends payable (63,207) -- -- (63,207) Balance at December 31, 1992 $ 7,553 $ 3,295 $ (5,838) $ 175,681 Earnings before patronage dividends 57,092 -- -- 57,092 Net payments on subscriptions -- -- -- 1,049 Stock issued -- -- -- -- Stock repurchased -- -- (7,835) (7,835) Stock retired -- -- 7,507 -- Stock issuable as patronage dividends -- -- -- 19,064 Patronage dividends payable (59,023) -- -- (59,023) Balance at December 31, 1993 $ 5,622 $ 3,295 $ (6,166) $ 186,028 See accompanying notes to financial statements.
34 ACE HARDWARE CORPORATION STATEMENTS OF CASH FLOWS Year Ended December 31,
(000's omitted) Operating Activities: 1993 1992 1991 Earnings before patronage dividends $ 57,092 $ 60,767 $ 59,157 Patronage dividends (59,023) (63,207) (57,729) Net Earnings (1,931) (2,440) 1,428 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation 16,156 14,817 13,086 Loss (Gain) on sale of property and equipment 460 507 (3,880) Changes in operating assets and liabilities: Increase in accounts receivable, net (18,880) (32,783) (9,002) Increase in inventories (50,099) (2,091) (34,571) Increase in prepaids and other current assets (352) (632) (235) Increase (Decrease) in accounts payable and accrued expenses 58,087 (2,237) 1,202 Net Cash Provided by (Used for) Operating Activities 3,441 (24,859) (31,972) Investing Activities: Purchase of property, plant and equipment (16,346) (34,582) (37,851) Proceeds from sale of property and equipment 238 83 10,878 Increase in other assets (1,991) (3,831) (1,202) Net Cash Used in Investing Activities (18,099) (38,330) (28,175) Financing Activities: (Payments of) Proceeds from short-term borrowings (17,500) 34,000 21,000 Proceeds from Notes Payable 30,000 20,000 27,000 Principal payments on long-term debt and patronage refund certificates (19,078) (24,582) (12,875) Patronage dividends payable in cash 25,766 27,538 26,864 Patronage refund certificates 12,728 14,598 15,176 Class C stock issuable to dealers for patronage dividends 19,064 20,301 14,841 Proceeds from sale of common stock 1,049 1,302 1,526 Repurchase of common stock (7,835) (7,893) (7,947) Payment of cash portion of patronage dividend (27,538) (26,864) (26,462) Net Cash Provided by Financing Activities 16,656 58,400 59,123 Increase (Decrease) in Cash and Cash Equivalents 1,998 (4,789) (1,024) Cash and Cash Equivalents at beginning of year 2,144 6,933 7,957 Cash and Cash Equivalents at end of year $ 4,142 $ 2,144 $ 6,933 See accompanying notes to financial statements.
35 ACE HARDWARE CORPORATION NOTES TO FINANCIAL STATEMENTS (1) Summary of Significant Accounting Policies (a) The Company and Its Business 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 earnings in the form of patronage dividends to its member dealers based on their volume of merchandise purchases. (b) Cash Equivalents The Company considers all highly liquid investments with an original maturity of one month or less when purchased to be cash equivalents. (c) Receivables Receivables from dealers include amounts due from the sale of merchandise and special equipment used in the operations of dealers' businesses. Other receivables are principally amounts due from suppliers for promotional and advertising allowances. (d) Inventories Inventories are valued at the lower of cost or net realizable value. Cost is determined using the last-in, first-out method on substantially all inventories. (e) Property and Equipment Property and equipment are stated at cost less accumulated depreciation and amortization. Expenditures for maintenance, repairs and renewals of relatively minor items generally are 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 Sum of years 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 leases. (f) 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. 36 (2) Inventories Inventories consist primarily of merchandise inventories. Substantially all of the Company's inventory is valued on the last-in, first-out (LIFO) method; the excess of replacement cost over the LIFO value of inventory was approximately $63,615,000 and $60,806,000 at December 31, 1993 and 1992, 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 1993 and 1992. The maximum amount outstanding at any month-end during the period was $91,000,000 in 1993 and $69,000,000 in 1992. The weighted average interest rate was 3.56%, 4.1%, and 6.28% for the years ended December 31, 1993, 1992 and 1991, respectively. Short term borrowings outstanding as of December 31, 1993, 1992 and 1991 were $38,500,000, $56,000,000 and $22,000,000, respectively. The aggregate unused line of credit available at December 31, 1993, 1992 and 1991 was $69,000,000, $41,500,000 and $54,500,000, respectively. The aggregate compensating balances (not legally restricted) at December 31, 1993, 1992 and 1991 were $600,000, $850,000 and $664,000, respectively. (4) Long-Term Debt Long-term debt is comprised of the following: December 31,
1993 1992 (000's omitted) Industrial Development Revenue and Variable Rate Bonds: $125,000 payable quarterly through December 1, 1996 with interest at 65% of the prime rate $ 1,500 $ 2,000 $8,250,000 due on February 1, 1994 with interest payable monthly beginning September 1, 1988 at variable rates ranging from 1.95% to 4.95% 8,250 8,250 Notes Payable: $20,000,000 due in quarterly installments of $540,500, commencing July 1, 1994 with interest payable quarterly beginning January 1, 1992 at a fixed rate of 8.74% 20,000 20,000 $20,000,000 due in quarterly installments of $952,400, commencing January 1, 1995 with interest payable quarterly beginning October 1, 1992 at a fixed rate of 6.89% 20,000 20,000 $30,000,000 due in semi-annual installments of $2,000,000, commencing June 22, 2001 with interest payable quarterly beginning December 22, 1993 at a fixed rate of 6.47% 30,000 -- Liability under capitalized leases (see Note 9) 1,197 1,632 Installment notes with maturities through 1997 with various interest rates 1,046 1,203 81,993 53,085 Less current installments 10,707 1,389 $ 71,286 $ 51,696
37 Prime interest rates in effect were 6.0% in 1993 and ranged from 6.0% to 6.5% in 1992. Aggregate maturities of long-term debt are $10,707,000, $7,283,000, $6,965,000, $6,034,000 and $5,972,000 in 1994 through 1998, respectively. Under the most restrictive covenants of the loan agreements the Company must not permit its working capital to be less than $33,000,000 and maintain current assets of at least 110% of current liabilities. The fair value of the Company's debt based upon discounting of future cash flows did not materially vary from the carrying value of such debt as of December 31, 1993. (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. For the years ended December 31, 1993 and 1992, 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. For the year ended December 31, 1991, the amount of patronage dividends to be remitted in cash depended upon the level of dividends earned by each member outlet, varying from 20% on the total dividends under $2,000 and increasing by 5% on total dividends for each subsequent $1,000 earned to a maximum of 40% on total dividends exceeding $5,000. All amounts exceeding the cash portions, as defined above, will be distributed in the form of Class C $100 par value stock, to a maximum based upon the current year's purchase volume or $20,000 ($10,000 in 1991), whichever is greater, and thereafter in a combination of additional cash and patronage refund certificates having maturity dates and bearing interest as determined by the Board of Directors. A portion of the dealer's annual patronage dividends distributed under the above plan in a form other than cash can be applied toward payment of principal and interest on any balances outstanding for approved exterior signage and in 1994 toward the payment of principal and interest on any outstanding computer equipment financing. The patronage dividend composition for 1993, 1992 and 1991 follows:
Subordinated Class Patronage Total Cash Refund C Financing Patronage Portion Certificates Stock Deductions Dividends (000's omitted) 1993 $25,766 $12,728 $19,064 $1,465 $59,023 1992 27,538 14,598 20,301 770 63,207 1991 26,864 15,176 14,841 848 57,729
Patronage dividends are allocated on a calandar year basis with issuance in the following year. The patronage refund certificates outstanding at December 31, 1993 are payable as follows:
Interest January 1, Amount Rate (000's omitted) 1994 $ 1,120 7.5 % 1995 11,292 7.0 1996 13,041 7.0 1997 14,764 6.25 1998 14,384 6.0 1999 12,728 6.0
38 On January 1, 1993 the Company prepaid a portion of the patronage refund certificates payable on January 1, 1994. The remaining patronage refund certificates payable on January 1, 1994 and a portion of the patronage refund certificates payable on January 1, 1995 will be paid in January 1994 and accordingly, are classified as current liabilities in the accompanying December 31, 1993 balance sheet. (6) Retirement Plans The Company has defined benefit pension plans covering substantially all non-union employees. Benefits are based on years of service, highest average compensation (as defined) and the related profit sharing and primary social security benefit. Contributions to the plan are based on the Entry Age Normal, Frozen Initial Liability actuarial funding method and are limited to amounts that are currently deductible for tax reporting purposes. As of December 31, 1993, plan assets were held primarily in group annuity and guaranteed interest contracts, equities and mutual funds. Pension income for the years 1993, 1992 and 1991 included the following components:
1993 1992 1991 (000's omitted) Service cost - benefits earned during the period $ 292 $ 338 $ 372 Interest cost on projected benefit obligation 752 722 602 Actual return on plan assets (1,104) (975) (1,120) Net amortization and deferral (169) (313) (233) Net periodic pension income $ (229) $ (228) $ (379)
The following table sets forth the funded status of the plans and amounts recognized in the Company's Balance Sheet at December 31, 1993 and 1992 (September 30th measurement date):
1993 1992 (000's omitted) Accumulated benefit obligation, including vested benefits of $8,500,000 and $8,009,000 $ 9,515 $ 9,251 Plan assets at fair value $ 14,023 $ 13,364 Projected benefit obligation for service rendered to date 10,897 10,451 Plan assets in excess of projected benefit obligation $ 3,126 $ 2,913 Unrecognized net gain (loss) from past experience different from that assumed and effects of changes in assumptions 1,544 1,611 Remaining unrecognized net asset being amortized over participants average remaining service period (2,148) (2,318) Prepaid pension cost included in other assets $ 2,522 $ 2,206
39 The weighted average discount rate and rate of increase in future compensation used in determining the actuarial present value of the projected benefit obligation was 7.5% and 6.0%, respectively, in 1993 and 1992. The related expected long-term rate of return was 8.5% in 1993 and 9% in 1992. The Company also participates in several multi-employer plans covering union employees. Amounts charged to expense and contributed to the plans totaled approximately $275,000, $426,000, and $485,000 in 1993, 1992 and 1991, respectively. The Company's profit sharing plan contribution for the years ended 1993, 1992, and 1991 was approximately $8,690,000, $7,374,000 and $6,824,000, respectively. The Company has no significant post-retirement benefit liabilities as defined under Financial Accounting Standard No. 106. (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. Accordingly, provisions for income taxes have been historically insignificant and are generally comprised primarily of state income taxes. The 1993 and 1992 provisions for federal income taxes were $177,000 and $299,000, respectively, and state income taxes were $267,000 and $126,000, repectively. As described in Note 11, the Company completed a sale and leaseback of its Los Angeles, California distribution facility in 1991. The 1991 tax provision totals $1,158,000 for federal income taxes and $236,000 for state income taxes. The Company made tax payments of $357,000, $728,000, and $5,017,000 during 1993, 1992 and 1991, respectively. (8) Member Dealers' Equity The Company's founders for many years contemplated that the ownership of the Company would eventually be with the Company's member dealers. Prior to November 30, 1976, dealers deposited monies to the Ace Dealer's Perpetuation Fund for the purpose of accumulating funds for the purchase of stock when such ownership became available. The Company registered its stock with the Securities and Exchange Commission on October 1, 1976 and existing dealers who subscribed for stock applied their deposits toward payment of such shares. The small number of dealers who did not subscribe for shares had their respective deposits refunded during 1977. 40 The Company's classes of stock are described below: Number of Shares at December 31,
1993 1992 Class A Stock, Voting, redeemable at par value -- Authorized 10,000 10,000 Issued and outstanding 3,946 4,060 Class B Stock, nonvoting, redeemable at not less than twice par value -- Authorized 6,500 6,500 0 Issued 6,499 6,499 Outstanding 3,416 3,580 Treasury stock 3,083 2,919 Class C Stock, nonvoting, redeemable at not less than par value -- Authorized 2,000,000 2,000,000 Issued and outstanding 1,531,549 1,390,137 Issuable as patronage dividends 190,635 203,013 Additional Stock Subscribed: Class A Stock 223 185 Class B Stock -- -- Class C Stock 19,520 21,840
At December 31, 1993 and 1992 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. 41 A Class A share is issued to a member dealer only when the share subscribed has been fully paid. Class B and Class C shares are only issued when all such shares subscribed with respect to a retail outlet have been fully paid. Additional Stock Subscribed in the accompanying statements represents the par value of shares subscribed, reduced by the unpaid portion. All shares of stock are currently issued and repurchased at par value, except for Class B Stock which is repurchased at twice its par value, or $2,000 per share. Upon retirement of Class B shares held in treasury, the excess of redemption price over par is allocated equally between contributed capital and retained earnings. Transactions during 1992 and 1993 affecting treasury shares follow: Shares Held in Treasury
Class A Class B Class C Balance at December 31, 1991 -- 2,767 -- Stock issued -- -- -- Stock repurchased 329 152 72,600 Stock retired (329) -- (72,600) Balance at December 31, 1992 -- 2,919 -- Stock issued -- -- -- Stock repurchased 271 164 72,359 Stock retired (271) -- (72,359) Balance at December 31, 1993 -- 3,083 --
(9) Commitments Leased property under capital leases included under "Property and Equipment" in the balance sheets as follows: December 31, (000's omitted)
1993 1992 Buildings and improvements $ 3,422 $ 3,422 Data processing equipment 723 723 Less: Accumulated depreciation and amortization (3,291) (2,973) $ 854 $ 1,172
42 The Company rents buildings and warehouse, office and certain other equipment under operating and capital leases. At December 31, 1993 annual minimum rental commitments under leases that have initial or remaining noncancelable terms in excess of one year were as follows: Year Ending Capital Operating December 31, Leases Leases (000's omitted) 1994 $ 518 $ 8,917 1995 510 6,548 1996 271 4,982 1997 -- 3,689 1998 -- 3,110 Thereafter -- 26,191 Total minimum lease payments $1,299 $53,437 Less amount representing interest 102 Present value of total minimum lease payments $1,197 All leases expire prior to 2009. 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 $21,444,000, $21,073,000 and $17,753,000 in 1993, 1992 and 1991, respectively. Rent expense includes $4,282,000, $3,706,000 and $3,289,000 in contingent rentals paid in 1993, 1992 and 1991, respectively, primarily for transportation equipment mileage. (10) Supplementary Income Statement Information Gross media expense, prior to income offsets from dealers and suppliers, amounting to $48,293,000, $47,813,000 and $46,167,000 were charged to operations in 1993, 1992, and 1991, respectively. (11) Interest Expense and Other Income, Net Capitalized interest totaled $29,000, $836,000 and $417,000 in 1993, 1992 and 1991, respectively. Interest paid was $10,670,000, $9,149,000 and $6,409,000 in 1993, 1992 and 1991, respectively. In November 1991, the Company completed a sale and leaseback of its Los Angeles, California facility resulting in a gain of $2.5 million, net of $1.4 million in federal and state income taxes. The facility was leased back for a term which expired on October 31, 1992. The gain on the sale and leaseback is included in other income for the year ended December 31, 1991. The capital gain from the sale constitutes nonpatronage-sourced income and is not available for distribution as patronage dividends. 43 Item 6. Selected Financial Data SELECTED FINANCIAL DATA (Not Covered by Auditors' Report) Income Statement Data: Year Ended December 31,
1993 1992 1991 1990 1989 (000's omitted) Net sales $ 2,017,763 $ 1,870,625 $ 1,704,203 $ 1,625,029 $ 1,546,450 Cost of sales 1,867,326 1,723,017 1,569,871 1,497,147 1,426,322 Gross profit 150,437 147,608 134,332 127,882 120,128 Total expenses 93,345 86,841 75,175 67,470 69,557 Earnings before patronage dividends 57,092 60,767 59,157 60,412 50,571 Patronage dividends (Note A, B, 5 and 8) 59,023 63,207 57,729 57,519 53,128 Net earnings $ (1,931) $ (2,440) $ 1,428 $ 2,893 $ (2,557)
Balance Sheet Data: Year Ended December 31,
1993 1992 1991 1990 1989 (000's omitted) Total assets $ 667,488 $ 594,676 $ 540,953 $ 479,202 $ 496,834 Working capital 133,287 103,952 105,899 92,376 76,683 Long-term debt 71,286 51,696 38,737 22,521 28,622 Patronage refund certificates payable, long-term 56,270 55,389 58,559 52,134 45,669 Member dealers' equity 186,028 175,681 164,411 154,563 139,545
(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 all patronage sourced earnings in the form of patronage dividends. Earnings before patronage dividends and patronage dividends will normally be the same, except for differences caused by the timing of the recognition of certain items for income tax purposes. (B) The form in which patronage dividends are to be distributed can only be determined at the end of each year when the amount distributable to each of the member dealers is known. For the five years ended December 31, 1993, patronage dividends were payable as follows: 44
1993 1992 1991 1990 1989 (000's omitted) In cash $25,766 $27,538 $26,864 $26,462 $24,359 In patronage refund certificates payable 12,728 14,598 15,176 13,597 12,310 In Class C Stock 19,064 20,301 14,841 16,322 15,328 In patronage finanacing deductions 1,465 770 848 1,138 1,131 Total patronage dividends $59,023 $63,207 $57,729 $57,519 $53,128
(C) Numbered notes refer to Notes to Financial Statements, beginning on page 36. Item 7. Management's Discussion And Analysis Of Financial Condition And Results Of Operations MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Liquidity and Capital Resources The Company's ability to generate cash adequate to meet its needs ("liquidity") results from internally generated funds, short-term lines of credit and long-term financings (see Notes 3 and 4 to the financial statements). These sources have been sufficient to finance the Company's seasonal and other working capital requirements and its capital expenditure programs. The Company had unused unsecured lines of credit of $69.0 million at December 31, 1993. Any borrowings under these lines of credit would bear interest at the prime rate or less. Long-term financings are arranged as determined necessary to meet the Company's capital or other requirements, with principal amount, timing and form dependent on prevailing debt markets and general economic conditions. Capital expenditures for new and improved facilities were $16.3, $34.6 and $37.9 million in 1993, 1992 and 1991, respectively. During 1993, the Company financed the $16.3 million of capital expenditures out of current and accumulated internally generated funds, and short-term and long-term borrowings. 1994 capital expenditures are anticipated to be approximately $30.9 million primarily for improvements to existing facilities. As a cooperative, the Company distributes substantially all of its patronage source earnings to its members in the form of patronage dividends, which are deductible for income tax purposes (see headings "Patronage Dividend Determinations And Allocations" and "Federal Tax Treatment of Patronage Dividends"). The 1991 capital gain from the sale and leaseback of the Los Angeles, California facility constitutes nonpatronage-sourced income and is not available for distribution as patronage dividends. The Company expects that existing and new internally generated funds, along with established lines of credit and long-term financings, will continue to be sufficient to finance the Company's patronage dividend and capital expenditure programs. Operations--1993 Compared to 1992 Net sales increased 7.9% in 1993 primarily due to increases in volume from existing dealers. Sales of basic hardware and paint merchandise (including warehouse, bulletin, and direct shipments) increased 6.8%. Lumber and building material sales experienced a higher percentage increase in 1993. Net dealer outlets decreased as set forth on page 14 as a result of increased sales and marketing efforts with existing dealers and increased competition. 45 Gross profit increased $2,829,000 or 1.9% vs. 1992 due primarily to higher net merchandise discounts and allowances. Gross profit decreased as a percent of sales, however, due to reduced handling charges on competitively priced items and shifts in the Company's sales mix. Warehouse and distribution expenses decreased by $641,000 or 2.0% due to decreased building rental and facility costs and increased levels of warehousing costs absorbed into cost of sales, partially offset by increased personnel and equipment costs and traffic freight subsidies. Selling, general, and administration expenses increased by $5,927,000 or 12.2% due to higher personnel costs and marketing expenses partially offset by higher advertising and retail support income. Interest expense increased $1,418,000 in 1993 despite lower interest rates due to increased long-term debt resulting from the financing of planned capital expenditures and increased inventory levels. The use of both short-term borrowings and long-term financing is expected to continue to fund planned capital expenditures (see liquidity and capital resources and Notes 3 and 4 to the financial statements). Operations--1992 Compared to 1991 Net sales increased 9.8% in 1992 primarily due to increases in volume from existing dealers. Sales of basic hardware and paint merchandise (including warehouse, bulletin, and direct shipments) increased 6.9%. Lumber and building material sales experienced a higher percentage increase in 1992. Total paint sales increased 12.3%. Net dealer outlets decreased as set forth on page 14 as a result of increased sales and marketing efforts with existing dealers and increased competition. Gross profit increased $13,276,000 or 9.9% vs. 1991 but is comparable as a percentage of sales primarily due to higher net merchandise discounts and allowances and a lower LIFO provision partially offset by reduced handling charges as a percent of sales caused by a shift in the sales mix. Warehouse and distribution expenses increased by $3,310,000 or 11.4% due to higher personnel costs related to volume increases, increased building rental costs and higher 1992 start-up and closing costs incurred in conjunction with the replacement of a facility. Selling, general, and administration expenses increased by $4,013,000 or 9.0% due to higher personnel costs and marketing expenses partially offset by higher advertising income. Interest expense increased $1,370,000 in 1992 despite lower interest rates due to increased long and short-term debt resulting from the financing of planned capital expenditures and increased inventory levels. The use of both short-term borrowings and long-term financing is expected to continue to fund planned capital expenditures (see liquidity and capital resources and Notes 3 and 4 to the financial statements). Other income, net decreased $2,973,000 in 1992 due primarily to the 1991 gain on the sale of the Los Angeles facility (see Note 11 to the 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. 46 MANAGEMENT The directors and the executive officers of the Company are: Name Age Position(s) Held Lawrence R. Bowman 47 Director David F. Hodnik 46 Executive Vice President and Chief Operating Officer Paul M. Ingevaldson 48 Vice President--Corporate Strategy and International Business Mark Jeronimus 45 Director Howard J. Jung 46 Director Rita D. Kahle 37 Vice President--Finance John E. Kingrey 50 Director Richard E. Laskowski 52 Chairman of the Board and Director William A. Loftus 55 Senior Vice President--Marketing and Advertising Fred J. Neer 54 Vice President--Human Resources Ray W. Osborne 57 Director Roger E. Peterson 56 President and Chief Executive Officer (CEO) Jon R. Weiss 58 Director Don S. Williams 52 Director James R. Williams 46 Director The primary type of business in which each director has been engaged during the past 5 years is that of the operation of one or more retail hardware stores. Gary R. Meyer whose term was to have expired in 1994, resigned from the Board of Directors for personal reasons in November, 1993 and no successor has yet been elected for the balance of his term. The By-laws of the Company provide that its Board of Directors shall be comprised of such number of persons, not less than 9, as shall be fixed from time to time by the Board of Directors. The By-laws also provide for three classes of directors who are to be elected for staggered 3-year terms. The By-laws provide that, except for one position on the Board which may, at the discretion of the directors, be filled by the President of the Company, no person is eligible to serve as a director unless such person is either the owner of a retail business organization holding stock in the Company or an executive officer, general partner or general manager of such a retail business organization. Such directors are referred to as "dealer directors", and are elected from geographic regions of the United States established by the Board in accordance with Article IV, Section 1 of the Company's By-laws. (See Appendix A). The current geographic composition of each of the regions established by the Board of Directors for the election of directors pursuant to the applicable By-law provisions is as follows: Region 1 - Maine, New Hampshire, Vermont, Massachusetts, Connecticut, Rhode Island, New York, Pennsylvania, New Jersey; Region 2 - Delaware, Maryland, Virginia, West Virginia, Kentucky, Tennessee, North Carolina, South Carolina, District of Columbia; Region 3 - Alabama, Mississippi, Georgia, Florida; 47 Region 4 - Ohio, Indiana, Illinois; Region 5 - Iowa, Missouri, Nebraska, Kansas, Colorado; Region 6 - Arkansas, Louisiana, Oklahoma, Texas; Region 7 - Alaska, Washington, Oregon, Idaho, Montana, Wyoming, Utah; Region 8 - Arizona, New Mexico, Nevada, California, Hawaii; Region 9 - Michigan, Minnesota, North Dakota, South Dakota, Wisconsin. In accordance with the applicable procedure established by the By-laws, the following directors have been selected as nominees for reelection at the annual stockholders meeting to be held on June 6, 1994 as directors of the classes, from the regions, and for terms as indicated below: Nominee Class Region Term Don S. Williams First 1 3 years Ray W. Osborne First 3 3 years Mark Jeronimus First 9 3 years The person named below has been selected as the nominee for election to the Board for the first time at the 1994 annual meeting as director of the class, from the region, and for the term indicated: Nominee Age Class Region Term Jennifer Anderson 43 First 8 3 years Reference should be made to Article IV of the copy of the By-laws in Appendix A for information concerning the qualifications required for membership on the Board of Directors, the terms of directors, the limitations on the total period of time for which a director may hold office, the procedure established for the designation of Nominating Committees to select certain persons as nominees for election to the Board of Directors, and the procedure for filling vacancies on the Board for the remaining portion of unexpired terms. INDEMNIFICATION OBLIGATIONS OF COMPANY AND S.E.C. POSITION ON SECURITIES ACT INDEMNIFICATION Under Article EIGHTH (b) of the restated Certificate of Incorporation of the Company, and Article XV, Section 1 of the By-laws of the Company, persons serving as directors, officers, employees or agents of or at the request of the Company are required to be indemnified by the Company against all expenses, liabilities and losses (including attorneys' fees, judgments, fines, excise taxes, or penalties under the U.S. Employee Retirement Income Security Act, as amended, and amounts paid or to be paid in settlement) reasonably incurred or suffered by them in connection with any action, suit or proceeding (whether civil, criminal, administrative or investigative) instituted or threatened to be instituted against them by reason of their service in any of the aforementioned capacities on behalf of the Company or at its request. The same section of the restated Certificate of Incorporation also authorizes the advancement of litigation expenses to any such person without specific approval of the Board of Directors in each specific case under certain circumstances. Also, Article EIGHTH (a) of the restated Certificate of Incorporation provides that a director of the Company shall not be personally liable to the Company or to its stockholders for monetary damages arising solely out of such director's breach of fiduciary duty as a director. This provision does not affect a director's liability for monetary damages based upon such grounds as a breach of the duty of loyalty, a failure to act in good faith, 48 intentional misconduct, a knowing violation of law, or the receipt of an improper personal benefit. The indemnification provisions described above would extend to and include proceedings under the federal Securities Act of 1933. However, insofar as indemnification for liabilities arising under said Act may be permitted to directors, officers and controlling persons of the Company pursuant to the foregoing provisions, or otherwise, the Company has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in said Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Company of expenses incurred or paid by a director, officer or controlling person of the Company in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being offered by this Prospectus, the Company will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question of whether such indemnification by it is against public policy as expressed in said Act and will be governed by the final adjudication of such issue. 49 APPENDIX A BY-LAWS OF ACE HARDWARE CORPORATION (As Amended on January 24, 1994) 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. A-1 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 Fnotice 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 its Board of Directors, which shall be comprised of 10 persons as of the annual meeting of stockholders to be held in 1987 and which thereafter shall be comprised of such number of persons, not less than 9, as shall be fixed from time to time by the Board of Directors. One of the members of the Board of Directors at all times may be the President of Ace Hardware Corporation, but otherwise no person shall be eligible for election or appointment as a director, or to continue to hold office as a director, unless such person is either the owner of a retail business A-3 organization which is a stockholder of Ace Hardware Corporation or an executive officer, general partner or general manager of such a retail business organization. Each director who is not a full-time executive officer of Ace Hardware Corporation shall sometimes hereinafter be referred to as a "dealer director". Effective with respect to the election of directors at the annual meeting of stockholders to be held in 1987, the following procedure shall be utilized in electing dealer directors:. (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 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 dealer director to be elected at such meeting shall be chosen. No person shall be eligible to serve as a 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. In the discretion of the Board, two or more dealer directors may be elected from and qualify for service on the Board from the same region. (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. (d) Each dealer director who was elected prior to the annual meeting of stockholders to be held in 1987 for a term expiring in a year subsequent to 1987 shall be deemed to have been chosen from the particular initially established region in which there is located 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. 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, either a dealer director or an executive officer director ceases to satisfy the eligibility requirements which are applicable to his position as a director, his membership on the Board of Directors shall thereupon immediately terminate. 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 regardless of the region or regions from which any particular position is to be filled. SECTION 2. No dealer director elected or appointed as such a director for the first time at the annual meeting of stockholders to be held in 1987 or at any time thereafter shall be eligible for subsequent election or appointment to any position on the Board if such election or appointment would result in his being elected or appointed to serve a total of more than 9 years as such a director. Subject to such extensions of their eligibility for which they qualify pursuant to provisions previously contained in these By-laws which were applicable to certain positions on the Board filled by elections conducted at certain annual stockholders meetings held prior to the year 1987, no dealer director who was elected or appointed for the first time at any time prior to that year shall be eligible to be elected or appointed to serve as a dealer director for a period of more than two elected terms of three years. Notwithstanding the foregoing provisions, however, one director whose term expires as of the date of the annual meeting of stockholders to be held in 1987 may be elected at that meeting for a 2-year term and two directors whose terms expire as of the date of said annual meeting may be reelected at said meeting for additional 1-year terms, one director who would not otherwise be eligible for reelection in 1988 may be reelected at the annual meeting of stockholders to be held in 1988 for a 2-year term, and one director who would not otherwise be eligible A-3 for election in 1990 may be reelected at the annual meeting of stockholders to be held in 1990 for a 3-year term. 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. SECTION 3. The directors shall be divided into three classes, as nearly equal in number as possible, as determined by the Board of Directors. Commencing as of the date of the annual meeting of stockholders to be held in 1987, the first of said classes shall consist of 4 directors, 2 of whom shall be directors to be elected at that meeting for 1-year terms, with a total of 4 directors of the first class then being elected for 3-year terms at the annual meeting of stockholders to be held in 1988. The second of said classes shall consist of 3 directors, 1 of whom shall be a director elected for a 1-year term at the 1987 annual meeting of stockholders whose position shall be filled at the 1988 annual meeting of stockholders by a person elected for a 2-year term. The remaining two second class positions shall be positions to be filled by the election of 2 persons for 3-year terms at the 1987 annual meeting. The third of said classes shall consist of 3 directors, 2 of whom shall be directors elected for 2-year terms at the 1987 annual meeting of stockholders whose positions shall be filled at the 1989 annual meeting of stockholders by 2 persons elected for 3-year terms. The remaining third class position shall be a position having a term expiring at the 1989 annual meeting and filled at that time by a person elected for a 3-year term. 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 by 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 4. 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. If the Board determines that proxies shall be solicited on its behalf for the election as a director at the next annual meeting of stockholders of the President of Ace Hardware Corporation, the Board shall make a timely determination to this effect. At the time that the Board determines the regions from which dealer directors are to be elected at the next annual meeting of the stockholders, the Board shall also determine whether each incumbent dealer 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. The following procedure shall be applied by the Board in selecting all other Board-endorsed 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 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. A-4 (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 director. (d) 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 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 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 director. 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; A-5 (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. A-6 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. A-7 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. A-8 SECTION 4. In addition to executive officers, certain employees of the corporation may be designated from time to time by the President as staff officers, that is, officers upon whom responsibility is conferred with respect to the operations of a particular department, division, branch or function of the corporation. Any such staff officer shall be appointed by the President and may thereafter be removed at any time, with or without cause, by the President. However, if the Board of Directors elects or appoints an Executive Vice President, Senior Vice President, Vice President or other officer pursuant to the authority vested in it by Section 1. above, such officer may thereafter be removed only by the affirmative vote of a majority of the whole Board of Directors then in office even though such officer's title includes one or more words which are descriptive of the particular department, division, branch or function of the corporation managed by such officer. The removal of any officer shall be subject to such contractual rights (if any) as may exist under any contract of employment which has been entered into with him. SECTION 5. Unless his compensation has been expressly specified by a contract of employment entered into with him, the compensation of any executive officer shall be such amount as shall be determined from time to time by the Board of Directors. The President shall have sole authority to determine from time to time the amount of compensation to be paid to any other officer, except in the case of an officer whose compensation has been expressly specified in a contract of employment which has been entered into with him and except in the case of any such officer whose basic annual compensation would be or is in an amount which equals or exceeds the basic annual compensation then being paid to any executive officer (exclusive of the Secretary or any Assistant Secretary or Assistant Treasurer). ARTICLE IX DUTIES OF THE CHAIRMAN OF THE BOARD, VICE CHAIRMAN OF THE BOARD AND PRESIDENT SECTION 1. The Chairman of the Board shall preside at all meetings of the stockholders and the Board of Directors and shall perform such other duties as may be prescribed from time to time by the Board of Directors or by the By-laws. His specific duties and responsibilities shall include (a) acting as the primary liaison between the executive officers of the corporation on the one hand and its Board of Directors and its dealer- stockholders on the other hand; (b) bringing to the attention of and consulting with the corporation's executive officers with respect to any special concerns of the corporation's dealer-stockholders which come to his attention or to the attention of the Board of Directors; (c) reviewing from the perspective of the Board of Directors and the corporation's dealer- stockholders all reports, financial budgets, and corporate plans as developed and submitted to him from time to time by the corporation's executive officers; (d) overseeing and aiding in the implementation of plans for orderly successions to the positions held by the corporation's executive officers and other important staff personnel; and (e) seeing that the efforts of the various executive officers and other key management personnel of the corporation are carried out in a coordinated manner, particularly in periods when transitions in important officer or management positions occur. Except where it is provided by law that the signature of the President is required, the Chairman of the Board shall possess all of the same powers as the President to sign all certificates for shares of stock of the corporation and all contracts and other instruments of the corporation which may be authorized by the Board of Directors. SECTION 2. If the Board has elected a Vice Chairman of the Board, he shall preside at all meetings of the stockholders and the Board of Directors in the absence of the Chairman of the Board, and he shall be empowered to perform the other duties and exercise the other powers vested in the Chairman of the Board in the event that the Chairman of the Board is prevented by his absence, by disability, or otherwise from being able to perform such duties and powers in connection with a particular matter within the legally permitted period of time or within such period of time as shall be deemed to be reasonable and appropriate for action to be taken by the Chairman with regard to such matter. If there is no director holding the position of Vice Chairman of the Board, but there is a director (other than the Chairman of the Board) holding the position of Chairman of the Executive Committee of the Board, then the Chairman of the Executive A-9 Committee shall perform the duties and exercise the powers described above for the Vice Chairman of the Board whenever necessary; otherwise, upon the occurrence of any circumstance in which a Vice Chairman of the Board would have been vested with authority to perform the duties and exercise the powers of Chairman of the Board, the Board shall select one of its members as acting Chairman of the Board who shall be vested with the same authority. SECTION 3. The President shall be charged with the general and active management of the day-to-day operations of the corporation and with seeing that all orders and resolutions of the Board of Directors are carried into effect. His specific duties and responsibilities shall include (a) reporting from time to time to the Chairman of the Board on all significant matters affecting the operations and interests of the corporation which fall within his knowledge; (b) seeing that short-term and long-term corporate plans and budgets consistent with the directions of the Board of Directors are prepared and developed on a regular basis; (c) seeing that the corporation continually maintains competent personnel at all levels in order to adequately serve the needs of the retail hardware dealers supplied by it; (d) consulting with the Chairman of the Board from time to time with respect to the types of programs, products and services to be made available to the corporation's retail hardware dealers in order to serve the best interests of the corporation's entire network of dealers; (e) submitting to the stockholders at their annual meetings and/or at dealer conventions sponsored by the corporation such reports on the operations and affairs of the corporation as shall be appropriate in order to provide them with information of importance to them as both customers and stockholders of the corporation; and (f) executing on behalf of the corporation contracts and other instruments in writing, including mortgages, bonds and governmental reports of various kinds, in all instances wherein the signature of the President of the corporation is required or has been authorized by the Board of Directors or is otherwise deemed to be appropriate. The Board of Directors, in its discretion, may vest the person holding the office of President of the corporation at any given time with the additional title of Chief Executive Officer. Whenever the title of Chief Executive Officer is used as an additional title for the person holding the office of President, it shall be deemed to relate specifically to the duties and responsibilities dealing with the development of plans for orderly successions to the positions held by the corporation's executive officers and other management personnel and to the ongoing development of short-term and long-term strategic plans for the corporation to be presented to and reviewed by the Board of Directors and to the execution of all such plans as are approved by the Board. ARTICLE X DUTIES OF EXECUTIVE VICE PRESIDENTS, SENIOR VICE PRESIDENTS AND OTHER VICE PRESIDENTS SECTION 1. Any Executive Vice President elected by the Board of Directors shall possess the power and may perform the duties of the President in his absence or disability. Each officer having the title of Executive Vice President shall perform such other duties as may be prescribed from time to the time by the Board of Directors. SECTION 2. Any Senior Vice President elected by the Board of Directors shall possess the power and may perform the duties herein authorized to be performed by an Executive Vice President in the event that there is no person holding the office of Executive Vice President at the time, or in the event of the absence or disability of all persons then holding the office of Executive Vice President. Each officer having the title of Senior Vice President shall perform such other duties as may be prescribed from time to time by the Board of Directors. SECTION 3. Any Vice President elected by the Board of Directors shall possess the power and may perform the duties herein authorized to be performed by a Senior Vice President in the event that there is no person holding the office of Senior Vice President at the time, or in the event of the absence or disability of all persons then holding the office of Senior Vice President. Each officer having the title of Vice President shall A-10 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. A-11 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. A-12 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 A-13 corporation of any class which the corporation would otherwise have been required to offer to such transferee in connection with the franchise granted to such transferee with respect to such store or other retail business unit, or (b) selling such shares to the corporation. In any case where the holder or holders of 50% or more of the outstanding voting stock of a corporation having a franchise from this corporation for one or more retail business outlets, or the holder or holders of 50% or more of the outstanding voting stock of a corporation owning 80% or more of the outstanding voting stock of a corporation having such a franchise, propose to sell or otherwise transfer all of the shares of capital stock (both voting and non-voting) of such corporation held by them, written notice of such proposal shall be given to this corporation, and upon the consummation of any such sale or transfer, such corporation shall have the option of either (a) retaining all of the shares of the capital stock of this corporation then held by it or (b) selling such shares to this corporation, but in the case of such a sale of said shares to this corporation, the franchise granted to said corporation by this corporation for each retail business unit operated by said corporation shall thereupon be deemed to have terminated by the voluntary action of said corporation and no such retail business unit shall thereafter operate as a franchise of this corporation unless a new application for a franchise for such retail business unit has been submitted to and accepted by this corporation. Notwithstanding any of the foregoing provisions, this corporation shall in no event be obligated to treat any of the following types of transfers as qualifying for purposes of the options provided for in this Section 6 of selling to this corporation shares of its capital stock: (a) any transfer of ownership of a retail business outlet or unit or of shares of the capital stock of a corporation directly or indirectly owning such outlet or unit which is not complete, unconditional and irrevocable; (b) any such transfer to an entity in which the transferor retains an ownership interest; or (c) any such transfer to the spouse of the transferor. SECTION 7. Subject to the provisions of Section 5 of this Article XVI of these By-laws, in the event of the termination of the franchise granted by this corporation with regard to the operation of a retail hardware store or other retail business unit for which shares of stock of the corporation are held, the corporation shall be obligated to purchase such shares. Unissued shares which have been subscribed for with respect to any such store or other retail business unit shall also be covered by the provisions of this Section to the extent of the amounts which have been paid on account of the purchase price thereof, and the corporation shall be obligated to refund all such amounts, subject only to the provisions of Section 5 of this Article XVI. For purposes of this Section, termination of the franchise granted for a particular retail hardware store or other retail business outlet shall include not only any termination pursuant to formal notice of termination given by either this corporation or the holder of the franchise but shall also include each of the following situations which shall be deemed to constitute such a termination: (a) The closing down of the store or other retail business unit with respect to which such shares of stock of the corporation are held, unless such store or other retail business unit is merely being moved, with the corporation's consent and approval, to another location or is being acquired by another dealer which this corporation has accepted or is willing to accept as a franchised dealer for operation pursuant to the same franchise at another location; (b) The death of an individual holder of the shares of stock of this corporation held for such retail store or other retail business unit, or of a member of a partnership which is a holder of such shares, except in a case where the store or other retail business unit with respect to which such shares are held continues, with the approval of the officers of the corporation (which approval shall not be unreasonably withheld), to be operated under a franchise from the corporation by the decedent's estate or by the person or persons to whom such shares are to be distributed by the decedent's estate or by the successor or successors to the decedent's interest in the partnership holding such shares (it being immaterial for this purpose that, in connection with such continuation of operation, the legal form of ownership of the franchised dealer has been changed from an individual proprietorship or partnership to a corporation or from a partnership to an individual proprietorship); (c) An adjudication of the insolvency of the dealer or of the store or other retail business unit for which the shares of stock of this corporation are held, or the making of an assignment for the benefit of A-14 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 per cent (50%) of the assets or profit shares therein, or more than fifty per cent (50%) of the capital stock of a corporation becoming the owner of such outlet, continues to A-15 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 per cent (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; A-16 (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. A-17 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 A-18 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 A-19 By-laws, such term shall be deemed to include all dealers holding memberships in this corporation except where the context in which such term appears is of such a nature that it is not practical for such term to be applied to "other dealers" as referred to in clause (b) of the first sentence of this Section. For purposes of this Article XXIV of the By-laws a "retail hardware store" shall be deemed to refer to a business location to which there is delivered for resale from such location at the retail level any merchandise purchased from this corporation. Each such retail hardware store owned or controlled, directly or indirectly, by the same person, partnership or corporation, shall be deemed to constitute only one (1) retail hardware dealer. An unincorporated person or partnership shall be deemed controlled by another person, partnership or corporation if fifty per cent (50%) or more of the assets or profit shares therein are legally or equitably owned by such other person, partnership or corporation, or by the legal or equitable owner or owners of fifty per cent (50%) or more of such other person, partnership or corporation's assets or profit shares (if unincorporated) or shares of capital stock (if incorporated). A corporation shall be deemed controlled by another person, partnership or corporation if fifty per cent (50%) or more of the capital stock of said corporation is owned by such other person, partnership or corporation, or by the owner or owners of fifty per cent (50%) or more of its capital stock (if incorporated) or fifty per cent (50%) or more of its assets or profit shares (if unincorporated). SECTION 2. In accordance with the policy heretofore established by the corporation in the Amendment to its By-laws adding Article XXIV thereto by the resolution adopted by the Board of Directors on July 20, 1973, there shall be distributed on a patronage basis to such members (that is, dealers holding memberships, as hereinabove defined, in the corporation) in a manner taking into account the amount of business done by the corporation with each of them, all the net savings and overcharges effected by or resulting from the operations conducted and carried on by the corporation in connection with sales of merchandise made by the corporation after May 31, 1974, to such members which remain after paying all operating and administration expenses of the corporation and all interest on its indebtedness and after the setting aside by the Board of Directors of such reasonable reserves as they shall determine from time to time to be appropriate for the purpose of insuring the safety and welfare of the corporation and for the purpose of providing for the expectancy of any losses or contingencies. Said distributions shall be made no later than eight and one-half (8 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 per cent (20%) of the total patronage distributions made each year to each member be distributed in cash. The remaining portion shall be distributed in cash or in written notices of allocation (as defined in Section 1388 of the U.S. Internal Revenue Code) in whatever proportions shall be determined each year by the Board of Directors. SECTION 3. Notwithstanding the foregoing, every such member on becoming such authorizes and directs that all net savings of every character effected by this corporation which are distributable to such member, to the extent of the excess thereof over the twenty per cent (20%) minimum portion of such distributable amount required to be distributed in cash, may first be applied by the corporation to the payment of any indebtedness owed to the corporation by such member. Any such net savings which become distributable with respect to merchandise sold by this corporation for delivery to any retail hardware store owned or controlled, directly or indirectly, by the same person, partnership or corporation which so owns or controls one (1) or more other retail hardware stores may be so applied against any indebtedness owing with respect to merchandise sold by this corporation for delivery to any store which is part of any group deemed hereunder to constitute one (1) retail hardware dealer. The balance of any such net savings not so applied shall then be distributed as patronage dividends in the manner set forth in Article XXIV, Section 2, of these By-laws. SECTION 4. Each retail hardware dealer who applies for and is accepted as a member of this corporation shall, by his act of subscribing for a share of Class A stock of the corporation entitling such dealer to become such a member, consent that the amount of any patronage dividends with respect to his purchases of merchandise from this corporation occurring on or after June 1, 1974, which are made in written notices of allocation (as defined in Section 1388 of the U.S. Internal Revenue Code, as amended) and which are received by such member from this corporation will be taken into account by him at their stated dollar amounts in the manner provided in A-20 Section 1385(a) of said Code in the taxable year in which such notices of allocation are received by said member. The term "written notice of allocation" as used here shall be deemed to include, but not to be limited to, a letter of advice to a member which discloses to such member an amount which the corporation has elected to apply against indebtedness owed to the corporation in accordance with the first sentence of Article XXIV, Section 3, of these By-laws. SECTION 5. The aforesaid written notices of allocation shall be redeemable by the corporation in cash at the discretion of the Board of Directors and/or in accordance with the restated Certificate of Incorporation of the corporation and these By-laws. As security for the payment to the corporation of any indebtedness owing at any time to the corporation by any retail hardware dealer having membership in the corporation or by any retail hardware dealer who has subscribed for the 1 share of Class A stock of the corporation which is required to be owned in order to become a member of the corporation, the corporation shall have a first lien upon any written notice of allocation held by any such dealer (including all retail hardware stores treated as being part of a group constituting one "member" or "dealer"). The interest of each holder of any written notice of allocation in and to the same shall at all times be deemed to be offset by the amount of any indebtedness payable to the corporation by such holder. SECTION 6. Notwithstanding any other provision of these By-laws, and in accordance with the policy heretofore established by the corporation in the Amendment to its By-laws adding Section 6 to Article XXIV thereof by the resolution adopted by the Board of Directors on April 24, 1974, commencing with respect to purchases of merchandise made from the corporation after May 31, 1974 the corporation shall also make distributions on a patronage basis to those of its dealers who have franchise or membership agreements with the corporation and who have executed unrevoked and unexpired written consents of the type referred to in Section 1388 (c)(2) (A) of the U. S. Internal Revenue Code to include in their gross income all patronage dividends distributed to them in the form of written notices of allocation (as defined in Section 1388 of the U.S. Internal Revenue Code), even though such dealers do not then own any shares of any class of the capital stock of the corporation. Such patronage dividend distributions shall be made to such dealers in a manner taking into account the amount of business done by the corporation with each of them during the periods with respect to which said written consents are effective for each of them and shall consist of all the net savings and overcharges effected by or resulting from the business done by the corporation with such dealers which remain after paying all of the operating and administration expenses and interest on indebtedness of the corporation allocable to such business and after the setting aside by the Board of Directors of such reasonable reserves as they shall determine from time to time to be appropriate for the purpose of insuring the safety and welfare of the corporation and for the purpose of providing for the expectancy of any losses or contingencies. Each such written consent shall provide that it may be revoked at any time by the dealer, effective with respect to business done by the corporation with such dealer after the close of the taxable year of this corporation during which the revocation is filed with it. Each such written consent shall cease to be effective with respect to all business done by this corporation with any dealer who has furnished such a written consent to this corporation immediately upon said dealer's becoming an owner of a share of Class A stock of this corporation, as of which date such consent shall expire and such dealer shall be deemed to hold a "membership" in this corporation so that the provisions of this Article XXIV which are applicable to the distribution of patronage dividends to its members then become effective with respect to such dealer. Unless the same shall have been revoked or otherwise terminated, any such consent which has theretofore been executed by a dealer shall in any event be deemed to have expired and been rendered ineffective at the end of one hundred twenty (120) days following the later of (a) the date as of which an initial Registration Statement and Prospectus with respect to an offer to sell shares of the capital stock of the corporation (including shares of its Class A stock) to its dealers have become effective under the U.S. Securities Act of 1933, or (b) the date as of which such Prospectus can be used under the securities law of any state in which state registration of such stock is required. No such dealer shall be eligible to receive distributions of patronage dividends from the corporation with respect to business done by the corporation with such dealer after the expiration of such 120-day period unless such dealer either has. become a member of the corporation by owning a share of its Class A stock (in which case such dealer shall thereupon be entitled to patronage dividends as provided for A-21 in Section 2 of this Article XXIV) or has executed a subscription agreement for the purchase of shares of capital stock of the corporation (including one (1) share of its Class A stock) which has been accepted by the corporation. There shall be incorporated in all such subscription agreements which include a subscription for a share of the Class A stock of the corporation a provision whereby the subscribing dealer consents to include in his gross income all patronage dividends distributed to such dealer in the form of written notices of allocation (as defined in Section 1388 of the U.S. Internal Revenue Code), and any dealer who has executed such a subscription agreement but who is not entitled to become the owner of a share of Class A stock of this corporation until he has completed payment of the purchase price for such share in accordance with such subscription agreement shall be entitled to receive patronage dividends pursuant to this Section 6 during the period for which he makes payments on account of such purchase price as required by the subscription agreement. Upon the completion of such payments and the issuance of such share of stock to him, such dealer shall then be entitled to receive patronage dividends pursuant to Section 2 of this Article XXIV. In no event shall less than twenty per cent (20%) of the total patronage dividend distributions made each year to any dealer who is entitled to receive such distributions pursuant to this Section 6 be distributed in cash. Any amount in excess of said twenty per cent (20%) minimum portion of the patronage dividends otherwise distributable to a dealer under this Section 6 may first be applied by the corporation to the payment of any indebtedness owed to the corporation by such dealer in the same manner as set forth in Section 3 of this Article XXIV. Any patronage dividends distributed in the form of written notices of allocation pursuant to this Section 6 shall be subject to all of the provisions with respect to distributions made in the form of written notices of allocation which are set forth in Section 5 of this Article XXIV. SECTION 7. Notwithstanding any of the foregoing provisions, the portion of any patronage dividends which would otherwise be distributable in cash under any provision of this Article XXIV to a retail hardware dealer with respect to a retail hardware store having a franchise or membership agreement with this corporation which has been cancelled or terminated at any time subsequent to the date of the annual meeting of stockholders to be held on the third Monday of May in 1980 by any means or for any reason whatsoever prior to the time of distribution of such patronage dividends shall be applied by the corporation to the payment of any indebtedness owed to the corporation by or on behalf of such store to the extent of such indebtedness instead of being distributed in cash, provided, however, that an amount equal to 20% of the total patronage dividends distributable for the applicable year to any such dealer with respect to such store shall nevertheless be paid in cash within 8 1/2 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 A-22 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 INTERNATIONAL DISTRIBUTORSHIPS SECTION 1. Except as provided in Article XXV, Section 3 hereof, no person, partnership or corporation shall be authorized or permitted to use the name "Ace Hardware" or any trademark or trade name including the word "Ace" in conjunction with the sale of hardware or related merchandise, to display any identification sign or emblem indicating that said person, partnership or corporation is an authorized Ace Hardware dealer, or to purchase merchandise (including items carried under the Ace brand name) from Ace Hardware Corporation unless such person, partnership or corporation has first been accepted by Ace Hardware Corporation as a duly licensed or franchised dealer and has executed the membership or similar agreement then utilized by Ace Hardware Corporation for the establishment of such a dealer relationship and has otherwise complied with the usual requirements of Ace Hardware Corporation with respect thereto. Any such agreement may contain such reasonable provisions with respect to the termination thereof as shall be legally permitted by the laws of the United States of America and by the laws of the state or other jurisdiction in which the business of the dealer is located. SECTION 2. In order for any person, partnership or corporation to be accepted by Ace Hardware Corporation as a licensed dealer, such person, partnership or corporation shall also be required to purchase the necessary number of shares of capital stock of the corporation as required by Article Fourth (c) and Article Fourth (e) of the restated Certificate of Incorporation of Ace Hardware Corporation filed with the Secretary of State of Delaware on September 18, 1974. Accordingly, each such person, partnership or corporation shall, concurrently with the execution by such person, partnership or corporation of the Ace Dealer Membership Agreement then utilized by the corporation, also agree in writing to purchase one (1) share of Class A stock of the corporation at a price equal to the par value thereof of $1,000 per share, and forty (40) shares of Class C stock of the corporation at a price equal to the par value thereof of $100 per share or, when the store which is licensed under such Membership Agreement is not the first store owned or controlled by said person, partnership or corporation which has become accepted by Ace Hardware Corporation as a licensed dealer, to purchase fifty (50) shares of Class C stock at a price equal to the par value thereof of $100 per share. The terms of payment with respect to any shares of capital stock of the corporation purchased by any such person, partnership or corporation shall be as set forth in such resolution as shall be adopted from time to time by the Board of Directors of the corporation for the purpose of establishing such terms of payment. SECTION 3. In the case of a person, partnership or corporation operating one or more business outlets located outside the United States of America, its territories and possessions, Ace Hardware Corporation A-23 may approve the sale of merchandise for delivery to such an outlet under the terms of an international distributor agreement entered into with it by such party in lieu of the membership or similar agreement utilized with respect to business outlets by parties who are accepted by Ace Hardware Corporation as licensed or franchised dealers. No party approved as an international distributor 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 international distributors. Purchases of merchandise by international distributors shall be made in accordance with the applicable terms of the international distributor agreement and such other terms as may be imposed by Ace Hardware Corporation from time to time with regard to particular international distributors. Such purchases may include items carried under "Ace" or "Ace Hardware" brand names or under other private label names owned by, or licensed to, Ace Hardware Corporation only with the express written consent of an executive officer whom its President has vested with authority to grant such consents. No international distributor 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 a separate written license agreement granting such distributor the right to such use is entered into between it and Ace Hardware Corporation. All of the terms and conditions contained in international distributor or license agreements or imposed upon international distributors (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 international distributors) 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 international distributor 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 international distributor in a particular location. SECTION 4. Each person, partnership or corporation accepted by Ace Hardware Corporation as a duly licensed dealer or international distributor 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 distributor 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. A-24 No dealer, salesman, or any other person has been authorized by the Company to give any information or make any representations other than those contained in this Prospectus in connection with the offering ACE HARDWARE CORPORATION described herein. This Prospectus does not constitute an offer to sell, or a solicitation of an offer to buy, to any person in any state in which it is unlawful to make such solicitation. The delivery of 925 Shares of Class A this Prospectus at any time does not imply (Voting) Stock that there has been no change in the $1,000 par value affairs of the Company subsequent to its date of issue. In Florida the securities covered by this Prospectus are being offered pursuant 65,980 Shares of Class C to a limited offering exemption which (Non-voting) Stock extends to Florida purchasers the privilege $100 par value of electing to void their purchases within 3 days after making any payment on account of the purchase price. TABLE OF CONTENTS Item Page Available Information 2 Reports to Security Holders 2 Factors to be Considered 2 Summary 3 Use of Proceeds 6 PROSPECTUS Distribution Plan and Offering Terms 7 Description of Capital Stock 9 Opinions of Experts 14 The Company's Business 14 Properties 28 Index to Financial Statements 29 Independent Auditors' Report 30 Financial Statements 31 Selected Financial Data 44 Dated: Management's Discussion and Analysis of Financial Condition and Results of Operations 45 Management 47 Indemnification Obligations of Company and S.E.C. Position on Securities Act Indemnification 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 12,000 Legal Fees 2,000 Fees and Expenses under "Blue Sky" Laws of Various States 3,500 Miscellaneous Expenses 500 Total $28,000 Item 15. Indemnification of Directors and Officers. In accordance with the authority granted by Section 145 of the General Corporation Law of the State of Delaware, under which the Registrant is incorporated, Article XV of the Registrant's By-Laws (which Article is included in the copy of the By-laws designated as Appendix A to the Prospectus constituting a part of this Registration Statement and is incorporated herein by reference) provides for indemnification by the Registrant of its directors, officers, employees or agents. The principal provisions of said By-law obligate the Registrant to indemnify any such person against expenses (including attorneys' fees) actually and reasonably incurred by any such person in connection with his successful defense of any action, suit or proceeding (whether civil, criminal, administrative or investigative) instituted against him by reason of the fact that he is or was an officer, director, employee or agent of the Registrant and further authorize the Registrant, in any situation where the Board of Directors of the Registrant, by a majority vote of disinterested directors, determines that any such person acted in good faith and in a manner he reasonably believed to be in the best interest of the Registrant, to indemnify him for the amount of any judgment or fine or settlement payment incurred by him, together with his expenses and attorneys' fees, in connection with any such action, suit or proceeding. Richard Kaup, the late Virgil Poss, and Antone Salel, who constitute the Trustees of the Ace Dealers' Perpetuation Fund prior to its termination on November 30, 1976 (as of which date all of the assets of said Fund were assigned and transferred to the Registrant and the Registrant then assumed and became responsible for any and all obligations and liabilities, contingent or otherwise, of the Trustees of said Fund), would also be afforded indemnification by the Registrant with respect to any of their activities while acting as such Trustees under the following terms included in a resolution adopted by unanimous vote of the Board of Directors of the Registrant on April 24, 1974: ". . . that the corporation indemnify and hold harmless each of said Trustees with respect to any claims made against any of them and any expenses thereby incurred by any of them in connection with any of their activities as such Trustees". Insofar as indemnification for liabilities arising under the federal Securities Act of 1933 may be permitted to directors, officers, or persons controlling the Registrant, pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdic- S-1 tion the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. The Registrant also maintains a directors and officers liability and corporation indemnification insurance policy issued by National Union Fire Insurance Company under which there are to be paid on behalf of the Registrant all amounts for which the Registrant grants indemnification to a director or officer of the Registrant with respect to any claim(s) made against him which arise out of a "Wrongful Act" (as defined in the policy) committed by such director or officer in his capacity as such a director or officer and which he has become legally obligated to pay. Said policy also insures each director or officer of the Registrant against loss arising from any claim(s) not indemnified by the Registrant which may be made against him by reason of any such "Wrongful Act" committed by him. The limits of liability under said policy are $10,000,000 for each loss and $10,000,000 for each policy year. The Registrant is subject to a $250,000 self-insured retention for a loss in which the Registrant grants indemnification to the directors and officers. Each director and officer covered by the policy has first dollar coverage with no deductible for each loss in which the Registrant does not grant indemnification. Coverage is not provided for claims under Section 16(b) of the federal Securities Exchange Act of 1934, which could not arise in any event due to the ownership limitations and restrictions on transfers which are applicable to the Registrant's stock. Among the other classes of claims which are excluded from coverage under the policy are claims based upon alleged violations of the federal Employee Retirement Income Security Act of 1974. Item 16. Exhibits and Financial Statement Schedules. (a) Exhibits: Exhibit No. 1 No exhibit. 2 No exhibit. 3 Not applicable. 4-A Restated Certificate of Incorporation of the Registrant dated September 18, 1974 filed as Exhibit 3-A to the Registrant's Form S-1 Registration Statement (Registration No. 2-55860) on March 30, 1976 and incorporated herein by reference. 4-B By-laws of the Registrant as amended on January 24, 1994 (included as Appendix A to the Prospectus constituting a part of this Post-Effective Amendment No. 2 to the Registrant's Form S-2 Registration Statement). 4-C Certificate of Amendment to the restated Certificate of Incorporation of the Registrant dated May 19, 1976 filed as Exhibit 3-D to Amendment No. 1 to the Registrant's Form S-1 Registration Statement (Registration No. 2-55860) on June 10, 1976 and incorporated herein by reference. 4-D Certificate of Amendment to the restated Certificate of Incorporation of the Registrant dated May 21, 1979 filed as Exhibit 3-F to Amendment No. 1 to the Registrant's Form S-1 Registration Statement (Registration No. 2-63880) on May 23, 1979 and incorporated herein by reference. S-2 4-E Certificate of Amendment to the restated Certificate of Incorporation of the Registrant dated June 7, 1982 filed as Exhibit 3-G to the Registrant's Form S-1 Registration Statement (Registration No. 2-82460) on March 16, 1983 and incorporated herein by reference. 4-F Certificate of Amendment to the restated Certificate of Incorporation of the Registrant dated June 5, 1987 filed as Exhibit 3-F to the Registrant's Form S-1 Registration Statement (Registration No. 33-4299) on March 29, 1988 and incorporated by reference. 4-G Certificate of Amendment to the Restated Certificate of Incorporation of the Registrant dated June 16, 1989 filed as Exhibit 4-G to the Post Effective Amendment No. 1 to the Registrant's Form S-2 Registration Statement (Registration No. 33-27790) on March 20, 1990 and incorporated herein by reference. 4-H 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-I 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-J 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-K 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-L 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. 4-M Copy of plan for the distribution of patronage dividends with respect to purchases of merchandise made from the Registrant on or after January 1, 1993 adopted by the Board of Directors of the Registrant on December 8, 1992, (the text of which plan is set forth under the heading "The Company's Business," subheading "Forms of Patronage Dividend Distributions" in the Prospectus constituting a part of this Post Effective Amendment No. 2 to the Registrant's Form S-2 Registration Statement). 5 Opinion of David W. League, General Counsel of the Registrant, as to legality of securities being registered. 6 No exhibit. 7 Opinion of Messrs. Gatenbey, Law & League filed as Exhibit 7 to the Registrant's Form S-1 Registration Statement (Registration No. 2-82460) on March 16, 1983 and incorporated herein by reference. S-3 8 No exhibit; the opinions of David W. League, General Counsel of the Registrant, as to certain tax matters are set forth in statements attributed to him under the heading "Distribution Plan and Offering Terms," subheading "Federal Income Tax Status of Class A and Class C Shares" and under the heading "The Company's Business," subheading "Federal Income Tax Treatment of Patronage Dividends" in the Prospectus constituting a part of this Post Effective Amendment No. 2 to the Registrant's Form S-2 Registration Statement. 9 Not applicable. 10-A Copy of Retirement Benefits Replacement Plan of the Registrant, restated as of January 1, 1989. 10-B Copy of resolutions establishing 1990 Incentive Compensation Plan for Executives and amending the 1988 and 1989 Incentive Compensation Plans for Executives of the Registrant adopted by its Board of Directors on January 30, 1990, filed as Exhibit 10-F to Post-Effective Amendment No. 2 to the Registrant's Form S-2 Registration Statement (Registration No. 33-27790) on March 20, 1991 and incorporated herein by reference. 10-C Copy of resolutions amending the 1990 Incentive Plans for Executives and establishing the Executive Supplement Benefit Plans of the Registrant adopted by its Board of Directors on December 11, 1990, filed as exhibit 10-G to Post-Effective Amendment No. 2 to the Registrant's Form S-2 Registration Statement (Registration No. 33-27790) on March 20, 1991 and incorporated herein by reference. 10-D Copy of Amendment to the Executive Supplemental Benefits Plan of the Registrant adopted by its Board of Directors on July 30, 1991 filed as Exhibit 10-E to the Registrant's Form S-2 Registration Statement (Registration No. 33-46449) on March 23, 1992 and incorporated herein by reference. 10-E Copy of amendment to the Executive Supplemental Benefits Plan of the Registrant adopted by its Board of Directors on December 9, 1991 filed as Exhibit 10-F to the Registrant's Form S-2 Registration Statement (Registration No. 33-46449) on March 23, 1992 and incorporated herein by reference. 10-F Copy of amendment to the 1990 Incentive Compensation Plan for Executives of the Registrant adopted by its Board of Directors on December 9, 1991 filed as Exhibit 10-H to the Registrant's Form S-2 Registration Statement (Registration No. 33-46449) on March 23, 1992 and incorporated herein by reference. 10-G Copy of the "Ace Hardware Corporation Officer's (sic) Incentive Compensation Plan" as amended and restated effective January 1, 1994. 10-H Copy of Employment Agreement effective January 1, 1993 between Ace Hardware Corporation and Paul Ingevaldson filed as Exhibit 10-I to the Post-Effective Amendment No. 1 to the Registrant's Form S-2 Registration Statement (Registration No. 33-464489) on March 22, 1993 and incorporated herein by reference. 10-I Copy of Employment Agreement effective January 1, 1993 between Ace Hardware Corporation and David F. Hodnik filed as Exhibit 10-J 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. S-4 10-J Copy of Employment Agreement effective January 1, 1993 between Ace Hardware Corporation and Roger E. Peterson filed as Exhibit 10-K 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-K Copy of Employment Agreement effective January 1, 1993 between Ace Hardware Corporation and William A. Loftus filed as Exhibit 10-L 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-L Copy of Loan Agreement with Anne Arundel County, Maryland dated December 1, 1981 securing 15-year floating rate industrial development revenue bonds in the principal sum of $9 million held by The Northern Trust Company, Chicago, Illinois, for itself and other participating lenders filed as Exhibit 10-A-k to Post-Effective Amendment No. 3 to the Registrant's Form S-1 Registration Statement (Registration No. 2-63880) on March 9, 1982 and incorporated herein by reference. 10-M Copy of Loan Agreement with Pulaski County, Arkansas dated July 1, 1988 securing a variable rate demand Industrial Development Revenue Refunding Bond with a maturity date of February 1, 1994 in the principal sum of $8,250,000.00 filed as Exhibit 10-V to the Registrant's Form S-2 Registration Statement (Registration No. 33-27790) on March 28, 1989 and incorporated herein by reference. 10-N Copy of Note Purchase and Private Shelf Agreement with The Prudential Insurance Company of America dated September 27, 1991 securing 8.74% Senior Series A Notes in the principal sum of $20,000,000 with a maturity date of July 1, 2003 filed as Exhibit 10-A-q to the Registrant's Form S-2 Registration Statement (Registration No. 33-46449) on March 23, 1992 and incorporated herein by reference. 10-O Copy of Standard Form of Ace Hardware International Retail Merchant Agreement adopted in 1990, filed as Exhibit 10-A-q to Post-Effective Amendment No. 2 to the Registrant's Form S-2 Registration Statement (Registration No. 33-27790) on March 20, 1991 and incorporated herein by reference. 10-P Copy of Current Standard Form of Ace Hardware Membership Agreement. 10-Q Copy of 6.89% Senior Series B notes in the aggregate principal sum of $20,000,000 issued July 29, 1992 with a maturity date of January 1, 2000 pursuant to Note Purchase and Private Shelf Agreement with the Prudential Insurance Company of America dated September 27, 1991. 10-R Copy of 6.47% Senior Series A notes in the aggregate principal sum of $30,000,000 issued September 22, 1993 with a maturity date of June 22, 2008, and $20,000,000 Private Shelf Facility, pursuant to Note Purchase and Private Shelf Agreement with the Prudential Insurance Company of America dated as of September 22, 1993. S-5 10-S Assignment and Assumption dated October 22, 1992 of Lease dated August 31, 1992 with MTI Vacations, Inc. filed as Exhibit 10-A-s to the Post-Effective Amendment No. 1 to the Registrant's Form S-2 Registration Statement (Registration No. 33-46449) on March 22, 1993 and incorporated herein by reference. 10-T Copy of Amendment to the Executive Supplemental Benefit Plans of the Registrant adopted by its Board of Directors on March 17, 1992 filed as Exhibit 10-A-t to the Post- Effective Amendment No. 1 to the Registrant's Form S-2 Registration Statement (Registration No. 33-46449) on March 22, 1993 and incorporated herein by reference. 10-U Copy of Lease dated September 30, 1992 for general offices of the Registrant in Oak Brook, Illinois filed as Exhibit 10-A-u to the Post-Effective Amendment No. 1 to the Registrant's Form S-2 Registration Statement (Registration No. 33-46449) on March 22, 1993 and incorporated herein by reference. 10-V Copy of Fourth Amendment to Executive Supplemental Benefit Plans effective January 1, 1994. 10-W Copy of Ace Hardware Corporation Deferred Director Fee Plan as amended on June 8, 1993. 10-X Copy of Ace Hardware Corporation Deferred Compensation Plan January, 1994. 11 No exhibit. 12 No exhibit. 13 Not applicable. 14 Not applicable. 15 No exhibit. 16 Not applicable. 17 Not applicable. 18 Not applicable. 19 Not applicable. 20 Not applicable. 21 Not applicable. 22 Not applicable. 23 (a) Auditors' Consent, Dated March 23, 1994. (b) Consent of Counsel, Legal Opinions-- Exhibit 5 and Exhibit 7. 24 Powers of Attorney. 25 No exhibit. 26 No exhibit. 27 No exhibit. 28 Not applicable. S-6 Item 17. Undertakings. The undersigned Registrant hereby undertakes: (a) Subject to the terms and conditions of Section 15(d) of the Securities Exchange Act of 1934, to file with the Securities and Exchange Commission such supplementary and periodic information, documents and reports as may be prescribed by any rule or regulation of the Commission heretofore or hereafter duly adopted pursuant to authority conferred in that section; (b) To file with the Securities and Exchange Commission, during any period in which offers or sales are being made pursuant to the registration, a post-effective amendment to the Registration Statement: (i) to include any Prospectus required by Section 10(a) (3) of the Securities Act of 1933; (ii) to reflect in the Prospectus any facts or events arising after the effective date of the Registration Statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the Registration Statement; (iii) to include any material information with respect to the plan of distribution not previously disclosed in the Registration Statement or any material change to such information in the Registration Statement, including (but not limited to) any addition or deletion of a managing underwriter. (c) That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment to the Registration Statement shall be deemed to be a new Registration Statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof; (d) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. S-7 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1933, the registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for the filing on Form S-2 and has duly caused this 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 23rd day of March, 1994. ACE HARDWARE CORPORATION By RICHARD E. LASKOWSKI Richard E. Laskowski Chairman of the Board and Director DATED: March 23, 1994 Pursuant to the requirements of the Securities Exchange Act of 1933, this registration statement has been signed below by the following persons in the capacities and on the dates indicated. Signature Title Date RICHARD E. LASKOWSKI Chairman of the Board March 23,1994 Richard E. Laskowski and Director ROGER E. PETERSON President and Chief March 23, 1994 Roger E. Peterson Executive Officer DAVID F. HODNIK Executive Vice President March 23, 1994 David F. Hodnik and Chief Operating Officer RITA D. KAHLE Vice President-Finance March 23, 1994 Rita D. Kahle (Principal Financial Officer) Lawrence R. Bowman, Mark Jeronimus, Directors Howard J. Jung, John E. Kingrey, Ray W. Osborne, Don S. Williams, Jon R. Weiss and James R. Williams *By DAVID F. HODNIK David F. Hodnik *By RITA D. KAHLE March 23, 1994 Rita D. Kahle *Attorneys-in-fact S-8 INDEX TO EXHIBITS FILED TO THE REGISTRATION STATEMENT ON FORM S-2 OF ACE HARDWARE CORPORATION Exhibit Number Exhibit 4-B By-laws of the Registrant as amended on January 24, 1994 (included as Appendix A to the Prospectus constituting a part of this Post-Effective Amendment No. 2 to the Registrants Form S-2 Registration Statement). 4-L 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. 4-M Copy of plan for the distribution of patronage dividends with respect to purchases of merchandise made from the Registrant on and after January 1, 1993, adopted by the Board of Directors of the Registrant on December 8, 1992 (the text of which plan is set forth under the heading "The Company's Business," subheading "Forms of Patronage Dividend Distributions" in the Prospectus constituting a part of this Post-Effective Amendment No. 2 to the Registrant's Form S-2 Registration Statement). 5 Opinion of David W. League, General Counsel of the Registrant as to legality of securities being registered 10-A Copy of Retirement Benefits Replacement Plan of the Registrant, restated as of January 1, 1989. 10-G Copy of "Ace Hardware Corporation Officer's (sic) Incentive Compensation Plan" as amended and restated effective January 1, 1994. 10-P Copy of current standard form of Ace Hardware Membership Agreement. 10-R Copy of 6.47% Senior Series A notes in the aggregate principal amount of $30,000,000 issued September 22, 1993 with a maturity date of June 22, 2008, and $20,000,000 Private Shelf Facility, pursuant to Note Purchase and Private Shelf Agreement with the Prudential Insurance Company of America dated as of September 22, 1993. 10-V Copy of Fourth Amendment to Executive Supplemental Benefit Plans effective January 1, 1994. 10-W Copy of Ace Hardware Corporation Deferred Director Fee Plan as amended on June 8, 1993. 10-X Copy of Ace Hardware Corporation Deferred Compensation Plan January, 1994. 23(a) Auditors' consent dated March 23, 1994 24 Powers of Attorney The various exhibits incorporated by reference are listed in Item 16 of this Post Effective Amendment No 2 to the Registration Statement on Form S-2 of Ace Hardware Corporation. S-9 EX-4 2 STD FORM-SUBSCRIPTION FOR CAP STOCK Exhibit 4-L ACE HARDWARE CORPORATION SUBSCRIPTION FOR CAPITAL STOCK (To be used for shares subscribed for in conjunction with an application for an Ace Hardware Corporation Membership) The undersigned, being the owner of the retail hardware store or other retail business outlet with respect to which an Application is being concurrently submitted to Ace Hardware Corporation (a Delaware Corporation) for a membership to purchase merchandise from said corporation and to use the "ACE" and/or "ACE HARDWARE" marks, hereby subscribes for and agrees to purchase the following shares of capital stock of said Ace Hardware Corporation at the prices set forth below: Purchase Price shares of Class "A" Voting Stock (par value $1,000 per share) at a price of $1,000.00 (1 share to be subscribed for if, and only if, the store or other retail business outlet for which an Ace Membership Application is being submitted would be the first ACE store owned or controlled by the undersigned) $ shares of Class "C" Non-Voting Stock (par value $100 per share) at a price of $100.00 per share (40 shares to be sub- scribed for if, and only if, the store or other retail business outlet for which an ACE Membership Application is being submitted would be the first ACE store owned or controlled by the undersigned) $ shares of Class "C" Non-Voting Stock (par value $100 per share) at a price of $100.00 per share (50 shares to be subscribed for if, and only if, the store or other retail business outlet for which an ACE Membership Applica- tion, is being submitted would be an additional ACE store or retail business outlet, over and above the first such store or outlet, owned or controlled by the undersigned) $ Total Purchase Price for all shares hereby subscribed for $ The undersigned agrees to pay for all of the shares hereby subscribed for at the principal office of Ace Hardware Corporation located at 2200 Kensington Court, Oak Brook, Illinois 60521. Written notice of a call for the payment of said purchase price is hereby waived. The undersigned further agrees that payment for the shares hereby subscribed for will be made by means of a special stock subscription payment charge to be added to the bi-weekly statement rendered by Ace Hardware Corporation. The amount of such special stock subscription payment charge to be added to each such bi-weekly statement shall be the greater of $40.00 or an amount equal to 2% of the purchase price of the merchandise purchased by such store or retail outlet from Ace Hardware Corporation during each bi-weekly period. Such charge shall be continued until the full purchase price for all shares of the capital stock of Ace Hardware Corporation has been paid. No interest or other finance charge shall be added to the unpaid balance of the purchase price to be paid so long as all payments are made when the same are due. All such stock subscription payments shall be due and payable at the same time and shall be subject to the same late payment service charges and other terms as are applicable to the charges shown on such billing statements for purchases of merchandise. The undersigned shall have the right to make prepayments at any time on account of the unpaid balance of the purchase price of the shares of stock subscribed for. If the store or other retail business outlet with respect to which this Subscription Agreement has been executed would be the first such store or retail business outlet owned or controlled by the undersigned with Ace Hardware Corporation, all payments made on account of the purchase price of the shares hereby subscribed for shall first be applied toward payment for the 1 share of Class "A" Voting Stock. Upon the completion of the payment of $1,000.00 for said 1 share of Class "A" Voting Stock, a certificate for such share shall immediately be issued to the undersigned. It is expressly understood that the undersigned shall have no voting rights with respect to said share of Class "A" Voting Stock until the complete price therefore has been paid and a certificate for the same has been issued. It is further understood that certificates for the shares of Class "C" Stock of Ace Hardware Corporation hereby subscribed for by the undersigned will be issued to the undersigned upon the completion of the payment of the full purchase price of all of the shares of Class "C" Stock so subscribed for. If 1 share of Class "A" Voting Stock of Ace Hardware Corporation is included as part of the shares of stock hereby subscribed for, the undersigned shall further hereby be deemed to have consented and agreed to include in gross income of the undersigned for U.S. income tax purposes all patronage dividends distributed to the undersigned (including those distributed in the form of qualified written notices of allocation, as defined in Section 1388 of the U.S. Internal Revenue Code, as amended) with respect to purchases of merchandise made by the undersigned for Ace Hardware Corporation for all Ace stores owned or controlled by the undersigned on or after the date on which this Subscription Agreement has been accepted by Ace Hardware Corporation. Such consent shall expire immediately upon the undersigned's becoming an owner of 1 share of Class "A" Voting Stock of Ace Hardware Corporation. Until such time, the undersigned reserves the right to revoke any consent hereby given by the undersigned at any time by written notice of revocation furnished to Ace Hardware Corporation, provided, however, that any such revocation shall be effective only with respect to purchases of merchandise made by the undersigned from said corporation after the close of the taxable year of Ace Hardware Corporation during which such revocation is so furnished. It is understood that no patronage dividends will be payable to the undersigned with respect to purchases of merchandise made by the undersigned during any period for which any such revocation is effective unless and until the undersigned becomes the owner of 1 share of Class "A" Voting Stock of Ace Hardware Corporation. If the undersigned is already the owner of 1 share of said Class "A" Voting Stock, or commencing as of the date when the undersigned becomes an owner of such a share, the undersigned instead shall be entitled to patronage dividends with respect to purchases of merchandise made by the undersigned for Ace Hardware Corporation in accordance with the provisions of Section 2 of Article XXIV of the By-laws of said corporation which are applicable to "members" of said corporation. The undersigned shall be deemed, by being a member owning such a share of Class "A" Voting Stock, to have consented that the amount of any patronage dividends distributed to the undersigned (including those distributed in the form of qualified written notices of allocation) with respect to purchases of merchandise made by the undersigned from Ace Hardware Corporation for all ACE stores owned or controlled by the undersigned will be included in the undersigned's gross income for U.S. income tax purposes. All patronage dividends distributed at any time to the undersigned will be included in the undersigned's gross income for the taxable year in which the same are received by the undersigned, with those received in the form of qualified written notices of allocation being included at their stated dollar amounts. The undersigned acknowledges receipt of the Prospectus dated ___________________, 19__ descriptive of the offering of the shares of stock of Ace Hardware Corporation hereby subscribed for by the undersigned. The undersigned acknowledges receipt of a copy of the By-laws of Ace Hardware Corporation (including Article XXIV thereof relative to "members' patronage dividends" which contains provisions deeming a member to have consented to include patronage dividends received in the form of written notices of allocation in his gross income) and agrees that the shares hereby subscribed for shall, when issued, be held by the undersigned subject to all of the provisions of the restated Certificate of Incorporation and the By-laws of Ace Hardware Corporation and all amendments and supplements thereto. THE SHARES OF CAPITAL STOCK, WHEN ISSUED, SHALL BE HELD BY THE UNDERSIGNED SUBJECT TO ALL OF THE PROVISIONS OF THE RESTATED CERTIFICATE OF INCORPORATION AND BY-LAWS OF THE COMPANY AND ALL AMENDMENTS AND SUPPLEMENTS THERETO, INCLUDING THE PROVISIONS GOVERNING THE DETERMINATION AS TO WHETHER A RETAIL BUSINESS OUTLET IS OWNED OR CONTROLLED BY THE UNDERSIGNED. TO SECURE THE PAYMENT OF ANY INDEBTEDNESS OWING TO THE COMPANY BY THE UNDERSIGNED AT ANY TIME, THE COMPANY SHALL RETAIN A FIRST LIEN UPON AND A RIGHT OF SET-OFF AGAINST ALL MONEYS PAID IN ON THE PURCHASE OF SAID SHARES AND UPON ALL SHARES OF CAPITAL STOCK OF THE COMPANY ISSUED TO THE UNDERSIGNED FOR ANY PURPOSE AT ANY TIME. THE UNDERSIGNED'S INTEREST IN ANY OF THE SHARES BEING PURCHASED UNDER THIS AGREEMENT AND IN ANY PATRONAGE DIVIDENDS HEREAFTER ISSUED BY THE COMPANY TO THE UNDERSIGNED FOR THE RETAIL BUSINESS OUTLET LICENSED UNDER THE AGREEMENT OR FOR ANY OTHER RETAIL BUSINESS OUTLET LICENSED BY THE COMPANY WHICH IS OWNED OR CONTROLLED BY THE UNDERSIGNED EITHER IN THE FORM OF SHARES OF THE COMPANY'S CAPITAL STOCK OR IN THE FORM OF ANY DEBT INSTRUMENT OF THE COMPANY SHALL AT ALL TIMES BE DEEMED TO BE OFFSET BY THE AMOUNT OF THE CURRENT BALANCE OF ANY INDEBTEDNESS OWING BY THE UNDERSIGNED TO THE COMPANY WITH RESPECT TO ANY OF SAID OWNED OR CONTROLLED RETAIL BUSINESS OUTLETS. AT THE COMPANY'S OPTION AND IN ACCORDANCE WITH THE BY-LAWS AND MEMBERSHIP AGREEMENT, IT SHALL HAVE THE RIGHT AT ANY TIME TO APPLY THE VALUE OF ANY PATRONAGE DIVIDENDS ISSUED BY IT TO THE UNDERSIGNED FOR ANY RETAIL BUSINESS OUTLET LICENSED BY THE COMPANY WHICH IS OWNED OR CONTROLLED BY THE UNDERSIGNED AS AN OFFSET AGAINST THE INDEBTEDNESS OWED TO THE COMPANY IN CONNECTION WITH TRANSACTIONS BETWEEN THE COMPANY AND THAT OUTLET OR ANY OTHER SUCH OWNED OR CONTROLLED RETAIL BUSINESS OUTLET, AND WHENEVER THE COMPANY, IN ITS SOLE JUDGMENT, DEEMS ITSELF TO BE INSECURE WITH RESPECT TO ANY SUCH INDEBTEDNESS, THE COMPANY MAY DEMAND THE ASSIGNMENT TO THE COMPANY BY THE UNDERSIGNED OF THE UNDERSIGNED'S INTEREST IN ANY SHARES OF THE CAPITAL STOCK OF THE COMPANY PURCHASED BY THE UNDERSIGNED AND IN ANY WRITTEN NOTICES OF ALLOCATION RECEIVED BY THE UNDERSIGNED. NO SHARES OF CAPITAL STOCK OF THE COMPANY HELD BY THE UNDERSIGNED AT ANY TIME SHALL BE PLEDGED, SOLD, ASSIGNED OR TRANSFERRED WITHOUT THE PRIOR CONSENT OF THE BOARD OF DIRECTORS OF THE COMPANY, AND IN NO EVENT SHALL ANY SUCH TRANSFER OR ASSIGNMENT BE MADE TO ANY TRANSFEREE WHO IS NOT ELIGIBLE TO BE A HOLDER OF SUCH SHARES. The undersigned understands and agrees that this Subscription for Capital Stock shall become effective only upon its acceptance by Ace Hardware Corporation at its principal office in Oak Brook, Illinois and that all of the terms and provisions of the aforesaid Prospectus are incorporated herein by this reference thereto as if set forth herein verbatim. Dated: , 19 Corporate, Partnership or Business Name Trading Name: D/B/A (Signatures) (The name of a corporate subscriber or partnership subscriber should be written above followed by the signature of an appropriate corporate officer or all partners of such subscriber.) Address of Store or Outlet with Respect to Which the Shares hereby Subscribed for Pertain. ACCEPTED for Ace Hardware Corporation at Oak Brook, Illinois this day of , 19 . By Address of Primary Store or Retail Outlet (Title of Officer) EX-5 3 OPINION FROM GENERAL COUNSEL Exhibit 5 March 23, 1994 To the Board of Directors Ace Hardware Corporation 2200 Kensington Court Oak Brook, Illinois 60521 Gentlemen: This opinion relates to the legality of certain unsold shares of Class A voting stock and Class C nonvoting stock of Ace Hardware Corporation (the "Company"), a Delaware corporation, previously registered with the Securities and Exchange Commission under the Securities Act of 1933 under Registration Statement No. 33-46449 which, pursuant to Rule 429 of Regulation C of the Securities Act of 1933, constitutes the shares being offered by the Prospectus filed as a part of Post-Effective Amendment No. 2 to the Company's Registration Statement No. 33-46449 with respect to which said opinion is furnished. As General Counsel in the Legal Department of the Company since January 1, 1989 and as a partner in the firm of Gatenbey, Law & League which acted as general counsel to the Company and its Illinois predecessor corporation for many years prior to that date, I have examined the Company's restated Certificate of Incorporation (as amended to date), the By-laws of the Company (as amended to date), and its corporate proceedings, and have made such other investigations as I have deemed necessary or appropriate for the purpose of this opinion. Based upon the foregoing, I am of the opinion that: (1) The Company is duly organized and validly existing as a corporation in good standing under the laws of the State of Delaware and is also duly qualified to do business as a foreign corporation in, and is in good standing under the laws of, the States of Arizona, Arkansas, California, Connecticut, Florida, Georgia, Idaho, Illinois, Maryland, Mississippi, Nebraska, North Carolina, Ohio, Oregon, Texas, Washington and Wisconsin. (2) The total authorized capital stock of the Company consists of 10,000 shares of Class A Voting Stock (par value $1,000 per share), 6,500 shares of Class B Nonvoting Stock (par value $1,000 per share) and 2,000,000 shares of Class C Nonvoting Stock (par value $100 per share). (3) All of the shares of capital stock of the Company which are to be offered by the Prospectus filed as a part of the aforesaid Post-Effective Amendment with respect to which this opinion is furnished (including any shares which may have heretofore been issued but are not presently outstanding), will, upon issuance in accordance with the terms set forth in said Prospectus, constitute legally and validly issued, fully paid and non-assessable shares. I understand that this opinion is to be used in connection with the aforesaid Post-Effective Amendment, and I consent to the filing of this opinion with the Post-Effective Amendment and to the reference to me in the Prospectus under the heading "Opinions of Experts". I also hereby consent to the comment made in the Prospectus under "Distribution Plan and Offering Terms", subheading "Federal Income Tax Status of Class A and Class C Shares", to the effect that the statements made under said subheading with respect to the federal income tax treatment of shares of the Company's Class A and Class C Stock purchased by its dealers and the statements made in the Prospectus under "The Company's Business", subheading "Federal Income Tax Treatment of Patronage Dividends" represent my opinion concerning said matters. I also hereby consent on behalf of Gatenbey, Law & League to the reference to them in the Prospectus under the heading "Opinions of Experts" and to the incorporation by reference as Exhibit No. 7 to said Post-Effective Amendment of their opinion relating to the preference in excess of par value to which shares of Class B nonvoting stock of the Company are entitled in the event of the involuntary liquidation of the Company which was heretofore filed as Exhibit No. 7 to the Company's Form S-1 Registration Statement under Registration No. 2-63880. Very truly yours, David W. League General Counsel - Ace Hardware Corporation EX-10 4 OFFICER INCENTIVE COMPENSATION PLAN Exhibit 10-G ACE HARDWARE CORPORATION OFFICER'S INCENTIVE COMPENSATION PLAN The Effective Dates The Present Incentive Compensation Plan for Officers of Ace Hardware Corporation shall remain in effect through December 31, 1993. Effective January 1, 1994, the Ace Hardware Corporation Officer's Incentive Compensation Plan is hereby amended and restated as provided herein. The 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 Plan participants are to be nominated by the President and confirmed by the Board of Directors. The President is not eligible for participation in this Plan. Incentive Compensation Award Participants Participation in the Plan shall be limited to the officers holding the following or similar positions of responsibility: Executive Vice President Senior Vice President-Marketing and Advertising Vice President - Controller Vice President - Corporate Strategy and International Business Vice President - General Counsel Vice President - Human Resources Vice President - Information Systems Vice President - Merchandising Vice President - Retail Support Incentive Compensation Award Percentages The following indicates the maximum short-term award and the maximum long-term award for each participant: Short Term Maximum Long Term Maximum Award Percentage of Award Percentage of Annual Base Salary Average Annual Base Salary 20% 30% Short-Term Incentive Compensation Award Distribution The Compensation and Human Resources Committee will review and recommend the short-term portion of the incentive awards to be determined by the Board of Directors. The Board of Directors shall have final approval of all short-term incentive awards. Distribution of the short-term portion of the incentive award payments will be made through a lump sum payment as soon as year-end audit reports are final. Short-term incentive awards will be a percent of annual base salary of the participant at Plan year-end. The percent of award will be based on achievement of individual objectives established by the President and reviewed and approved by the Board of Directors, up to the maximum percentage of base salary as established by the Plan. Long-Term Incentive Compensation Award Distribution The Compensation and Human Resources Committee will review and recommend the long-term portion of the incentive awards to be determined by the Board of Directors. The Board of Directors shall have final approval of all long-term incentive awards. The long-term incentive compensation award plan will be based on a 3-year time frame. Awards will be a percentage of the participant's average annual base salary at each Plan year-end during the 3-year time frame. The percentage will be based on achievement of the corporate goals established by the President and reviewed and approved by the Board of Directors, up to the maximum percentage of average annual base salary determined by the Plan. At the end of the third year of each 3-year time frame, the award shall be calculated. The first 3-year time frame shall be the years 1992 through 1994. Distribution of the long-term portion of the incentive award will be made through a lump sum payment as soon as the year-end audit reports are final. General Provisions The general provisions of the Plan are listed below: The officer must be actively employed upon the last day of the calendar year to be eligible for that year's short-term incentive award. The officer must also be actively employed upon the last day of the calendar year of the third year in any long-term time frame to be eligible for that time frame's long-term incentive award. However, in the event of retirement, death or permanent disability, the Plan participant (or his/her estate) will receive his/her pro rata share of any earned short-term or long-term incentive award as soon as such award can be determined and approved by the Board of Directors. A Plan participant who voluntarily terminates or is involuntarily terminated during a Plan year for reasons other than death, permanent disability or retirement, will not be eligible for any short-term incentive award for the year in which the termination occurs, or any long-term incentive award for any 3-year time frame that includes the year of termination. The interpretation of the Plan and determination of the awards by the Board of Directors will be final and binding on all Plan 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 Plan in any respect effective at the end of each Plan year. The Plan does not constitute an employment contract and does not alter the fact that a Plan participant may resign from the Company nor that the Company may discharge a Plan participant. The participants in the Ace Hardware Corporation Officer's Incentive Compensation Plan shall consist of the following officers: David F. Hodnik William A. Loftus Michael C. Bodzewski Paul M. Ingevaldson Rita D. Kahle David W. League David F. Myer Fred J. Neer Donald L. Schuman EX-10 5 MEMBERSHIP AGREEMENT Exhibit 10-P ACE HARDWARE MEMBERSHIP AGREEMENT This Agreement 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, hereinafter referred to as the "Company", and an independent merchant hereinafter referred to as the "Member" operating a retail business at sometimes referred to as the "licensed location"; WITNESSETH: In consideration of the respective undertakings and covenants herein contained, the Company and the Member hereby agree as follows: ARTICLE I RIGHTS GRANTED TO THE MEMBER The Company hereby grants to the Member, subject to the terms and conditions set forth herein: 1. License. A non-exclusive license to use, in a manner designated or approved by the Company, the word "ACE" and/or certain marks, presently "ACE Hardware" and such other marks as the Company may from time to time designate or approve in writing (hereinafter individually and collectively referred to as the "Marks") to identify the retail business operated by the Member at the licensed location and in connection therewith to display such ACE identification signs at such location as shall comply with the standards prescribed by the Company. If it becomes advisable at any time in Company's sole judgment for the Member to modify or discontinue use of any of the Marks and/or for the Member to use one or more additional or substitute trademarks or service marks or an additional or substitute type of trade dress, then the Member agrees to immediately comply with Company's directions to modify or otherwise discontinue the use of such Marks, and/or to use one or more additional or substitute trademarks, service marks, logos or commercial symbols or additional or substitute trade dress after notice thereof by Company. Company shall not have any obligation to reimburse the Member for any expenditures made by the Member to modify or discontinue the use of any of the Marks or to adopt additional marks or substitutes for any discontinued Marks, including, without limitation, any expenditures relating to advertising or promotional materials or to compensate the Member for any goodwill related to any discontinued Marks. Further, the Company retains the sole and exclusive discretion to determine whether any of the Marks shall be or continue to be registered and what action, if any, shall be taken against any person in the event of any actual or alleged infringement thereof. 2. Merchandise Purchases. The right to purchase from the Company for resale at retail from the licensed location such merchandise as the Company may, from time to time, in its sole discretion offer for sale to its Members, including such items, if any, as the Company may choose to distribute under private labels bearing the trademarks "ACE," "ACE Hardware" or other trademarks owned by the Company; 3. Retail Services. The right to purchase or subscribe for, in connection with the business operated at the licensed location, such advertising circulars and materials, identification signs, and other promotional materials, and such other retail service materials, equipment, devices, programs and systems as the Company makes available from time to time to its Members; 4. Trade Shows and Workshops. The right, upon payment of such fees and charges as the Company shall reasonably require from time to time, to attend (a) such Conventions and Trade Shows, if any, as may be sponsored by the Company; and (b) such workshops and seminars, if any, as may be sponsored from time to time by the Company; 5. Patronage Dividends. The right to receive from the Company within 8 1/2 months following the close of each year the proportionate share allocable to the licensed location of the patronage dividends distributed by the Company out of its net earnings from operations conducted by it (or from the operations of each separate division or category of sales as shall be established on the Company's books) with or for patrons to whom the Company is obligated to pay patronage dividends on qualifying purchases made from it in accordance with and in the manner provided for by the then effective applicable provisions of the Company's By-laws and any applicable patronage dividend distribution plan. ARTICLE II DUTIES AND RESPONSIBILITIES OF THE MEMBER The Member agrees: l. Capital Stock . To subscribe and pay for the appropriate number of shares of capital stock of the Company in accordance with the accompanying Subscription for Capital Stock Agreement and where the required shares of capital stock of the Company are to be acquired, with the Company's consent, by transfer from a previous owner of the business at the licensed location, to assume any and all of the then-remaining obligations of such previous owner to the Company with respect to such shares; 2. Processing Charge. To pay to the Company at the time required by the Company's current policy the processing charge currently imposed by it to partially defray the Company's costs in processing the Member's application for membership in the Company; 3. Advertising Assessments. To pay its applicable portion of such charges as the Company assesses its members in order to fund the Company's national and regional advertising programs, including, but not limited to any assessments imposed by the Company under any advertising plan or program established by the Company for its members in a particular marketing area; 4. Confidentiality of Documents and Information. To comply with any and all policy statements and instructions issued from time to time by the Company concerning the Company's confidential information and to keep in strict confidence all checklists, microfiche films, bulletins, catalogs, price lists, order forms and other documents and information furnished to the Member by the Company with respect to the merchandise, programs and services which are available from the Company. The Member further agrees to at no time divulge or display or disclose any such documents or information other than in connection with the Member's transactions with the Company or as otherwise specifically required by law or authorized by the Company in writing and, upon termination of this Agreement, to immediately return to the Company all such documents, items and any tangible personal property containing such confidential information as may have been prepared or copied by or on behalf of the Member or furnished by the Company. The provisions of this Article II, Section 4, shall survive the termination of this Agreement; 5. Restrictions on Corporate or Trade Name Use of "ACE". To refrain from using the word "ACE" or the words "ACE Hardware" as part of the corporate name or the registered trade or commercial name of the Member or of the Member's retail outlet covered by this Agreement unless such name also includes another word or words clearly distinguishing it from the corporate or trade name or names used by the Company or any of its subsidiaries or divisions or by any other retail entity licensed by the Company to use the word "ACE" or the words "ACE Hardware" to identify and promote its business. The Member agrees that it does not now and will not in the future assert any claims to any goodwill or ownership of any of the Company's trademarks, service marks or other intellectual property, including, but not limited to, the Marks licensed to the Member hereunder, and will not engage in any acts or conduct in derogation of the Company's ownership thereof. The Member further agrees that upon the termination of this Agreement for any reason whatsoever, the Member will promptly issue such instructions and execute and file such documents as may be necessary to revoke or terminate any listing or service which the Member may have obtained under any corporate or trade name containing the words "ACE" or "ACE Hardware" including, but not limited to assumed name or other registrations with governmental entities and any telephone service, telephone directory assistance listings and printed telephone directory listings. The Member hereby irrevocably appoints the Company as the Member's attorney-in-fact to issue such instructions and to execute and file such documents as the Company may deem necessary or desirable to accomplish the foregoing in the Member's name and on its behalf in the event that the Member, for any reason, does not do so promptly upon the termination of this Agreement. The provisions of this Article II, Paragraph 5, shall survive the termination of this Agreement. 6. Compliance with Trademark Policy Statements and Guidelines. To comply with all policy statements and guidelines communicated from time to time to the Company's Members by the Company with respect to the use of any trade name, trademark or service mark belonging to or registered by the Company (including, but not limited to the Marks licensed to the Member hereunder) and, without the Company's prior written consent, to (a) at no time use any such trade name, trademark or service mark in a manner or for a product or service not approved by the Company for such use, (b) at no time authorize, permit or condone the use of any of the foregoing items by any other person or firm, and (c) at no time 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, the Marks or with any trade name, trademark or service mark belonging to or registered by the Company (it being understood and agreed that all variations or adaptations of any of the Marks, or any trademarks or service marks owned or registered by the Company shall be the exclusive property of the Company and that the Company shall have the exclusive right to register the same and to license the use thereof); 7. Use of "ACE" Identification to Cease upon Termination of Agreement. Upon termination of this Agreement for any reason, to discontinue the use of any and all Marks, including but not limited to, the word "ACE," and the use of all trade names, trademarks, service marks, or logos belonging to or registered by the Company (including, but not limited to, any reference to the Member's former affiliation with the Company) and to remove, at the Member's sole expense, all identification signs and decals used by the Member at the licensed location which contain any of the foregoing, (it being further understood that this also requires that the word "ACE" be eliminated if it has been used as a part of the Member's corporate name or trade name at such location). Further, if the Member continues, following such termination, to display at or have affixed to the licensed location any such identification signs bearing any marks of the Company, then the Member agrees to pay to the Company a fee in the amount of Ten Thousand Dollars ($10,000.00) per month, payable on the first day of each and every month during which any such identification sign continues to be affixed to or displayed at the licensed location for one or more days. Such payments shall continue to accrue and be due and payable until the first day of the month following the month in which all such identification signs have been permanently removed from the licensed location. Without prejudice to the Company's right to collect the fee hereinabove prescribed, and to pursue any other remedies, whether at law or in equity, the parties agree that any display of identification signage bearing any of the Company's trade names, trademarks, service marks, or logos by the Member following termination of membership is an infringement thereof, the continuation of which is likely to result in irreparable harm to the Company, and in such event, the Company is hereby granted the right, with or without process of law, to remove such signage and, in furtherance thereof, the Member hereby expressly grants the Company the right to enter upon and have free access to the licensed location without being deemed guilty of trespass or any other tort whatsoever for the purpose aforesaid. The Member further agrees that it will pay promptly, upon demand, any and all of the Company's costs and expenses, including reasonable attorneys' fees, incurred by the Company in exercising or enforcing any of the aforesaid rights and remedies. The provisions of this Article II, Section 7, shall survive the termination of this Agreement. 8. Indemnification by Member for Certain Claims against Company. To assume full responsibility with respect to and to indemnify the Company and hold it harmless from any and all claims and liabilities asserted by or against the Company in each of the cases hereinafter set forth to the extent that such claims or liabilities do not arise solely from the gross negligence or wrongful conduct of the Company. For purposes of this indemnification, "claims" and "liabilities" shall mean and include all obligations, actual, special, consequential and punitive damages and costs incurred by the Company in any matter hereinbelow set forth, including, without limitation, the reasonable fees of accountants, attorneys, attorneys' assistants, mediators, arbitrators, and expert witnesses, as well as costs of investigation and proof of facts, court costs, and any other litigation expenses, including but not limited to travel and lodging expenses: (a) which are based upon or arise out of any representation made by the Member or its employees to the Member's customers that product can be used for a purpose for which the product was not intended by its manufacturer; or (b) which are based upon or arise out of any act performed by the Member or its employees which was intended to assist the Member's customer in selecting or using a product; or (c) which arise out of charges asserted against the Company by another party for services provided by such party to the Member or for merchandise shipped by such party to the Member or the Member's licensed location or to a shipping address otherwise set forth in any "ACE" or "ACE Hardware" purchase order form issued by the Company to the Member for the Member's use in purchasing merchandise or services from any third party or which involve damages demanded from the Company in connection with any occurrence concerning which it is alleged that the member or its employees functioned as an agent of the Company, or which in any way arise from or in connection with the Member's occupation of its store at the licensed location, the use or operation of any fixtures or equipment at the licensed location, or the sale of any merchandise or services at the licensed location; or (d) which arise out of the Member's execution and delivery of this Agreement, or the performance of any of its obligations hereunder, or any liabilities arising in connection with site selection services or training provided by the Company; or (e) which arise out of any transfer of interest by the Member in this Agreement, its membership in the Company, the licensed location, or some or all of the assets of its business in any manner not in accordance with this Agreement, or the Company's By-laws; or (f) which arise out of the Company's collection of any past due balances owing by the Member for the purchase of merchandise or services from the Company or any sums of money otherwise due and owing to the Company by the Member hereunder; and (g) which arise out of the Company's obtaining relief from the automatic stay provisions of the U.S. Bankruptcy Code or otherwise protecting any secured or unsecured interest of the Company in any property of the Member in the event that the Member becomes the subject of proceedings under said Code; The provisions of this Article II, Section 8 shall survive the termination of this Agreement. 9. Notification Obligations of Member. To notify the Company in writing (a) in advance of any change in the legal form of ownership of the Member (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 the Company any party previously responsible for the Member's obligations hereunder without the written consent of the Company, (b) as promptly as feasible, as to the death of any partner having an interest in any partnership by which the Member is owned or the death of any stockholder owning 50% or more of the voting stock of the Member if the Member 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 (i) of 50% or more of the ownership interest(s) in either the Member or the business operated at the licensed location or (ii) of all of the capital stock (both voting and non-voting) owned by the holder(s) in a corporation owning the business operated at the licensed location if 50% or more of the outstanding voting stock of such corporation is owned by such holder(s); 10. Low Volume Service Charge. To pay to the Company in accordance with the Low Volume Service Charge Program established by the Company's Board of Directors, as modified from time to time, a special service charge when the Dealer's qualifying purchases during any calendar year are below the minimum established in the Program. Minimum purchase level requirements applicable to Members may be changed from time to time upon advance notice to the Member by the Company. Notwithstanding the payment of any low volume service charges by the Member under the program as aforesaid, the Member understands and agrees that the failure to meet the Company's minimum purchase level requirements constitutes cause for termination pursuant to Article III, Paragraph 1 hereof. 11. Late Payment Service Charge. To pay all amounts shown as currently due on the Company's billing statements for purchases of merchandise, supplies and services made by the Member and other sums incurred by the Member with such promptness as shall enable the 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 to pay such service charge per bi-weekly billing statement on any past due balance as the Company regularly imposes upon its licensed members (it being acknowledged by the Member that, unless the Member has been or is hereafter informed by the Company in writing of a change which has been or is to be made in the percentage applied by it in determining such charge, such percentage shall be .77% of the past due balance shown on each statement except that the percentage applied to any business operated by the Member in Texas shall be .384% and to any business operated by the Member in Georgia shall be .692%) unless and until such time as notice of change is given to the Member as aforesaid. 12. Furnishing Information to Company. To furnish, from time to time for the Company's review and upon the Company's advance written request, such information concerning the Member and its business operations as the Company shall deem necessary or desirable, including, but not limited to, copies of the Member's financial statements and any leases or proposed leases for the licensed location. 13. Compliance with Company By-laws and Company Policies. To comply with all provisions of the By-laws and Policies of the Company, as amended from time to time, which apply in any way to any of the relationships between the Member and the Company; 14. Member Operational Requirements. To comply with all the provisions of the Member Operational Requirements of the Company now in force or as hereafter amended or adopted by the Company. The Company hereby unilaterally, without limitation, reserves the sole and exclusive right and discretion to amend, modify and change the Member Operational Requirements under any conditions and to any extent which the Company may deem necessary or desirable to meet competition, to protect its trademarks, service marks, trade names or logos, or to improve the quality of the products or services provided by the Company or the Member. Such amendments, modifications and changes may include, but are not limited to, the subjects and subject matter presently set forth in the Member Operational Requirements, or the image, appearance and decor of the Member's store, the types of merchandise, services and equipment to be acquired, utilized, or offered by the Member, and any approved manufacturers, distributors or suppliers thereof, or specifications therefor. 15. Merchandise Return. To return no merchandise purchased by the member from the Company without the written consent of the Company first being obtained. ARTICLE III TERMINATION OF AGREEMENT 1. Termination By Either Party Upon Advance Written Notice. This Agreement may be terminated with or without cause at any time by either the Member or the Company by giving written notice of such intention to terminate to the other party. As used herein, "cause" means a breach by Member of any material obligation of this Agreement or the Member Operational Requirements now in force or hereafter amended or adopted by the Company. It is further understood that any misrepresentations made by Member in connection with the obtaining of rights granted hereunder or the failure to meet the annual minimum purchase levels established by the Company from time to time shall each constitute cause for termination of the Agreement by the Company. Any such notice shall be given not less than thirty (30) days in advance of the termination date set forth in the notice, with the exception of notices given by the Company under Article III, Section 2 hereof. 2. Termination By Company for Account Delinquency. Upon three (3) days advance written notice to the Member, the Company may terminate this Agreement in the event of a delinquency on the part of the Member in making payment for merchandise or services supplied by the Company to the licensed location in time for receipt thereof by the Company not more than fifteen (15) days after the date on which such payment is due. 3. Automatic Termination Upon Closing Down of Member's Business or Member's Insolvency. The closing down of the business operated at the licensed location shall automatically cause this Agreement to be terminated unless such business is moved to another location to which the Company consents in accordance with the provisions of the Company's By-laws. This Agreement shall also automatically terminate upon the giving of written notice by the Company to the Member at any time after the Member becomes insolvent or makes an assignment for the benefit of creditors. 4. Termination Upon Member's Transfer of Capital Stock of the Company. Unless the Company shall expressly consent to the continuation of this Agreement after such time, this Agreement shall automatically be deemed to have terminated as of the time when any of the shares of capital stock of the Company issued to the Member with respect to the Member's business at the licensed location are transferred (with the Company's consent) to another eligible holder for said shares or are purchased back from the Member by the Company. 5. Termination Upon Death Unless Company Approves Continuation. If the business operated at the licensed location is owned by an individual sole proprietor, this Agreement shall automatically terminate upon the death of such individual. If such business is owned by a partnership, this Agreement shall automatically terminate upon the death of a general partner in such partnership. However, with the 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. 6. Termination Upon Transfer of Stock of Member's Corporation. If the business operated at the licensed location is owned by 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 or upon the sale or transfer of all of the shares of capital stock (both voting and non-voting) of a corporation owning 80% or more of the outstanding voting stock of the corporation owning said business held by the holder or holders of 50% or more of the outstanding voting stock of that corporation unless such sale or transfer of shares did not result in a repurchase by the Company of the shares of capital stock of the Company theretofore issued by it to the corporation owning the business operated at the licensed location. 7. Statute, Rule or Regulation Applicable to Licensed Location. Notwithstanding the provisions of this Article III, Sections 1 through 6, where a longer period of advance notice or other conduct constituting "cause" or "good cause" is prescribed by a statute, rule or regulation applicable to the licensed location, this Agreement shall be deemed to be reformed and amended to the extent necessary to conform to the minimum notice periods and restrictions on termination required thereby. The Company shall not, however, be precluded from contesting the validity, enforceability or application of any such statute, rule or regulation in any action, proceeding or dispute relating to this Agreement or to its rescission or termination. ARTICLE IV MODIFICATION OF TERMS 1. Reservation By The Company Of The Right To Modify. The Member acknowledges and agrees that Article XXVI, Section 1 of the Company's By-laws provides that the By-laws, as amended from time to time, constitute a binding legal contract between the Company and its shareholders, and are legally binding on all shareholders and their successors, heirs, executors, administrators, assigns and personal representatives. The Member further acknowledges and agrees that this Agreement is modifiable by amendment of the Company's By-laws and otherwise by action of the Company's shareholders or its Board of Directors, in each case unilaterally, without limitation, and without the consent of the Member. The Member further acknowledges and agrees that the Company may modify the trademark license granted hereunder and its Member Operational Requirements unilaterally in accordance with Article I, Section 1 and Article II, Section 14 hereof, respectively. 2. Modifications To Comply With Amendments to Certificate ofIncorporation and By-laws. If any provision of any amendment to the Certificate of Incorporation of the Company or any provision of any amendment to the By-laws of the Company which is duly adopted subsequent to the Member's execution of this Agreement is in any way inconsistent with or in conflict with any provision of this Agreement, then the Agreement shall be deemed to have been modified effective as of the date specified in an advance written notice given by the Company to the Member in order to place the Agreement in conformity with such amendment. The Member's act of continuing to do business with the Company after the effective date of such modification shall be deemed to constitute the Member's consent to be bound by such modification. 3. Modification of Member's Other Membership Agreements To Conform With This Agreement. If the Member has previously entered into a franchise or membership agreement with the Company for a retail business owned or controlled by the Member at any location other than the above-designated licensed location, each such other franchise or membership agreement shall be deemed to have been automatically modified as of the date of acceptance of this Agreement by the Company to conform each such agreement with the provisions hereof, and, except for any provisions which have been included in any such other agreement to comply with the special termination or other requirements imposed by the laws of the State in which such business is located, the provisions of this Agreement shall thereafter be deemed to supersede and replace all of the provisions of each such other agreement. The applicable provisions of the Company's By-laws shall govern all determinations as to whether any such other retail business is owned or controlled by the Member. ARTICLE V MISCELLANEOUS l. Effective Date; Application of Illinois Law; Enforcement in Illinois Courts; Partial Illegality Not To Void Rest of Agreement. The signing of this Agreement by the Member constitutes an application only, and the Agreement shall not be effective unless and until it has been duly accepted and countersigned by the Company at its principal office in Illinois. All orders for merchandise, supplies and services placed by the Member pursuant to this Agreement shall be transmitted to the Company at said office, and the Member hereby consents and agrees that: (a) all provisions of this Agreement shall be interpreted and construed in accordance with the laws of Illinois, except that such state's choice of law and conflicts of law rules shall not apply and the Illinois Franchise Disclosure Act or any successor statute and/or regulation shall not apply unless its jurisdictional requirements are met independently without reference to this paragraph. (b) any suit brought by the Company against the Member to enforce any provision of this Agreement or seeking any relief in connection with or arising out of the relationship between the Company and the Member may be instituted in an appropriate court in the State of Illinois unless institution of such suit in Illinois is prohibited by the laws of the jurisdiction in which the licensed location is situated; and (c) if any provision of this Agreement shall be held to be illegal or void, the validity or the legality of the remaining portion hereof shall not be affected thereby. 2. Successor and Assigns. Neither this Agreement nor any interest of the Member herein shall be assignable or subject to transfer, assignment or encumbrance by the Member at any time. A purchaser or successor of the business operated by the Member at the licensed location shall be entitled to operate such business as an authorized ACE member only if such purchaser has executed and the Company has accepted and signed an ACE Hardware Membership Agreement for the business. The Company expressly reserves the right to assign this Agreement and all of its rights and privileges to any other person, firm or corporation, and this Agreement shall inure to the benefit of any such transferee or other legal successor to the interest of the Company herein. 3. Minimum Cash Portion of Patronage Dividend Distributions. The cash portion of the patronage dividends distributed each year to the Member by the Company shall not be less than 20%, but the entire undistributed patronage dividends accrued for the licensed location at the time of termination of this Agreement shall nevertheless be applied against any indebtedness then owing to the Company by the Member to the extent of such indebtedness unless the Member submits a timely request to the Company for payment of 20% of such patronage dividends in cash. 4. Company's Right To Deny or Limit Member's Credit and Merchandise Orders. If the Company at any time reasonably believes that the financial condition of the Member may not be capable of supporting the continued extension of normal credit to the Member by the Company, the Company may limit or deny the extension of credit to the Member and/or may limit the Member's orders to those which are to be filled from the Company's warehouse inventories and otherwise limit the quantities of merchandise which the Member may purchase, or the manner or terms of payment which shall be applicable to such orders. 5. Status of Agreement With Respect to Other Documents. This Agreement shall be deemed to constitute the "franchise or membership agreement" utilized by the Company in any reference to such term contained in the Company's Certificate of Incorporation, its By-laws or in any document affecting the relationship between the Company and its members. 6. Manner of Giving Notices. All notices required or permitted to be given hereunder by one party to the other party shall be effective if personally delivered or mailed to the other party by registered or certified mail at the address of such other party set forth herein or at such other address as such party shall have specified in writing, and shall be deemed to have been given on the date of such personal delivery or on the date of deposit in the U.S. mails, as the case may be. 7. Independent Relationship. The relationship between the Company and the Member established by this Agreement shall at all times and for all purposes be deemed to be one between separate and totally independent parties. Neither the Member nor any employee of the Member shall be deemed to be an employee of the Company. No legally recognized partnership, agency or similar relationship is hereby created in any respect. It is mutually understood and agreed that any and all policies affecting the Member's hiring or firing of employees, any control over the financial management of the Member's business, the determination of the Member's retail pricing, and the Member's compliance with applicable governmental laws and regulations are to be established solely by the Member. However, the Member shall not thereby be relieved from satisfying any of its obligations hereunder, or under applicable laws or regulations. It is further understood and agreed by the parties hereto that this Agreement does not create a fiduciary relationship between them. The Member shall identify itself in all dealings as the independent owner of its business. 8. Waiver of Rights. No waiver by the Company of any obligation of the Member or restriction on the Member pursuant to the terms and conditions hereof shall be effective unless in writing and signed by an officer of the Company. Any such waiver granted by the Company shall be without prejudice to any of the Company's rights hereunder, will be subject to continuing review by the Company and may be effectively revoked upon written notice thereof to the Member upon the terms and conditions set forth therein, if applicable or otherwise. Neither party shall be deemed to have waived or impaired any of its rights hereunder, (including, without limitation, the right to demand exact compliance with every term, condition and provision herein, or to declare any breach thereof to be a default and to terminate this Agreement) by reason of any verbal agreement between the parties or by virtue of any custom, practice or actions of the parties at variance with the terms hereof, or by reason of any failure, refusal, or omission by either party in exercising any of its rights hereunder or in failing to insist on strict compliance herewith by the other party. No waiver, forbearance, delay, failure or omission by the Company in the exercise of any of its rights or powers with respect to any other member, shareholder, dealer, or any other person shall be deemed to constitute a waiver of any of the Company's rights hereunder, nor shall any acceptance of payments by the Company from the Member be deemed a waiver by the Company of any preceding breach by the Member of its obligations under this Agreement. 9. Reservation of Company's Right To Approve Additional Membership Locations. Nothing contained in this Agreement shall be deemed to grant the Member an exclusive territory or exclusive rights, or to limit, deny, or otherwise restrict the Company's right to enter into agreements for the licensing of its marks or for the acceptance of other members or dealers or for the authorization of others to own or operate retail or other outlets which offer products or services similar to those of the Member at any locations and within any proximity to the Member's licensed location as the Company, in the exercise of its sole and exclusive discretion, shall determine. 10. Site Approval or Acceptance. The Member hereby acknowledges andagrees that the Company's approval or acceptance of a site for an Ace Hardware store does not constitute an assurance, representation or warranty of any kind, express or implied, as to the suitability of the licensed location for an Ace Hardware store or the successful operation or profitability of an Ace Hardware store hereunder. The Company's approval or acceptance of any site, including the licensed location, indicates only that the Company believes that such site falls within acceptable minimum criteria established by the Company solely for the Company's own purposes and benefit at the time of the Company's approval or acceptance thereof. The parties acknowledge that application of criteria that have been effective with respect to other sites and premises may not be predictive of potential for the licensed location and that demographic and/or economic factors, such as competition from other similar businesses, included in or excluded from the Company's own criteria could change, thereby altering the potential thereof. The parties acknowledge that such factors are unpredictable and are beyond the Company's control, and the Member agrees that the Company shall not be responsible for the failure of any site approved or accepted by the Company to meet the Member's expectations as to revenue or operational criteria. The Member also represents and warrants that its acceptance of a membership for the operation of an Ace Hardware store at the licensed location is based on its own independent investigation of the suitability of the site for such purpose. 11. Further Representations of Member. As an inducement to the Company to enter into this Agreement, the Member further represents and warrants as follows: a) that the Member has conducted an independent investigation of the business contemplated by this Agreement, and recognizes that the nature of the business or its market area are subject to change over time, that the Member's investment involves business risks; b) that no representations have been made by the Company or by any of its officers, directors, employees or agents that are contrary to the terms contained in this Agreement, or contrary to any statements contained in any prospectus or offering circular heretofore delivered to the Member; and c) the Member has not received or relied upon any guarantee, whether express or implied, of the sales, revenues, profits or success of the business venture contemplated by this Agreement. IN WITNESS WHEREOF, this Agreement has been executed on this day of , 19 by the person(s) signing it for the Member, whose authority to sign shall be deemed to have been duly authorized by the Member. 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 he 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 , 19 . (Title of Officer) EX-10 6 $30 M NOTE AGREEMENT Exhibit 10-R ACE HARDWARE CORPORATION NOTE PURCHASE AND PRIVATE SHELF AGREEMENT $30,000,000 6.47% SENIOR SERIES A NOTES DUE JUNE 22, 2008 $20,000,000 PRIVATE SHELF FACILITY Dated as of September 22, 1993 TABLE OF CONTENTS (Not Part of Agreement) Page 1. AUTHORIZATION OF ISSUE OF NOTES................... 1 2. PURCHASE AND SALE OF NOTES........................ 2 3. CONDITIONS OF CLOSING............................. 7 4. PREPAYMENTS....................................... 9 5. AFFIRMATIVE COVENANTS............................. 10 6. NEGATIVE COVENANTS................................ 13 7. EVENTS OF DEFAULT................................. 17 8. REPRESENTATIONS, COVENANTS AND WARRANTIES......... 20 9. REPRESENTATIONS OF THE PURCHASERS................. 24 10. DEFINITIONS....................................... 25 11. MISCELLANEOUS..................................... 34 PURCHASER SCHEDULE INFORMATION SCHEDULE EXHIBIT A-1 -- FORM OF SERIES A NOTE EXHIBIT A-2 -- FORM OF PRIVATE SHELF NOTE EXHIBIT B -- FORM OF REQUEST FOR PURCHASE EXHIBIT C -- FORM OF CONFIRMATION OF ACCEPTANCE EXHIBIT D-1 -- FORM OF OPINION OF COMPANY'S COUNSEL (Original Closing) EXHIBIT D-2 -- FORM OF OPINION OF COMPANY'S COUNSEL (Shelf Closing) EXHIBIT E -- LIST OF AGREEMENTS LIMITING DEBT EXHIBIT F -- PATRONAGE INDEBTEDNESS SUBORDINATION LANGUAGE ACE HARDWARE CORPORATION 2200 Kensington Court Oak Brook, Illinois 60521 As of September 22, 1993 The Prudential Insurance Company of America ("Prudential") Each Prudential Affiliate (as hereinafter defined) which becomes bound by certain provisions of this Agreement as hereinafter provided (together with Prudential, the "Purchasers") c/o Prudential Capital Group Two Prudential Plaza Suite 5600 Chicago, Illinois 60601 Gentlemen: The undersigned, Ace Hardware Corporation (herein called the "Company"), hereby agrees with you as follows: 1A. AUTHORIZATION OF ISSUE OF SERIES A NOTES. The Company will authorize the issue of its senior promissory notes (herein called the "Series A Notes") in the aggregate principal amount of $30,000,000, to be dated the date of issue thereof, to mature June 22, 2008, to bear interest on the unpaid balance thereof from the date thereof until the principal thereof shall have become due and payable at the rate of 6.47% per annum and on overdue principal, Yield-Maintenance Amount and interest at the rate specified therein, and to be substantially in the form of Exhibit A-1 attached hereto. The terms "Series A Note" and "Series A Notes" as used herein shall include each Series A Note delivered pursuant to any provision of this Agreement and each Series A Note delivered in substitution or exchange for any such Series A Note pursuant to any such provision. 1B. AUTHORIZATION OF ISSUE OF PRIVATE SHELF NOTES. The Company will authorize the issue of (but, except as provided in paragraph 2B(7), will not be obligated to issue) its additional senior promissory notes (herein called the "Private Shelf Notes") in the aggregate principal amount of $20,000,000, to be dated the date of issue thereof, to mature, in the case of each Note so issued, no less than five years and no more than fifteen years after the date of original issuance thereof, to bear interest on the unpaid balance thereof from the date thereof at the rate per annum, and to have such other particular terms, as shall be set forth in the Confirmation of Acceptance with respect to such Private Shelf Note delivered pursuant to paragraph 2B(5), and to be substantially in the form of Exhibit A-2 attached hereto. The terms "Private Shelf Note" and "Private Shelf Notes" as used herein shall include each Private Shelf Note delivered pursuant to any provision of this Agreement and each Private Shelf Note delivered in substitution or exchange for any such Private Shelf Note pursuant to any such provision. The terms "Note" or "Notes" as used herein shall include each Series A Note and each Private Shelf Note (whether designated a Series B Note, Series C Note, Series D Note or Series E Note) delivered pursuant to any provision of this Agreement and each Note delivered in substitution or exchange for any such Note pursuant to any such provision. Notes which have (i) the same final maturity, (ii) the same principal prepayment dates, (iii) the same principal prepayment amounts (as a percentage of the original principal amount of each Note), (iv) the same interest rate, and (v) the same interest payment periods, are herein called a "Series" of Notes. 2. PURCHASE AND SALE OF NOTES. 2A. Purchase and Sale of Series A Notes. The Company hereby agrees to sell to Prudential and, subject to the terms and conditions herein set forth, Prudential agrees to purchase from the Company the aggregate principal amount of Series A Notes set forth in the Purchaser Schedule attached hereto at 100% of such aggregate principal amount. The Company will deliver to Prudential at the offices of Prudential Capital Group, Two Prudential Plaza, Suite 5600, Chicago, Illinois 60601, one or more Series A Notes registered in its name, evidencing the aggregate principal amount of Series A Notes to be purchased by Prudential and in the denomination or denominations specified with respect to Prudential in the Purchaser Schedule attached hereto, against payment of the purchase price thereof by transfer of immediately available funds for credit to the Company's account #94064 at The Northern Trust Company, Chicago, Illinois, ABA Routing Number 071000152 on the date of closing, which shall be September 22, 1993, or any other date prior to September 23, 1993 upon which the Company and you may mutually agree (herein called the "Series A Closing Day"). 2B. Purchase and Sale of Private Shelf Notes. 2B(1). Facility. Prudential is willing to consider, in its sole discretion and within limits which may be authorized for purchase by Prudential and Prudential Affiliates from time to time, the purchase of Private Shelf Notes pursuant to this Agreement. The willingness of Prudential to consider such purchase of Private Shelf Notes is herein called the "Facility". At any time, the aggregate principal amount of Private Shelf Notes stated in paragraph 1B, minus the aggregate principal amount of Private Shelf Notes purchased and sold pursuant to this Agreement prior to such time, minus the aggregate principal amount of Accepted Notes (as hereinafter defined) which have not yet been purchased and sold hereunder prior to such time is herein called the "Available Facility Amount" at such time. NOTWITHSTANDING THE WILLINGNESS OF PRUDENTIAL TO CONSIDER PURCHASES OF PRIVATE SHELF NOTES, THIS AGREEMENT IS ENTERED INTO ON THE EXPRESS UNDERSTANDING THAT NEITHER PRUDENTIAL NOR ANY PRUDENTIAL AFFILIATE SHALL BE OBLIGATED TO MAKE OR ACCEPT OFFERS TO PURCHASE PRIVATE SHELF NOTES, OR TO QUOTE RATES, SPREADS OR OTHER TERMS WITH RESPECT TO SPECIFIC PURCHASES OF PRIVATE SHELF COMMITMENT BY PRUDENTIAL OR ANY PRUDENTIAL AFFILIATE. 2B(2). Issuance Period. Private Shelf Notes may be issued and sold pursuant to this Agreement until the earlier of (i) September 22, 1996 and (ii) the thirtieth day after Prudential shall have given to the Company, or the Company shall have given to Prudential, a notice stating that it elects to terminate the issuance and sale of Private Shelf Notes pursuant to this Agreement (or if such thirtieth day is not a Business Day, the Business Day next preceding such thirtieth day). The period during which Private Shelf Notes may be issued and sold pursuant to this Agreement is herein called the "Issuance Period". 2B(3). Request for Purchase. The Company may from time to time during the Issuance Period make requests for purchases of Private Shelf Notes (each such request being herein called a "Request for Purchase"). Each Request for Purchase shall be made to Prudential by telecopier and confirmed by nationwide overnight delivery service, and shall (i) specify the aggregate principal amount of Private Shelf Notes covered thereby, which shall not be less than $5,000,000 and not be greater than the Available Facility Amount at the time such Request for Purchase is made, (ii) specify the principal amounts, final maturities and principal payment dates and amounts, (iii) specify the use of proceeds of such Private Shelf Notes, (iv) specify the proposed day for the closing of the purchase and sale of such Private Shelf Notes, which shall be a Business Day during the Issuance Period not less than 10 Business Days and not more than 25 Business Days after the making of such Request for Purchase, (v) specify the number of the account and the name and address of the depository institution to which the purchase prices of such Private Shelf Notes are to be transferred on the Private Shelf Closing Day for such purchase and sale, (vi) certify that the representations and warranties contained in paragraph 8 are true on and as of the date of such Request for Purchase except to the extent of changes caused by the transactions herein contemplated and that there exists on the date of such Request for Purchase no Event of Default or Default, (vii) specify whether the fee to be due pursuant to paragraph 2B(8)(i) should be included in the rate quotes Prudential may provide pursuant to paragraph 2B(4) or will be paid separately by the Company on the Private Shelf Closing Day for such purchase and sale, and (viii) be substantially in the form of Exhibit B attached hereto. Each Request for Purchase shall be in writing and shall be deemed made when received by Prudential. 2B(4). Rate Quotes. Not later than five Business Days after the Company shall have given Prudential a Request for Purchase pursuant to paragraph 2B(3), Prudential may provide (by telephone promptly thereafter confirmed by telecopier, in each case no earlier than 9:30 A.M. and no later than 1:00 P.M. New York City local time) interest rate quotes for the several principal amounts, maturities, prepayment schedules and interest payment periods of Private Shelf Notes specified in such Request for Purchase. Each quote pursuant to this paragraph 2B(4) shall represent the fixed interest rate per annum payable on the outstanding principal balance of such Private Shelf Notes until such balance shall have become due and payable, at which Prudential or a Prudential Affiliate would be willing to purchase such Private Shelf Notes at 100% of the principal amount thereof. 2B(5). Acceptance. Within 30 minutes after Prudential shall have provided any interest rate quotes pursuant to paragraph 2B(4) or such shorter period as Prudential may specify to the Company (such period herein called the "Acceptance Window"), the Company may, subject to paragraph 2B(6), elect to accept such interest rate quotes. Such election shall be made by an Authorized Officer of the Company notifying Prudential by telephone or telecopier within the Acceptance Window (but not earlier than 9:30 A.M. or later than 2:00 P.M., New York City local time) that the Company elects to accept such interest rate quotes, specifying the Private Shelf Note (each such Private Shelf Note being herein called an "Accepted Note") as to which such acceptance (herein called an "Acceptance") relates. The day the Company notifies Prudential of an Acceptance with respect to any Accepted Notes is herein called the "Acceptance Day" for such Accepted Notes. Any interest rate quotes as to which Prudential does not receive an Acceptance within the Acceptance Window shall expire, and no purchase or sale of Private Shelf Notes hereunder shall be made based on such expired interest rate quotes. Subject to paragraph 2B(6) and the other terms and conditions hereof, the Company agrees to sell to Prudential or a Prudential Affiliate, and Prudential agrees to purchase, or to cause the purchase by a Prudential Affiliate of, the Accepted Notes. Prior to the close of business on the Business Day next following the Acceptance Day, the Company, Prudential and each Prudential Affiliate which is to purchase any such Accepted Notes will execute a confirmation of such Acceptance substantially in the form of Exhibit C attached hereto (herein called a "Confirmation of Acceptance"). 2B(6). Market Disruption. Notwithstanding the provisions of paragraph 2B(5), if Prudential shall have provided interest rate quotes pursuant to paragraph 2B(5) and thereafter, prior to the time an Acceptance with respect to such quotes shall have been notified to Prudential in accordance with paragraph 2B(5), there shall occur a general suspension, material limitation, or significant disruption of trading in securities generally on the New York Stock Exchange or in the market for U.S. Treasury securities and other financial instruments, then such interest rate quotes shall expire, and no purchase or sale of Private Shelf Notes hereunder shall be made based on such expired interest rate quotes. If the Company thereafter notifies Prudential of the Acceptance of any such interest rate quotes, such Acceptance shall be ineffective for all purposes of this Agreement, and Prudential shall promptly notify the Company that the provisions of this paragraph 2B(6) are applicable with respect to such Acceptance. 2B(7). Private Shelf Closing. Not later than 11:30 A.M. (New York City local time) on the Private Shelf Closing Day for any Accepted Notes, the Company will deliver to Prudential or the Prudential Affiliate listed in the Confirmation of Acceptance relating thereto at the offices of Prudential Capital Group, Two Prudential Plaza, Suite 5600, Chicago, Illinois 60601, the Private Shelf Notes to be purchased by such Purchaser in the form of a single Accepted Note for the Accepted Notes which have exactly the same terms (or such greater number of Notes in authorized denominations as such Purchaser may request) dated the Private Shelf Closing Day and registered in such Purchaser's name, against payment of the purchase price thereof by transfer of immediately available funds for credit to the Company's account specified in the Request for Purchase of such Private Shelf Notes. If the Company fails to tender to any Purchaser the Accepted Notes to be purchased by such Purchaser on the scheduled Private Shelf Closing Day for such Accepted Notes as provided above in this paragraph 2B(7), or any of the conditions specified in paragraph 3 shall not have been fulfilled by the time required on such scheduled Private Shelf Closing Day, the Company shall, prior to 1:00 P.M., New York City local time, on such scheduled Private Shelf Closing Day notify such Purchaser in writing whether (x) such closing is to be rescheduled (such rescheduled date to be a Business Day during the Issuance Period not less than one Business Day and not more than 30 Business Days after such scheduled Private Shelf Closing Day (the "Rescheduled Closing Day") and certify to such Purchaser that the Company reasonably believes that it will be able to comply with the conditions set forth in paragraph 3 on such Rescheduled Closing Day and that the Company will pay the Delayed Delivery Fee in accordance with paragraph 2B(8)(ii) or (y) such closing is to be cancelled as provided in paragraph 2B(8)(iii). In the event that the Company shall fail to give such notice referred to in the preceding sentence, such Purchaser may at its election, at any time after 1:00 P.M., New York City local time, on such scheduled Private Shelf Closing Day, notify the Company in writing that such closing is to be cancelled as provided in paragraph 2B(8)(iii). 2B(8). Fees. 2B(8)(i) Facility Fee. The Company will pay to Prudential in immediately available funds a fee (herein called the "Facility Fee") on each Private Shelf Closing Day in an amount equal to 0.15% of the aggregate principal amount of Notes sold on such Closing Day, unless the Company shall have requested pursuant to its Request for Purchase that such fee be included in the rate quotes Prudential may provide pursuant to paragraph 2B(4). 2B(8)(ii) Delayed Delivery Fee. If the closing of the purchase and sale of any Accepted Note is delayed for any reason beyond the original Private Shelf Closing Day for such Accepted Note, the Company will pay to Prudential on the last Business Day of each calendar month, commencing with the first such day to occur more than 30 days after the Acceptance Day for such Accepted Note and ending with the last such day to occur prior to the Cancellation Date or the actual closing date of such purchase and sale, and on the Cancellation Date or actual closing date of such purchase and sale (if such Cancellation Date or closing date occurs more than 30 days after the Acceptance Day for such Accepted Note), a fee (herein called the "Delayed Delivery Fee") calculated as follows: (BEY - MMY) X DTS/360 X PA where "BEY" means Bond Equivalent Yield, i.e., the bond equivalent yield per annum of such Accepted Note; "MMY" means Money Market Yield, i.e., the yield per annum on an alternative investment selected by Prudential on the date Prudential receives notice of the delay in the closing for such Accepted Notes having a maturity date or dates the same as, or closest to, the Rescheduled Closing Day or Rescheduled Closing Days (a new alternative investment being selected by Prudential each time such closing is delayed); "DTS" means Days to Settlement, i.e., the number of actual days elapsed from and including the thirty- first day after the Acceptance Day for such Accepted Note (in the case of the first such payment with respect to such Accepted Note) or from and including the date of the next preceding payment (in the case of any subsequent delayed delivery fee payment with respect to such Accepted Note) to but excluding the date of such payment; and "PA" means Principal Amount, i.e., the principal amount of the Accepted Note for which such calculation is being made. In no case shall the Delayed Delivery Fee be less than zero. Nothing contained herein shall obligate any Purchaser to purchase any Accepted Note on any day other than the Private Shelf Closing Day for such Accepted Note, as the same may be rescheduled from time to time in compliance with paragraph 2B(7). 2B(8)(iii) Cancellation Fee. If the Company at any time notifies Prudential in writing that the Company is cancelling the closing of the purchase and sale of such Accepted Note, or if Prudential notifies the Company in writing under the circumstances set forth in the last sentence of paragraph 2B(7) that the closing of the purchase and sale of such Accepted Note is to be cancelled, or if the closing of the purchase and sale of such Accepted Note is not consummated on or prior to the last day of the Issuance Period (the date of any such notification, or the last day of the Issuance Period, as the case may be, being herein called the "Cancellation Date"), the Company will pay Prudential in immediately available funds an amount (the "Cancellation Fee") calculated as follows: PI X PA where "PI" means Price Increase, i.e., the quotient (expressed in decimals) obtained by dividing (a) the excess of the ask price (as determined by Prudential) of the Hedge Treasury Note(s) on the Cancellation Date over the bid price (as determined by Prudential) of the Hedge Treasury Note(s) on the Acceptance Day for such Accepted Note by (b) such bid price. The foregoing bid and ask prices shall be as reported by Telerate Systems, Inc. (or, if such data for any reason ceases to be available through Telerate Systems, Inc., any publicly available source of similar market data). Each price shall be based on a U.S. Treasury security having a par value of $100.00 and shall be rounded to the second decimal place. In no case shall the Cancellation Fee be less than zero. 3. CONDITIONS OF CLOSING. Prudential's obligation to purchase the Series A Notes, and the obligation of any Purchaser to purchase and pay for any Private Shelf Notes, is subject in each case to the satisfaction, on or before the applicable Closing Day for such Notes, of the following conditions: 3A(1). Opinion of Company's Counsel. On the Series A Closing Day, you shall have received from David W. League, general counsel to the Company, a favorable opinion satisfactory to you and substantially in the form of Exhibit D-1 attached hereto. The Company hereby directs such counsel to deliver such opinion, and agrees that the issuance and sale of any Notes will constitute a reconfirmation of such direction. 3A(2). Opinion of Company's Counsel. On each Private Shelf Closing Day, such Purchaser shall have received from David W. League, general counsel to the Company, or, at the Company's election, other counsel designated by the Company and acceptable to such Purchaser, a favorable opinion satisfactory to the Purchaser and substantially in the form of Exhibit D-2 attached hereto. 3B. Representations and Warranties; No Default. The representations and warranties contained in paragraph 8 shall be true on and as of the applicable Closing Day, except to the extent of changes caused by the transactions herein contemplated; there shall exist on the applicable Closing Day no Default or Event of Default; and the Company shall have delivered to each Purchaser an Officer's Certificate, dated the applicable Closing Day, to both such effects. 3C. Accountants Letter. On or before the Series A Closing Day, the Company shall have delivered a letter to KPMG Peat Marwick, in form and substance satisfactory to Prudential, advising KPMG Peat Marwick that it is the intent of the Company that the services of such accountants in connection with the audits of the Company's financial statements referred to in paragraph 5A(ii) be for the benefit of and to influence the Purchasers and that it is the intent of the Purchasers to rely upon the financial statements prepared pursuant to paragraph 5A(ii) and that the Purchasers intend to rely on the financial statements described in paragraph 8B and the audits thereof. 3D(1). Processing Fee. On or before the Series A Closing Day, the Company shall have paid to Prudential a processing fee in the amount of $15,000. 3D(2). Fees. On or before each Private Shelf Closing Day, the Company shall have paid to the Purchasers any fee required by paragraphs 2B(8)(i) and 2B(8)(ii). 3E. Purchase Permitted By Applicable Laws. The purchase of and payment for the Notes to be purchased on the applicable Closing Day on the terms and conditions herein provided (including the use of the proceeds of such Notes by the Company) shall not violate any applicable law or governmental regulation (including, without limitation, section 5 of the Securities Act or Regulation G, T or X of the Board of Governors of the Federal Reserve System) and shall not subject any Purchaser to any tax, penalty, liability or other onerous condition under or pursuant to any applicable law or governmental regulation, and such Purchaser shall have received such certificates or other evidence as such Purchaser may request to establish compliance with this condition. 3F. Proceedings. All corporate and other proceedings taken or to be taken in connection with the transactions contemplated hereby and all documents incident thereto shall be satisfactory in substance and form to each Purchaser, and each Purchaser shall have received all such counterpart originals or certified or other copies of such documents as it may reasonably request. 4. PREPAYMENTS. The Notes shall be subject to prepayment with respect to the required prepayments specified in paragraphs 4A and 4B and also under the circumstances set forth in paragraph 4C. 4A. Required Prepayments of Series A Notes. Until the Series A Notes shall be paid in full, the Company shall apply to the prepayment of the Series A Notes, without Yield-Maintenance Amount, the sum of $2,000,000 on June 22 and December 22 of each year, commencing June 22, 2001 and to and including December 22, 2007, and such principal amounts of the Notes, together with interest thereon to the prepayment dates, shall become due on such prepayment dates. Any prepayment made by the Company pursuant to any other provision of this paragraph 4 shall not reduce or otherwise affect its obligation to make any scheduled prepayment required by this paragraph 4A. The remaining unpaid principal amount of the Series A Notes, together with interest accrued thereon, shall become due on June 22, 2008. 4B. Required Prepayment of Private Shelf Notes. Until each respective Series of Private Shelf Notes shall be paid in full, each respective Series of Private Shelf Notes shall be subject to such required prepayments, if any, as are specified in the respective Series of Private Shelf Notes in accordance with the provisions of paragraph 2B(3) hereof. Any prepayment made by the Company pursuant to any other provision of this paragraph 4 shall not reduce or otherwise affect its obligation to make any prepayment as specified in the respective Series of Private Shelf Notes. 4C. Optional Prepayment With Yield-Maintenance Amount. The Notes of each Series shall be subject to optional prepayment on any required principal prepayment date for such Series, in whole or in part, in multiples of $100,000, and in a minimum amount of $1,000,000, at the option of the Company, at 100% of the principal amount so prepaid plus interest thereon to the prepayment date and the Yield-Maintenance Amount, if any, with respect to each such Note. 4D. Notice of Optional Prepayment. The Company shall give notice to the holder of each Note of a Series irrevocable written notice of any optional prepayment pursuant to paragraph 4C with respect to such Series not less than 30 days prior to the prepayment date, specifying (i) such prepayment date, (ii) the aggregate principal amount of the Notes of such Series to be prepaid on such date, (iii) the principal amount of the Notes of such holder to be prepaid on that date, and (iv) stating that such optional prepayment is to be made pursuant to paragraph 4C. Notice of optional prepayment having been given as aforesaid, the principal amount of the Notes specified in such notice, together with interest thereon to the prepayment date and together with the Yield-Maintenance Amount, if any, herein provided, shall become due and payable on such prepayment date and, as to principal, applied to required payments thereon in the inverse order of maturity. 4E. Application of Prepayments. In the case of each prepayment of less than the entire unpaid principal amount of all outstanding Notes of any Series, the amount to be prepaid shall be applied pro rata to all outstanding Notes of such Series (including, for the purpose of this paragraph 4E only, all Notes of such Series prepaid or otherwise retired or purchased or otherwise acquired by the Company or any of its Subsidiaries or Affiliates other than by prepayment pursuant to paragraph 4A, 4B or 4C) according to the respective unpaid principal amounts thereof. 4F. Retirement of Notes. The Company shall not, and shall not permit any of its Subsidiaries or Affiliates to, prepay or otherwise retire in whole or in part prior to their stated final maturity (other than by prepayment pursuant to paragraphs 4A, 4B or 4C or upon acceleration of such final maturity pursuant to paragraph 7A), or purchase or otherwise acquire, directly or indirectly, Notes held by any holder unless the Company or such Subsidiary or Affiliate shall have offered to prepay or otherwise retire or purchase or otherwise acquire, as the case may be, the same proportion of the aggregate principal amount of Notes held by each other holder of Notes at the time outstanding upon the same terms and conditions. Any Notes so prepaid or otherwise retired or purchased or otherwise acquired by the Company or any of its Subsidiaries or Affiliates shall not be deemed to be outstanding for any purpose under this Agreement, except as provided in paragraph 4E. 5. AFFIRMATIVE COVENANTS. 5A. Financial Statements. The Company covenants that it will deliver to each Significant Holder in triplicate: (i) as soon as practicable and in any event within 60 days after the end of each quarterly period (other than the last quarterly period) in each fiscal year, consolidated statements of income and cash flows of (a) the Company and its Subsidiaries and (b) each such Subsidiary for such quarterly period, and a consolidated balance sheet of (y) the Company and its Subsidiaries and (z) each such Subsidiary as at the end of such quarterly period, setting forth in each case in comparative form figures for the corresponding period in the preceding fiscal year, all in reasonable detail and certified by an authorized financial officer of the Company, subject to changes resulting from year-end adjustments; (ii) as soon as practicable and in any event within 120 days after the end of each fiscal year, consolidated statements of income and cash flows of (a) the Company and its Subsidiaries and (b) each such Subsidiary for such year, and a consolidated balance sheet of (y) the Company and its Subsidiaries and (z) each such Subsidiary as at the end of such year, setting forth in each case in comparative form corresponding consolidated figures from the preceding annual financial statements (which, in the case of the consolidated statements of the Company and its Subsidiaries, shall be the preceding annual audit), all in reasonable detail and satisfactory in scope to the Required Holder(s) and, as to the consolidated statements of the Company and its Subsidiaries, certified to the Company by independent public accountants of recognized standing selected by the Company whose certificate shall be in scope and substance reasonably satisfactory to the Required Holder(s) and, as to the consolidated statements of each Subsidiary, certified by an authorized financial officer of the Company; (iii) promptly upon transmission thereof, copies of all such financial statements, proxy statements, notices and reports as it shall send to its public stockholders, if any, and copies of all registration statements (without exhibits) and all reports which it files with the Securities and Exchange Commission (or any governmental body or agency succeeding to the functions of the Securities and Exchange Commission); and (iv) with reasonable promptness, such other financial data as such Significant Holder may reasonably request. Together with each delivery of financial statements required by clauses (i) and (ii) above, the Company will deliver to each Significant Holder an Officer's Certificate (a) demonstrating (with computations in reasonable detail) compliance by the Company and its Subsidiaries with the provisions of paragraph 6 hereof, (b) listing all Subsidiaries, and (c) stating that there exists no Event of Default or Default, or, if any Event of Default or Default exists, specifying the nature and period of existence thereof and what action the Company proposes to take with respect thereto. Together with each delivery of financial statements required by clause (ii) above, the Company will deliver to each Significant Holder (y) a written statement of the Company's independent public accountants acknowledging that the holders of the Notes are entitled to rely on such auditor's certification of such audited financial statements and (z) a certificate of such accountants stating that, in making the audit necessary to the certification of such financial statements, they have obtained no knowledge of any Event of Default or Default, or, if they have obtained knowledge of any Event of Default or Default, specifying the nature and period of existence thereof. The Company also covenants that forthwith upon the chief executive officer, principal financial officer or principal accounting officer of the Company obtaining knowledge of an Event of Default or Default, it will deliver to each Significant Holder an Officer's Certificate specifying the nature and period of existence thereof and what action the Company proposes to take with respect thereto. 5B. Inspection of Property. The Company covenants that it will permit any Person designated by any Significant Holder in writing, at such Significant Holder's expense, to visit and inspect any of the properties of the Company and its Subsidiaries, to examine the corporate books and financial records of the Company and its Subsidiaries and make copies thereof or extracts therefrom and to discuss the affairs, finances and accounts of any of such corporations with the chief executive officer, principal financial officer or principal accounting officer of the Company (or any other officer or employee designated by any of them) and its independent public accountants, all at such reasonable times and as often as such Significant Holder may reasonably request. 5C. Covenant to Secure Note Equally. The Company covenants that, if it or any Subsidiary shall create or assume any Lien upon any of its property or assets, whether now owned or hereafter acquired, other than Liens permitted by the provisions of paragraph 6B(1) (unless prior written consent to the creation or assumption thereof shall have been obtained pursuant to paragraph 11C), it will make or cause to be made effective provision whereby the Notes will be secured by such Lien equally and ratably with any and all other Debt thereby secured so long as any such other Debt shall be so secured. 5D. Maintenance of Insurance. The Company covenants that it and each Subsidiary will maintain, with financially sound and reputable insurers, insurance in such amounts and against such liabilities and hazards as customarily is maintained by other companies operating similar businesses. Together with each delivery of financial statements under clause (ii) of paragraph 5A, the Company will, upon the request of any Significant Holder, deliver an Officer's Certificate specifying the details of such insurance in effect. 5E. Compliance With Environmental Laws. The Company covenants that it will, and will cause each of its Subsidiaries to, comply in a timely fashion with, or operate pursuant to valid waivers of the provisions of, all Environmental Laws, except where noncompliance would not adversely affect the business, condition (financial or otherwise) or operations of the Company or its Subsidiaries. 5F. Cooperative Status. The Company covenants that it will at all times maintain its status as a cooperative for purposes of Subchapter T of the Code. 6. NEGATIVE COVENANTS. 6A. Current Ratio; Fixed Charge Coverage. The Company will not permit (i) consolidated current assets to be less than 110% of consolidated current liabilities as of the last day of any fiscal quarter, or (ii) for any rolling four fiscal quarter period, Adjusted Net Earnings for such period to be less than 175% of the sum of interest expense, lease expense and scheduled principal payments made by the Company and Subsidiaries on a consolidated basis on all Debt and Patronage Indebtedness for such period. 6B. Lien, Debt and Other Restrictions. The Company covenants that it will not and will not permit any Subsidiary to: 6B(1). Liens. Create, assume or suffer to exist any Lien upon any of its property or assets, whether now owned or hereafter acquired (whether or not provision is made for the equal and ratable securing of the Note in accordance with the provisions of paragraph 5C), except: (i) Liens for taxes not yet due or which are being actively contested in good faith by appropriate proceedings, (ii) other Liens incidental to the conduct of its business or the ownership of its property and assets which were not incurred in connection with the borrowing of money or the obtaining of advances or credit, and which do not in the aggregate materially detract from the value of its property or assets or materially impair the use thereof in the operation of its business, (iii) Liens on property or assets of a Subsidiary to secure obligations of such Subsidiary to the Company or another Subsidiary, (iv) Liens consisting of capitalized leases if (a) the Funded Debt represented by the related Capitalized Lease Obligations is permitted by the provisions of paragraph 6B(2), and (b) such Lien would be permitted by the provisions of clause (v) of this paragraph 6B(1), and (v) other Liens (including existing Liens), provided that the aggregate amount of Debt secured by all such Liens and any Liens permitted by clause (iv) above shall at no time exceed an amount equal to 15% of Member Dealers' Equity, and further provided that such Debt is permitted by the provisions of paragraph 6B(2); 6B(2). Debt. Create, incur, assume or suffer to exist any Debt, except: (i) Funded Debt represented by the Notes and the 1991 Agreement Notes, (ii) Debt of any Subsidiary to the Company or any other Subsidiary, (iii) additional Funded Debt of Subsidiaries, provided that the aggregate principal amount thereof shall at no time exceed $3,000,000, (iv) additional Funded Debt of the Company, provided that Consolidated Funded Debt shall at no time exceed 40% of Total Capitalization, and (v) Current Debt of the Company, provided that commencing on December 31, 1991, and at all times thereafter there shall have been a period of at least 45 consecutive days during each period of 12 consecutive calendar months on each day of which either there shall be no Current Debt outstanding or the Company could incur pursuant to clause (iv), above, additional Funded Debt in an amount equal to the maximum amount of Current Debt of the Company outstanding during such clean-down period; 6B(3). Sale of Stock and Debt of Subsidiaries. Sell or otherwise dispose of, or part with control of, any shares of stock or Debt of any Subsidiary, except to the Company or another Subsidiary, and except that all shares of stock and Debt of any Subsidiary at the time owned by or owed to the Company and all Subsidiaries may be sold as an entirety for such consideration which represents the fair value (as determined in good faith by the Board of Directors of the Company) at the time of sale of the shares of stock and Debt so sold, provided that, the assets of such Subsidiary, together with the assets of any other Subsidiaries sold or otherwise disposed of during the most recent 36-month rolling period, do not constitute a Substantial Part of the consolidated assets of the Company and its Subsidiaries and that such Subsidiary, together with any other Subsidiaries sold or otherwise disposed of during the most recent 36-month period, shall not have contributed a Substantial Part of Consolidated Net Earnings for any of the three fiscal years then most recently ended, and further provided that, at the time of such sale, such Subsidiary shall not own, directly or indirectly, any shares of stock or Debt of any other Subsidiary (unless all of the shares of stock and Debt of such other Subsidiary owned, directly or indirectly, by the Company and its Subsidiary are simultaneously being sold as permitted by this paragraph 6B(3)); 6B(4). Merger and Sale of Assets. Merge or consolidate with any other corporation or sell, lease or transfer or otherwise dispose of all of the consolidated assets of the Company and its Subsidiaries, or assets which, together with all assets of the Company and Subsidiaries sold, leased or otherwise disposed of during the most recent 36-month rolling period, constitute a Substantial Part of the consolidated assets of the Company and its Subsidiaries or shall have contributed a Substantial Part of Consolidated Net Earnings for any of the three fiscal years then most recently ended, to any Person, except that: (i) any Subsidiary may merge or consolidate with the Company (provided that the Company shall be the continuing or surviving corporation), or with any one or more other Subsidiaries, (ii) any Subsidiary may sell, lease, transfer or otherwise dispose of any of its assets to the Company or another Subsidiary, (iii) any Subsidiary may sell or otherwise dispose of all or substantially all of its assets subject to the conditions specified in paragraph 6B(3) with respect to a sale of the stock of such Subsidiary, and (iv) the Company may merge or consolidate with any other corporation, provided that (a) the Company shall be the continuing or surviving corporation, (b) after giving effect to such merger or consolidation, no Default or Event of Default shall exist under this Agreement and (c) assuming that the effective date of such merger or consolidation was the last day of a fiscal quarter, no Default or Event of Default would exist under clause (i) of paragraph 6A; 6B(5). Restrictions on Transactions with Affiliates and Stockholders. Directly or indirectly, purchase, acquire or lease any property from, or sell, transfer or lease any property (other than shares of stock of Company) to, or otherwise deal with, in the ordinary course of business or otherwise (i) any Affiliate or Substantial Stockholder, or (ii) any corporation in which an Affiliate, Substantial Stockholder or the Company (either directly or through Subsidiaries) owns 5% or more of the outstanding voting stock, except that (a) any such Affiliate or Substantial Stockholder may be a director, officer or employee of the Company or any Subsidiary and may be paid reasonable compensation in connection therewith and (b) such acts and transactions prohibited by this paragraph 6B(5) may be performed or engaged in if (x) specifically authorized by the Company's Board of Directors (exclusive of any Affiliate or Substantial Stockholder who is a director and who may have a direct or indirect interest in such transaction) and (y) upon terms not less favorable to the Company or a Subsidiary (as the case may be) than if no such relationship described in clauses (i) and (ii) above existed. 6C. Issuance of Stock by Subsidiaries. The Company covenants that it will not permit any Subsidiary (either directly, or indirectly by the issuance of rights or options for, or securities convertible into, such shares) to issue, sell or otherwise dispose of any shares of any class of its stock (other than directors' qualifying shares) except to the Company or another Subsidiary. 6D. Compliance with ERISA. The Company will not, and will not permit any Subsidiary to, engage in any transaction in connection with which the Company or any Subsidiary could be subject to either a civil penalty assessed pursuant to section 502(i) of ERISA or a tax imposed by section 4975 of the Code, terminate or 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 Company and its Subsidiaries taken as a whole. 6E. No Change in Subordination Terms, etc. The Company covenants that (i) no certificate representing Patronage Indebtedness will be amended or re-issued with the effect of eliminating or in any way altering the subordination language appearing therein, (ii) no amendment shall be adopted to its By- laws or any other governing document, and no agreement shall be entered into with any of its stockholders, which would entitle a stockholder, upon termination of his or its franchise in any of the circumstances described in Section 12(a) of Article XVI of the By-laws of the Company, as in effect on the date of this Agreement, to receive consideration for his or its shares in a form other than a promissory note of the Company with a term of, or in excess of, four years and providing for payments in equal annual principal installments, except to the extent specifically provided in clauses (7) and (8) of Section 12(b) of Article XVI of the By-laws of the Company as in effect on the date of this Agreement and (iii) notwithstanding the foregoing clause (ii), in no fiscal year shall cash payments in excess of $5,000,000 be made under circumstances described in clauses (7) and (8) of Section 12(b) of Article XVI of the By-laws of the Company as in effect on the date of this Agreement. 6F. Nature of Business. The Company will not, and will not permit any Subsidiary to, (i) engage in the business of underwriting risks for insurance purposes, or in any other aspect of insurance related business other than the sale of insurance on an agency or brokerage basis, or (ii) purchase and sell real estate (other than on an agency basis) for purposes other than those relating directly to its principal business. 7. EVENTS OF DEFAULT. 7A. Acceleration. If any of the following events shall occur and be continuing for any reason whatsoever (and whether such occurrence shall be voluntary or involuntary or come about or be effected by operation of law or otherwise): (i) the Company defaults in the payment of any principal of, or Yield-Maintenance Amount payable with respect to, any Note when the same shall become due, either by the terms thereof or otherwise as herein provided; or (ii) the Company defaults in the payment of any interest on any Note for more than 5 days after the date due; or (iii) the Company or any Subsidiary defaults (whether as primary obligor or as guarantor or other surety) in any payment of principal of or interest on any other obligation for money borrowed (or any Capitalized Lease Obligation, any obligation under a conditional sale or other title retention agreement, any obligation issued or assumed as full or partial payment for property whether or not secured by a purchase money mortgage or any obligation under notes payable or drafts accepted representing extensions of credit) beyond any period of grace provided with respect thereto, or the Company or any Subsidiary fails to perform or observe any other agreement, term or condition contained in any agreement under which any such obligation is created (or if any other event thereunder or under any such agreement shall occur and be continuing) and the effect of such failure or other event is to cause, or to permit the holder or holders of such obligation (or a trustee on behalf of such holder or holders) to cause, such obligation to become due (or to be repurchased by the Company or any Subsidiary) prior to any stated maturity, provided that the aggregate amount of all obligations as to which such a payment default shall occur and be continuing or such a failure or other event causing or permitting acceleration (or repurchase by the Company or any Subsidiary) shall occur and be continuing exceeds $3,000,000; or (iv) any representation or warranty made by or on behalf of the Company herein or in any writing furnished by any officer of the Company on behalf of the Company in connection with or pursuant to this Agreement shall be false in any material respect on the date as of which made and, in the case of a misrepresentation in the second sentence of paragraph 8A, such falsity shall result in a liability of the Company under the Code in an amount in excess of $10,000,000; or (v) the Company fails to perform or observe any agreement contained in paragraph 5F or paragraph 6 hereof; or (vi) the Company fails to perform or observe any other agreement, term or condition contained herein and such failure shall not be remedied within 30 days after any officer of the Company obtains actual knowledge thereof; or (vii) the Company or any Subsidiary makes an assignment for the benefit of creditors or is generally not paying its debts as such debts become due; or (viii) any decree or order for relief in respect of the Company or any Subsidiary is entered under any bankruptcy, reorganization, compromise, arrangement, insolvency, readjustment of debt, dissolution or liquidation or similar law, whether now or hereafter in effect (herein called the "Bankruptcy Law"), of any jurisdiction; or (ix) the Company or any Subsidiary petitions or applies to any tribunal for, or consents to, the appointment of, or taking possession by, a trustee, receiver, custodian, liquidator or similar official of the Company or any Subsidiary, or of any Substantial Part of the assets of the Company or any Subsidiary, or commences a voluntary case under the Bankruptcy Law of the United States or any proceedings (other than proceedings for the voluntary liquidation and dissolution of a Subsidiary) relating to the Company or any Subsidiary under the Bankruptcy Law of any other jurisdiction; or (x) any such petition or application is filed, or any such proceedings are commenced, against the Company or any Subsidiary and the Company or such Subsidiary by any act indicates its approval thereof, consent thereto or acquiescence therein, or an order, judgment or decree is entered appointing any such trustee, receiver, custodian, liquidator or similar official, or approving the petition in any such proceedings, and such order, judgment or decree remains unstayed and in effect for more than 30 days; or (xi) any order, judgment or decree is entered in any proceedings against the Company decreeing the dissolution of the Company and such order, judgment or decree remains unstayed and in effect for more than 60 days; or (xii) any order, judgment or decree is entered in any proceedings against the Company or any Subsidiary decreeing a split-up of the Company or such Subsidiary which requires the divestiture of assets representing a Substantial Part, or the divestiture of the stock of a Subsidiary whose assets represent a Substantial Part, of the consolidated assets of the Company and its Subsidiaries (determined in accordance with generally accepted accounting principles) or which requires the divestiture of assets, or stock of a Subsidiary, which shall have contributed a Substantial Part of the consolidated net income of the Company and its Subsidiaries (determined in accordance with generally accepted accounting principles) for any of the three fiscal years then most recently ended, and such order, judgment or decree remains unstayed and in effect for more than 60 days; or (xiii) a final judgment in an amount in excess of $10,000,000 is rendered against the Company or any Subsidiary and, within 60 days after 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; then (a) if such event is an Event of Default specified in clause (viii), (ix) or (x) of this paragraph 7A with respect to the Company, all of the Notes at the time outstanding shall automatically become immediately due and payable at par together with interest accrued thereon, without presentment, demand, protest or notice of any kind, all of which are hereby waived by the Company, and (b) if such event is any other Event of Default, the Required Holder(s) of the Notes of any Series may at its or their option, by notice in writing to the Company, declare all of the Notes of such Series to be, and all of the Notes of such Series shall thereupon be and become, immediately due and payable together with interest accrued thereon and together with the Yield-Maintenance Amount, if any, with respect to each Note of such Series, without presentment, demand, protest or other notice of any kind, all of which are hereby waived by the Company, provided that the Yield-Maintenance Amount, if any, with respect to each Note shall be due and payable upon such declaration only if (x) such event is an Event of Default specified in any of clauses (i) to (vi), inclusive, of this paragraph 7A, (y) the Required Holder(s) of the Notes of such Series shall have given to the Company, at least 10 Business Days before such declaration, written notice stating its or their intention so to declare the Notes of such Series to be immediately due and payable and identifying one or more such Events of Default whose occurrence on or before the date of such notice permits such declaration and (z) one or more of the Events of Default so identified shall be continuing at the time of such declaration. 7B. Notice of Acceleration. Whenever any Note shall be declared immediately due and payable pursuant to paragraph 7A the Company shall forthwith give written notice thereof to the holder of each Note of each Series at the time outstanding. 7C. Other Remedies. If any Event of Default or Default shall occur and be continuing, the holder of any Note may proceed to protect and enforce its rights under this Agreement and such Note by exercising such remedies as are available to such holder in respect thereof under applicable law, either by suit in equity or by action at law, or both, whether for specific performance of any covenant or other agreement contained in this Agreement or in aid of the exercise of any power granted in this Agreement. No remedy conferred in this Agreement upon the holder of any Note is intended to be exclusive of any other remedy, and each and every such remedy shall be cumulative and shall be in addition to every other remedy conferred herein or now or hereafter existing at law or in equity or by statute or otherwise. 8. REPRESENTATIONS, COVENANTS AND WARRANTIES. The Company represents, covenants and warrants as follows: 8A. Organization and Cooperative Status. The Company is a corporation duly organized and existing in good standing under the laws of the State of Delaware and each Subsidiary is duly organized and existing in good standing under the laws of the jurisdiction in which it is incorporated. At all times since January 1, 1975, the Company has been a cooperative for federal income tax purposes pursuant to Subchapter T of the Code. 8B. Financial Statements. The Company has furnished each Purchaser of Series A Notes and any Accepted Notes with the following financial statements, identified by a principal financial officer of the Company: (i) a consolidated balance sheet of the Company and its Subsidiaries as at December 31 in each of the five fiscal years of the Company most recently completed prior to the date as of which this representation is made or repeated to such Purchaser (other than fiscal years completed within 90 days prior to such date for which audited financial statements have not been released) and a consolidated statement of income and statement of cash flows of the Company and its Subsidiaries for each such year, all certified by KPMG Peat Marwick; and (ii) consolidated balance sheets of the Company and its Subsidiaries as at the end of the quarterly period (if any) most recently completed prior to such date and after the end of such fiscal year (other than quarterly periods completed within 45 days prior to such date for which financial statements have not been released) and the comparable quarterly period in the preceding fiscal year and consolidated statements of income and statements of cash flows for the periods from the beginning of the fiscal years in which such quarterly periods are included to the end of such quarterly periods, prepared by the Company. Such financial statements (including any related schedules and/or notes) are true and correct in all material respects (subject, as to interim statements, to changes resulting from audits and year- end adjustments), have been prepared in accordance with generally accepted accounting principles consistently followed throughout the periods involved and show all liabilities, direct and contingent, of the Company and its Subsidiaries required to be shown in accordance with such principles. The balance sheets fairly present the condition of the Company and its Subsidiaries as at the dates thereof, and the statements of income and statements of cash flows fairly present the results of the operations of the Company and its Subsidiaries for the periods indicated. There has been no material adverse change in the business, condition or operations (financial or otherwise) of the Company and its Subsidiaries taken as a whole since the end of the most recent fiscal year for which such audited financial statements have been furnished. 8C. Actions Pending. There is no action, suit, investigation or proceeding pending or, to the knowledge of the Company, threatened against the Company or any of its Subsidiaries, or any properties or rights of the Company or any of its Subsidiaries, by or before any court, arbitrator or administrative or governmental body which might result in any material adverse change in the business, condition (financial or otherwise) or operations of the Company and its Subsidiaries taken as a whole. 8D. Outstanding Debt. Neither the Company nor any of its Subsidiaries has outstanding any Debt except as permitted by paragraph 6B(2). There exists no default under the provisions of any instrument evidencing such Debt or of any agreement relating thereto. 8E. Environmental Compliance. The Company and its Subsidiaries and all of their respective properties and facilities have complied at all times and in all respects with all 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 would not result in a material adverse effect on the business, condition (financial or otherwise) or operations of the Company and its Subsidiaries taken as a whole. 8F. Taxes. The Company has and each of its Subsidiaries has filed all federal, state and other income tax returns which, to the best knowledge of the officers of the Company, are required to be filed, and each has paid all taxes as shown on such returns and on all assessments received by it to the extent that such taxes have become due, except such taxes as are being contested in good faith by appropriate proceedings for which adequate reserves have been established in accordance with generally accepted accounting principles. 8G. Conflicting Agreements and Other Matters. Neither the Company nor any of its Subsidiaries is a party to any contract or agreement or subject to any charter or other corporate restriction which materially and adversely affects its business, property or assets, or financial condition. Neither the execution nor delivery of this Agreement or the Notes, nor the offering, issuance and sale of the Notes, nor fulfillment of nor compliance with the terms and provisions hereof and of the Notes will conflict with, or result in a breach of the terms, conditions or provisions of, or constitute a default under, or result in any violation of, or result in the creation of any Lien upon any of the properties or assets of the Company or any of its Subsidiaries pursuant to, the charter or by-laws of the Company or any of its Subsidiaries, any award of any arbitrator or any agreement (including any agreement with stockholders), instrument, order, judgment, decree, statute, law, rule or regulation to which the Company or any of its Subsidiaries is subject. Neither the Company nor any of its Subsidiaries is a party to, or otherwise subject to any provision contained in, any instrument evidencing indebtedness of the Company or such Subsidiary, any agreement relating thereto or any other contract or agreement (including its charter) which limits the amount of, or otherwise imposes restrictions on the incurring of, Debt of the Company of the type to be evidenced by the Notes except as set forth in the agreements listed in Exhibit E attached hereto. 8H. Offering of Notes. Neither the Company nor any agent acting on its behalf has, directly or indirectly, offered the Notes or any similar security of the Company for sale to, or solicited any offers to buy the Notes or any similar security of the Company from, or otherwise approached or negotiated with respect thereto with, any Person other than institutional investors, and neither the Company nor any agent acting on its behalf has taken or will take any action which would subject the issuance or sale of the Notes to the provisions of section 5 of the Securities Act or to the provisions of any securities of Blue Sky law of any applicable jurisdiction. 8I. Regulation G, etc. Neither the Company nor any Subsidiary owns or has any present intention of acquiring any "margin stock" as defined in Regulation G (12 CFR Part 207) of the Board of Governors of the Federal Reserve System (herein called "margin stock"). The proceeds of sale of the Notes will be used to refinance bank debt and fund capital expenditures and acquisitions. None of such proceeds will be used, directly or indirectly, for the purpose, whether immediate, incidental or ultimate, of purchasing or carrying any margin stock or for the purpose of maintaining, reducing or retiring any indebtedness which was originally incurred to purchase or carry any stock that is currently a margin stock or for any other purpose which might constitute this transaction a "purpose credit" within the meaning of such Regulation G. Neither the Company nor any agent acting on its behalf has taken or will take any action which might cause this Agreement or the Notes to violate Regulation G, Regulation T or any other regulation of the Board of Governors of the Federal Reserve System or to violate the Securities Exchange Act of 1934, as amended, in each case as in effect now or as the same may hereafter be in effect. 8J. ERISA. No accumulated funding deficiency (as defined in section 302 of ERISA and section 412 of the Code), whether or not waived, exists with respect to any plan (other than a Multiemployer Plan). No liability to the PBGC has been or is expected by the Company to be incurred with respect to any plan (other than a Multiemployer Plan) by the Company which is or would be materially adverse to the Company. The Company has not incurred and does not presently expect to incur any withdrawal liability under Title IV of ERISA with respect to any Multiemployer Plan which is or would be materially adverse to the Company taken as a whole. The execution and delivery of this Agreement and the issuance and sale of the Notes will not involve any transaction which is subject to the prohibitions of section 406 of ERISA or in connection with which a tax could be imposed pursuant to section 4975 of the Code. The representation by the Company in the next preceding sentence is made in reliance upon and subject to the accuracy of the representation in paragraph 9 as to the source of the funds to be used to pay the purchase price of the Notes to be purchased. 8K. Governmental Consent. Neither the nature of the Company or of any Subsidiary nor any of their respective businesses or properties, nor any relationship between the Company or any Subsidiary and any other Person, nor any circumstance in connection with the offering, issuance, sale or delivery of the Notes is such as to require any authorization, consent, approval, exemption or other action by or notice to or filing with any court or administrative or governmental body (other than routine filings after the date of closing with the Securities and Exchange Commission and/or state Blue Sky authorities) in connection with the execution and delivery of this Agreement, the offering, issuance, sale or delivery of the Notes or fulfillment of or compliance with the terms and provisions hereof or of the Notes. The representation by the Company in this paragraph 8K is made in reliance upon and subject to the representation in paragraph 9. 8L. Hostile Tender Offers. None of the proceeds of the sale of any Notes will be used to finance a Hostile Tender Offer. 8M. Subordination. All indebtedness identified as "Patronage refund certificates payable" on the Company's most recently furnished balance sheet is effectively subordinated to the Notes pursuant to subordination language identical to that set forth in Exhibit F hereto, which language appears on all certificates evidencing such indebtedness. The subordination language set forth in Exhibit F hereto effectively subordinates to the Notes all indebtedness evidenced by instruments bearing such language. 8N. Disclosure. Neither this Agreement nor any other document, certificate or statement furnished by or on behalf of the Company in connection herewith or in connection with the issuance of any Notes contains any untrue statement of a material fact or omits to state a material fact necessary in order to make the statements contained herein and therein not misleading. There is no fact peculiar to the Company or any of its Subsidiaries which materially adversely affects or in the future would (so far as the Company can now foresee) materially adversely affect the business, property or assets, or financial condition of the Company or any of its Subsidiaries and which has not been set forth in this Agreement or in the other documents, certificates and statements furnished in connection herewith by or on behalf of the Company prior to the date hereof in connection with the transactions contemplated hereby. 9. REPRESENTATIONS OF THE PURCHASERS. Each Purchaser represents as follows: 9A. Nature of Purchase. Such Purchaser is not acquiring the Notes purchased by it hereunder with a view to or for sale in connection with any distribution thereof within the meaning of the Securities Act, provided that the disposition of such Purchaser's property shall at all times be and remain within its control. 9B. Source of Funds. No part of the funds used by such Purchaser to pay the purchase price of the Notes purchased by such Purchaser hereunder constitutes assets allocated to any separate account maintained by such Purchaser in which any employee benefit plan, other than employee benefit plans identified on a list which has been furnished by such Purchaser to the Company, participates to the extent of 10% or more. For the purpose of this paragraph 9B, the terms "separate account" and "employee benefit plan" shall have the respective meanings specified in section 3 of ERISA. 10. DEFINITIONS. For the purpose of this Agreement, the terms defined in the text of any paragraph shall have the respective meanings specified therein, and the following terms shall have the meanings specified with respect thereto below: 10A. Yield-Maintenance Terms. "Called Principal" shall mean, with respect to any Note, the principal of such Note that is to be prepaid pursuant to paragraph 4C (any partial prepayment being applied in satisfaction of required payments of principal in inverse order of their scheduled due dates), or is declared to be immediately due and payable pursuant to paragraph 7A, as the context requires. "Discounted Value" shall mean, with respect to the Called Principal of any Note, the amount obtained by discounting all Remaining Scheduled Payments with respect to such Called Principal from their respective scheduled due dates to the Settlement Date with respect to such Called Principal, in accordance with accepted financial practice and at a discount factor (applied on the same periodic basis as that on which interest on such Note is payable) equal to the Reinvestment Yield with respect to such Called Principal. "Reinvestment Yield" shall mean, with respect to the Called Principal of any Note, the yield to maturity implied by (i) the yields reported, as of 10:00 A.M. (New York City time) on the Business Day next preceding the Settlement Date with respect to such Called Principal, on the display designated as "Page 678" on the Telerate Service (or such other display as may replace Page 678 on the Telerate Service) for actively traded U.S. Treasury securities having a maturity equal to the Remaining Average Life of such Called Principal as of such Settlement Date, or if such yields shall not be reported as of such time or the yields reported as of such time shall not be ascertainable, (ii) the Treasury Constant Maturity Series yields reported, for the latest day for which such yields shall have been so reported as of the Business Day next preceding the Settlement Date with respect to such Called Principal, in Federal Reserve Statistical Release H.15 (519) (or any comparable successor publication) for actively traded U.S. Treasury securities having a constant maturity equal to the Remaining Average Life of such Called Principal as of such Settlement Date. Such implied yield shall be determined, if necessary, by (a) converting U.S. Treasury bill quotations to bond-equivalent yields in accordance with accepted financial practice and (b) interpolating linearly between reported yields. "Remaining Average Life" shall mean, with respect to the Called Principal of any Note, the number of years (calculated to the nearest one-twelfth year) obtained by dividing (i) such Called Principal into (ii) the sum of the products obtained by multiplying (a) each Remaining Scheduled Payment of such Called Principal (but not of interest thereon) by (b) the number of years (calculated to the nearest one-twelfth year) which will elapse between the Settlement Date with respect to such Called Principal and the scheduled due date of such Remaining Scheduled Payment. "Remaining Scheduled Payments" shall mean, with respect to the Called Principal of any Note, all payments of such Called Principal and interest thereon that would be due on or after the Settlement Date with respect to such Called Principal if no payment of such Called Principal were made prior to its scheduled due date. "Settlement Date" shall mean, with respect to the Called Principal of any Note, the date on which such Called Principal is to be prepaid pursuant to paragraph 4C, or is declared to be immediately due and payable pursuant to paragraph 7A, as the context requires. "Yield-Maintenance Amount" shall mean, with respect to any Note, an amount equal to the excess, if any, of the Discounted Value of the Called Principal of such Note over the sum of (i) such Called Principal plus (ii) interest accrued thereon as of (including interest due on) the Settlement Date with respect to such Called Principal. The Yield-Maintenance Amount shall in no event be less than zero. 10B. Other Terms. "Acceptance" shall have the meaning specified in paragraph 2B(5). "Acceptance Day" shall have the meaning specified in paragraph 2B(5). "Acceptance Window" shall have the meaning specified in paragraph 2B(5). "Accepted Note" shall have the meaning specified in paragraph 2B(5). "Adjusted Net Earnings" shall mean Consolidated Net Earnings plus amounts deducted in the calculation thereof for depreciation, amortization, interest expense, and lease expense. "Affiliate" shall mean any Person directly or indirectly controlling, controlled by, or under direct or indirect common control with, the Company, except a Subsidiary. A Person shall be deemed to control a corporation if such Person possesses, directly or indirectly, the power to direct or cause the direction of the management and policies of such corporation, whether through the ownership of voting securities, by contract or otherwise. "Authorized Officer" shall mean (i) in the case of the Company, its chief executive officer, its chief financial officer, any vice president of the Company designated as an "Authorized Officer" of the Company in the Information Schedule attached hereto or any vice president of the Company designated as an "Authorized Officer" of the Company for the purpose of this Agreement in an Officer's Certificate executed by the Company's chief executive officer or chief financial officer and delivered to Prudential, and (ii) in the case of Prudential, any officer of Prudential designated as its "Authorized Officer" in the Information Schedule or any officer of Prudential designated as its "Authorized Officer" for the purpose of this Agreement in a certificate executed by one of its Authorized Officers. Any action taken under this Agreement on behalf of the Company by any individual who on or after the date of this Agreement shall have been an Authorized Officer of the Company and whom Prudential in good faith believes to be an Authorized Officer of the Company at the time of such action shall be binding on the Company even though such individual shall have ceased to be an Authorized Officer of the Company, and any action taken under this Agreement on behalf of Prudential by any individual who on or after the date of this Agreement shall have been an Authorized Officer of Prudential, and whom the Company in good faith believes to be an Authorized Officer of Prudential at the time of such action shall be binding on Prudential even though such individual shall have ceased to be an Authorized Officer of Prudential. "Available Facility Amount" shall have the meaning specified in paragraph 2B(1). "Bankruptcy Law" shall have the meaning specified in clause (viii) of paragraph 7A. "Business Day" shall mean any day other than a Saturday, a Sunday or a day on which commercial banks in New York City are required or authorized to be closed. "Cancellation Date" shall have the meaning specified in paragraph 2B(8)(iii). "Cancellation Fee" shall have the meaning specified in paragraph 2B(8)(iii). "Capitalized Lease Obligation" shall mean any rental obliga- tion which, under generally accepted accounting principles, is or will be required to be capitalized on the books of the Company or any Subsidiary, taken at the amount thereof accounted for as indebtedness (net of interest expense) in accordance with such principles. "Closing Day" shall mean the Series A Closing Day or a Private Shelf Closing Day, as the case may be. "Code" shall mean the Internal Revenue Code of 1986, as amended. "Company" shall have the meaning specified in the introductory paragraph of this Agreement. "Confidential Information" shall mean any written information delivered or made available by or on behalf of the Company or any Subsidiary to a Purchaser or a Transferee (as the case may be), including without limitation any non-public information obtained pursuant to paragraph 5A or 5B, in connection with or pursuant to this Agreement which is proprietary in nature and clearly marked or labeled as being confidential information, but in no event shall include information (i) which was publicly known or otherwise known to such Purchaser or Transferee (as the case may be) at the time of disclosure (except pursuant to disclosure in connection with this Agreement), (ii) which subsequently becomes publicly known through no act or omission by such Purchaser or Transferee (as the case may be), or (iii) which otherwise becomes known to such Purchaser or Transferee, other than through disclosure by the Company. "Confirmation of Acceptance" shall have the meaning specified in paragraph 2B(5). "Consolidated Funded Debt" shall mean, as of the time of any determination, the sum of (i) all Funded Debt of the Company and Subsidiaries determined on a consolidated basis and (ii) all Funded Debt of the Company owed to Subsidiaries. "Consolidated Net Earnings" shall mean: (i) consolidated gross revenues of the Company and its Subsidiaries less (ii) all operating and non-operating expenses of the Company and its Subsidiaries including all charges of a proper character (including current and deferred taxes on income, provision for taxes on unremitted foreign earnings which are included in gross revenues, and current additions to reserves), but not including in gross revenues: (a) any gains (net of expenses and taxes applicable thereto) in excess of losses resulting from the sale, conversion or other disposition of capital assets (i.e., assets other than current assets); (b) any gains resulting from the write-up of assets; (c) any equity of the Company or any Subsidiary in the unremitted earnings of any corporation which is not a Subsidiary; (d) any earnings of any Person acquired by the Company or any Subsidiary through purchase, merger or consolidation or otherwise for any period prior to the date of acquisition; or (e) any deferred credit representing the excess of equity in any Subsidiary at the date of acquisition over the cost of the investment in such Subsidiary; all determined in accordance with generally accepted accounting principles. "Consolidated Net Worth" shall mean, as of the time of any determination, the sum of (i) Patronage Indebtedness, and (ii) Member Dealers' Equity. "Current Debt" shall mean any obligation for borrowed money (and any notes payable and drafts accepted representing exten- sions of credit whether or not representing obligations for borrowed money) payable on demand or within a period of one year from the date of the creation thereof; provided that any obligation shall be treated as Funded Debt, regardless of its term, if such obligation is renewable at the sole option of the Company pursuant to the terms thereof or of a revolving credit or similar agreement effective for more than one year after the date of the creation of such obligation, or may be payable out of the proceeds of a similar obligation pursuant to the terms of such obligation or of any such agreement. Any obligation secured by a Lien on, or payable out of the proceeds of production from, property of the Company or any Subsidiary shall be deemed to be Funded or Current Debt, as the case may be, of the Company or such Subsidiary even though such obligation shall not be assumed by the Company or such Subsidiary. "Debt" shall mean Funded Debt and Current Debt. "Delayed Delivery Fee" shall have the meaning specified in paragraph 2B(8)(ii). "Environmental Laws" shall mean all federal, state, local and foreign laws relating to pollution or protection of the environment, including laws relating to emissions, discharges, releases or threatened releases of pollutants, contaminants, chemicals, or industrial, toxic or hazardous substances or wastes into the environment (including without limitation ambient air, surface water, ground water, or land), or otherwise relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport, or handling of pollutants, contaminants, chemicals, or industrial, toxic or hazardous substances or wastes, and any and all regulations, codes, plans, orders, decrees, judgments, injunctions, notices or demand letters issued, entered, promulgated or approved thereunder. "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended. "Event of Default" shall mean any of the events specified in paragraph 7A, provided that there has been satisfied any requirement in connection with such event for the giving of notice, or the lapse of time, or the happening of any further condition, event or act, and "Default" shall mean any of such events, whether or not any such requirement has been satisfied. "Facility" shall have the meaning specified in paragraph 2B(1). "Facility Fee" shall have the meaning specified in paragraph 2B(8)(i). "Funded Debt" shall mean and include without duplication, (i) any obligation payable more than one year from the date of creation thereof, which under generally accepted accounting principles is shown on the balance sheet as a liability, including Capitalized Lease Obligations, (ii) indebtedness payable more than one year from the date of creation thereof which is secured by any Lien on property owned by the Company or any Subsidiary, whether or not the indebtedness secured thereby shall have been assumed by the Company or such Subsidiary, (iii) guarantees, endorsements (other than endorsements of negotiable instruments for collection in the ordinary course of business) and other contingent liabilities (whether direct or indirect) in connection with the obligations, stock or dividends of any Person, (iv) obligations under any other contract which, in economic effect, is substantially equivalent to a guarantee, and (v) any obligation which, regardless of its term, is renewable pursuant to the terms thereof or of a revolving credit or similar agreement effective for more than one year after the creation of such obligation, or may be payable out of the proceeds of a similar obligation pursuant to the terms of such obligation or of any such agreement; all as determined in accordance with generally accepted accounting principles; provided, however, that Funded Debt shall not include Patronage Indebtedness. "Hostile Tender Offer" shall mean, with respect to the use of proceeds of any Note, any offer to purchase, or any purchase of, shares of capital stock of any corporation or equity interests in any other entity, or securities convertible into or representing the beneficial ownership of, or rights to acquire, any such shares or equity interests, if such shares, equity interests, securities or rights are of a class which is publicly traded on any securities exchange or in any over-the-counter market, other than purchases of such shares, equity interests, securities or rights representing less than 5% of the equity interests or beneficial ownership of such corporation or other entity for portfolio investment purposes, and such offer or purchase has not been duly approved by the board of directors of such corporation or the equivalent governing body of such other entity prior to the date on which the Company makes the Request for Purchase of such Note. "Institutional Investor" shall mean any insurance company, pension fund, mutual fund, investment company, bank, savings bank, savings and loan association, investment banking company, trust company, or any finance or credit company, any portfolio or any investment fund managed by any of the foregoing, or any other institutional investor, and any nominee of the foregoing. "Issuance Period" shall have the meaning specified in paragraph 2B(2). "Lien" shall mean any mortgage, pledge, security interest, encumbrance, deposit agreement, lien (statutory or otherwise) or charge of any kind (including any agreement to give any of the foregoing, any conditional sale or other title retention agreement, any lease in the nature thereof, and the filing of or agreement to give any financing statement under the Uniform Commercial Code of any jurisdiction) or any other type of preferential arrangement for the purpose, or having the effect, of protecting a creditor against loss or securing the payment or performance of an obligation. "Member Dealers' Equity" shall mean, as of the time of any determination, the total of (i) the par value (or stated value on the books of the Company) of the capital stock of all classes of the Company, plus (or minus in the case of a surplus deficit) (ii) the amount of the consolidated surplus, whether capital or earned, of the Company and its Subsidiaries; provided that in no event shall amounts attributable to treasury stock be included in Member Dealers' Equity. "Multiemployer Plan" shall mean any Plan which is a "multiemployer plan" as such term is defined in Section 4001(a)(3) of ERISA. "1991 Agreement Notes" shall mean the notes of the Company issued pursuant to the Note Purchase and Private Shelf Agreement dated as of September 27, 1991 between the Company and Prudential, as amended from time to time. "Note" and "Notes" shall have the meaning specified in paragraph 1B. "Officer's Certificate" shall mean a certificate signed in the name of the Company by an Authorized Officer of the Company. "Patronage Indebtedness" shall mean subordinated indebtedness of the Company issued to its members as all or part of a patronage dividend and evidenced by a certificate bearing subordination language identical to that set forth in Exhibit F hereto. "PBGC" shall mean the Pension Benefit Guaranty Corporation and any entity succeeding to any of its functions under ERISA. "Person" shall mean and include an individual, a partnership, a joint venture, a corporation, a trust, an unincorporated organization and a government or any department or agency thereof. "Plan" shall mean any "employee pension benefit plan" (as such term is defined in section 3 of ERISA) which is or has been established or maintained, or to which contributions are or have been made, by the Company or by any trade or business, whether or not incorporated which, together with the Company, is under common control, as described in section 414(b) or (c) of the Code. "Price Movement" shall have the meaning specified in paragraph 2B(8)(iii). "Private Shelf Closing Day" for any Accepted Note shall mean the Business Day specified for the closing of the purchase and sale of such Private Shelf Note in the Request for Purchase of such Private Shelf Note, provided that (i) if the Acceptance Day for such Accepted Note is less than five Business Days after the Company shall have made such Request for Purchase and the Company and the Purchaser which is obligated to purchase such Private Shelf Note agree on an earlier Business Day for such closing, the "Private Shelf Closing Day" for such Accepted Note shall be such earlier Business Day, and (ii) if the closing of the purchase and sale of such Accepted Note is rescheduled pursuant to paragraph 2B(7), the Private Shelf Closing Day for such Accepted Note, for all purposes of this Agreement except paragraph 2B(8)(iii), shall mean the Rescheduled Closing Day with respect to such Closing. "Private Shelf Note" and "Private Shelf Notes" shall have the meaning specified in paragraph 1B. "Prudential" shall mean The Prudential Insurance Company of America. "Prudential Affiliate" shall mean any corporation or other entity all of the Voting Stock (or equivalent voting securities or interests) of which is owned by Prudential either directly or through Prudential Affiliates. "Purchaser" shall mean Prudential as purchaser of the Series A Notes, and Prudential or a Prudential Affiliate purchasing any Private Shelf Note, as the case may be. "Request for Purchase" shall have the meaning specified in paragraph 2B(3). "Required Holder(s)" shall mean the holder or holders of at least 51% of the aggregate principal amount of the Notes or of a Series of Notes, as the context may require, from time to time outstanding. "Rescheduled Closing Day" shall have the meaning specified in paragraph 2B(7). "Securities Act" shall mean the Securities Act of 1933, as amended. "Series" shall have the meaning specified in paragraph 1B. "Series A Closing Day" shall have the meaning specified in paragraph 2A. "Series A Note" and "Series A Notes" shall have the meaning specified in paragraph 1A. "Significant Holder" shall mean (i) Prudential and any other Purchaser, so long as Prudential or such Purchaser shall hold (or be committed under this Agreement to purchase) any Note, or (ii) any other holder of at least 5% of the aggregate principal amount of the Notes from time to time outstanding. "Subsidiary" shall mean any corporation, all of the stock of every class of which, except directors' qualifying shares shall, at the time as of which any determination is being made, be owned by the Company either directly or through Subsidiaries. "Substantial Part" shall mean (i) in the context of the consolidated assets of the Company and its Subsidiaries, assets which constitute 10% or more thereof and (ii) in the context of assets' contribution to Consolidated Net Earnings, assets which contributed 15% or more thereof. "Substantial Stockholder" shall mean (i) any Person owning, beneficially or of record, directly or indirectly, either individually or together with all other Persons to whom such Person is related by blood, adoption or marriage, stock of the Company (of any class having ordinary voting power for the election of directors) aggregating 5% or more of such voting power or (ii) any Person related by blood, adoption or marriage to any Person described or coming within the provisions of clause (i) of this paragraph. "Total Capitalization" shall mean, as of the time of any determination, the sum of (i) Consolidated Net Worth and (ii) Consolidated Funded Debt. "Transferee" shall mean any direct or indirect transferee of all or any part of any Note purchased under this Agreement. "Voting Stock" shall mean, with respect to any corporation, any shares of stock of such corporation whose holders are entitled under ordinary circumstances to vote for the election of directors of such corporation (irrespective of whether at the time stock of any other class or classes shall have or might have voting power by reason of the happening of any contingency). 11. MISCELLANEOUS. 11A. Note Payments. The Company agrees that, so long as any Purchaser shall hold any Note, it will make payments of principal thereof and Yield-Maintenance Amount, if any, and interest thereon, which comply with the terms of this Agreement, by wire transfer of immediately available funds for credit to (i) the account or accounts as specified in the Purchaser Schedule attached hereto (in the case of the Series A Notes), (ii) the account or accounts specified in the applicable Confirmation of Acceptance (in the case of any Private Shelf Note), or (iii) such other account or accounts in the United States as any Purchaser may designate in writing, notwithstanding any contrary provision herein or in any Note with respect to the place of payment. Each Purchaser agrees that, before disposing of any Note, it will make a notation thereon (or on a schedule attached thereto) of all principal payments previously made thereon and of the date to which interest thereon has been paid. The Company agrees to afford the benefits of this paragraph 11A to any Transferee which shall have made the same agreement as you have made in this paragraph 11A. 11B. Expenses. The Company agrees, whether or not the transactions contemplated hereby shall be consummated, to pay, and save each Purchaser and any Transferee harmless against liability for the payment of, all out-of-pocket expenses arising in connection with such transactions, including (i) all document production and duplication charges and the fees and expenses of any special counsel engaged by the Purchasers or any Transferee in connection with this Agreement, the transactions contemplated hereby and any subsequent proposed modification requested by the Company of, or proposed consent under, this Agreement, whether or not such proposed modification shall be effected or proposed consent granted, and (ii) the costs and expenses, including attorneys' fees, incurred by each Purchaser or any Transferee in enforcing any rights under this Agreement or the Notes or in responding to any subpoena or other legal process issued in connection with this Agreement or the transactions contemplated hereby or by reason of any Purchaser's or any Transferee's having acquired any Note, including without limitation costs and expenses incurred in any bankruptcy case. Notwithstanding the foregoing, the Company shall not be obligated to reimburse a Purchaser or any Transferee for expenses incurred in connection with the sale or transfer of a Note. The obligations of the Company under this paragraph 11B shall survive the transfer of any Note or portion thereof or interest therein by any Purchaser or any Transferee and the payment of any Note. 11C. Consent to Amendments. This Agreement may be amended, and the Company may take any action herein prohibited, or omit to perform any act herein required to be performed by it, if the Company shall obtain the written consent to such amendment, action or omission to act, of the Required Holder(s) of the Notes of each Series except that, (i) with the written consent of the holders of all Notes of a particular Series, and if an Event of Default shall have occurred and be continuing, of the holders of all Notes of all Series, at the time outstanding (and not without such written consents), the Notes of such Series may be amended or the provisions thereof waived to change the maturity thereof, to change or affect the principal thereof, or to change or affect the rate or time of payment of interest or premium payable with respect to the Notes of such Series, (ii) without the written consent of the holder or holders of all Notes at the time outstanding, no amendment to or waiver of the provisions of this Agreement shall change or affect the provisions of paragraph 7A or this paragraph 11C insofar as such provisions relate to proportions of the principal amount of the Notes of any Series, or the rights of any individual holder of Notes, required with respect to any declaration of Notes to be due and payable or with respect to any consent, (iii) with the written consent of Prudential (and not without the written consent of Prudential) the provisions of paragraph 2 may be amended or waived (except insofar as any such amendment or waiver would affect any rights or obligations with respect to the purchase and sale of Notes which shall have become Accepted Notes prior to such amendment or waiver) and (iv) with the written consent of all of the Purchasers which shall have become obligated to purchase Accepted Notes of any Series (and not without the written consent of all such Purchasers), any of the provisions of paragraphs 2 and 3 may be amended or waived insofar as such amendment or waiver would affect only rights or obligations with respect to the purchase and sale of the Accepted Notes of such Series or the terms and provisions of such Accepted Notes. Each holder of any Note at the time or thereafter outstanding shall be bound by any consent authorized by this paragraph 11C, whether or not such Note shall have been marked to indicate such consent, but any Notes issued thereafter may bear a notation referring to any such consent. No course of dealing between the Company and the holder of any Note nor any delay in exercising any rights hereunder or under any Note shall operate as a waiver of any rights of any holder of such Note. As used herein and in the Notes, the term "this Agreement" and references thereto shall mean this Agreement as it may from time to time be amended or supplemented. 11D. Form, Registration, Transfer and Exchange of Notes; Lost Notes. The Notes are issuable as registered notes without coupons in denominations of at least $1,000,000, except as may be necessary to reflect any principal amount not evenly divisible by $1,000,000. The Company shall keep at its principal office a register in which the Company shall provide for the registration of Notes and of transfers of Notes. Upon surrender for registration of transfer of any Note at the principal office of the Company, the Company shall, at its expense, execute and deliver one or more new Notes of like tenor and of a like aggregate principal amount, registered in the name of such transferee or transferees. At the option of the holder of any Note, such Note may be exchanged for other Notes of like tenor and of any authorized denominations, of a like aggregate principal amount, upon surrender of the Note to be exchanged at the principal office of the Company. Whenever any Notes are so surrendered for exchange, the Company shall, at its expense, execute and deliver the Notes which the holder making the exchange is entitled to receive. Every Note surrendered for registration of transfer or exchange shall be duly endorsed, or be accompanied by a written instrument of transfer duly executed, by the holder of such Note or such holder's attorney duly authorized in writing. Any Note or Notes issued in exchange for any Note or upon transfer thereof shall carry the rights to unpaid interest and interest to accrue which were carried by the Note so exchanged or transferred, so that neither gain nor loss of interest shall result from any such transfer or exchange. Upon receipt of written notice from the holder of any Note of the loss, theft, destruction or mutilation of such Note and, in the case of any such loss, theft or destruction, upon receipt of such holder's unsecured indemnity agreement, or in the case of any such mutilation upon surrender and cancellation of such Note, the Company will make and deliver a new Note, of like tenor, in lieu of the lost, stolen, destroyed or mutilated Note. Notwithstanding anything to the contrary herein, each Purchaser agrees, and each Transferee by its acceptance of an interest in any Note agrees, that no Note (or any interest therein) shall be transferred to any Person which is not an Institutional Investor. 11E. Persons Deemed Owners; Participations. Prior to due presentment for registration of transfer, the Company may treat the Person in whose name any Note is registered as the owner and holder of such Note for the purpose of receiving payment of principal of and Yield-Maintenance Amount, if any, and interest on such Note and for all other purposes whatsoever, whether or not such Note shall be overdue, and the Company shall not be affected by notice to the contrary. Subject to the preceding sentence, the holder of any Note may from time to time grant participations in all or any part of such Note to any Person on such terms and conditions as may be determined by such holder in its sole and absolute discretion. 11F. Survival of Representations and Warranties; Entire Agreement. All representations and warranties contained herein or made in writing by or on behalf of the Company in connection herewith shall survive the execution and delivery of this Agreement and the Notes, the transfer by any Purchaser of any Note or portion thereof or interest therein and the payment of any Note, and may be relied upon by any Transferee, regardless of any investigation made at any time by or on behalf of any Purchaser or any Transferee. Subject to the preceding sentence, this Agreement and the Notes embody the entire agreement and understanding between the parties hereto with respect to the subject matter hereof and supersede all prior agreements and understandings relating to the subject matter hereof. 11G. Successors and Assigns. All covenants and other agreements in this Agreement contained by or on behalf of any of the parties hereto shall bind and inure to the benefit of the respective successors and assigns of the parties hereto (including, without limitation, any Transferee) whether so expressed or not; provided, however, that the Company may not assign its rights or obligations hereunder to any Person. 11H. Disclosure to Other Persons. Each Purchaser agrees (and each Transferee by its acceptance of an interest in any Note agrees) to use its best efforts to hold in confidence and not disclose any Confidential Information; provided that nothing herein shall prevent the holder of any Note from delivering copies of any financial statements and other documents delivered to such holder, and disclosing any other information disclosed to such holder, by or on behalf of the Company or any Subsidiary in connection with or pursuant to this Agreement to (i) such holder's directors, officers, employees, agents and professional consultants, (ii) any other holder of any Note, (iii) any Person to which such holder offers to sell such Note or any part thereof, (iv) any Person to which such holder sells or offers to sell a participation in all or any part of such Note, (v) any federal or state regulatory authority having jurisdiction over such holder, (vi) the National Association of Insurance Commissioners or any similar organization or (vii) any other Person to which such delivery or disclosure may be necessary or appropriate (a) to effect compliance with any law, rule, regulation or order applicable to such holder, (b) in response to any subpoena or other legal process, (c) in connection with any litigation to which such holder is a party or (d) in order to protect such holder's investment in such Note. 11I. Notices. All written communications provided for hereunder (other than communications provided for under paragraph 2) shall be sent by first class mail or nationwide overnight delivery service (with charges prepaid) and (i) if to any Purchaser, addressed as specified for such communications in the Purchaser Schedule attached hereto (in the case of the Series A Notes) or the Purchaser Schedule attached to the applicable Confirmation of Acceptance (in the case of any Private Shelf Notes), or at such other address as any Purchaser shall have specified to the Company in writing, (ii) if to any other holder of any Note, addressed to such other holder at such address as such other holder shall have specified to the Company in writing or, if any such other holder shall not have so specified an address to the Company, then addressed to such other holder in care of the last holder of such Note which shall have so specified an address to the Company, and (iii) if to the Company, addressed to it at Ace Hardware Corporation, 2200 Kensington Court, Oak Brook, Illinois 60521, Attention: Treasurer, or at such other address as the Company shall have specified to the holder of each Note in writing. Any communication pursuant to paragraph 2 shall be made by the method specified for such communication in paragraph 2, and shall be effective to create any rights or obligations under this Agreement only if, in the case of a telephone communication, an Authorized Officer of the party conveying the information and of the party receiving the information are parties to the telephone call, and in the case of a telecopier communication, the communication is signed by an Authorized Officer of the party conveying the information, addressed to the attention of an Authorized Officer of the party receiving the information, and in fact received at the telecopier terminal the number of which is set forth on the Information Schedule attached hereto or at such other telecopier terminal as the party receiving the information shall have specified in writing to the party sending such information. 11J. Descriptive Headings. The descriptive headings of the several paragraphs of this Agreement are inserted for convenience only and do not constitute a part of this Agreement. 11K. Satisfaction Requirement. If any agreement, certificate or other writing, or any action taken or to be taken, is by the terms of this Agreement required to be satisfactory to you or to the Required Holder(s), the determination of such satisfaction shall be made by you or the Required Holder(s), as the case may be, in the sole and exclusive judgment (exercised in good faith) of the Person or Persons making such determination. 11L. Accounting Terms and Determinations. All references in this Agreement to "generally accepted accounting principles" shall be deemed to refer to generally accepted accounting principles in effect in the United States at the time of application thereof, subject to the next sentence. Unless otherwise specified herein, all accounting terms used herein shall be interpreted, all determinations with respect to accounting matters hereunder shall be made, and all financial statements and certificates and reports as to financial matters required to be furnished hereunder shall be prepared, in accordance with generally accepted accounting principles, applied on a basis consistent with the audited consolidated financial statements of the Company and its Subsidiaries delivered pursuant to clause (ii) of paragraph 5A. 11M. Payments Due on Non-Business Days. Anything in this Agreement or the Notes to the contrary notwithstanding, any payment of principal of or interest on any Note that is due on a date other than a Business Day shall be made on the next succeeding Business Day. If the date for any payment is extended to the next succeeding Business Day by reason of the preceding sentence, the period of such extension shall be included in the computation of the interest payable on such Business Day. 11N. Governing Law. This Agreement shall be construed and enforced in accordance with, and the rights of the parties shall be governed by, the law internal of the State of Illinois. 11O. Counterparts. This Agreement may be executed simultaneously in two or more counterparts, each of which shall be deemed an original, and it shall not be necessary in making proof of this Agreement to produce or account for more than one such counterpart. If you are in agreement with the foregoing, please sign the form of acceptance on the enclosed counterpart of this letter and return the same to the Company, whereupon this letter shall become a binding agreement between you and the Company. Very truly yours, ACE HARDWARE CORPORATION By: Its: Vice President-Controller The foregoing Agreement is hereby accepted as of the date first above written. THE PRUDENTIAL INSURANCE COMPANY OF AMERICA By: ____________________________ Title: Vice President Series A Notes PURCHASER SCHEDULE Ace Hardware Corporation Aggregate Principal Amount of Notes to be Note Denom- Purchased ination(s) THE PRUDENTIAL INSURANCE COMPANY OF AMERICA $30,000,000 $25,000,000 $5,000,000 All payments on account of Notes held by such purchaser shall be made by wire transfer of immediately available funds for credit to: (1) In the case of payments on account of the Note originally issued in the principal amount of $25,000,000: Account No. 050-54-526 Morgan Guaranty Trust Company of New York 23 Wall Street New York, New York 10015 (ABA No.: 021-000-238) Each such wire transfer shall set forth the name of the Company, a reference to "6.47% Series A Senior Notes due June 22, 2008, Security No. !INV4571!", and the due date and application (as among principal, interest and Yield-Maintenance Amount) of the payment being made. (2) In the case of payments on account of the Note originally issued in the principal amount of $5,000,000: Account No. 000-01-159 Morgan Guaranty Trust Company of New York 23 Wall Street New York, New York 10015 (ABA No.: 021-000-238) Each such wire transfer shall set forth the name of the Company, a reference to "6.47% Series A Senior Notes due June 22, 2008, Security No. !INV4572!", and the due date and application (as among principal, interest and Yield-Maintenance Amount) of the payment being made. (3) Address for all notices relating to payments: The Prudential Insurance Company of America c/o Prudential Capital Group Four Gateway Center 100 Mulberry Street Newark, New Jersey 07102 Attention: Investment Administration Unit Telecopy: (201) 802-7551 (4) Address for all other communications and notices: The Prudential Insurance Company of America c/o Prudential Capital Group Two Prudential Plaza Suite 5600 Chicago, Illinois 60601 Attention: Managing Director Telecopy: (312) 540-4222 (5) Recipient of telephonic prepayment notices: Manager, Asset Management Unit Telephone: (201) 802-6429 Telecopy: (201) 802-7551 (6) Recipient of telephonic prepayment notices: Manager, Asset Management Unit (201) 802-6429 (7) Tax Identification No.: 22-1211670 INFORMATION SCHEDULE Authorized Officers for Prudential Allen A. Weaver P. Scott von Fischer Managing Director Senior Vice President Prudential Capital Group Prudential Capital Group Two Prudential Plaza Two Prudential Plaza Suite 5600 Suite 5600 Chicago, Illinois 60601 Chicago, Illinois 60601 Telephone: (312) 540-4211 Telephone: (312)540-4225 Facsimile: (312) 540-4222 Facsimile: (312)540-4222 Mark A. Hoffmeister Leonard H. Lillard IV Vice President Vice President Prudential Capital Group Prudential Capital Group Two Prudential Plaza Two Prudential Plaza Suite 5600 Suite 5600 Chicago, Illinois 60601 Chicago, Illinois 60601 Telephone: (312) 540-4215 Telephone: (312)540-4216 Facsimile: (312) 540-4222 Facsimile: (312)540-4222 Senior Vice President Central Credit Prudential Capital Group Four Gateway Center 100 Mulberry Street Newark, New Jersey 07102 Telephone: (201) 802-6429 Facsimile: (201) 624-6432 Authorized Officers for the Company David F. Hodnik Rita D. Kahle Executive Vice President Vice President-Controller Ace Hardware Corporation Ace Hardware Corporation 2200 Kensington Court 2200 Kensington Court Oak Brook, Illinois 60521 Oak Brook, Illinois 60521 Roger E. Peterson David W. League President & C.E.O. Vice President & Ace Hardware Corporation General Counsel 2200 Kensington Court Ace Hardware Corporation Oak Brook, Illinois 60521 2200 Kensington Court Oak Brook, Illinois 60521 Telephone: (708) 990-6600 Facsimile: (708) 571-4512 EXHIBIT A-1 [FORM OF SERIES A NOTE] ACE HARDWARE CORPORATION 6.47% SENIOR SERIES A NOTE DUE JUNE 22, 2008 No. [Date] $ FOR VALUE RECEIVED, the undersigned, Ace Hardware Corporation (herein called the "Company"), a corporation organized and existing under the laws of the State of Delaware, hereby promises to pay to , or registered assigns, the principal sum of DOLLARS on June 22, 2008, with interest (computed on the basis of a 360-day year--30-day month) (a) on the unpaid balance thereof at the rate of 6.47% per annum from the date hereof, payable quarterly on the twenty-second day of March, June, September and December in each year, commencing with the March 22, June 22, September 22 or December 22 next succeeding the date hereof, until the principal hereof shall have become due and payable, and (b) on any overdue payment (including any overdue prepayment) of principal, any overdue payment of Yield Maintenance Amount and any overdue payment of interest, payable quarterly as aforesaid (or, at the option of the registered holder hereof, on demand), at a rate per annum from time to time equal to the greater of (i) 8.47% or (ii) the rate of interest publicly announced by Morgan Guaranty Trust Company of New York from time to time in New York City as its Prime Rate. Payments of principal, Yield Maintenance Amounts, if any, and interest are to be made at the main office of Morgan Guaranty Trust Company of New York in New York City or at such other place as the holder hereof shall designate to the Company in writing, in lawful money of the United States of America. This Note is one of a series of Senior Notes (herein called the "Notes") issued pursuant to a Note Purchase and Private Shelf Agreement, dated as of September 22, 1993 (herein called the "Agreement"), between the Company, on the one hand, and The Prudential Insurance Company of America and each Prudential Affiliate (as defined in the Agreement) which becomes party thereto, on the other hand, and is entitled to the benefits thereof. As provided in the Agreement, this Note is subject to prepayment, in whole or from time to time in part, in certain cases without Yield Maintenance Amount and in other cases with Yield Maintenance Amount as specified in the Agreement. This Note is a registered Note and, as provided in the Agreement, upon surrender of this Note for registration of transfer, duly endorsed, or accompanied by a written instrument of transfer duly executed, by the registered holder hereof or such holder's attorney duly authorized in writing, a new Note for the then outstanding principal amount will be issued to, and registered in the name of, the transferee. Prior to due presentment for registration of transfer, the Company may treat the person in whose name this Note is registered as the owner hereof for the purpose of receiving payment and for all other purposes, and the Company shall not be affected by any notice to the contrary. The Company agrees to make prepayments of principal of this Note on the dates and in the amounts specified in the Agreement. In case an Event of Default, as defined in the Agreement, shall occur and be continuing, the principal of this Note may be declared or otherwise become due and payable in the manner and with the effect provided in the Agreement. This Note is intended to be performed in the State of Illinois and shall be construed and enforced in accordance with the internal law of such State. ACE HARDWARE CORPORATION By: Title: EXHIBIT A-2 [FORM OF PRIVATE SHELF NOTE] ACE HARDWARE CORPORATION SENIOR NOTE (Fixed Rate) SERIES ____ No. ORIGINAL PRINCIPAL AMOUNT: ORIGINAL ISSUE DATE: INTEREST RATE: INTEREST PAYMENT DATES: FINAL MATURITY DATE: PRINCIPAL INSTALLMENT DATES AND AMOUNTS: FOR VALUE RECEIVED, the undersigned, Ace Hardware Corporation (herein called the "Company"), a corporation organized and existing under the laws of the State of Delaware, hereby promises to pay to ________________________, or registered assigns, the principal sum of DOLLARS [on the Final Maturity Date specified above] [, payable in installments on the Principal Installment Dates and in the amounts specified above, and on the Final Maturity Date specified above in an amount equal to the unpaid balance of the principal hereof,] with interest (computed on the basis of a 360-day year--30-day month) (a) on the unpaid balance thereof at the Interest Rate per annum specified above, payable on each Interest Payment Date specified above and on the Final Maturity Date specified above, commencing with the Interest Payment Date next succeeding the date hereof, until the principal hereof shall have become due and payable, and (b) on any overdue payment (including any overdue prepayment) of principal, any overdue payment of Yield Maintenance Amounts and any overdue payment of interest, payable on each Interest Payment Date as aforesaid (or, at the option of the registered holder hereof, on demand), at a rate per annum from time to time equal to the greater of (i) 2% plus the Interest Rate specified above or (ii) the rate of interest publicly announced by Morgan Guaranty Trust Company of New York from time to time in New York City as its Prime Rate. Payments of principal, Yield Maintenance Amounts, if any, and interest are to be made at the main office of Morgan Guaranty Trust Company of New York in New York City or at such other place as the holder hereof shall designate to the Company in writing, in lawful money of the United States of America. This Note is one of a series of Senior Notes (herein called the "Notes") issued pursuant to a Note Purchase and Private Shelf Agreement, dated as of September 22, 1993 (herein called the "Agree- ment"), between the Company, on the one hand, and The Prudential Insurance Company of America and each Prudential Affiliate (as defined in the Agreement) which becomes party thereto, on the other hand, and is entitled to the benefits thereof. The Company agrees to make principal payments of this Note on the Principal Installment Dates (if any) specified above. This Note is subject to optional prepayment, in whole or from time to time in part, on the terms specified in the Agreement. This Note is a registered Note and, as provided in the Agreement, upon surrender of this Note for registration of transfer, duly endorsed, or accompanied by a written instrument of transfer duly executed, by the registered holder hereof or such holder's attorney duly authorized in writing, a new Note for the then outstanding principal amount will be issued to, and registered in the name of, the transferee. Prior to due presentment for registration of transfer, the Company may treat the person in whose name this Note is registered as the owner hereof for the purpose of receiving payment and for all other purposes, and the Company shall not be affected by any notice to the contrary. In case an Event of Default, as defined in the Agreement, shall occur and be continuing, the principal of this Note may be declared or otherwise become due and payable in the manner and with the effect provided in the Agreement. This Note is intended to be performed in the State of Illinois and shall be construed and enforced in accordance with the internal law of such State. ACE HARDWARE CORPORATION By: Title: EXHIBIT B [FORM OF REQUEST FOR PURCHASE] Ace Hardware Corporation Reference is made to the Note Purchase and Private Shelf Agreement (the "Agreement"), dated as of September 22, 1993 between Ace Hardware Corporation (the "Company"), on the one hand, and The Prudential Insurance Company of America ("Prudential") and each Prudential Affiliate which becomes party thereto, on the other hand. All terms used herein that are defined in the Agreement have the respective meanings specified in the Agreement. Pursuant to Paragraph 2B(3) of the Agreement, the Company hereby makes the following Request for Purchase: 1. Aggregate principal amount of the Notes covered hereby (the "Notes") ................... $ 2. Individual specifications of the Notes: Principal Final Installment Interest Principal Maturity Dates and Payment Amount * Date Amounts Period quarterly 3. Use of proceeds of the Notes: 4. Proposed day for the closing of the purchase and sale of the Notes: ________________________ * Minimum principal amount of $5,000,000 5. The purchase price of the Notes is to be transferred to: Name, Address Name and and ABA Routing Number of Telephone No. Number of Bank Account of Bank Officer 6. The Company certifies (a) that the representations and warranties contained in paragraph 8 of the Agreement are true on and as of the date of this Request for Purchase except to the extent of changes caused by the transactions contemplated in the Agreement and (b) that there exists on the date of this Request for Purchase no Event of Default or Default. 7. The fee to be paid pursuant to paragraph 2B(8)(i) of the Agreement [should be included in the rate quotes which may be provided by Prudential] [will be paid by the Company on the closing date]. Dated: Ace Hardware Corporation By: Authorized Officer EXHIBIT C [FORM OF CONFIRMATION OF ACCEPTANCE] ACE HARDWARE CORPORATION Reference is made to the Note Purchase and Private Shelf Agreement (the "Agreement"), dated as of September 22, 1993 between Ace Hardware Corporation (the "Company"), on the one hand, and The Prudential Insurance Company of America ("Prudential") and each Prudential Affiliate which becomes party thereto, on the other hand. All terms used herein that are defined in the Agreement have the respective meanings specified in the Agreement. Prudential or the Prudential Affiliate which is named below as a Purchaser of Notes hereby confirms the representations as to such Notes set forth in paragraph 9 of the Agreement, and agrees to be bound by the provisions of paragraphs 2B(5) and 2B(7) of the Agreement relating to the purchase and sale of such Notes and by the provisions of the penultimate sentence of paragraph 11A of the Agreement. Pursuant to paragraph 2B(5) of the Agreement, an Acceptance with respect to the following Accepted Notes is hereby confirmed: I. Accepted Notes: Aggregate principal amount $__________________ (A) (a) Name of Purchaser: (b) Principal amount: (c) Final maturity date: (d) Principal installment dates and amounts: (e) Interest rate: (f) Interest payment period: (g) Payment and notice instructions: As set forth on attached Purchaser Schedule (B) (a) Name of Purchaser: (b) Principal amount: (c) Final maturity date: (d) Principal installment dates and amounts: (e) Interest rate: (f) Interest payment period: (g) Payment and notice instructions: As set forth on attached Purchaser Schedule [(C), (D)..... same information as above.] II. Closing Day: Dated: ACE HARDWARE CORPORATION By: Title: [THE PRUDENTIAL INSURANCE COMPANY OF AMERICA] By: Vice President [PRUDENTIAL AFFILIATE] By: Vice President EXHIBIT D-1 [FORM OF OPINION OF COMPANY'S COUNSEL] [Date of Closing] The Prudential Insurance Company of America c/o Prudential Capital Group Two Prudential Plaza Suite 5600 Chicago, Illinois 60601 Dear Sirs: I have acted as counsel for Ace Hardware Corporation (the "Company") in connection with the Note Purchase and Private Shelf Agreement, dated as of September 22, 1993 between the Company and you (the "Agreement"), pursuant to which the Company has issued to you today its Senior Series A Notes in the aggregate principal amount of $30,000,000 (the "Notes"). All terms used herein that are defined in the Agreement have the respective meanings specified in the Agreement. This letter is being delivered to you in satisfaction of the condition set forth in paragraph 3A(1) of the Agreement and with the understanding you are purchasing the Notes in reliance on the opinions expressed herein. In this connection, I have examined such certificates of public officials, certificates of officers of the Company and copies certified to my satisfaction of corporate documents and records of the Company and of other papers, and have made such other investigations, as I have deemed relevant and necessary as a basis for my opinion hereinafter set forth. I have relied upon such certificates of public officials and of officers of the Company with respect to the accuracy of material factual matters contained therein which were not independently established. With respect to the opinion expressed in paragraph 3 below, I have also relied upon the representation made by you in paragraph 9A of the Agreement. Based on the foregoing, it is my opinion that: 1. The Company is a corporation duly organized and validly existing in good standing under the laws of the State of Delaware. Each Subsidiary is a corporation duly organized and validly existing in good standing under the laws of its jurisdiction of incorporation. The Company has, and each Subsidiary has, the corporate power to carry on its business as now being conducted. 2. The Agreement and the Notes have been duly authorized by all requisite corporate action and duly executed and delivered by authorized officers of the Company, and are valid obligations of the Company, legally binding upon and enforceable against the Company in accordance with their respective terms, except as such enforceability may be limited by (a) bankruptcy, insolvency, reorganization or other similar laws affecting the enforcement of creditors' rights generally and (b) general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law). 3. It is not necessary in connection with the offering, issuance, sale and delivery of the Notes under the circumstances contemplated by the Agreement to register the Notes under the Securities Act or to qualify an indenture in respect of the Notes under the Trust Indenture Act of 1939, as amended. 4. The extension, arranging and obtaining of the credit represented by the Notes do not result in any violation of regulation G, T or X of the Board of Governors of the Federal Reserve System. 5. The execution and delivery of the Agreement and the Notes, the offering, issuance and sale of the Notes and fulfillment of and compliance with the respective provisions of the Agreement and the Notes do not conflict with, or result in a breach of the terms, conditions or provisions of, or constitute a default under, or result in any violation of, or result in the creation of any Lien upon any of the properties or assets of the Company pursuant to, or require any authorization, consent, approval, exemption, or other action by or notice to or filing with any court, administrative or governmental body or other Person (other than routine filings after the date hereof with the Securities and Exchange Commission and/or state Blue Sky authorities) pursuant to, the charter or by-laws of the Company, any applicable law (including any securities or Blue Sky law), statute, rule or regulation or (insofar as is known to me after having made due inquiry with respect thereto) any agreement (including, without limitation, any agreement listed in Exhibit E to the Agreement), instrument, order, judgment or decree to which the Company or any of its Subsidiaries is a party or otherwise subject. 6. The Notes constitute "other indebtedness" as that term is used in the subordination language appearing in the Company's outstanding patronage refund certificates (which subordination language is attached to the Agreement as Exhibit F), and all indebtedness of the Company evidenced by such certificates is subordinate to the Notes as provided in such certificates. Very truly yours, EXHIBIT D-2 [FORM OF OPINION OF COMPANY COUNSEL] [Date of Closing] [Name(s) and address(es) of purchaser(s)] Dear Sirs: I have acted as counsel for Ace Hardware Corporation (the "Company") in connection with the Note Purchase and Private Shelf Agreement, dated as of September 22, 1993 between the Company and The Prudential Insurance Company of America (the "Agreement"), pursuant to which the Company has issued to you today Series ___ Private Shelf Notes of the Company in the aggregate principal amount of $__________ (the "Notes"). All terms used herein that are defined in the Agreement have the respective meanings specified in the Agreement. This letter is being delivered to you in satisfaction of the condition set forth in paragraph 3A(2) of the Agreement and with the understanding you are purchasing the Notes in reliance on the opinions expressed herein. In this connection, I have examined such certificates of public officials, certificates of officers of the Company and copies certified to my satisfaction of corporate documents and records of the Company and of other papers, and have made such other investigations, as I have deemed relevant and necessary as a basis for my opinion hereinafter set forth. I have relied upon such certificates of public officials and of officers of the Company with respect to the accuracy of material factual matters contained therein which were not independently established. With respect to the opinion expressed in paragraph 3 below, I have also relied upon the representation made by you in paragraph 9A of the Agreement. Based on the foregoing, it is my opinion that: 1. The Company is a corporation duly organized and validly existing in good standing under the laws of the State of Delaware. Each Subsidiary is a corporation duly organized and validly existing in good standing under the laws of its jurisdiction of incorporation. The Company has, and each Subsidiary has, the corporate power to carry on its business as now being conducted. 2. The Agreement and the Notes have been duly authorized by all requisite corporate action and duly executed and delivered by authorized officers of the Company, and are valid obligations of the Company, legally binding upon and enforceable against the Company in accordance with their respective terms, except as such enforceability may be limited by (a) bankruptcy, insolvency, reorganization or other similar laws affecting the enforcement of creditors' rights generally and (b) general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law). 3. It is not necessary in connection with the offering, issuance, sale and delivery of the Notes under the circumstances contemplated by the Agreement to register the Notes under the Securities Act or to qualify an indenture in respect of the Notes under the Trust Indenture Act of 1939, as amended. 4. The extension, arranging and obtaining of the credit represented by the Notes do not result in any violation of regulation G, T or X of the Board of Governors of the Federal Reserve System. 5. The execution and delivery of the Agreement and the Notes, the offering, issuance and sale of the Notes and fulfillment of and compliance with the respective provisions of the Agreement and the Notes do not conflict with, or result in a breach of the terms, conditions or provisions of, or constitute a default under, or result in any violation of, or result in the creation of any Lien upon any of the properties or assets of the Company pursuant to, or require any authorization, consent, approval, exemption, or other action by or notice to or filing with any court, administrative or governmental body or other Person (other than routine filings after the date hereof with the Securities and Exchange Commission and/or state Blue Sky authorities) pursuant to, the charter or by-laws of the Company, any applicable law (including any securities or Blue Sky law), statute, rule or regulation or (insofar as is known to me after having made due inquiry with respect thereto) any agreement (including, without limitation, any agreement listed in Exhibit E to the Agreement), instrument, order, judgment or decree to which the Company is a party or otherwise subject. 6. The Note constitutes "other indebtedness" as that term is used in the subordination language appearing in the Company's outstanding patronage refund certificates (which subordination language is attached to the Agreement as Exhibit F), and all indebtedness of the Company evidenced by such certificates is subordinate to the Note as provided in such certificates. Very truly yours, EXHIBIT E LIST OF AGREEMENTS LIMITING DEBT AGREEMENT RESTRICTION Bond Purchase Agreement, Not permit the ratio of dated December 22, 1981 between Total Liabilities to Net Anne Arundel County, Maryland, Worth to exceed 2.9 to 1. Ace Hardware Corporation and The Northern Trust Company As of 8-31-93: Liabilities $462,245,000 Net Worth $182,257,000 Ratio 2.5 to 1 Note Purechase and Private Shelf Consolidated Funded Debt Agreement, dated September 27, 1991 shall at no time exceed 35% between Ace Hardware Corporation and of Total Capitalization. The Prudential Insurance Company of America As of 8-31-93: Funded Debt $109,505,000 Total Capitalization $354,027,000 Percent 31% EXHIBIT F This Certificate is subordinated to all the rights and claims of all secured, general and bank creditors against Ace Hardware Corporation and no payment hereon shall be made if, at the time of such proposed payment, there exists a default in the payment of principal or interest on any indebtedness secured by any mortgage now or hereafter made by Ace Hardware Corporation or any other default under any such mortgage or any default in payment of any other indebtedness now or hereafter incurred by Ace Hardware Corporation until such default has been cured or waived, or if such proposed payment would cause a default in any such mortgage or any other indebtedness or result in the nonpayment thereof; and in the event of foreclosure, if the property securing any such mortgage or other indebtedness is sold pursuant to such proceedings or in lieu thereof, and a lesser sum is realized than the amount due on such debt, this Certificate is subordinate to any such deficiency and such deficiency on any such mortgage or other indebtedness shall first be paid in full before any payment hereon; and in the event of voluntary or involuntary liquidation of Ace Hardware Corporation, or in any bankruptcy, reorganization, insolvency or receivership proceedings, such mortgage or such other indebtedness shall first be paid in full before any payment hereon. EX-10 7 AMENDMENT TO EXECUTIVE SUPPLEMENTAL BENEFIT PLAN Exhibit 10-V FOURTH AMENDMENT TO EXECUTIVE SUPPLEMENTAL BENEFIT PLANS The Supplemental Retirement Program, which is a portion of the Executive Supplemental Benefit Plans is amended, effective January 1, 1994, by deleting the provision that provides that amounts would be allocated by Tier, with Tiers I through IV participants receiving a dollar benefit 125% higher than Tier V participants and by adding the following provision: SUPPLEMENTAL RETIREMENT PROGRAM The eligible dollars established after audited financial numbers are available shall be allocated equally to each officer who is a participant in the Executive Supplemental Benefit Plans. EX-10 8 DEFERRED DIRECTOR FEE PLAN Exhibit 10-W ACE HARDWARE CORPORATION DEFERRED DIRECTOR FEE PLAN (as amended on June 8, 1993) I ELIGIBILITY All dealer-directors of Ace Hardware Corporation ("ACE") are eligible to participate in the Plan. The Plan shall become effective only if anappropriate participation election signed by one or more of the currentdealer-directors has been filed with the Treasurer of ACE on or before October 1, 1986. II TYPE OF PLAN The Plan will be a non-qualified, unfunded Plan. The amounts which may qualify for deferment under the Plan shall consist of the monthly directors fees paid to dealer-directors of ACE, including all monthly supplemental fees payable to any dealer-director who at any time shall be serving as Chairman of the Board or Vice Chairman of the Board of ACE. The amounts to be deferred and the accumulated values added thereto shall continue to be part of ACE's general funds. No participant shall have any property interest in any specific assets of ACE to secure the payment of his benefits under the Plan. III DEFERMENT PERCENTAGE OPTIONS A participant may elect to defer such percentage from 10% to 100% of his monthly director's fee, in 10% increments, as shall be designated by the participant in writing. Any such designation shall apply through the end of the calendar year in which it is made. The percentage of such fees to be deferred may be changed not more frequently than three times in any calendar year. IV PARTICIPATION ELECTIONS All dealer-directors holding office as of September 23, 1986 who desire to participate in the Plan for the period from October 1, 1986 through December 31, 1986 shall file written elections to do so with the Treasurer of ACE at any time during the period from September 23, 1986 through October 1, 1986. Any such initial election shall cease to be effective on January 1, 1987. Any dealer-director holding office at any time subsequent to the year 1986 may participate in the Plan for a calendar year or for the remaining portion of such a year by filing such a written election with the Treasurer of ACE no later than 5 days prior to the first day of the first month for which such election is to be effective, except that dealer-directors who are elected by the stockholders or appointed by the Board of Directors to serve for an initial full or unexpired term may participate in the Plan effective as of the date of commencement of their service on the Board by filing such an election within 5 days thereafter. A dealer-director may revoke any election to participate previously filed by him for a calendar year effective as of the first day of any month by filing a written notice of revocation with the Treasurer of ACE not less than 5 days prior to the effective date of the revocation. V ADDITIONAL VALUE ACCUMULATIONS The benefits accrued for the account of any participant in the Plan from monthly fees which he has elected to defer prior to June 30, 1993, shall be augmented by the accumulation of additional values earned from each deferral date until the date of payment at simple interest rates equivalent to the "prime rate" of interest charged by The Northern Trust Company of Chicago, Illinois less 1.25%. The benefits accrued for the account of any participant in the Plan from monthly fees which he has elected to defer after June 30, 1993, shall be augmented by the accumulation of additional values earned from each deferral date until the date of payment at simple interest rates equivalent to the "prime rate" of interest charged by The Northern Trust Company of Chicago, Illinois. For the period from October 1, 1986 through December 31, 1986 such rate shall be determined by applying said prime rate as in effect on October 1, 1986. For each year subsequent to 1986 such rate shall be established by applying said prime rate as in effect on the first day of the year. The Board of Directors reserve the right to increase or decrease the rate to be used in calculating the accumulation of additional values for all deferrals made subsequent to June 30, 1993 until the date of payment by making such a determination prior to or during any year to be affected. VI PAYMENT OF BENEFITS TO PARTICIPANTS All benefits accrued under the Plan for the account of a participating director (including deferred fees and all accumulated values added thereto) pursuant to an election made by a director prior to July 1, 1987 for the deferral of monthly director's fees earned by him for any month prior to such date shall be paid to such director upon the earlier of (a) the first day of the month coinciding with or next following such director's 70th birthday of (b) the first day of the month coinciding with or next following such director's final day of service as a director. All benefits accrued under the Plan for the account of a participating director (including deferred fees and all accumulated values added thereto) pursuant to an election made by a director on or after June 2, 1987 for the deferral of director's fees earned by him for any month subsequent to June, 1987 shall be paid to such director upon whichever of the following dates shall be selected by him at the time he makes such deferral election: (A) the first day of the month coinciding with or next following such director's final service as a director; (B) the first day of the month coinciding with or next following such director's 70th birthday; (c) the first day of the month coinciding with or next following such director's 75th birthday. In addition to the above, all benefits accrued under the Plan for the account of a participating director(including deferred fees and all accumulated values added thereto) pursuant to an election made on or after June 8, 1993 for the deferral of monthly director's fees earned by him for any month subsequent to June, 1993 shall be paid to such director upon the date or dates selected by him at the time he makes such deferral election. VII PAYMENT OF DECEASED PARTICIPANTS' BENEFITS In the event of the death of a participant prior to his receipt of payment of any benefits accrued for him under the Plan, such benefits shall be paid as soon as practicable after his death to the beneficiary or beneficiaries designated by him to receive payment of such benefits in a written instrument signed by the participant and filed with the Treasurer of ACE. The designation of beneficiary form most recently filed by a participant shall be deemed to have revoked any previously filed designation. In the absence of any unrevoked designation, or in the event of the death of all of the beneficiaries designated by a participant prior to such participant's death, such benefits shall be paid to his estate. EX-10 9 DEFERRED COMPENSATION PLAN Exhibit 10-X ACE HARDWARE CORPORATION DEFERRED COMPENSATION PLAN JANUARY, 1994 I. Provides for a Deferred Compensation Plan for the Officers and other designated key management employees. Amounts available for deferral must exceed the limitation amount ($150,000 as of January 1, 1994) on contributions and benefits imposed by Sections 415 and 401(a)(17) of the tax code. Deferred amounts shall be considered as Compensation of the employee for the purposes of determining the amount of the Profit Sharing Replacement Benefits of that employee under the Retirement Benefits Replacement Plan (if the employee is a Participant in both Plans). This ensures that all compensation will be covered by retirement benefits. II. Provides for flexibility in deferrals and payments of deferred amounts: - Provides that deferrals can be made at any time with 30 days written notice, and can be made separately for annual compensation and bonus payment amounts. - Objective to avoid "constructive receipt" concerns for both the Participants and the Company. Provides that an initial payment election is required at the date of deferral and that, if changes are made, the payment election must be completed and actual payments begin in different years. Also, provides for acceleration of payments at Board discretion. - Provides for deferred amounts and interest during deferred payment periods similar to the Deferred Director's Fee Plan. III. Protects benefits in the event of a change in control (standard language added). This is still an unfunded plan and a general liability of the Company. 1 ACE HARDWARE CORPORATION DEFERRED COMPENSATION PLAN I PURPOSE The purpose of this Deferred Compensation Plan (the "Plan") is to offer a benefit in the form of an unfunded deferred compensation arrangement to selected key management employees of Ace Hardware Corporation ("ACE") who make significant contributions to its growth, earnings and profits. Pursuant to the Plan, an eligible employee of ACE may defer receipt of a specified portion of his annual compensation. II EFFECTIVE DATE This Plan is adopted by the Board to be effective as of January 1, 1994. III ELIGIBILITY FOR PLAN PARTICIPATION Participation in the Plan shall be exclusively limited to any Officer or key management employee who is designated as a Participant by the Board of Directors of Ace Hardware Corporation ("Board") as making significant contributions to the growth, earnings or profits of the Company. Effective as of January 1, 1994, the following individuals shall become and continue to be Participants hereunder (hereinafter the "Participant"): Roger E. Peterson David F. Hodnik William A. Loftus Paul M. Ingevaldson Micheal C. Bodzewski Rita D. Kahle David W. League David F. Myer Fred J. Neer Donald L. Schuman IV AMOUNT OF COMPENSATION TO BE DEFERRED The amount of Compensation which a Participant elects to defer per year and the number of years for which he elects to defer such amount 2 per year shall be specified by the Participant in a Participant's Election as indicated in Section V of the Plan. For purposes of this Plan and the Election, "Compensation" shall mean the total amount of all payments made by the Company to an employee for services rendered to ACE, which amounts are paid to the Participant through semi- monthly salary checks, including bonuses or other incentive pay. Separate incentive or bonus payments can be subject to a separate participant's Election, which deferral period can be different than that of other deferred amounts covered by an Election already on file or subsequently filed. If so, such Election related to a separate bonus payment must be on file with the Plan Administrator at least fifteen (15) days before the end of the fiscal year to which the bonus payment relates. Compensation shall not include employee expense reimbursements, fringe benefits (taxable or nontaxable) or contributions by the Company under any employee retirement benefit plan (profit sharing, pension or supplemental) or welfare benefit plan it maintains. A Participant may elect to defer compensation as a percentage (from 10% to 100%, in 10% increments) of semi-monthly salary earned by him for services performed for ACE or as a designated dollar amount of semi-monthly salary (minimum $50 per semi-monthly period in $50 increments). Amounts available for deferral must exceed the limitation amount ($150,000 as of January 1, 1994) on contributions and benefits imposed by Sections 415 and 401(a)(17) of the Internal Revenue Code of 1986 ("Code"). Such deferred amounts shall be considered as Compensation of the employee for the purposes of determining the amount of the Profit Sharing Replacement Benefits of that employee under the Retirement Benefits Replacement Plan of the Company (if such employee is a Participant in both Plans). This Plan and the Retirement Benefits Replacement Plans are unfunded deferred compensation plans for a select group of highly compensated employees as defined in Sections 201(2), 301(a)(3) and 401 (a)(1) of ERISA. V PARTICIPANT ELECTIONS Within the thirty (30) days immediately following the date of adoption of this Plan by the Board, and thereafter within the thirty (30) days immediately preceding any semi-monthly salary earnings period, any employee eligible to participate in the Plan may elect to participate. The Election is made by executing and filing a written Election form to defer with the Plan Administrator, a copy of which Election is attached hereto as Exhibit "A" and by this reference incorporated herein. The election by a Participant to defer all or part of his Compensation (hereinafter defined) shall be effective only with respect to Compensation to be earned subsequent to the date of such Participant's election. Each participant shall file their written participation Election with the Plan Administrator at least 30 days prior to the semi-monthly salary earnings period designated by such participant as the period for which the participation 3 election for such year is to become effective. Any such designation shall apply through the end of the calendar year for which it is made, provided, however, that a Participant shall have the right to revoke or change his deferment election as provided for in Section VI. of the Plan. An initial payment election as described in Section VII of the Plan is required to be filed at the date of the participation election. VI ELECTION REVOCATIONS AND DEFERMENT CHANGES Any revocation of a participation election must be filed with the Plan Administrator at least 30 days prior to the commencement of the semi-monthly salary earnings period as of which the revocation is to become effective. If a participant intends to have his participation election continue to be effective but desires to change the dollar amount or percentage of his semi-monthly salary which is to be deferred, any such change shall be set forth in an appropriate election document filed with the Plan Administrator at least 30 days prior to the commencement of the semi-monthly salary earnings period for which it is to become effective. An existing participant's election cannot continue to be effective beyond the designated fiscal year to which it relates, and a new election form must be completed and filed with the Plan Administrator at least 30 days prior to the beginning of the new fiscal year. In the event of termination of a Participant's Election, the Compensation deferred by the Participant prior to the termination or expiration shall not be paid upon termination or expiration but shall be paid in accordance with the Participant's Election and the terms of the Plan. VII PAYMENT OF DEFERRED COMPENSATION BENEFITS The amounts credited to a Participant's account shall be paid to such Participant upon the following dates selected by the Participant pursuant to a valid election: (A) in one lump sum at a date specified in the Election, which date can be no later than 10 years after the date of deferral; or (B) in monthly or semi-monthly installment payments beginning when designated after the date of deferral and extending for a period of up to 10 years as designated by the Participant (regardless of whether that period extends past the retirement date of the Participant); or (C) in one lump sum as soon as practicable after the date of retirement, disability or death; or 4 (D) in one lump sum as soon as practicable following termination of employment other than retirement, disability or death. A Payment Election is attached hereto as Exhibit "B" and by this reference incorporated herein. An initial payment election is required to be filed at the date of the deferral participation election. Changes to the payment election can be made, but in order to be valid, payment elections under this Plan must be made by the Participant and on file with the Plan Administrator prior to the earlier of (i) at least 6 months prior to the date of payment or retirement, or (ii) the last day of the calendar year preceding the calendar year of payment or the Participant's retirement. In no event shall a payment of deferred compensation benefits be made over a period of greater than fifteen (15) years. VIII ADDITIONAL VALUE ACCUMULATIONS ON DEFERRED OR INSTALLMENT PAYMENTS The salary amounts deferred for the account of any Participant in the Plan (who has elected to defer payments or elected to receive installment payments) shall be augmented by the accumulation of additional values earned from the day next following each semi- monthly earnings period with respect to which a salary deferral has been made until the date of payment at simple interest rates equivalent to the "prime rate" of interest charged by The Northern Trust Company of Chicago, Illinois. For each year, such rate shall be established by applying said prime rate as in effect on the first day of the year. The Board reserves the right to increase or decrease the rate to be used in calculating the accumulation of additional values for all payment deferrals at any time. Until payment thereof to a Participant, all such additional value accumulations shall continue to be part of ACE's general funds. IX ACCELERATION OF BENEFIT PAYMENTS Notwithstanding the provisions of the Plan or the period of payment previously elected by the Participant, in the event a Participant ceases to be an employee of the Company and, within three years thereafter, becomes a proprietor, officer, director or employee, or otherwise becomes affiliated with, any business which competes with the Company as determined by the Board, the entire balance of such Participant's account may, if so decided by the Board, in its sole discretion, be paid to said Participant in a lump sum. Payments may also be accelerated at the sole discretion of the Board in the event of a Participant's financial hardship or other unforeseeable event. 5 X PAYMENT OF DECEASED PARTICIPANTS' BENEFITS In the event of the death of a Participant prior to his receipt of payment of all salary deferrals or additional value accumulations accrued for him under the Plan, such amounts shall be paid as soon as practicable after his death to the beneficiary or beneficiaries designated by him to receive payment of such benefits in a written instrument signed by the Participant and filed with the Plan Administrator. The designation of beneficiary form most recently filed by a Participant shall be deemed to have revoked any previously filed designation. In the absence of any designation, or in the event of the death of all of the beneficiaries designated by a Participant prior to such Participant's death, such benefits shall be paid to the Participant's estate. XI DEFERRED COMPENSATION ACCOUNT AN UNFUNDED PLAN The Plan is a non-qualified, unfunded plan. Ace Hardware Corporation shall maintain such records as shall be deemed by it to be appropriate for the determination of the deferred and accrued amounts for a Participant hereunder. The amount of Compensation deferred by each Participant, together with any additions thereto at any time required to be made pursuant to this Plan, shall be credited monthly to a book reserve, hereinafter referred to as a "Deferred Compensation Account" or "Account", in such Participant's name. For the period during which amounts remain credited to such Participant's Account, the Account shall continue to be part of ACE's general funds, and no Participant shall have any property interest in any specific assets of ACE to secure the payment of such amounts. No payments are to be made for the funding of any amounts provided for under this Plan and the Company shall not set aside any specific assets to be representative of the Account. Nothing contained in the Plan and no action taken pursuant to the provisions of the Plan shall create or be construed to create a trust of any kind. The rights of any Participant and any beneficiary of a Participant hereunder shall be solely those of an unsecured creditor of Ace Hardware Corporation. XII EMPLOYMENT RELATIONSHIP AND OTHER BENEFITS This Plan and the Participant's Election hereunder shall not replace any contract of employment, in whole or in part, whether oral or written, between the Company and the Participant, but shall be considered a supplement thereto. Nothing contained herein shall be 6 construed as conferring upon a Participant the right to continue in the employment of the Company in any capacity. Nothing contained in this Plan shall in any way limit the Participant's right to participate in or benefit from any other benefits provided by the Company such as employee retirement plans (profit sharing, pension or supplemental) or welfare benefit plans, insurance or other benefits for which he may become eligible by reason of being an employee of the Company. XIII BINDING EFFECT AND ASSIGNABILITY OF BENEFITS In the event the Company becomes a party to any merger, consolidation or reorganization or a "change of control" occurs, any amounts deferred or accrued under this Plan prior to such merger, consolidation, reorganization or change of control shall remain in full force and effect as an obligation of the Company or its successor in interest. A change of control shall be deemed to have occurred on the date on which there is a change in 25% or more of the combined voting power of the Corporation (whether by tender or exchange offer, merger or beneficial ownership), the shareholders approve a sale of substantially all of the Corporation's assets or, during any period of two consecutive years, individuals who, at the beginning of such period, constituted the Board cease to constitute at least a majority thereof, unless election or nomination for election of each new director was approved by a vote of at least two- thirds of the directors then still in office who were directors at the beginning of the period. None of the payment of amounts provided by the Plan shall be subject to seizure for the payment of any debts of or judgements against, the Participant. The rights of the Participant or any other person to payment of deferred or accrued amounts under the Plan shall not be assigned, transferred, pledged or encumbered except by written beneficiary designation, by will or by the laws of descent and distribution and any attempt at assignment, transfer, pledge or encumbrance shall not be recognized by the Company, and shall be void and of no further force or effect. XIV GENERAL PROVISIONS (a) Administration. This Plan shall be administered by the Company. The Company shall be the Plan Administrator and shall have the authority with respect to this Plan that is co-extensive of that which the Plan Administrator has with respect to the other Plans of the Company, including but not limited to the discretionary authority to construe and to interpret the Plan and to control and manage the 7 operation and administration of the Plan. The Board may adopt rules regarding the administration of the Plan and delegate responsibilities as deemed appropriate. Any claims under the Plan shall be presented to and will be ruled upon by the Plan Administrator. (b) Finality of Determination. The determination of the Plan Administrator as to any disputed questions arising under this Plan, including questions of construction and interpretation shall be final, binding and conclusive upon all persons. (c) Expenses. The expenses of administering the Plan shall be borne by the Company. (d) Indemnification and Exculpation. The Board, its agents and officers, directors and employees of the Company and its affiliates shall be indemnified and held harmless by the Company against and from any and all loss, cost, liability, or expense that may be imposed upon or reasonably incurred by them in connection with or resulting from any claim, action, suit, or proceeding to which they may be a party or in which they may be involved by reason of any action taken or failure to act under this Plan and against and from any and all amounts paid by them in settlement (with the Company's written approval) or paid by them in satisfaction of a judgment in any such action, suit or proceeding. The foregoing provision shall not be applicable to any person if the loss, cost, liability, or expense is due to such person's gross negligence or willful misconduct. (e) Action by the Company. Any action required of or permitted by the Company under this Plan shall be by resolution of the Board of Directors of the Company or any person or persons authorized by resolution of the Board of Directors. (f) Severability. In the event any provision of this Plan or a related Participant Election is held invalid, illegal or unenforceable, or is limited in whole or in part, such provision shall be deemed severed and the remaining provisions shall not be effected thereby. (g) Tax Liability. The Company may withhold from any payment of amounts hereunder any taxes required to be withheld. (h) Applicable Law. The Plan shall be construed in accordance with the laws of the State of Illinois. XV TERMINATION OR AMENDMENT The Board reserves the right to amend this Plan from time to time or 8 to terminate the Plan at any time by resolution of the Board; provided, no amendment or the termination of the Plan shall deprive a Participant of his deferred or accrued amounts, as constituted at the time of the amendment or termination, as may be the case, without written consent of the effected Participant. 9 Exhibit A ACE HARDWARE CORPORATION ELECTION TO DEFER COMPENSATION UNDER THE DEFERRED COMPENSATION PLAN I, the undersigned, being an employee of Ace Hardware Corporation who is eligible to participate in its Deferred Compensation Plan, do hereby elect to become a participant in the Plan in accordance with the terms thereof. This is an original election related to the calendar year ending , to become effective on , and continue through . This is a change in my election related to the calendar year ending , to become effective on , and continue through . This is a revocation of my election related to the calendar year ending , to become effective on . This is a separate election related to a separate bonus or incentive payment only for the calendar year ending , to become effective on . Identification of bonus or incentive payment . (long term or short term). Election to Defer Compensation I hereby elect that the portion of my semi-monthly compensation or separate bonus or incentive payment to be deferred under the Plan shall be (complete one election): % (in increments from 10% to 100%), or $ ($ amount, in increments of $50 per semi-monthly salary period) I understand that amounts available for deferral must exceed the limitation amount ($150,000 as of January 1, 1994) on contributions and benefits imposed by Sections 415 and 401 (a)(17) of the Internal Revenue Code of 1986 ("Code"). I further understand that my election to become a participant shall continue through the earlier of (1) the date indicated above as the date which deferrals will continue through, or (2) the end of the current calendar year, or (3) the end of my employment by the Company. I understand that I may change the percentage or dollar amount of my semi-monthly compensation to be deferred in accordance with the terms of the Plan not more frequently than twice in any calendar year only by a new written election filed with the Plan Administrator. NOTE: An initial Payment Election is required to be filed with the Plan Administrator along with the deferral election. Exhibit B ACE HARDWARE CORPORATION ELECTION FOR PAYMENT OF DEFERRED COMPENSATION UNDER THE DEFERRED COMPENSATION PLAN I, the undersigned, being an employee of Ace Hardware Corporation and a Participant in its Deferred Compensation Plan, do hereby elect payment of my benefits under the Plan in accordance with the terms thereof. This is an original payment election. This is a change in my payment election. Election for Payment of Deferred Compensation I hereby elect that the total of the deferred compensation amounts plus any additional value accumulations thereon shall be paid to me as follows (initial and complete one election): in one lump sum on , which date can be no later than 10 years after the date of deferral; or in substantially equal monthly or semi-monthly installment payments beginning on after the date of deferral and extending for a period of years. This period extends for no longer than a period of 10 years; or in one lump sum as soon as practicable after the date of my retirement, disability or death; or in one lump sum as soon as practicable following termination of employment other than retirement, disability or death. An initial payment election is required to be filed at the date of the Election to Defer Compensation under the Plan. I understand that, in order to be valid, payment elections under this Plan must be made and on file with the Plan Administrator prior to the earlier of (i) at least 6 months prior to the date of payment or retirement, or (ii) the last day of the calendar year preceding the calendar year of payment or retirement. I understand that in no event shall a payment of deferred compensation benefits be made over a period of greater than fifteen (15) years. Notwithstanding any of the foregoing and any previously valid election on file, in the event a Participant ceased to be an employee of the Company and, within three years thereafter, became a proprietor, officer, director or employee, or otherwise became affiliated with, any business which competes with the Company as determined by the Board, the entire balance of such Participant's account may, if so decided by the Board, in its sole discretion, be paid to said Participant in a lump sum. I further understand that payments will be made to me except in the event of my death, such amounts shall be paid to the beneficiary or beneficiaries designated by me to receive payment of my deferred compensation in a valid Beneficiary Designation form filed with the Plan Administrator. Date: Date: Received by: Signature of Participant Vice President - Finance Ace Hardware Corporation Exhibit C ACE HARDWARE CORPORATION BENEFICIARY DESIGNATION UNDER THE DEFERRED COMPENSATION PLAN TO THE PLAN ADMINISTRATOR OF THE DEFERRED COMPENSATION PLAN OF ACE HARDWARE CORPORATION: Pursuant to the provisions of the above Plan permitting the designation of a beneficiary or beneficiaries by a Participant, I hereby designate the following person(s) as primary and secondary beneficiaries to receive payment of any of my benefits under the Plan which have not been paid to me prior to my death: Primary Beneficiary (ies): Name and Relationship Address Secondary Beneficiary (ies): Name and Relationship Address The right to revoke and change any beneficiary designation is hereby reserved. All prior designations (if any) of primary or secondary beneficiaries are hereby revoked. All sums payable under the Plan subsequent to my death shall be paid to the primary beneficiary (ies), but if no primary beneficiary survives me, such sums shall be paid to the secondary beneficiary (ies). If no primary beneficiary or secondary beneficiary survives me, then the sums shall be paid to my estate. Unless the Participant has provided otherwise in completing this designation, all sums payable to more than one beneficiary shall be paid equally to the living beneficiaries. Date of this Designation Signature of Employee Date Received: By: Vice President - Finance Ace Hardware Corporation EX-23 10 AUDITORS CONSENT Exhibit 23 Consent of Independent Auditors The Board of Directors Ace Hardware Corporation: We consent to the use of our report included herein and to the reference to our firm under the heading "Opinions of Experts" in the Prospectus. KPMG Peat Marwick Chicago, Illinois March 23, 1994 EX-24 11 POWER OF ATTORNEY LETTER Exhibit 24 ACE HARDWARE CORPORATION: POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS that each of the undersigned directors of ACE HARDWARE CORPORATION, a Delaware corporation, hereby constitutes and appoints DAVID F. HODNIK and RITA D. KAHLE, and each of them, his true and lawful attorneys-in-fact and agents, each with full power to act without the other, with full power of substitution, for him and in his name, place and stead, in any and all capacities, to sign the Post-Effective Amendment No. 2 to the Registration Statement on Form S-2, and any and all amendments thereto, and to file the same with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys and agents full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as they might or could do in person, hereby ratifying and confirming all that said attorneys and agents, or either of them, or their substitutes, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, each of the undersigned has set his or her hand and seal as of this 23rd day of March, 1994. LAWRENCE R. BOWMAN Lawrence R. Bowman MARK JERONIMUS RAY W. OSBORNE Mark Jeronimus Ray W. Osborne HOWARD J. JUNG JON R. WEISS Howard J. Jung Jon R. Weiss JOHN E. KINGREY DON S. WILLIAMS John E. Kingrey Don S. Williams RICHARD E. LASKOWSKI JAMES R. WILLIAMS Richard E. Laskowski James R. Williams, Jr. -----END PRIVACY-ENHANCED MESSAGE-----