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:
<TABLE>
<CAPTION>
Class of Stock
A B C
No. of Purchase No. of Purchase No. of Purchase Aggregate
Shares Price Shares Price Shares Price Cost
<S> <C> <C> <C> <C> <C> <C> <C>
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
</TABLE>
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:
<TABLE>
<CAPTION>
1993 1992 1991
<S> <C> <C> <C>
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
</TABLE>
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:
<TABLE>
<CAPTION>
Class of Merchandise 1993 1992 1991
<S> <C> <C> <C>
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%
</TABLE>
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
<TABLE>
<CAPTION>
Registration
Description of Mark Type of Mark Number Expiration Date
<S> <C> <C> <C>
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
</TABLE>
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:
<TABLE>
<CAPTION>
Square Feet Owned Lease
of Facility or Expiration
Location (Land in Acres) Leased Date
General Offices:
<S> <C> <C> <C>
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
</TABLE>
(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
<TABLE>
ACE HARDWARE CORPORATION
BALANCE SHEEET
December 31, 1993 and 1992
ASSETS
<CAPTION>
1993 1992
(000's omitted)
<S>
Current assets: <C> <C>
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.
</TABLE>
31
<TABLE>
ACE HARDWARE CORPORATION
BALANCE SHEETS
December 31, 1993 and 1992
LIABILITIES AND MEMBER DEALERS' EQUITY
<CAPTION>
1993 1992
(000's omitted)
<S>
Current Liabilities: <C> <C>
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.
</TABLE>
32
<TABLE>
ACE HARDWARE CORPORATION
STATEMENTS OF EARNINGS
<CAPTION>
Year Ended December 31,
1993 1992 1991
(000's omitted)
<S> <C> <C> <C>
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.
</TABLE>
33
<TABLE>
ACE HARDWARE CORPORATION
STATEMENTS OF MEMBER DEALERS' EQUITY
Three Years Ended December 31, 1993
(000's omitted)
<CAPTION>
Class C
Stock
Issuable to
Dealers for Additional
Class A Class B Class C Patronage Stock
Stock Stock Stock Dividends Subscribed*
<S> <C> <C> <C> <C> <C>
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>
(Table Continued on following page)
<TABLE>
* Additional stock subscribed is comprised of the following amounts at December 31, 1991, 1992 and 1993:
<CAPTION>
1991 1992 1993
<S> <C> <C> <C>
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
</TABLE>
<TABLE>
<CAPTION>
Retained Contributed Treasury
Earnings Capital Stock Total
<S> <C> <C> <C> <C>
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.
</TABLE>
34
<TABLE>
ACE HARDWARE CORPORATION
STATEMENTS OF CASH FLOWS
Year Ended December 31,
<CAPTION>
(000's omitted)
Operating Activities: 1993 1992 1991
<S> <C> <C> <C>
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.
</TABLE>
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:
<TABLE>
December 31,
<CAPTION>
1993 1992
(000's omitted)
<S> <C> <C>
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
</TABLE>
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:
<TABLE>
<CAPTION>
Subordinated Class Patronage Total
Cash Refund C Financing Patronage
Portion Certificates Stock Deductions Dividends
(000's omitted)
<S> <C> <C> <C> <C> <C>
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
</TABLE>
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:
<TABLE>
<CAPTION>
Interest
January 1, Amount Rate
(000's omitted)
<S> <C> <C>
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
</TABLE>
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:
<TABLE>
<CAPTION>
1993 1992 1991
(000's omitted)
<S> <C> <C> <C>
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)
</TABLE>
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):
<TABLE>
<CAPTION>
1993 1992
(000's omitted)
<S> <C> <C>
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
</TABLE>
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:
<TABLE>
Number of Shares
at December 31,
<CAPTION>
1993 1992
<S> <C> <C>
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
</TABLE>
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:
<TABLE>
Shares Held in Treasury
<CAPTION>
Class A Class B Class C
<S> <C> <C> <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 --
</TABLE>
(9) Commitments
Leased property under capital leases included under "Property and
Equipment" in the balance sheets as follows:
<TABLE>
December 31,
(000's omitted)
<CAPTION>
1993 1992
<S> <C> <C>
Buildings and improvements $ 3,422 $ 3,422
Data processing equipment 723 723
Less: Accumulated depreciation and amortization (3,291) (2,973)
$ 854 $ 1,172
</TABLE>
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
<TABLE>
SELECTED FINANCIAL DATA
(Not Covered by Auditors' Report)
Income Statement Data:
Year Ended December 31,
<CAPTION>
1993 1992 1991 1990 1989
(000's omitted)
<S> <C> <C> <C> <C> <C>
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)
</TABLE>
<TABLE>
Balance Sheet Data:
Year Ended December 31,
<CAPTION>
1993 1992 1991 1990 1989
(000's omitted)
<S> <C> <C> <C> <C> <C>
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
</TABLE>
(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
<TABLE>
<CAPTION>
1993 1992 1991 1990 1989
(000's omitted)
<S> <C> <C> <C> <C> <C>
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
</TABLE>
(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
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)
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
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
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)
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.
<PAGE>
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.
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.
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.
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
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
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.
