SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Post-Effective Amendment No. 3
To
Form S-2
REGISTRATION STATEMENT
Under the
SECURITIES ACT OF 1933
Ace Hardware Corporation
(Exact Name of Registrant as Specified in its Charter)
Delaware
(State of Incorporation)
36-0700810
(I.R.S. Employer Identification No.)
2200 Kensington Court
Oak Brook, Illinois 60523
(630) 990-6600
(Address and telephone number of registrant's principal executive offices)
David W. League
Vice President, General Counsel
Ace Hardware Corporation
2200 Kensington Court
Oak Brook, Illinois 60523
(630) 990-6600
(Name, address and telephone number of agent for service)
Approximate date of commencement of proposed sale to the public:
As soon as practicable after the effective date of this Post-Effective
Amendment to the Registration Statement. If any of the securities being
registered on this form are to be offered on a delayed or continuous basis
pursuant to Rule 415 under the Securities Act of 1933, check the following
box. X
If the registrant elects to deliver its latest annual report to
security-holders, or a complete and legible facsimile thereof, pursuant to
Item 11(a)(1) of this form, check the following box. __
ACE HARDWARE CORPORATION
Cross Reference Sheet Pursuant to Item 501(b) of Regulation S-K
Between Items in Part I of Form S-2 and the Prospectus
Item Number and Caption Heading in Prospectus
1. Forepart of the Registration
Statement and Outside Front
Cover Page of Prospectus Outside Front Cover Page
2. Inside Front and Outside Back
Cover Pages 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 60523
(630) 990-6600
1,146 Shares Class A (Voting) Stock, $1,000 par value
42,949 Shares Class C (Non-Voting) Stock, $100 par value
Class A Stock is offered only in combination with Class C Stock
to retailers of hardware and related or similar merchandise in connection
with their initial business outlets that become members of the Company.
Class C Stock is also offered separately to such retailers in connection
with each additional business outlet that becomes a member of the Company.
(See "Distribution Plan and Offering Terms" herein)
There is no existing market for the Capital Stock offered hereunder,
and there is no expectation that any market will develop.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
Underwriting
Price to Discounts and Proceeds to
Public Commissions(5) Company
----------- -------------- -------------
Class A Stock
Per share(1)(2) $ 1,000 None $ 1,000
Total $ 1,146,000 None $ 1,146,000
----------- -------------- -------------
Class C Stock
Per Share(1)(3)(4)(6) $ 100 None $ 100
Total $ 4,294,900 None $ 4,294,900
----------- -------------- -------------
(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 1997 and
subsequent years.
This offering is exempt from the registration provisions of the New
York Franchise/Disclosure Statute. The Company's agent for service of
process in connection with the offering pursuant to such exemption is C T
Corporation, 1633 Broadway, New York, New York 10019. See back cover page
regarding revocation rights of Florida purchasers. No state securities
commission has passed upon the accuracy of this prospectus.
REFERENCE IS MADE TO FACTORS TO BE CONSIDERED ON PAGE 2 OF THIS PROSPECTUS.
This is a continuous offering terminating not later than April 30, 1999.
The date of this Prospectus is __________ __, 1998
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 1997 fiscal year
ending December 31, 1997, filed pursuant to Section 15(d) of the
Exchange Act is incorporated herein by reference. The Company will
provide without charge to each person to whom a Prospectus is delivered,
upon written or oral request of such person, a copy of any and all of
the documents incorporated by reference in the Registration Statement
(other than exhibits to such documents unless such exhibits are
specifically incorporated by reference into the documents that the
Registration Statement incorporates). Requests for such copies should
be directed to David League, Vice President, General Counsel and
Secretary, Ace Hardware Corporation, 2200 Kensington Court, Oak Brook,
Illinois 60523, (630) 990-6600.
FACTORS TO BE CONSIDERED
Limitations on Value and Marketability of Stock
Although Ace Hardware Corporation ("the Company") is obligated to
pay patronage dividends to its stockholders in proportion to the
respective purchases of merchandise made by them from the Company, the
payment of dividends on shares of the Company's capital stock is prohibited
and transfer of the shares is limited so that no trading market for them
exists. The shares can be sold only to another retail hardware dealer
whom the Company has approved as a member for the retail outlet for which
the shares were purchased or to the Company which must repurchase the
shares if said retail outlet closes down or if its Company membership
is otherwise terminated. (See the heading "Description of Capital Stock".)
However, no amounts to fund repurchase of shares by the Company are
expressly set aside for such purpose and repurchases can be made only as
permitted under the General Corporation Law of Delaware. (See the heading
"Summary," subheading "Repurchase of Shares by Company".) Accordingly,
except for the voting rights attached to the Class A Stock, the stock
has value to a purchaser thereof only in the event of the liquidation
of the Company or upon termination of the Company membership for the
retail outlet for which the stock has been purchased.
Income Tax Liability Incidental to Patronage Dividends
A purchaser of shares will be required to report as gross income
for federal income tax purposes the total amount of patronage dividends
distributed by the Company to such purchaser, including shares of Class
C Stock and patronage refund certificates distributed in the form of
written notices of allocation at their stated dollar amounts. Patronage
refund certificates are non-negotiable having a maturity date and
bearing interest at an annual rate to be determined by the Board of
Directors prior to issuance. Although a minimum of 20% of each recipient's
total annual patronage dividends is required to be paid in cash in all
cases except those in which the cash portion has been applied against
indebtedness owed to the Company by a stockholder whose Company membership
has terminated and who has not requested payment of such 20% minimum
portion in cash, the cash portion may be insufficient, depending upon the
income tax bracket of each recipient, to provide funds for the full payment
of the federal income tax liability incurred by the recipient with respect
to such patronage dividends. (See the heading "The Company's Business",
subheading "Federal Income Tax Treatment of Patronage Dividends".)
Sale of All Shares Offered Not Assured
Since the shares offered hereby are available for purchase only by
retailers of hardware and related merchandise with respect to particular
retail outlets for which a Company membership is approved, it is not
certain that all of the shares offered will be sold.
Company's First Lien Rights on Shares
The shares held by any purchaser, including any shares of Class C
Stock distributed as patronage dividends, will be subject to a first lien
in favor of the Company for the amount of any indebtedness payable to the
Company by such holder. (See the heading "Description of Capital Stock",
subheading "Other Restrictions and Rights".) Any patronage refund
certificates which are distributed as patronage dividends will also be
subject to a similar first lien. (See the heading "The Company's
Business", subheading "Forms of Patronage Dividend Distributions".)
Full Payment Required for Issuance of Shares
Unless a purchaser of shares chooses to prepay the purchase price
of the shares, the purchase price is to be paid by charges added to the
purchaser's bi-weekly billing statements from the Company for merchandise
and services. A purchaser will receive a certificate for each class of
stock included in his subscription for shares only upon the completion
of payment of the purchase price for the share or shares of that class.
(See the heading "Distribution Plan and Offering Terms".)
By-law Provisions Constitute a Legal Contract with the Company
It is provided in Article XXVI of the By-laws of the Company that
said By-laws shall constitute a legal contract between the Company and
its stockholders. A copy of the By-laws of the Company, as amended as of
August 19, 1997, 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 60523,
(630) 990-6600.
The Company is a wholesaler of hardware and related products, and
manufactures paint products. Sales of such products are made almost
exclusively to retail hardware dealers having Membership Agreements with
the Company entitling them to purchase merchandise and services from it
and to use the Company's marks as provided in the Membership Agreement.
(See the heading "The Company's Business," subheading "Membership
Agreement.") Also see further description under "The Company's Business"
for a discussion of member operational requirements and material
requirements on purchases of the Company's securities. The number of
retail business outlets for which Membership Agreements have been executed
as of December 31, 1997 were 5032. (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 By-laws, no dividends can be declared on
any of the shares of any class of stock of the Company. (See the heading
"Description of Capital Stock", subheading "Dividend Rights.")
Basic Features of Offering
The shares of the Company's stock being offered hereby are offered
only to approved retail and other dealers in hardware and related products
who submit applications for Ace Hardware Corporation memberships. The
offering price for each share of Class A Stock is $1,000 and the offering
price for each share of Class C Stock is $100.
The offering enables dealers in hardware or similar merchandise to
obtain membership in the Company. Membership entitles a dealer to use the
Company's marks as provided in the Membership Agreement, to purchase
merchandise from the Company under the various sales classes and programs
described under the heading "The Company's Business," and also to receive
patronage dividends based upon the dealer's purchases from the Company.
A dealer who applies for an initial Company membership must subscribe
for a combination of 1 share of Class A Stock plus 40 shares of Class C
Stock. If a membership is applied for with respect to an additional outlet
owned or controlled by the same dealer, the dealer must subscribe for 50
shares of Class C Stock for such outlet. Any application for a membership
must be accompanied by a $400 payment constituting a handling charge to
defray the estimated cost of processing such application.
The shares subscribed for by a dealer are to be paid for by means of
charges to be added to the bi-weekly billing statements of the Company for
merchandise and services purchased from it by its dealers. The dealer shall
also have the right at any time to make prepayments on account of the
purchase price. For a detailed explanation of the offering reference is
made to the information set forth under the heading "Distribution Plan and
Offering Terms".
Repurchase of Shares by Company
Upon termination of the Ace Hardware Corporation membership for any
retail business outlet, all of the shares with respect to such outlet held
by the dealer must be sold back to the Company, unless the shares are to be
transferred to another party whom the Company agrees to accept as a member
dealer with regard to such outlet. In any repurchase of its shares, the
Company must pay a price equal to the $1,000 par value for Class A Stock,
a price which cannot be less than twice the $1,000 par value for Class B
Stock, and a price which cannot be less than the $100 par value for Class C
Stock. (See the heading "Description of Capital Stock", subheading "Other
Restrictions and Rights", paragraph (g).) A portion of the repurchase price
to be paid by the Company will be paid by means of an interest-bearing
4-year installment note if the dealer's membership with the Company
terminates in either of two basic types of situations. Reference is made
to the heading "Description of Capital Stock", subheading "Other
Restrictions and Rights", paragraph (h), of this Prospectus and to Section
12 of Article XVI of the By-laws, set forth in Appendix A of this
Prospectus, for further details concerning the situations in which part of
such repurchase price will be paid by means of an installment note and the
terms and conditions which will be applicable to such notes.
As of December 31, 1997, the number of outstanding shares of the
Company's stock is Class A stock - 3,874 shares, Class B stock - 2,716
shares, and Class C stock - 2,136,085 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 - 5,018 shares,
Class B stock - 2,704 shares, and Class C stock - 2,167,557 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 fiscal years were as
follows:
Class of Stock
------------------------------------------------------
A B C
---------------- ---------------- -----------------
No. of Purchase No. of Purchase No. of Purchase Aggregate
Shares Price Shares Price Shares Price Cost
------ -------- ------ -------- ------ -------- ---------
Year ended
December 31,
1997 299 $1,000 180 $2,000 123,964 $100 $13,055,400
Year ended
December 31,
1996 236 $1,000 132 $2,000 99,290 $100 $10,429,000
Year ended
December 31,
1995 256 $1,000 220 $2,000 99,975 $100 $10,693,500
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 fiscal years 1995 through 1997
which were distributed as patronage dividends. Under the Company's patronage
dividend plan which is currently in effect, a portion of such patronage
dividends (which can never be less than 20% nor more than 45% of the total
annual patronage dividends distributed to each eligible and qualifying
dealer) will be paid in cash, except that the portion of any patronage
dividends which would otherwise have been paid in cash to a dealer whose
membership with the Company has terminated will instead be applied against
any indebtedness owing by such dealer to the Company to the extent of such
indebtedness unless a timely request for the payment of the minimum 20%
cash portion thereof is submitted to the Company by the dealer. The entire
remaining portion will be paid in the form of shares of Class C Stock of
the Company or non-negotiable patronage refund certificates, or in a
combination of Class C shares and such patronage refund certificates.
Those dealers whose volume of purchases entitles them to larger total annual
patronage dividend distributions will receive larger percentages of
their patronage dividends in cash. (See the heading "The Company's
Business", subheadings "Distribution of Patronage Dividends", "Patronage
Dividend Determinations and Allocations", and "Forms of Patronage Dividend
Distributions.") The amount of patronage dividends allocated over the
past five fiscal years is set forth in Note (C) to Selected Financial Data.
The cash payments and the stated dollar amounts of shares of the
Company's Class C Stock and of any patronage refund certificates which
are distributed by the Company as a part of patronage dividends must all
be taken into the gross income of each of the recipients thereof for
federal income tax purposes in the taxable years in which they are received.
(See the heading "The Company's Business", subheading "Federal Income Tax
Treatment of Patronage Dividends.")
In the case of member dealers whose places of business are located in
foreign countries or Puerto Rico (except for unincorporated Puerto Rico
dealers owned by individuals having U.S. citizenship) who are subject to
the special 30% U.S. income tax imposed on nonresident alien individuals
and foreign corporations (not including certain Guam, American Samoa,
Northern Mariana Islands, or U.S. Virgin Islands corporations) receiving
fixed or determinable annual income from sources within the United States,
the minimum portion of the annual patronage dividends to be distributed in
cash is 30%, and that amount will be withheld by the Company for payment
of the U.S. income tax imposed on such dealers. (See the heading "The Company's
Business", subheadings "Forms of Patronage Dividend Distributions", and
"Federal Income Tax Treatment of Patronage Dividends.")
USE OF PROCEEDS
The proceeds to be received from the shares of stock of the Company
offered hereby will be used by the Company primarily for general working
capital purposes (including the purchase of merchandise to be resold by
the Company to its member dealers and the maintenance of adequate
inventories of such merchandise) and also for capital expenditures as
required in order to serve the Company's retail business outlets. The
Company has no current specific plan for the proceeds or a significant
portion thereof. The Company has no plan if less than all shares offered
are sold, as the principal reason for the offering is to enable the Company
to accept new dealer outlets in accordance with the Company's By-laws.
See the heading "The Company's Business," subheadings "Patronage Dividend
Determinations and Allocations" and "Forms of Patronage Dividend
Distributions", for a description of the method by which the Company will
obtain most of the balance of its operating capital. (See the heading
"Factors to be Considered," subheading "Sale of All Shares Offered Not
Assured.")
DISTRIBUTION PLAN AND OFFERING TERMS
Offering Made Through Company Officers
Sales of each class of stock offered by the Company are made by the
officers of the Company to dealers whose applications for Ace memberships
have been accepted by the Company. The Company also employs approximately
223 field sales personnel including retail consultants, management and
retail development personnel whose duties include contact with retail dealer
outlets and promotion of the Company's business and the dealer services
offered by it. Among these field sales personnel are Market Development
Managers, New Business Sales Managers, and Retail Sales Managers whose
duties include initial contact with potential retail dealer outlets. The
Company's field sales personnel, however, do not and are not empowered to
accept new dealer outlets on behalf of the Company, 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, field sales personnel, or other employee
of the Company in connection with the sale of its stock.
Limitation of Offering to Applicants for Ace Dealer Memberships
The offering of the Company's stock being made by this Prospectus is
limited to dealers in hardware or similar merchandise who submit membership
applications to the Company with respect to designated retail outlets which
are accepted by the Company. In connection with each such application with
respect to any retail outlet owned or controlled by a dealer, there must be
submitted to the Company:
1. A membership agreement executed by the applicant
in the form submitted by the Company;
2. A check in the sum of $400 in payment of a
processing charge which is imposed to defray the
estimated cost of processing the application; and
3. An executed Subscription Agreement for the
purchase of shares of the Company's stock.
Offering Price and Terms of Payment
Each retail dealer who applies for Ace membership privileges with
respect to any retail business outlet must subscribe for shares of the
Company's stock having a total purchase price of $5,000. In the case of
a dealer who does not already have a Membership Agreement with the Company
with respect to any retail outlet, the shares to be subscribed for on
behalf of such dealer's first retail outlet will include 1 share of Class A
Voting Stock at a price of $1,000 per share plus 40 shares of Class C
Non-voting Stock at a price of $100 per share. The shares of stock to be
subscribed for by a dealer on behalf of each additional retail outlet owned
or controlled by the same dealer will consist entirely of 50 shares of
Class C Non-voting Stock at a price of $100 per share.
Unless the right of prepayment described below is exercised, the entire
purchase price of all shares of stock of the Company subscribed for by a
dealer for any retail business outlet owned or controlled by such dealer
shall be paid by means of a stock subscription payment charge to be added
to such outlet's bi-weekly billing statement from the Company in the amount
of $40 or in an amount equal to 2% of the purchase price of the merchandise
and services purchased by such outlet from the Company during each bi-weekly
period (if such percentage amount is greater than $40). Such charge shall
be continued until the full purchase price for all shares of the stock of
the Company subscribed for with respect to such outlet has been paid. Upon
the acceptance by the Company of the Membership Agreement and the Stock
Subscription Agreement executed by a dealer for a prospective member outlet,
such outlet will be entitled to participate in the patronage dividend
distributions made by the Company even though the full purchase price for
the shares of stock subscribed for has not yet been paid.
Right of Prepayment
All dealers subscribing for shares of any class of stock of the
Company shall also have the right at any time to pay all or any portion
of the then unpaid balance of the purchase price payable by them for the
shares of any class of the stock of the Company subscribed for by them
with respect to any member business outlet. However, no interest or other
finance charge shall accrue upon or be added to the unpaid balance so long
as all payments are made when the same are due in accordance with the
terms described above.
Time of Issuance of Stock Certificates
Immediately upon the completion of the payment by a dealer of the full
purchase price of $1,000 for the 1 share of Class A Voting Stock of the
Company subscribed for by such dealer, a certificate for such share will
be issued to him. In the case of a dealer whose subscription for shares
includes 1 share of Class A Stock, all payments made by him under his
Stock Subscription Agreement will be applied first toward the $1,000
purchase price for such Class A Stock. No dealer shall have any voting
rights until such share of Class A Voting Stock has been issued to him.
Certificates for the shares of Class C Stock of the Company subscribed
for by a dealer with respect to any member business outlet owned or
controlled by such dealer will be issued to him only upon the completion
of the payment by him of the full purchase price of all of the Class C
shares subscribed for by him with respect to such outlet.
If any store or other business outlet with respect to which a dealer
has subscribed for shares of stock of the Company ceases to be a member
business outlet of the Company before such shares have been issued and paid
for in full, the amount paid in by such dealer on account of the purchase
price of such shares will thereupon be refunded to him.
Termination of Membership Upon Transfer or Repurchase of Shares
Unless the Company expressly consents at such time to the continuation
of such membership, the Ace Hardware Membership Agreement for any store or
other business outlet shall automatically be deemed to have terminated as
of the time when any of the shares of capital stock of the Company owned
for such outlet by a dealer (regardless of whether the shares were
purchased by the dealer or were received by him as patronage dividends)
are transferred by him to another eligible holder or are purchased from
him by the Company.
Federal Income Tax Status of Class A and Class C Shares (See the
Heading "Opinions of Experts").
If the Ace Hardware Corporation membership for a particular business
outlet owned by a dealer who has only one member outlet is terminated, or
if the memberships for all of a dealer's business outlets having
memberships with the Company are terminated, and the shares of the
Company's stock owned by such dealer are then repurchased by the Company,
such dealer's 1 share of Class A Stock would be included among the shares
so repurchased. Since the Class A Stock can never be repurchased by
the Company at a price other than the $1,000 par value, no taxable income
would be realized by a dealer upon the Company's repurchase of his share
of Class A Stock.
Upon the purchase by the Company of shares of Class C Stock previously
sold or distributed to a dealer, taxable income would be realized by such
dealer under the present provisions of the U.S. Internal Revenue Code to
the extent that the price to be paid by the Company for such shares is
established by the Board of Directors at some time in the future at a
figure in excess of the $100 par value offering price of the shares.
Unless the dealer whose shares of Class C Stock are purchased by the Company
still owns shares of the Company's stock in connection with one or more
other outlets that are members of the Company, the taxable income realized
by such dealer at the time of the Company's purchase of Class C shares
from him would probably qualify for capital gain treatment.
In the case of a dealer who continues to own shares of the Company's
stock for one or more other member outlets after his shares with respect
to a member outlet have been purchased or redeemed by the Company, the
entire amount paid to such dealer for the shares purchased by the Company
might be treated under applicable provisions of the Internal Revenue Code
as a distribution essentially equivalent to a dividend which would be
taxable to the dealer as ordinary income. In such case the income tax
basis of the shares of the Company's stock still held by such dealer would
be increased by an amount equal to the original basis of the shares
purchased from him by the Company.
The provisions of Section 483 of the U.S. Internal Revenue Code may
be applicable to sales of the Company's stock to dealers who make payment
for said shares in periodic installments extending more than 1 year after
the date of the sale. In any such case, all payments which are due to be
made by a dealer more than 6 months after the date of the sale may be
deemed to include "unstated interest" which would be tax deductible by
the dealer, but would also reduce the cost basis of his shares.
"Unstated interest" constituting taxable income may be imputed under
Section 483 of the U.S. Internal Revenue Code to a dealer whose Company
membership is terminated and who receives a 4-year installment note (See
the heading "Description of Capital Stock," subheading "Other Restrictions
and Rights," subparagraph (h)) in partial payment of the repurchase price
of his Company stock if the sum of the total payments to be made to the
dealer by the Company with respect to such repurchase exceeds the sum of
the present values of such payments and the present values of any interest
payments due under the note. For this purpose, the present value of a
payment is to be determined by using a discount rate equal to the applicable
Federal rate in effect as of the date of the note, compounded semi-annually.
DESCRIPTION OF CAPITAL STOCK
Dividend Rights
The Company's Certificate of Incorporation and By-laws prohibit the
declaration of dividends on any of the shares of any class of stock of the
Company. However, the Company may distribute shares of its Class C Stock
as a part of the annual patronage dividends to be paid to its eligible and
qualifying dealers. (See the heading "The Company's Business," subheading
"Forms of Patronage Dividend Distributions," as well as Note 5 to Financial
Statements, and Note (B) to "Selected Financial Data.")
Voting Rights
All rights to vote and all voting powers are vested solely in the
Class A Stock, provided, however, that holders of shares of $1,000 par
value Class B Stock and shares of $100 par value Class C Stock shall be
entitled to vote separately as a class upon any proposed amendment to the
Company's Certificate of Incorporation which would increase or decrease
the number of authorized shares of such class, increase or decrease the par
value of the shares of such class, or alter or change the power, preferences
or special rights of the shares of such class so as to affect them adversely.
Each holder of any class of stock having the right to vote at any meeting of
the stockholders of the Company shall be entitled to one vote for every
share of such stock outstanding in the name of such holder on the books of
the Company. Cumulative voting of shares with respect to the election
of directors or otherwise is expressly prohibited.
Liquidation Rights
In the event of any liquidation or winding up of the affairs of the
Company, whether voluntary or involuntary, the net assets of the Company
shall be distributed among the holders of all classes of issued and
outstanding stock of the Company. In such event, there shall first be
distributed to the holders of outstanding shares of Class B Stock and Class
C Stock amounts equal to the total amounts which the Company would have been
required to pay to them to purchase or redeem all of their outstanding
shares of such stock in accordance with the purchase or redemption prices
for said shares as last determined by the Board of Directors, but if the
net assets are insufficient to pay such amounts to the holders of said
shares, each outstanding share of Class B Stock and each outstanding share
of Class C Stock shall share in the distribution of the Company's net assets
in the proportion which its purchase or redemption price bears to such total
amount. (See the subheading "Redemption Provisions" below). If the net
assets exceed said total amount, the excess is to be distributed in equal
portions to each holder of an outstanding share of Class A Stock, but the
amount so distributed to each holder of a share of Class A Stock cannot
exceed such share's $1,000 par value. Any net assets still remaining are to
be distributed among the holders of all classes of issued and outstanding
shares of stock of the Company pursuant to the following procedure:
(a) there shall first be determined the sum of the
total $1,000 par value of all of the outstanding shares of
Class A Stock and the total amount which the Company would have
been required to pay to purchase or redeem all of its
outstanding shares of Class B Stock and Class C Stock in
accordance with the purchase or redemption price thereof last
determined by the Board of Directors;
(b) each outstanding share of Class A Stock shall
share in said remaining net assets in the proportion which the
$1,000 par value thereof bears to the sum determined in the
foregoing manner; and
(c) each outstanding share of Class B Stock and each
outstanding share of Class C Stock shall share in said
remaining net assets in the proportion which the purchase or
redemption prices thereof last determined by the Board of
Directors bear to said sum.
Preemptive Rights
No stockholder of the Company shall, by reason of his holding shares
of any class of stock of the Company, have any preemptive or preferential
right to purchase or to subscribe to any shares of any class of the Company,
now or to be hereafter authorized, or any notes, debentures, bonds or other
securities convertible into or carrying options or warrants to purchase any
shares of any class, now or hereafter to be authorized.
Redemption Provisions
There are no redemption provisions applicable to any of the shares of
Class A Stock or to any of the shares of Class C Stock other than shares of
Class C Stock which have been issued to the Company's member dealers in
partial payment of their annual patronage dividends. The Company may, at the
option of its Board of Directors, redeem the whole or any part of the
outstanding shares of its Class B Stock or the whole or any part of the
outstanding shares of its Class C Stock which have been issued as patronage
dividend distributions. Such redemptions may be made at any time or from
time to time. The redemption price in each instance shall be determined by
the Board of Directors, but the redemption price to be paid for Class C
Stock shall in no event be less than the $100 par value of such stock and
the redemption price to be paid for Class B Stock shall at all times be no
less than twice the $1,000 par value of the Class B Stock and shall always
be equal to twenty times the per share price last established by the Board
of Directors with respect to purchases or redemptions by the Company of its
Class C Stock. Notice of any election to redeem shall be mailed to each
holder of the class of stock so to be redeemed at his address as it appears
on the books of the Company not less than 30 days prior to the date upon
which the stock is to be redeemed. In case less than all of the outstanding
shares of Class B Stock are redeemed, or in case less than all of the
eligible outstanding shares of Class C Stock are redeemed, the number of
shares to be redeemed and the method of effecting such redemption, whether
by lot or prorata or otherwise, may be determined by the Board of Directors.
Other Restrictions and Rights
(a) There are no conversion rights, sinking fund
provisions, or liability to further calls or assessment by the
Company in regard to any of its shares of stock.
(b) As security for the payment of any indebtedness
owing to the Company by any stockholder or any subscriber for
shares of the Company's stock, the Company retains a first
lien upon all shares of its stock held by each stockholder and
upon all amounts which have been paid to the Company pursuant to
a Stock Subscription agreement for shares to be issued upon the
completion of payment of the purchase price of the shares. The
interest of each holder of shares of the Company's stock in and
to the shares issued to such holder and the interest of each
subscriber for shares of the Company's stock in and to the funds
paid to the Company by such subscriber shall at all times be
deemed to be offset by the amount of any indebtedness payable
to the Company by such holder or subscriber. In no event shall
any transfer of the shares owned by any stockholder or any
transfer of the stock subscription account of any subscriber
for shares be made unless and until the stockholder whose
shares are being transferred or the subscriber whose
subscription account is being transferred is free from all
indebtedness to the Company. If an installment note would be
issuable in payment of a portion of the total purchase price to
be paid by the Company for shares of its capital stock held by a
dealer for a retail outlet whose Company membership is
terminated in one of the situations described in subparagraph
(h) below, the cash portion of the purchase price of said shares
will be applied first toward any indebtedness payable to the
Company by such dealer and the portion of the purchase price
which would otherwise be paid by the issuance of an installment
note will then be applied against any such indebtedness which
still remains.
(c) From and after the date on which share of the
Company's stock are first issued to its member dealers who
subscribe for such shares, ownership of the shares of all
classes of stock of the Company shall be limited to
approved retail or other dealers in hardware and related
products having membership agreements with the Company, and
ownership of shares of Class B Stock shall be limited to
dealers having membership agreements with the Company
which were entered into on or before February 20, 1974. No
certificate representing any issued and outstanding share or
shares of any class of stock of the Company shall be pledged,
mortgaged, hypothecated, sold, assigned or transferred without
the prior consent of the Board of Directors of the Company. In
the event that the Board of Directors shall refuse to consent to
any transfer or assignment of any certificate or certificates
representing any share or shares of issued and outstanding stock
of the Company of any class, then the Company shall have the
right and shall be obligated to purchase such stock from its
owner at a price determined in accordance with the provisions of
subparagraph (g) below. In no event shall any transfer or
assignment of shares of any class of stock of the Company be made
to any transferee who is not eligible to be a holder of such
shares, that is, a dealer having a membership agreement with the
Company. In the case of a proposed transfer of ownership of a
store or other business outlet owned by a holder of shares of
stock of the Company to a transferee which the Company has
accepted or is willing to accept as a member Ace Hardware dealer,
then the owner of such stock shall have the option of either (i)
selling or otherwise transferring to such transferee such number
of shares of stock of the Company of any class which the Company
would otherwise have been required to offer to such transferee in
connection with the membership granted to such transferee with
respect to such store or other business outlet, or (ii) selling
such shares to the Company. However, the following types of
transfers of ownership of a store or other business outlet will
not be recognized for purposes of determining the availability of
the option of selling to the Company shares of its capital stock:
(i) any transfer which is not complete, unconditional and irrevocable;
(ii) any transfer to an entity in which the transferor retains
an ownership interest; or (iii) any transfer to the spouse of the
transferor.
(d) Subject to the Company's first lien and set-off
rights as described in subparagraph (b) above, in the event
of the termination of the Company membership granted for a
retail hardware store or other business unit for which
shares of stock of the Company are held, the Company shall
be obligated to purchase such shares. The Company shall also be
obligated to refund all amounts which have been paid to it
pursuant to a Stock Subscription Agreement for the purchase of
shares which have not as yet been issued to the subscriber,
subject only to the Company's first lien and set-off rights as
described in subparagraph (b) above. Termination of the
membership granted for a particular retail hardware store or
other business outlet shall include not only any termination
pursuant to a formal notice of termination given by either the
Company or the holder of the membership but shall also include
each of the following situations which shall be deemed to
constitute such a termination:
(i) The closing down of the store or other
business unit with respect to which such shares of
stock of the Company are held, unless such store or
other business unit is merely being moved, with the
Company's consent and approval, to another location or
is being acquired by another dealer which the Company
has accepted or is willing to accept as a member dealer
for operation pursuant to the same membership at another
location;
(ii) The death of an individual holder of the
shares of stock of the Company held for such retail
store or other business unit, or of a member of a
partnership which is a holder of such shares, except in
a case where the store or other business unit with respect
to which such shares are held continues, with the
approval of the officers of the Company (which approval
shall not be unreasonably withheld), to be operated under a
membership from the Company by the decedent's estate or by the
person or persons to whom such shares are to be distributed by
the decedent's estate or by the successor or successors to the
decedent's interest in the partnership holding such shares (it
being immaterial for this purpose that, in connection with such
continuation of operation, the legal form of ownership of the
member dealer has been changed from an individual proprietorship
or partnership to a corporation or from a partnership to an
individual proprietorship);
(iii) An adjudication of the insolvency of the
dealer or of the store or other business unit for which
the shares of stock of the Company are held, or the
making of an assignment for the benefit of creditors or
the filing of a voluntary petition in bankruptcy or
similar petition under the U. S. Bankruptcy Code by or
on behalf of such dealer or retail business unit, or
the filing of an involuntary petition in bankruptcy or
similar petition under the U. S. Bankruptcy Code against
the dealer or against said business unit.
(e) A transfer of shares of stock of the Company requiring the
consent of the Board of Directors shall not be deemed to have occurred
upon the death of a person who is the holder of shares of stock of the
Company jointly with one or more other persons under circumstances
whereby ownership of such shares passes automatically by operation of
law to the surviving holder or holders of such shares, nor shall the
Company become obligated to purchase such shares upon the death of such
person unless the store or other business outlet with respect to which
such shares are held either (i) closes down, or (ii) ceases to be
operated under a membership from the Company.
(f) In any case where the holder or holders of 50% or more of the
outstanding voting stock of a corporation having 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.
(g) The price to be paid by the Company in connection with the
purchase by it of any shares of its stock shall be as follows:
(i) in the case of Class A Stock, the $1,000 par value
of the shares;
(ii) in the case of Class B Stock, an amount per share
equal to the per share price last established by the Board of
Directors as the price to be paid by the Company in the event
of redemption of shares of its Class B Stock (currently $2,000
per share), which price shall in no event be less than twice the
$1,000 par value of the Class B Stock and shall also at all times
be equal to twenty times the per share purchase price last
established by the Board of Directors with respect to purchases
by it of shares of its Class C Stock;
(iii) in the case of Class C Stock, an amount per share
equal to the per share price last established by the Board of
Directors as the purchase price to be paid by the Company for
shares of its Class C Stock (currently $100 per share), which
price shall in no event be less than the $100 par value thereof.
There is no market for the Company's stock. The redemption prices
last established by the Board of Directors for Class A, B and C stock
have not been adjusted since 1974 when the Company first became a
cooperative organization.
(h) In case of the purchase by the Company of the shares of its
stock held by a dealer for a business outlet whose Company membership
is terminated in either of the following situations, a portion of the
purchase price will be paid in the form of an installment note payable
in four equal annual installments plus accrued interest:
(i) voluntary termination of the membership by the dealer
under circumstances whereby the member outlet continues to engage
in substantially the same business and continues to be controlled
to the extent of more than 50% by the same person, partnership or
corporation;
(ii) termination of the membership by the Company due to
a delinquency on the dealer's part in paying for goods or services
supplied by the Company or due to a default on the dealer's part
in performing some other obligation under his membership agreement
with the Company.
Even in the above situations, though, the portion of the total purchase
price represented by the amount actually paid in by the dealer under a Stock
Subscription Agreement for Class A Stock, Class B Stock and Class C Stock
will be paid in cash, and the entire remaining portion of the total purchase
price for the shares being purchased by the Company from the dealer will also
be paid in cash if such remaining portion is less that $5,000. Where such
remaining portion of the total purchase price is $5,000 or more in any of
the above situations, then only the amount actually paid in by the dealer
under the dealer's Stock Subscription Agreement will be paid in cash and the
entire remaining portion of the purchase price will be paid by means of
an installment note as described above. The interest rate on any such
installment note will be such rate as shall have been established by the
Company's Board of Directors for such purpose as of the date of the issuance
of the note, but the interest rate shall in no event be less than the latest
interest rate established for patronage refund certificates to be issued as a
part of the annual patronage dividends payable to the Company's dealers, nor
shall the interest rate ever be less than 6% per annum. After considering
the financial condition and requirements of the Company, the Company's Board
of Directors may authorize that payment be made in cash of all or any
portion of the total purchase price which would otherwise be payable by
means of such an installment note if the Board determines that the
installment payment method would impose an undue hardship on the dealer.
(i) There is no restriction on the repurchase or redemption
of any of its shares of stock by the Company in the event that the
Company shall at any time be in arrears in making any sinking fund
installment payments which it may hereafter incur an obligation to
make. Since the Company is prohibited from paying dividends on any
of its shares of stock, there can be no arrearage in the payment
of any such dividends which would impose any restriction on the
repurchase or redemption of any of its shares of stock by the
Company. Under the General Corporation Law of Delaware, the
Company cannot repurchase any of its shares at any time when its
assets are less than the amount represented by the aggregate
outstanding shares of its capital stock or would be reduced below
said amount as a result of a repurchase of its shares.
OPINIONS OF EXPERTS
The validity of shares of stock of the Company offered hereby will be
passed upon for the Company by the Company's Vice President, General Counsel
and Secretary, David W. League. The statements made under the subheadings
"Federal Income Tax Status of Class A and Class C Shares," "Federal Income
Tax Treatment of Patronage Dividends," "Income Tax Liability Incidental to
Patronage Dividends" and "Patronage Dividends and Income Tax Treatment
Thereof" are also his opinions. Said counsel has also passed upon legal
questions relating to the effect upon the surplus or retained earnings of
the Company of the fact that, in the event of the involuntary liquidation of
the Company, shares of its Class B stock will have a preference exceeding the
par value of said shares in the distribution of the net assets of the Company.
The consolidated financial statements of Ace Hardware Corporation and
subsidiaries as of December 31, 1997 and 1996 and for each of the years in the
three-year period ended December 31, 1997, have been included herein and in
the Registration Statement have been included herein and in the Registration
Statement in reliance upon the report of KPMG Peat Marwick LLP, independent
certified public accountants, appearing elsewhere herein and upon the
authority of said firm as experts in accounting and auditing.
THE COMPANY'S BUSINESS
Ace Hardware Corporation was formally organized as a Delaware
corporation in 1964. In 1973, by means of a corporate merger, it succeeded
to the business of Ace Hardware Corporation, an Illinois corporation
organized in 1928. Until 1973, the business now being engaged in by the
Company had been conducted by the Illinois corporation. The Company's
principal executive offices are located at 2200 Kensington Court, Oak Brook,
Illinois 60523. Its telephone number is (630) 990-6600.
The Company primarily functions as a wholesaler of hardware and related
products, and manufactures paint products. Sales of the products distributed
by it are presently made primarily to individuals, partnerships or corporations
who are engaged in business as dealers in hardware or related items and who
have entered into Membership Agreements with the Company entitling them to
purchase merchandise and services from the Company and to use the Company's
marks as provided therein. (See the heading "Factors To Be Considered,"
subheading "Documents Accompanying Prospectus," and the heading "The
Company's Business" subheading "Membership Agreement").
The Company operates on a cooperative basis and distributes patronage
dividends to its eligible member dealers each year in proportion to the
amount of their annual purchases of merchandise from it. (See the subheading
"Distribution of Patronage Dividends").
At December 31, 1997 there were 5,032 retail business outlets with
respect to which such Membership Agreements had been entered into. Those
States having the largest concentration of member outlets are California
(approximately 10%), Illinois and Texas (approximately 6% each), Florida
and Michigan (approximately 5% each) and Georgia (approximately 4%). States
into which were shipped the largest percentages of the merchandise sold by
the Company in fiscal year 1997 are California (approximately 11%), Illinois
and Florida (approximately 7% each), Texas (approximately 5%), Michigan and
Georgia (approximately 4% each). Approximately 7% 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 fiscal years is set forth in the following table:
1997 1996 1995
----- ----- -----
Member outlets at beginning of period 5,067 5,007 4,940
New member outlets 208 272 285
Member outlets terminated 243 212 218
----- ----- -----
Member outlets at end of period 5,032 5,067 5,007
Dealers having one or more member ===== ===== =====
outlets at end of period 4,022 4,084 4,055
The Company services its dealers by purchasing merchandise in quantity
lots, primarily from manufacturers, by warehousing substantial quantities
of said merchandise and by selling the same in smaller lots to the dealers.
Most of the products that the Company distributes to its dealers from its
regional warehouses are sold at a dealer price established by the Company
("dealer cost"), to which a 10% adder ("handling charge") is generally added.
In fiscal year 1997 warehouse sales accounted for 61% of total sales and
bulletin sales accounted for 2% of total sales with the balance of 37%
representing direct shipment sales, including lumber and building material.
The proportions in which the Company's total warehouse sales were
divided among the various general classes of merchandise sold by it during
each of the past three fiscal years are as follows:
Class of Merchandise 1997 1996 1995
-------------------- ---- ---- ----
Paint, cleaning and related supplies 21% 20% 19%
Plumbing and heating supplies 15% 16% 16%
Hand and power tools 14% 14% 14%
Garden, rural equipment and
related supplies 13% 13% 13%
General hardware 12% 12% 13%
Electrical supplies 12% 12% 13%
Sundry 7% 7% 7%
Housewares and appliances 6% 6% 5%
The Company sponsors two major conventions annually (one in the Spring
and one in the Autumn) at various locations. Dealers and vendors are invited
to attend, and dealers generally place orders for delivery during the period
prior to the next convention. During the convention regular merchandise, new
merchandise and seasonal merchandise for the coming season are displayed to
attending dealers. Lawn and garden supplies, building materials and exterior
paints are seasonal merchandise in many parts of the country, as are certain
sundries such as holiday decorations.
Warehouse sales involve the purchase of merchandise from the Company
that is maintained in inventory by the Company at its warehouses. Direct
shipment sales involve the purchase of merchandise from the Company with
shipment directly from the vendors. Bulletin sales involve the purchase of
merchandise from the Company pursuant to special bulletin offers by the
Company.
Direct shipment sales are orders placed by dealers directly with
vendors, using special purchase orders. Such vendors bill the Company for
such orders, which are shipped directly to dealers. The Company, in turn,
bills the ordering dealers with an adder ("handling charge") that varies in
accordance with the following schedule and is exclusive of sales under the
LTL Plus program discussed below.
Invoice Amount Adder (Handling Charge)
-------------- -----------------------
$ 0.00 to $ 999.99 2.00% or $1.00 whichever is greater
$1,000.00 to $1,999.99 1.75%
$2,000.00 to $2,999.99 1.50%
$3,000.00 to $3,999.99 1.25%
$4,000.00 to $4,999.99 1.00%
$5,000.00 to $5,999.99 .75%
$6,000.00 to $6,999.99 .50%
$7,000.00 to $7,999.99 .25%
$8,000.00 and over .00%
Bulletin sales are made based upon notification from dealers of their
participation in special bulletins offered by the Company. Generally, the
Company will give notice to all members of its intention to purchase certain
products for bulletin shipment and then purchases only so many of such
products as the members order. When the bulletin shipment arrives at the
Company, it is not warehoused, but is broken up into appropriate quantities
and delivered to members who placed orders. A 6% adder ("handling charge")
is generally applied to this category of sales.
An additional adder of 3% applies to various categories of sales of
merchandise exported to certain dealers located outside of the United States
and its territories and possessions. Ace dealers located outside of the
United States and its territories and possessions not subject to the
additional 3% adder are assessed a flat 2% adder on all direct shipment sales.
The Company maintains inventories to meet only normal resupply orders.
Resupply orders are orders from members for merchandise to keep inventories
at normal levels. Generally, such orders are filled within one day of
receipt. Bulletin orders (which are in the nature of resupply orders) may be
for future delivery. The Company does not backlog normal resupply orders
and, accordingly, no significant backlog exists at any point in time.
The Company also has established special sales programs for lumber and
building materials products and for products assigned from time to time to
an "extreme competitive price sales" classification and for products
purchased from specified vendors for delivery to certain of the Company's
dealers on a direct shipment basis (LTL Plus Program). Under its lumber and
building materials ("LBM") program, the Company imposes no adder ("handling
charge") or national advertising assessment on direct shipment orders for
such products. The LBM program enables the Company's dealers to realize
important savings resulting from the Company's closely monitored lumber and
building materials purchasing procedures. Additionally, the LBM program
offers dealers the opportunity to order less-than-truckload quantities of
many lumber and building materials products at economical prices under
the LTL warehouse redistribution procedure which the Company has established
with certain major vendors.
The Store Traffic Opportunity Program ("STOP") established by the
Company is a program under which certain stockkeeping units of specific
products assigned to a "competitive price sales" classification are offered
for sale to its dealers for delivery from designated Company retail support
centers. Sales under this program are made without the addition of freight
charges and with such adder ("handling charge"), if any, of not more than
5% as shall be specified for each item. The Company's officers have
authority to add items to, and to withdraw items from, the STOP program from
time to time and to establish reasonable minimum or multiple item purchase
requirements for the items offered under the program. No allocations or
distributions of patronage dividends are made with respect to sales under the
STOP program. Purchases under the STOP program are, however, deemed to be
warehouse purchases or bulletin purchases, as the case may be, for purposes
of calculating the forms of patronage dividend distributions. (See the
heading "The Company's Business" subheading, "Forms of Patronage Dividend
Distributions.")
The LTL Plus Program established by the Company is a program under
which full or partial truckloads of products are purchased by certain of the
Company's dealers from specified vendors for delivery to such dealers on a
direct shipment basis. No adder ("handling charge") or national advertising
assessment is imposed by the Company on sales under the LTL Plus Program,
and the maximum amount of patronage dividends allocated or distributed to
the Company's dealers with respect to their purchases of products in the LTL
Plus category is .5% of such sales. (See heading "The Company's Business,"
subheading "Patronage Dividend Determinations and Allocations.")
The Company, in addition to conducting semi-annual and other conventions
and product exhibits for its dealers, also provides them with numerous
special services (on a voluntary basis and at an established cost), such as
inventory control systems, as well as price and bin ticketing. In order for
them to have on hand current pricing and other information concerning the
merchandise obtainable from the Company, the Company further provides to each
of its dealers either a catalogue or CD 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 materials for educational and training programs for
which dealers must pay an established monthly charge. (See the heading "The
Company's Business," subheading "Special Charges and Assessments.")
Through its wholly-owned subsidiary, Ace Insurance Agency, Inc., the
Company makes available to its dealers a Group Dealer Insurance Program
under which they can purchase a package of insurance coverages, including
"all risk" property insurance and business interruption, crime, liability
and workers' compensation coverages, as well as medical insurance coverage
for their employees. AHC Realty Corporation, another wholly-owned subsidiary
of the Company, provides the services of a broker to those dealers who
desire to sell or seek a new location for a presently owned store or to
acquire an additional store. Loss Prevention Services, Inc., another wholly-
owned subsidiary provides security training and services for all dealers
desiring security assistance. In addition, the Company offers to its dealers
retail computer systems consisting of computer equipment, maintenance service
and certain software programs and services. These are marketed by the Company
under its registered service mark "PACE".
During 1996 the Company commenced operations through Ace Hardware
Canada, Limited, a wholly-owned subsidiary as a wholesaler of hardware and
related merchandise through two distribution facilities located in Calgary,
Alberta and Brantford, Ontario. Ace Hardware Canada, Limited generated less
than three percent of the Company's consolidated revenue during fiscal year
1997.
As of the date hereof, the Company operates, through A.H.C. Store
Development Corp. and Ace Corporate Stores, Inc., its wholly owned
subsidiaries, six company-owned retail hardware stores. In addition, three
other locations are being developed for company-owned retail hardware stores.
Two of the newly acquired locations are expected to be operational by the
close of the second quarter of 1998. The third location is under construction
and is expected to be operational in the beginning of the fourth quarter of
1998. (See the heading "Properties.")
The Company manufactures paint and related products at facilities owned
by it in Matteson and Chicago Heights, Illinois. These facilities now
constitute the primary source of such products offered for sale by the
Company to its dealers. The Company's paint manufacturing business is
operated as a separate Division of the Company for accounting purposes. All
raw materials used by the Company to manufacture paint are purchased from
outside sources. The Company has had adequate sources of raw materials, and
no shortages of any materials which would materially impact operations are
currently anticipated. The manufacturing of paint is seasonal to the extent
that greater paint sales are found in the months of April through September.
Historically, compliance with federal, state and local provisions which have
been enacted or adopted regulating the discharge of materials into the
environment or otherwise relating to the protection of the environment have
not had any material impact.
The Company's business, either in hardware wholesaling or paint
manufacturing activities is not dependent on any major suppliers and the
Company feels that any seasonal fluctuations do not have a significant
impact upon operations. For further discussion of the Company's business,
see "Management's Discussion and Analysis of Financial Condition and Results
of Operations," which appears following the "Notes to Financial Statements"
in this prospectus.
The Company makes available some services to members which are related
to the operation of their retail businesses. These services (such as
advertising, store supplies and training programs) are provided in order to
assist members and/or to utilize the centralized buying power of the Company.
Members are rebilled in order to pay the Company the established charges for
such services.
Strategic Planning
This section summarizes the Company's strategic planning initiatives.
By reason of the nature of strategic plans, this section contains a number
for forward looking statements, all of which are based on current
expectations. Actual results may differ materially. The Company believes
that it has the facilities, personnel and competitive and financial resources
for continued business success in the implementation of these plans, but
future developments, including revenues, costs, margins and profits are all
influenced by a number of factors, including but not limited to the
following, all of which are inherently difficult to forecast. These factors
include the uncertain impact of future growth in the hardware and hardlines-
related industries, including the lumber/building materials, home center,
do-it-yourself, rental and commercial/industrial categories, as well as the
condition of the economy domestically, internationally and in specific
geographical regions. These factors also include potential changes in
merchandise and inventory prices, the impact of increasingly intense
competition, potential shifts in market demand, the potential impact of future
litigation, and the potential impact of environmental, franchising and
licensing laws on the Company's business operations. The Company is presently
unable to predict whether, or to what extent such factor may result in future
costs of liabilities that are not presently known, or the impact of such
factors on the Company's future ability to achieve its plans.
The Company has an ongoing strategic planning process and has focused
its plans around four cornerstones for future growth and success in this
competitive industry. The four cornerstones are: Retail Success (store
operations), Wholesale Success (distribution), International growth and new
member growth. Dealer retail success is a primary objective since it drives
both retail performance and wholesale growth of the Company. The Company has
accelerated its efforts in assisting member-dealers in "retail success
initiatives" designed to improve their retail performance and competitiveness.
The retail success initiatives include retail goals which each dealer should
strive for within their store and local competitive environment, but do not
dictate material restrictions or requirements on member dealers. Minimum
requirements for acceptance of a member-dealer by the Company are outlined
only in the Membership Agreement and in the Member Operational Requirements
under the Ace Hardware Membership Agreement. The Operational Requirements do
require that, within one year from the Company's acceptance of the Agreement,
the member-dealer must make Ace its primary source of supply and terminate
participation in the program of any other major hardware wholesaler. There are
currently no generally applicable requirements for Ace member-dealers as to
percentage of purchases required through Ace or minimum retail performance
which must be achieved (i.e. sales dollars per square foot). The four
cornerstones also include present strategic initiatives to focus on the
consumer through research, target marketing and the development of an
appropriate long-term advertising strategy, as well as the review by the
Company of merger and acquisition opportunities and the development of
international and domestic non-shareholder franchise programs. "The New Retail
Age of Ace" is an extension of previous strategic efforts under "The New Age
of Ace" and "Ace 2000" and is not in conflict with these efforts.
Special Charges and Assessments
The Company sponsors a national advertising program for which its
dealers are assessed an amount equal to 1.3% of their purchases (exclusive
of purchases of lumber, LTL, LTL Plus, building materials products and PACE
hardware and software computer systems), with the minimum annual assessment
for each dealer location being established at $1,622.40 effective January
1, 1997 (or such greater amount as would be required to maintain the
foregoing minimum applicable assessment at 1.3%) subject to: 1) a maximum
annual assessment for each dealer location for which a membership agreement
has been entered into with the Company of $5,500.00; 2) a maximum total
annual assessment for any one dealer determined by multiplying the number of
such dealer's retail outlets supplied by the Company which serve the general
public by $5,500.00 with certain exemptions from or adjustments to the
national advertising assessment for dealer outlets located outside of the
contiguous 48 states of the United States and the District of Columbia,
based on the evaluation by the Company's management of the amount and nature
of the television broadcasts received in the dealer's area. The percentage of
bi-weekly purchases to be assessed for the Company's national advertising
program and the amount of the maximum annual assessment for such program are
both subject to being changed from time to time by action of the Board of
Directors of the Company. The Company also has the authority, effective
January 1, 1993 to impose a regional advertising assessment (for select
geographic regions) not to exceed 2% of annual purchases with the same minimum
and maximum assessments imposed by the National Advertising assessment.
A special low volume account service charge of $50.00 per bi-weekly
billing statement period is imposed on all stores whose annual purchases
(exclusive of lumber and LTL purchases) are less than $50,000.00 and $30.00
per bi-weekly billing for annual purchases between $50,000 and $124,800. Any
such charges imposed on a store during a specified year will be automatically
refunded to the store if its total purchases (exclusive of lumber and
LTLpurchases) exceed $124,800 during the year. All stores are exempted from
such special charge during the first 12 months from the date that they are
affiliated as Ace dealers. Exceptions to the low volume account service
charge are as follows:
1. when a dealer has purchased $124,800.00 of
merchandise (exclusive of carload lumber purchases)
during the applicable year, the dealer will be given
credit on the next bi-weekly billing statement for any
low volume charges which have been added to the account
during such year and the low volume charge shall no longer
be added on any of such dealer's bi-weekly billing
statements during the remainder of such period even if
the current purchases shown on the billing statement
are less than $4,800.00; and
2. the low volume account service charge will not be
billed on a bi-weekly basis to those accounts whose
previous year's sales volume exceeded the low volume
purchases minimum ($124,800.00) for the previous year, but
the full annual low volume account service charge will be
billed on the last billing statement of the year to those
accounts if the minimum purchases to avoid imposition of
the charge have not been met for the current year.
An Ace store that falls below minimum purchase levels may also be
subject to termination.
A late payment service charge is added on any past due balance owing
by a dealer to the Company for purchases of merchandise and services or for
the purchase price of the capital stock of the Company subscribed for by the
dealer. The late payment service charge currently in effect is an amount
equal to .77% per bi-weekly statement period, except in Texas where the
charge is .384% and Georgia where the charge is .692%. A past due balance is
created whenever payment of the amounts shown as due on any such statement
is not received by the Company within 10 days following the date of the
statement. The percentage for determining the amount of the late payment
service charge may be changed from time to time by the Company.
Subscriptions to a retail training program consisting of video tapes
and related course materials (the "S.T.A.R. Program") are mandatory for all
stores located in the United States and U.S. Territories. The initial
monthly assessment imposed on such stores for such subscriptions is $16 for
each single store or parent store and $11 for each branch store. A single
store or parent store is an initial retail outlet for which a dealer owns,
or has subscribed for, one (1) share of Class A stock and forty (40) shares
of Class C stock of the Company. A branch store is an additional retail
outlet for which a dealer owns, or has subscribed for, fifty (50) shares of
Class C stock of the Company. (See Article XXV, Section 2 of the By-laws,
set forth in Appendix A). Branch stores may, upon request, be granted an
exemption from the monthly subscription fee.
Subscriptions to a Material Safety Data Sheet information service are
also mandatory for all stores located in the United States. The initial
annual assessment imposed on such stores for such subscriptions is $20 for
each single store or parent store and $10 for each branch store.
Trademark and Service Mark Registrations
The names "ACE HARDWARE" and "ACE" are used extensively by the Company
and by its member-dealers in connection with the promotion, advertising and
marketing of products and services sold by the Company. The Company holds
the following Trademark and Service Mark Registrations issued by the U.S.
Patent and Trademark Office for the marks used by it:
Registration Expiration
Description of Mark Type of Mark Number Date
--------------------- ------------ --------- ---------
"ACE HARDWARE" with winged
emblem design Service Mark 840,176 December 5, 2007
"ACE HARDWARE" with winged
emblem design Trademark 898,070 September 8, 2000
"THE PAINTIN' PLACE" Service Mark 1,138,654 August 12, 2000
"HARDWARE UNIVERSITY"
with design Service Mark 1,180,539 December 1, 2001
"SUPER STRIKER" Trademark 1,182,330 December 15, 2001
"PACE" with design Service Mark 1,208,887 September 14, 2002
"ACE HARDWARE" with winged
emblem design Trademark 1,277,581 May 15, 2004
"ACE HARDWARE" in stylized
lettering design Trademark 1,426,137 January 27, 2007
"ACE" in stylized
lettering design Service Mark 1,464,025 November 3, 2007
"ACE HARDWARE" in stylized
lettering design Service Mark 1,486,528 April 26, 2008
"ACE HARDWARE AND
GARDEN CENTER" in stylized
lettering design Service Mark 1,487,216 May 3, 2008
"ACE NEW EXPERIENCE" in
stylized lettering
design Trademark 1,554,322 September 5, 2009
"ACE SEVEN STAR" in
stylized
lettering design Trademark 1,556,389 September 19, 2009
"ACE BEST BUYS" in
circle design Service Mark 1,560,250 October 10, 2009
"ACENET" Service Mark 1,574,019 December 26, 1999
"ACE IS THE PLACE" Service Mark 1,602,715 June 19, 2000
"LUB-E" Trademark 1,615,386 October 2, 2000
"ACE PRO" Trademark 1,632,078 January 22, 2001
"ASK ACE" Service Mark 1,653,263 August 6, 2001
Christmas Elves design Trademark 1,669,306 December 24, 2001
"ACE 2000" Service Mark 1,682,467 April 7, 2002
"ACE" in stylized
lettering design Trademark 1,683,538 April 21, 2002
"HARMONY" in stylized
lettering design Trademark 1,700,526 July 14, 2002
"SEVEN STAR SATISFACTION
GUARANTEED QUALITY
ACE PAINTS" with design Service Mark 1,705,321 August 4, 2002
"THE OAKBROOK COLLECTION"
in stylized
lettering design Trademark 1,707,986 August 18, 2002
"ACE HARDWARE BROWN BAG
BONANZA" with design Service Mark 1,761,277 April 13, 2003
"ACE HARDWARE
COMMITTED TO A QUALITY
ENVIRONMENT" design Service Mark 1,764,803 April 13, 2003
"THE OAKBROOK COLLECTION"
in stylized
lettering design Trademark 1,783,335 July 20, 2003
"STORE 2000 THE
STORE OF THE FUTURE" Service Mark 1,811,032 December 14, 2003
"ENVIRO-CHOICE" Trademark 1,811,392 December 14, 2003
"CELEBRATIONS" Service Mark 1,918,785 September 12, 2005
Repetitive Stylized
"A" design Service Mark 1,926,798 October 10, 2005
"The NEW AGE OF ACE"
design Service Mark 1,937,008 November 21, 2005
"ACE RENTAL PLACE"
in stylized
lettering design Service Mark 1,943,140 December 19, 2005
"HELPFUL HARDWARE FOLKS" Service Mark 1,970,828 April 30, 2006
"ACE HOME CENTER" Service Mark 1,982,130 June 25, 2006
"SEALTECH" Trademark 2,007,132 October 8, 2006
"GREAT FINISHES" Trademark 2,019,696 November 26, 2006
"WOODROYAL" Trademark 2,065,927 May 27, 2007
"ROYAL SHIELD" Trademark 2,070,848 June 10, 2007
"ROYAL TOUCH" Trademark 2,070,849 June 10, 2007
"QUALITY SHIELD" Trademark 2,012,305 September 30, 2007
"QUALITY TOUCH" Trademark 2,102,306 September 30, 2007
"STAINHALT" Trademark 2,122,418 December 16, 2007
Currently, the Company has applications pending before the U.S. Patent
and Trademark Office for Registration of "ACE ROYAL" for exterior and interior
paint, "ACE DRY GUARD" for waterproofing paint, "ACE CONTRACTOR PRO" for
paints, primers and varnishes and "THE OAKBROOK COLLECTION" for bathroom
faucets. In addition, the Company also has service mark applications pending for
"ACE COMMERCIAL & INDUSTRIAL SUPPLY" for retail store services in the field of
hardware and related goods, "NHS NATIONAL HARDLINES SUPPLY" for retail store
services in the field of hardware and related goods, "HELPFUL HARDWARE CLUB"
for promoting the goods and services of others through various incentive
programs offered to preferred customers, "ACE CONTRACTOR CENTER" for retail
store services for identifying dealers who sell lumber and building materials,
"ACE GARDEN PLACE" for retail store services in the field of hardware,
garden products and building materials and "THE FOLKS IN THE RED VEST" for
retail store services in the field of hardware and related goods.
Competition
The competitive conditions in the wholesale hardware industry can be
characterized as intensive and increasing due to the fact that independent
retailers are required to remain competitive with discount stores and chain
stores, such as Wal-Mart, Home Depot, Menard's, Sears, and Lowe's, and with
other mass merchandisers. The gradual shift of retail operations to high rent
shopping center locations and the trend toward longer store hours have also
intensified pressures to obtain low cost wholesale supply sources. The
Company directly competes in several U.S. markets with TruServ Corporation,
as well as with Hardware Wholesalers, Inc., and United Hardware Distributing
Co., all of which companies are also dealer-owned wholesalers.
Employees
The Company employs 4,685 full-time employees, of which 1,353 are
salaried employees. Collective bargaining agreements, covering one truck
drivers' bargaining unit and three warehouse bargaining units are currently
in effect at certain of the Company's distribution warehouses. The Company's
employee relations with both union and non-union employees are considered
to be good, and the Company has experienced no significant employee-related
work stoppage in the past five years. All employees are covered either by
negotiated or non-negotiated employee benefit plans which include
hospitalization, death benefits and, with few exceptions, retirement benefits.
Limitations on Ownership of Stock
All of the issued and outstanding shares of capital stock of the Company
are owned by its dealers. Only approved retail and other dealers in hardware
and related products having Membership Agreements with the Company are
eligible to own or purchase shares of any class of the Company's stock.
No dealer, regardless of the number of member business outlets owned or
controlled by the dealer, shall be entitled to own more than 1 share of Class
A Stock, which is the only class of voting stock which can be issued by the
Company. This ensures that each stockholder-dealer will have an equal voice
in the management of the Company. An unincorporated person or partnership
shall be deemed to be controlled by another person, partnership or
corporation if 50% or more of the assets or profit shares therein are owned
(i) by such other person, partnership or corporation or (ii) by the owner or
owners of 50% or more of the assets or profit shares of another unincorporated
business firm or (iii) by the owner or owners of 50% or more of the capital
stock of an incorporated business firm. A corporation shall be deemed to be
controlled by another person, partnership or corporation if 50% or more of
the capital stock of said corporation is owned (i) by such person,
partnership or corporation or (ii) by the owner or owners of 50% or more of
the capital stock of another incorporated business firm or (iii) by the
owner or owners of 50% or more of the assets or profit shares of an
unincorporated business firm.
Distribution of Patronage Dividends
The Company operates on a cooperative basis with respect to purchases of
merchandise made from it by those of its dealers who have become "members" of
the Company as described below and in the Company's By-laws. In addition, the
Company operates on a cooperative basis with respect to all dealers who have
subscribed for shares but who have not as yet become "members" by reason of
the fact that the payments made by them on account of the purchase price of
their shares have not yet reached an amount equal to the $1,000 purchase
price of 1 share of Class A Voting Stock. All member dealers falling into
either of the foregoing classifications are entitled to receive patronage
dividend distributions once each year from the Company in proportion to
the amount of their annual purchases of merchandise from it.
The patronage dividends distributed on wholesale warehouse, bulletin and
direct shipment sales made by the Company and on total sales of products
manufactured by the Paint Division represented the following percentages of
each of said categories of sales during each of the past three fiscal years:
1997 1996 1995
-------- -------- --------
Warehouse Sales 4.32753% 4.53912% 4.42965%
Bulletin Sales 2.0% 2.0% 2.0%
Direct Shipment Sales 1.0% 1.0% 1.0%
Paint Sales 10.3088% 7.9773% 6.8725%
In addition to the dividends described above, patronage dividends are
calculated separately and distributed on sales of lumber products, building
material and millwork products and less-than-truckload (LTL) sales of lumber
and building material products. Patronage dividends equal to .4593%, .4328%
and .3560% 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 fiscal years 1997, 1996 and 1995,
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 fiscal years 1997, 1996
and 1995.
Patronage Dividend Determinations and Allocations
The amounts distributed by the Company as patronage dividends consist of
its gross profits on business done with dealers who qualify for patronage
dividend distributions after deducting from said gross profits a proportionate
share of the Company's expenses for administration and operations. Such gross
profits consist of the difference between the price at which merchandise is
sold to such dealers and the cost of such merchandise to the Company. All
income and expenses associated with activities not directly related to
patronage transactions are excluded from the computation of patronage
dividends. Generally these include profits on business done with dealers who
do not qualify for patronage dividend distributions and any income (loss)
realized by the Company from the disposition of property and equipment
(except that, to the extent that depreciation on such assets has been
deducted as an expense during the time that the Company has been operating on
a cooperative basis and is recaptured in connection with such a disposition,
the income derived from such recapture would be included in computing
patronage dividends).
The By-laws of the Company provide that, by virtue of a dealer being a
"member" of the Company (that is, by virtue of his ownership of 1 share of
Class A Voting Stock), he will be deemed to have consented to include in his
gross income for federal income tax purposes for the dealer's taxable year in
which they are received by him all patronage dividends distributed to him by
the Company in connection with his purchases of merchandise from the Company.
A dealer who has not yet paid an amount which at least equals the $1,000
purchase price of the 1 share of Class A Voting Stock subscribed for by him
will also be required to include all patronage dividends distributed to him
by the Company in his gross income for federal income tax purposes in the year
in which they are received by him. This is required by virtue of a provision
in the Subscription Agreement executed by him under which he expressly
consents to take all such patronage dividends into his gross income for such
purposes. The amount of the patronage dividends which must be included in a
dealer's gross income includes both the portion of such patronage dividends
received by him in cash or applied against indebtedness owing by him to the
Company in accordance with Section 7 of Article XXIV of the Company's By-laws
and the portion or portions thereof which he receives in shares of Class C
Nonvoting Stock of the Company or in patronage refund certificates.
Patronage dividends on each of the Company's three basic categories of
sales (warehouse sales, bulletin sales and direct shipment sales) are
allocated separately, as are patronage dividends under the LTL Plus Program.
However, the maximum amount of patronage dividends allocable to the LTL Plus
Program is an amount no greater than .5% of such sales, the maximum amount of
patronage dividends allocable to direct shipment sales exclusive of LTL Plus
Program sales is an amount equal to 1% of such sales and the maximum amount
of patronage dividends allocable to bulletin sales is an amount equal to 2%
of that category of sales. All remaining patronage dividends resulting from
sales made under these programs are allocated by the Company to warehouse
sales. The Company feels that this allocation procedure provides a practical
and understandable method for the distribution of these patronage dividends
in a fair and equitable manner.
Sales of lumber and building materials products are not included as part
of warehouse sales, bulletin sales, or direct shipment sales for patronage
dividend purposes. Patronage dividends are calculated separately and
distributed to the Company's dealers with respect to their purchases within
each of four sales categories involving these types of products. These
four categories are (a) lumber products (other than less-than-truckload
sales); (b) building materials products (other than less-than-truckload
sales); (c) millwork products and (d) less-than-truckload ("LTL") sales of
lumber and building material products. Patronage dividends are also calculated
separately and distributed to the Company's dealers for full and partial
truckloads of products purchased under the LTL Plus program. (See the heading
"The Company's Business", discussion of LTL Plus program, and the subheading
"Forms of Patronage Dividend Distributions", subparagraphs 2(a)-(b) below.)
Any manufacturing profit realized on intracompany sales of the products
manufactured by the Company's Paint Division is allocated among and
distributed as patronage dividends to those member dealers who are eligible
to receive patronage dividends from the Company in proportion to their
respective annual dollar purchases of paint and related products manufactured
by said Division. The earnings realized by the Company on wholesale sales
of such products made by it to its member dealers are distributed as
patronage dividends to all of its dealers who are eligible to receive
patronage dividends from it as part of the patronage dividends which they
receive each year with respect to the basic patronage dividend categories
established for warehouse sales, bulletin sales, and direct shipment sales.
Under Section 8 of Article XXIV of the Company's By-laws, if the Paint
Division's manufacturing operations for any year result in a net loss,
rather than a profit, to the Paint Division, such loss would be netted
against the earnings realized by the Company from its other activities during
the year, with the result that the earnings available from such other
activities for distribution as patronage dividends for such year would be
correspondingly reduced.
Forms of Patronage Dividend Distributions
Patronage dividend distributions will be made to the eligible and
qualified member dealers of the Company in cash, shares of the Company's
Class C stock and patronage refund certificates in accordance with the
following plans which have 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 the dates indicated, 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:
A. For purchases made on or after January 1, 1998,
1. with respect to each store owned or controlled by
each eligible and qualifying dealer, such dealer
shall receive a minimum cash distribution determined
as follows:
(a) an amount equal to 20% of the first $5,000 of
the total patronage dividends allocated for
distribution each year to such dealer in
connection with the purchases made for such
store;
(b) an amount equal to 25% of the portion of the
total patronage dividends allocated for
distribution each year to such dealer for
such store which exceeds $5,000 but does not
exceed $7,500;
(c) an amount equal to 30% of the portion of the
total patronage dividends allocated for
distribution each year to such dealer for
such store which exceed $7,500 but does not
exceed $10,000;
(d) an amount equal to 35% of the portion of the
total patronage dividends allocated for
distribution each year to such dealer for
such store which exceeds $10,000 but does not
exceed $12,500;
(e) an amount equal to 40% of the portion of the
total patronage dividends allocated for
distribution each year to such dealer for
such store which exceeds $12,500.
2. The portion of the total annual distribution
allocated to any such dealer for each store owned
or controlled by such dealer in excess of the amount
to be distributed to such dealer for such store in
cash shall be distributed to him each year in the
form of shares of Class C Non-voting Stock of Ace
Hardware Corporation (par value $100 per share), valued
at the par value thereof, until the total par value of
all shares of all classes of capital stock of the
corporation held by such dealer with respect to such
store equals the greater of:
(a) $20,000; or
(b) a sum equal to the total of the following
categories of purchases made by such dealer
for such store during the most recent
calendar year:
(i) 15% of the volume of Ace manufactured
paint and related products purchases,
plus
(ii) 3% of the volume of drop-shipment or
direct purchases (excluding Ace
manufactured paint and related
products), plus
(iii)15% of the volume of warehouse
(including STOPand excluding Ace
manufactured paint and related products)
and bulletin purchases, plus
(iv) 3% of the volume of lumber and building
material (excluding LTL) purchases,
subject to a maximum lumber and building
material capital stock requirement of
$25,000, plus
(v) 4% of the volume of LTL Plus purchases;
provided, however, that no fractional shares of Class C
Non-voting Stock shall be issued to any dealer and that
any amount which would have otherwise been distributable
as a fractional share of such stock shall instead be
distributed to such dealer in cash.
3. The portion of the total patronage dividends
allocated each year to any such dealer for each
store owned or controlled by such dealer which
exceeds the sum of (a) the amount to be distributed
to such dealer for such store in cash pursuant to
Paragraph 1. above and (b) any amount to be
distributed to him in the form of shares of Class C
Non-voting Stock of Ace Hardware Corporation (par
value $100 per share) pursuant to Paragraph 2. above
shall be distributed to such dealer in cash;
provided, however, that in no event shall the total
amount distributed under this plan to any such
dealer for any such store in cash exceed 45% of the
total patronage dividends allocated for such store
for such year, and to the extent that any distribution
to be made to any such dealer for any store pursuant to
this Paragraph 3. would otherwise cause the total cash
distribution to such dealer for such store to exceed
45% of the total patronage dividends allocated for
such store for such year, the distribution to be made
under this Paragraph 3. shall instead be made in the
form of a non-negotiable patronage refund certificate
having such a maturity date and bearing interest
at such an annual rate as shall be determined by the
Board of Directors prior to the issuance thereof.
B. For purchases made between January 1, 1995-December 31,
1997,
1. with respect to each store owned or controlled by
each eligible and qualifying dealer, such dealer
shall receive a minimum cash distribution determined
as follows:
(a) an amount equal to 20% of the first $5,000 of
the total patronage dividends allocated for
distribution each year to such dealer in
connection with the purchases made for such
store;
(b) an amount equal to 25% of the portion of the
total patronage dividends allocated for
distribution each year to such dealer for
such store which exceeds $5,000 but does not
exceed $7,500;
(c) an amount equal to 30% of the portion of the
total patronage dividends allocated for
distribution each year to such dealer for
such store which exceed $7,500 but does not
exceed $10,000;
(d) an amount equal to 35% of the portion of the
total patronage dividends allocated for
distribution each year to such dealer for
such store which exceeds $10,000 but does not
exceed $12,500;
(e) an amount equal to 40% of the portion of the
total patronage dividends allocated for
distribution each year to such dealer for
such store which exceeds $12,500.
2. The portion of the total annual distribution
allocated to any such dealer for each store owned or
controlled by such dealer in excess of the amount to
be distributed to such dealer for such store in cash
shall be distributed to him each year in the form of
shares of Class C non-voting Stock of Ace Hardware
Corporation (par value $100 per share), valued at
the par value thereof, until the total par value of
all shares of all classes of capital stock of the
corporation held by such dealer with respect to
such store equals the greater of:
(a) $20,000; or
(b) a sum equal to the total of the following
categories of purchases made by such dealer
for such store during the most recent
calendar year:
(i) 15% of the volume of warehouse
(including STOP and excluding Ace
manufactured paint and related products)
and bulletin purchases, plus
(ii) 15% of the volume of Ace manufactured
paint and related products purchases,
plus
(iii)3% of the volume of drop-shipment or
direct purchases (excluding Ace manufactured
paint and related products),
plus
(iv) 4% of the volume of lumber and building
material (excluding LTL) purchases, plus
(v) 4% of the volume of LTL Plus purchases;
provided, however, that no fractional shares
of Class C non-voting Stock shall be issued
to any dealer and that any amount which would
have otherwise been distributable as a fractional
share of such stock shall instead be distributed
to such dealer in cash.
3. The portion of the total patronage dividends allocated each
year to any such dealer for each store owned or controlled
by such dealer which exceeds the sum of (a) the amount to
be distributed to such dealer for such store in cash pursuant
to Paragraph 1., above and (b) any amount to be distributed
to him in the form of shares of Class C non-voting Stock of
Ace Hardware Corporation (par value $100 per share) pursuant
to Paragraph 2. above shall be distributed to such dealer
in cash; provided, however, that in no event shall the total
amount distributed under this plan to any such dealer for
any such store in cash exceed 45% of the total patronage
dividends allocated for such store for such year, and to the
extent that any distribution to be made to any such dealer for
any store pursuant to this Paragraph 3. would otherwise cause
the total cash distribution to such dealer for such store to
exceed 45% of the total patronage dividends allocated for such
store for such year, the distribution to be made under this
Paragraph 3. shall instead be made in the form of a non-negotiable
patronage refund certificate having such a maturity date and
bearing interest at such an annual rate as shall be determined
by the Board of Directors prior to the issuance thereof.
With certain modifications, the above plans are applied separately in
determining the form in which patronage dividends accrued with respect to
sales of lumber and building materials products are distributed. In this
connection the combined patronage dividends allocated annually to a store
from (a) sales of lumber products (other than LTL sales), (b) sales of
building materials (other than LTL sales), (c) sales of millwork product
and (d) LTL sales to the store are used in determining the minimum cash
distribution percentages to be applied under Paragraph 1 of the above plans.
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 plans are applied separately to patronage
dividends on lumber and building materials sales and the requirements of
Paragraph 2 of the plans shall not be deemed to have been complied with in
the cases of (a) purchases of lumber products (other than LTL purchases),
(b) purchases of building materials products (other than LTL purchases) or
(c) purchases of millwork product until the store's holdings of Class C
non-voting Stock of the Company resulting from patronage dividends on the
Company's sales to it within the particular one of those two sales
categories for which a patronage dividend distribution is to be made equal
3% of the volume of the store's purchases within such category during the
most recent calendar year, subject to a maximum of lumber and building
materials capital stock requirement of $25,000 under the 1998 plan and 4% of
the volume of the store's purchases within such category during the most
recent applicable calendar year (not subject to a maximum lumber and building
materials capital stock requirement) under the 1995-1997 plan. However, no
such special Class C Stock requirement applies to patronage dividends accrued
on LTL purchases.
Notwithstanding the provisions of the above-described plans, however,
under Section 7 of Article XXIV of the Company's By-laws the portion of any
patronage dividends which would otherwise be distributable in cash with
respect to a retail dealer outlet which is a member of the Company will
instead be applied against any indebtedness owing by the dealer to the
Company to the extent of such indebtedness in any case where the membership
for such outlet is cancelled or terminated prior to the distribution of such
patronage dividends except that an amount equal to 20% of the dealer's total
annual patronage dividends for such outlet will be paid in cash if a timely
request for the payment of such amount in cash is submitted to the Company by
the dealer.
Because of the requirement of the U. S. Internal Revenue Code that the
Company withhold 30% of the annual patronage dividends distributed to member
dealers of the Company whose places of business are located in foreign
countries or Puerto Rico (except in the case of unincorporated Puerto Rico
dealers owned by individuals who are U.S. citizens and certain dealers
incorporated in Guam, American Samoa, the Northern Mariana Islands, or the
U.S. Virgin Islands, if less than 25% of its stock is owned by foreign
persons, and at least 65% of the Corporation's gross income for the last
three years has been effectively connected with the conduct of a trade or
business in such possession or in the United States), the cash portion of the
annual patronage dividends of such dealers shall in no event be less than 30%.
It is anticipated that the terms of any patronage refund certificates
issued pursuant to Paragraph 3. of the foregoing plans would include
provisions giving the Company a first lien thereon for the amount of any
indebtedness owing to it at any time by the owner of any such certificate and
provisions subordinating the certificates to all the rights and claims of
secured, general and bank creditors against the Company. It is further
anticipated that all such patronage refund certificates will have maturity
dates which will be no later than five years from the dates of issuance
thereof.
In order to aid the Company's dealers in acquiring and installing
standardized exterior signs identifying the retail stores operated by them as
member outlets supplied by the Company, the Board of Directors of the Company
has authorized a program under which a dealer may borrow from the Company
within a range of $100 to $20,000 per location the funds required for such
purpose. A dealer who obtains a loan under this program may either repay the
loan in twelve substantially equal payments billed on such dealer's regular
bi-weekly billing statement, or may execute a direction to have the portion
of the dealer's annual patronage dividends which would otherwise be
distributed under the above plan in a form other than cash from no more than
the next three annual distributions of such dividends applied toward payment
of the principal and interest on the loan.
In order to aid the Company's dealers in acquiring and installing PACE
and PAINTMAKER computer systems purchased from the Company and to finance
capital improvements, the Board of Directors of the Company has also
authorized programs under which the Company will finance, for qualified
dealers (but not to exceed 80% of the cost of any system), in the case of a
PAINTMAKER computer, within the range of $1,000 to $15,000 per location
repayable over a period of three (3) years, in the case of a PACE computer,
within the range of $5,000 to $50,000 per location repayable over a period of
five (5) years, for such purpose and in the case of capital improvements, up
to $2.00 per square foot of retail space repayable over a period of three (3)
years for such purpose. Dealers who obtain financing from the Company for
these purposes direct the Company, during the financing term, to first apply
toward the principal and interest due on such balances, the patronage
dividends which would otherwise be payable in the form of patronage refund
certificates for each year, and then to apply the patronage dividends which
would otherwise be payable for the same year in the form of the Company's
Class C stock.
The aforementioned signage, computer financing and store retrofit
programs may be revised or discontinued by the Board at any time.
Federal Income Tax Treatment of Patronage Dividends (See Previous Heading
"Opinions of Experts")
Both the shares of Class C non-voting Stock and the patronage refund
certificates used by the Company to pay patronage dividends that accrue to
its eligible and qualifying dealers constitute "qualified written notices of
allocation" within the meaning of that term as used in Sections 1381 through
1388 of the U.S. Internal Revenue Code, which specifically provide for the
income tax treatment of cooperatives and their patrons and which have been in
effect since 1963. The stated dollar amounts of such qualified written
notices of allocation must be taken into the gross income of each of the
recipients thereof for the taxable years in which such written notices of
allocation are received, notwithstanding the fact that the stated dollar
amounts may not be received in such taxable years.
In order for the Company to receive a deduction from its gross income
for federal income tax purposes for the amount of any patronage dividends
paid by it to a patron (that is, to one of its eligible and qualifying
dealers) in the form of qualified written notices of allocation, it is
necessary that the Company pay (or apply against indebtedness owing to the
Company by such patron in accordance with Section 7 of Article XXIV of the
Company's By-laws) not less than 20% of the total patronage dividends
distributable to such patron in cash and that the patron consent to having
the written notices of allocation, at their stated dollar amounts, included
in his gross income for the taxable year in which they are received by him.
It is also required under the Code that any patronage dividend distributions
deducted by the Company on its federal income tax return with respect to
business done by it with patrons during the year for which such deduction is
taken must be made to the Company's patrons within 8 months after the end of
such year.
Dealers who have become "members" of the Company by owning 1 share of
Class A Voting Stock are deemed under the U.S. Internal Revenue Code to have
consented to take any written notices of allocation distributed to them into
their gross income by their act of obtaining or retaining membership in the
Company and by having received from the Company a written notification of the
By-law provision providing that membership in the Company constitutes such
consent. In accordance with another provision in the Internal Revenue Code,
nonmember dealers who have subscribed for shares of the Company's stock will
also be deemed to have consented, by virtue of the consent provisions
included in their Subscription Agreements, to take any written notices of
allocation distributed to them into their gross income.
A dealer receiving a patronage refund certificate as part of the
dealer's patronage dividends in accordance with the last clause of Paragraph
3 of the patronage dividend distribution plan previously described under the
heading "The Company's Business," subheading, "Forms of Patronage Dividend
Distributions," may be deemed to have received interest income in the form of an
original issue discount to the extent of any excess of the face amount of the
certificate over the present value of the stated principal and interest
payments to be made by the Company under the terms of the certificate. Such
income would be taxable to the dealer ratably over the term of the
certificate under Section 7872(b) (2) of the U.S. Internal Revenue Code. The
present value for this purpose is to be determined by using a discount rate
equal to the applicable Federal rate in effect as of the day of issuance of
the certificate, compounded semi-annually.
The Company will be required to withhold for federal income tax on the
total patronage dividend distribution which is made to a payee who has not
furnished his taxpayer identification number to the Company or as to whom the
Company has notice of the fact that the number furnished to it is incorrect.
A cooperative organization may also be required to withhold on the cash
portion of each patronage dividend distribution made to a payee who becomes a
member of the cooperative if the payee fails to certify to the cooperative
that he is not subject to backup withholding. It is the opinion of counsel
for the Company that this provision is not applicable to any patronage
dividend distribution to a payee unless 50% or more of the total distribution
is made in cash. Since all of the Company's patronage dividends for a given
year are distributed at the same time and the Company's currently effective
patronage dividend plan does not permit any store which is a member of the
Company to receive more than 45% of its patronage dividends for the year in
the form of cash, it is said counsel's further opinion that such a
certification failure would ordinarily have no effect on the Company or any
of its dealers.
Patronage dividends distributed by a cooperative organization to its
patrons who are located in foreign countries or certain U. S. possessions
have been held to constitute fixed or determinable annual or periodic income
on which such patrons are required to pay a tax of 30% of the amount received in
accordance with the provisions of Sections 871(a)(1)(A) and 881(a) (1) of the
Internal Revenue Code, as do patronage dividends distributed to patrons which
are incorporated in Puerto Rico or who reside in Puerto Rico but have not
become citizens of the United States. With respect to its dealers who are
subject to such 30% tax, the Company is also obligated to withhold from
their patronage dividends and pay over to the U.S. Internal Revenue Service
an amount equal to the tax. The foregoing provisions do not apply to a
corporation organized in Guam, American Samoa, the Northern Mariana Islands,
or the U. S. Virgin Islands if less than 25% of its stock is owned by foreign
persons and at least 65% of its gross income for the last three years has
been effectively connected with the conduct of a trade or business in such
possession or in the United States.
The 20% minimum portion of the patronage dividends to be paid in cash to
a patron with respect to whom the Company is neither required to withhold 30%
of his total patronage dividend distribution nor permitted to apply such
minimum portion against indebtedness owing to it by him may be insufficient,
depending upon the income tax bracket of each individual patron, to provide
funds for the full payment of the federal income tax for which such patron
will be liable as a result of the receipt of the total patronage dividends
distributed to him during the year, including cash, patronage refund
certificates and/or Class C non-voting Stock.
In the opinion of the Company's management, payment in cash of not less
than 20% of the total patronage dividends distributable each year to the
Company's eligible and qualifying dealers will not have a material adverse
effect on the operations of the Company or its ability to obtain adequate
working capital for the normal requirements of its business.
Membership Agreement
In addition to signing a Subscription Agreement for the purchase of
shares of the Company's stock, each retail dealer who applies to become an
Ace dealer (excluding firms which are discussed below under the subheading
"International Retail Merchants") must sign the Company's customary Membership
Agreement. A payment of $400 must accompany the signed Membership Agreement
to defray the Company's estimated costs of processing the membership
application. If the application is accepted, copies of both the Membership
Agreement and the Stock Subscription Agreement, signed on behalf of the
Company to evidence its acceptance, are forwarded to the dealer. No royalties
are payable at any time by a dealer for an outlet which the Company accepts
as a member-shareholder. Membership may be terminated upon various notice
periods and for various reasons (including voluntary termination by either
party) as prescribed in the Membership Agreement, except to the extent that
special laws or regulations applicable to specific locations may limit the
Company's right to terminate memberships, or may prescribe greater periods of
advance notice under particular circumstances.
International Retail Merchants and Non-Member Accounts
In 1989, the Company's Board of Directors authorized the Company to
affiliate International Retail Merchants, who operate retail businesses
outside the United States, its territories and possessions. International
Retail Merchants do not sign the Company's regular Membership Agreement but
may, depending on the circumstances, be granted a license to use certain of
the Company's trademarks and service marks. They do not sign stock
subscription agreements or become shareholders of the Company, nor do they
receive distribution of patronage dividends. As of the end of fiscal years
1997, 1996 and 1995, International Retail Merchant volume accounted for
approximately 4% of the Company's total sales in each such year. In 1995, the
Company's Board of Directors authorized the Company to affiliate non-member
retail accounts, which are not entitled to membership in the cooperative, and
which therefore will neither own stock in the Company, nor receive patronage
dividends. (See Appendix A, Article XXV, Sections 3 and 4 of the By-laws
regarding International Retail Merchants and non-member accounts.) In 1996,
the Company commenced operations through Ace Canada, Limited. Ace Canada
merchants are not shareholders of the Company, nor do they receive
distribution of patronage dividends.
Year 2000
A detailed plan has been established to identify and track progress on
the identification of systems, changing of non-compliant systems and testing
of those systems for Year 2000 compliant status. The assessment to identify
the systems affected by the Year 2000 issue will be completed by the end of the
first quarter 1998. Project completion is planned for the middle of 1999. In
addition, a plan is being developed for all devices (time clocks, power
systems, etc.) within the Company. The Company expects its Year 2000 date
conversion project to be completed on a timely basis.
The Company expects to incur internal staff costs as well as incremental
consulting and other expenses related to infrastructure and facilities
enhancements necessary to prepare the systems for the Year 2000. A significant
portion of these costs will represent the re-deployment of existing
information technology resources. However, management has not yet fully
assessed the Year 2000 compliance expense.
To date, correspondence has been received from the Company's primary
vendors that plans are being developed to address processing of transactions
in the Year 2000. However, there can be no assurance that the systems of other
companies on which the Company's systems rely will be converted timely or that
any such failure to convert by another company would not have an adverse
effect on the Company's systems.
PROPERTIES
The Company's general offices are located at 2200 Kensington Court,
Oak Brook, lllinois 60523. Information with respect to the Company's
principal properties follows:
Square Feet Owned Lease
of Facility or Expiration
Location (Land in Acres) Leased Date
---------- --------------- -------- ----------
General Offices:
Oak Brook, Illinois 206,030 Leased September 30, 2009
Oak Brook, Illinois 70,508 Owned
Markham, Ontario, Canada(1) 15,372 Leased February 28, 2006
Distribution Warehouses:
Lincoln, Nebraska 346,000 Leased December 31, 2006
Arlington, Texas 313,000 Leased July 31, 2002
Perrysburg, Ohio 396,000 Leased November 1, 2004
Tampa, Florida 391,760 Owned
Harmans, Maryland 277,000 Owned
Yakima, Washington 502,400 Owned
Maumelle, Arkansas 585,500 Owned
LaCrosse, Wisconsin 363,000 Owned
Bloomfield, Connecticut (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
Carol Stream, Illinois (3) 250,000 Leased September 30, 1999
Chicago, Illinois (4) 18,168 Leased May 31, 1999
Brantford, Ontario, Canada(5) 434,000 Leased March 31, 2006
Baltimore, Maryland (6) 158,485 Leased March 31, 1998
Colorado Springs, Colorado 493,000 Owned
Wilton, New York 795,000 Leased September 1, 2007
Calgary, Alberta, Canada (5) 240,000 Leased December 31, 2001
Print Shop Facility:
Downers Grove, Illinois 41,000 Leased April 30, 2002
Paint Manufacturing Facilities:
Matteson, Illinois 356,000 Owned
Chicago Heights, Illinois 194,000 Owned
Other Property:
Aurora, Illinois 72 acres Owned
LaCrosse, Wisconsin (7) 3 acres Owned
(1) This facility is leased by the Company's wholly owned
subsidiary, Ace Hardware Canada, Limited for use as its
corporate office.
(2) This facility no longer operates as a distribution
warehouse and is for sale.
(3) This facility was leased by the Company in October,
1994, for use as a bulk merchandise redistribution
center.
(4) This facility was leased by the Company in June, 1994
for use as a freight consolidation center.
(5) This facility is leased by the Company's wholly owned
subsidiary, Ace Hardware Canada, Limited for use as a
distribution warehouse. The Brantford facility includes
80,000 square feet leased for a two-year period commencing
January 1, 1998 and expiring December 31, 2000.
(6) This facility was leased by the Company in February,
1995 for use as a redistribution center. The Company
does not intend to renew this lease.
(7) This land is adjacent to the Company's LaCrosse,
Wisconsin warehouse.
In addition to the above principal properties, the Company also leases
other property for the purpose of operating retail hardware stores through
its wholly owned subsidiaries, A.H.C. Store Development Corp. and Ace
Corporate Stores, Inc. A.H.C. Store Development Corp. leases two properties
in Illinois, one in Wisconsin, one in Michigan and two in Georgia. Ace
Corporate Stores, Inc. leases one property in Illinois. The Company is also
leasing real estate in Georgia for the purpose of operating a company-owned
retail hardware store. This location is under construction.
The Company also leases a fleet of transportation equipment for the
primary purpose of delivering merchandise from the Company's warehouses to
its dealers.
THIS PAGE INTENTIONALLY LEFT BLANK
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Independent Auditors' Report 34
Consolidated Balance Sheets as of
December 31, 1997 and 1996 35
Consolidated Statements of Earnings for the years
in the three-year period ended December 31, 1997 37
Consolidated Statements of Member Dealers' Equity
for each of the years in the three-year period
ended December 31, 1997 38
Consolidated Statements of Cash Flows for each of
the years in the three-year period ended
December 31, 1997 39
Notes to Consolidated Financial Statements 40
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Ace Hardware Corporation:
We have audited the accompanying consolidated balance sheets of Ace
Hardware Corporation and subsidiaries as of December 31, 1997 and 1996, and
the related consolidated statements of earnings, member dealers' equity and
cash flows for each of the years in the three-year period ended December 31,
1997. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Ace
Hardware Corporation and subsidiaries as of December 31, 1997 and 1996, and
the results of their operations and their cash flows for each of the years in
the three-year period ended December 31, 1997 in conformity with generally
accepted accounting principles.
KPMG PEAT MARWICK LLP
Chicago, Illinois
January 28, 1998
ACE HARDWARE CORPORATION
CONSOLIDATED BALANCE SHEETS
December 31, 1997 and 1996
ASSETS
1997 1996
--------- --------
(000's omitted)
Current assets:
Cash and cash equivalents $ 14,171 $ 12,657
Receivables:
Trade 320,166 305,742
Other 45,554 43,206
--------- ---------
365,720 348,948
Less allowance for doubtful receivables (2,086) (1,700)
--------- ---------
Net receivables 363,634 347,248
Inventories (Note 2) 338,509 327,145
Prepaid expenses and other current assets 12,873 11,880
--------- ---------
Total current assets 729,187 698,930
--------- ---------
Property and equipment (Note 9):
Land 17,480 17,464
Buildings and improvements 188,967 162,100
Warehouse equipment 66,330 57,246
Office equipment 71,578 71,689
Manufacturing equipment 15,312 13,132
Transportation equipment 13,686 14,609
Leasehold improvements 16,110 15,654
Construction in progress 6,686 12,501
--------- ---------
396,149 364,395
Less accumulated depreciation
and amortization (153,170) (150,861)
--------- ---------
Net property and equipment 242,979 213,534
Other assets 4,405 3,911
--------- ---------
$976,571 $916,375
========= =========
See accompanying notes to consolidated financial statements.
ACE HARDWARE CORPORATION
CONSOLIDATED BALANCE SHEETS
December 31, 1997 and 1996
LIABILITIES AND MEMBER DEALERS' EQUITY
1997 1996
--------- ---------
(000's omitted)
Current liabilities:
Current installments of
long-term debt (Note 4) $ 7,515 $ 6,727
Short-term borrowings (Note 3) 42,000 71,000
Accounts payable 423,499 394,070
Patronage dividends payable
in cash (Note 5) 29,943 28,178
Patronage refund certificates
payable (Note 5) 13,636 14,138
Accrued expenses 53,583 37,906
--------- ---------
Total current liabilities 570,176 552,019
Long-term debt (Note 4) 96,815 71,837
Patronage refund certificates
payable (Note 5) 49,044 49,639
Other long-term liabilities 14,722 9,517
--------- ---------
Total liabilities 730,757 683,012
--------- ---------
Member dealers' equity (Notes 5 and 8):
Class A Stock of $1,000 par value 3,874 3,937
Class B Stock of $1,000 par value 6,499 6,499
Class C Stock of $100 par value 213,609 196,742
Class C Stock of $100 par value,
issuable to dealers for
patronage dividends 22,366 26,474
Additional stock subscribed, net 383 502
Retained earnings 3,354 3,120
Contributed capital 3,295 3,295
--------- ---------
253,380 240,569
Less: Treasury stock, at cost (7,566) (7,206)
--------- ---------
Total member dealers' equity 245,814 233,363
Commitments (Notes 6 and 9) --------- ---------
$976,571 $916,375
========= =========
See accompanying notes to consolidated financial statements.
ACE HARDWARE CORPORATION
CONSOLIDATED STATEMENTS OF EARNINGS
Year Ended December 31,
---------------------------------------
1997 1996 1995
----------- ----------- -----------
(000's omitted)
Net sales $2,907,259 $2,742,451 $2,436,012
Cost of sales 2,682,863 2,535,014 2,253,430
----------- ----------- -----------
Gross profit 224,396 207,437 182,582
----------- ----------- -----------
Operating expenses:
Warehouse and distribution 39,292 36,658 29,849
Selling, general and
administrative 72,218 67,661 59,772
Retail success and development 25,573 21,644 18,596
----------- ----------- -----------
Total operating expenses 137,083 125,963 108,217
----------- ----------- -----------
Operating income 87,313 81,474 74,365
Interest expense (Note 11) (14,751) (11,855) (13,137)
Other income, net 5,735 3,806 3,715
Income taxes (Note 7) (1,910) (1,118) (1,201)
----------- ----------- -----------
Net earnings $ 76,387 $ 72,307 $ 63,742
=========== =========== ===========
Retained earnings at
beginning of year $ 3,120 $ 4,650 $ 5,624
Net earnings 76,387 72,307 63,742
Patronage dividends
(Notes 5 and 8) (76,153) (73,837) (64,716)
----------- ----------- -----------
Retained earnings at
end of year $ 3,354 $ 3,120 $ 4,650
=========== =========== ===========
See accompanying notes to consolidated financial statements.
ACE HARDWARE CORPORATION
CONSOLIDATED STATEMENTS OF MEMBER DEALERS EQUITY
Three Years Ended December 31, 1997
(000 s omitted)
Class C Stock
Issuable to
Dealers for Additioal
Class A Class B Class C Patronage Stock
Stock Stock Stock Dividends Subscribed
-------- ------- ------- --------- ----------
Balance at December 31, 1994 $3,924 $6,499 $164,666 $21,766 $ 555
Net Earnings - - - - -
Net payments on subscriptions - - - - 1,580
Patronage financing deductions - - - (15) -
Stock issued 237 - 23,149 (21,751) (1,620)
Stock repurchased - - - - -
Stock retired (256) - (9,998) - -
Stock issuable as
patronage dividends - - - 27,506 -
Patronage dividends payable - - - - -
-------- ------- -------- -------- ----------
Balance at December 31, 1995 $3,905 $6,499 $177,817 $27,506 $ 515
Net earnings - - - - -
Net payments on subscriptions - - - - 1,603
Patronage financing deductions - - - (43) -
Stock issued 268 - 28,854 (27,463) (1,616)
Stock repurchased - - - - -
Stock retired (236) - (9,929) - -
Stock issuable as
patronage dividends - - - 26,474 -
Patronage dividends payable - - - - -
-------- ------- -------- -------- ----------
Balance at December 31, 1996 $3,937 $6,499 $196,742 $26,474 $ 502
Net earnings - - - - -
Net payments on subscriptions - - - - 2,906
Patronage financing deductions - - - (119) -
Stock issued 236 - 29,263 (26,355) (3,025)
Stock repurchased - - - - -
Stock retired (299) - (12,396) - -
Stock issuable as
patronage dividends - - - 22,366 -
Patronage dividends payable - - - - -
-------- ------- --------- -------- ----------
Balance at December 31, 1997 $3,874 $6,499 $213,609 $22,366 $ 383
======== ======= ========= ======== ==========
Retained Contributed Treasury
Earnings Capital Stock Total
---------- -------- -------- --------
Balance at Decenber 31, 1994 $ 5,624 $3,295 $(6,502) $199,827
Net Earnings 63,742 - - 63,742
Net Payments on subscriptions - - - 1,580
Patronage financing deductions - - - (15)
Stock Issued - - - 15
Stock repurchased - - (10,694) (10,694)
Stock retired - - 10,254 -
Stock issuable as
patronage dividends - - - 27,506
Patronage dividends payable (64,716) - - (64,716)
--------- --------- -------- --------
Balance at December 31, 1995 $ 4,650 $3,295 $(6,942) $217,245
Net Earnings 72,307 - - 72,307
Net payments on subscriptions - - - 1,603
Patronage financing deductions - - - (43)
Stock issued - - - 43
Stock repurchased - - (10,429) (10,429)
Stock retired - - 10,165 -
Stock issuable as
patronage dividends - - - 26,474
Patronage dividends payable (73,837) - - (73,837)
--------- --------- -------- --------
Balance at December 31, 1996 $ 3,120 $3,295 $(7,206) $233,363
Net earnings 76,387 - - 76,387
Net payments on subscriptions - - - 2,906
Patronage financing deductions - - - (119)
Stock issued - - - 119
Stock repurchased - - (13,055) (13,055)
Stock retired - - 12,695 -
Stock issuable as
patronage dividends - - - 22,366
Patronage dividends payable (76,153) - - (76,153)
---------- --------- -------- --------
Balance at December 31, 1997 $ 3,354 $3,295 $(7,566) $245,814
========== ========= ======== ========
*Additional stock subscribed is comprised of the following amounts at
December 31, 1995, 1996 and 1997:
1995 1996 1997
------ ------ ------
Class A Stock $ 332 $ 337 $ 387
Class B Stock - - -
Class C Stock 2,332 2,450 2,329
------ ------ ------
2,664 2,787 2,716
Less unpaid portion 2,149 2,285 2,333
------ ------ ------
$ 515 $ 502 $ 383
====== ====== ======
See accompanying notes to consolidated financial statements.
ACE HARDWARE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
----------------------------------
(000's omitted)
Operating Activities: 1997 1996 1995
--------- --------- ---------
Net Earnings $76,387 $72,307 $63,742
Adjustments to reconcile
net earnings to net cash
provided by operating activities:
Depreciation 19,494 17,517 16,837
Loss on sale of property
and equipment 285 712 3
Increase in accounts
receivable, net (16,386) (60,170) (27,526)
Decrease (increase) in
inventories (11,364) (72,694) 15,940
Increase in prepaid
expenses and
other current assets (993) (2,556) (2,135)
Increase in accounts payable
and accrued expenses 45,106 64,616 41,860
Increase in other long-term
liabilities 5,205 4,066 1,107
Net Cash Provided by ---------- --------- -----------
Operating Activities 117,734 23,798 109,828
---------- --------- -----------
Investing Activities:
Purchase of property
and equipment (49,373) (40,379) (31,263)
Proceeds from sale of
property and equipment 149 120 27
Decrease (increase) in
other assets (494) 12 579
--------- -------- --------
Net Cash Used in
Investing Activities (49,718) (40,247) (30,657)
--------- -------- --------
Financing Activities:
Proceeds (payments) of
short-term borrowings (29,000) 58,000 (17,000)
Proceeds from notes payable 32,994 20,853 -
Payments on long-term debt (7,228) (7,462) (6,483)
Payment of cash portion
of patronage dividend (28,178) (23,522) (27,302)
Payments of patronage
refund certificates
and patronage financing
deductions (24,941) (22,790) (11,287)
Proceeds from sale of
common stock 2,906 1,603 1,580
Repurchase of common stock (13,055) (10,429) (10,694)
--------- --------- ---------
Net Cash Provided by
(Used in) Financing
Activities (66,502) 16,253 (71,186)
-------- --------- --------
Increase (Decrease) in Cash and
Cash Equivalents 1,514 (196) 7,985
Cash and Cash Equivalents at
beginning of year 12,657 12,853 4,868
-------- -------- --------
Cash and Cash Equivalents at
end of year $14,171 $12,657 $12,853
======== ======== ========
See accompanying notes to consolidated financial statements.
ACE HARDWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Summary of Significant Accounting Policies
(a) The Company and Its Business
Ace Hardware Corporation (the Company) operates as a wholesaler of
hardware and related products and manufactures paint products. As a dealer-
owned cooperative, the Company distributes substantially all of its patronage
sourced earnings in the form of patronage dividends to member dealers based on
their volume of merchandise purchases. The accompanying consolidated
financial statements include the accounts of the Company and subsidiaries,
all of which are wholly-owned. All significant intercompany transactions have
been eliminated.
(b) Cash Equivalents
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents.
(c) Receivables
Receivables from dealers include amounts due from the sale of
merchandise and special equipment used in the operation of dealers'
businesses. Other receivables are principally amounts due from suppliers for
promotional and advertising allowances.
(d) Inventories
Inventories are valued at the lower of cost or net realizable value.
Cost is determined primarily using the last-in, first-out method.
(e) Property and Equipment
Property and equipment are stated at cost less accumulated depreciation
and amortization. Expenditures for maintenance, repairs and renewals of
relatively minor items are generally charged to earnings. Significant
improvements or renewals are capitalized.
Depreciation expense is computed on both straight-line and accelerated
methods based on estimated useful lives as follows:
Useful Life Principal
Years Depreciation Method
----------- -------------------
Buildings and improvements 10-40 Straight line
Warehouse equipment 5-10 Accelerated
Office equipment 3-10 Various
Manufacturing equipment 3-20 Straight line
Transportation equipment 3-7 Straight line
Leasehold improvements are generally amortized on a straight-line basis
over the term of the respective lease.
(f) Foreign Currency Translation
Substantially all assets and liabilities of foreign operations are
translated at the rate of exchange in effect at the balance sheet date while
revenues and expenses are translated at the average monthly exchange rates
prevailing during the year. The Company has utilized foreign exchange forward
contracts to hedge non-U.S. equity investments. Foreign currency translation
adjustments were insignificant in 1997 and 1996.
ACE HARDWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(g) Financial Instruments
The carrying value of assets and liabilities that meet the definition of
a financial instrument included in the accompanying Consolidated Balance
Sheets approximate fair value. The fair market value of foreign exchange
forward contracts approximates carrying cost at December 31, 1997 and 1996.
(h) Retirement Plans
The Company has retirement plans covering substantially all non-union
employees. Costs with respect to the noncontributory pension plans are
determined actuarially and consist of current costs and amounts to amortize
prior service costs and unrecognized gains and losses. The Company
contribution under the profit sharing plan is determined annually by the
Board of Directors.
(i) Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
(j) Reclassifications
Certain financial statement reclassifications have been made to prior
year amounts to conform to comparable classifications followed in 1997.
(2) Inventories
Inventories consist primarily of merchandise inventories. Substantially
all of the Company's domestic inventories are valued on the last-in, first-out
(LIFO) method; the excess of replacement cost over the LIFO value of
inventory was approximately $67,151,000 and $69,867,000 at December 31, 1997
and 1996, 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 1997 and 1996. The maximum
amount outstanding at any month-end during the period was $113.0 million in
1997 and $97.5 million in 1996. The weighted average interest rate effective
as of December 31, 1997 and 1996 was 6.60% and 7.13%, respectively. Short-term
borrowings outstanding as of December 31, 1997 and 1996 were $42.0 million
and $71.0 million, respectively. At December 31, 1997 the Company has
available a revolving credit facility with a group of banks providing for
$100 million in committed lines and also has available $75 million in
uncommitted lines. The aggregate unused line of credit available at December
31, 1997 and 1996 was $133 million and $109 million, respectively. At
December 31, 1997 the Company had no compensating balance requirements.
ACE HARDWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(4) Long-Term Debt
Long-term debt is comprised of the following:
December 31,
--------------------------
1997 1996
------------ ----------
(000's omitted)
Notes Payable:
$20,000,000 due in quarterly installments
of $540,500 with interest payable
quarterly at a fixed rate of 8.74% $12,432 $14,595
$20,000,000 due in quarterly installments
of $952,400 with interest payable
quarterly at a fixed rate of 6.89% 8,571 12,381
$30,000,000 due in semi-annual installments
of $2,000,000 commencing June 22, 2001
with interest payable quarterly at
a fixed rate of 6.47% 30,000 30,000
$20,000,000 due in quarterly installments
of $714,300 commencing September 15,
2004 with interest payable quarterly
at a fixed rate of 7.49% 20,000 20,000
$30,000,000 due in annual installments
of $6,000,000 commencing March 25, 2005
with interest payable quarterly
at a fixed rate of 7.55% 30,000 -
Liability under capitalized leases (see Note 9) 2,171 664
Installment notes with maturities through 2001
with various interest rates 1,156 924
-------- --------
104,330 78,564
Less current installments 7,515 6,727
-------- --------
$96,815 $71,837
======== ========
Aggregate maturities of long-term debt are $7,515,000, $7,092,000,
$3,657,000, $6,282,000 and $6,162,000 in 1998 through 2002, respectively,
and $73,622,000 thereafter.
(5) Patronage Dividends and Refund Certificates Payable
The Company operates as a cooperative organization and has paid or will
pay patronage dividends to member dealers on the portion of earnings derived
from business done with such dealers. Patronage dividends are allocated in
proportion to the volume of purchases by member dealers during the period.
The amount of patronage dividends to be remitted in cash depends upon the
level of dividends earned by each member outlet, varying from 20% on the
total dividends under $5,000 and increasing by 5% on total dividends for each
subsequent $2,500 earned to a maximum of 40% on total dividends exceeding
$12,500. All amounts exceeding the cash portions will be distributed in the
form of Class C $100 par value stock, to a maximum based upon the current
year purchase volume or $20,000 whichever is greater, and thereafter in a
combination of additional cash and patronage refund certificates having
maturity dates and bearing interest as determined by the Board of Directors.
A portion of the dealer's annual patronage dividends distributed under the
above plan in a form other than cash can be applied toward payment of
principal and interest on any balances outstanding for approved exterior
signage, computer equipment and store retrofit financing.
ACE HARDWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
The patronage dividend composition for 1997, 1996 and 1995 follows:
Subordinated Class Patronage Total
Cash Refund C Financing Patronage
Portion Certificates Stock Deductions Dividend
------- ------------ ----- ---------- ---------
(000's omitted)
1997 $29,943 $13,726 $22,366 $10,118 $76,153
1996 28,178 9,500 26,474 9,685 73,837
1995 23,522 5,032 27,506 8,656 64,716
Patronage dividends are allocated on a calendar year basis with
issuance in the following year.
The patronage refund certificates outstanding or issuable at December 31,
1997 are payable as follows:
Interest
January 1, Amount Rate
--------- -------------- --------
(000's omitted)
1998 $13,636 6.00%
1999 11,377 6.00
2000 9,415 7.00
2001 5,079 6.00
2002 9,447 6.25
2003 13,726 6.00
(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, 1997 plan assets were held primarily in equities, mutual funds and
group annuity contracts.
Pension expense for the years 1997, 1996 and 1995 included the following
components:
1997 1996 1995
-------- -------- --------
(000's omitted)
Service cost - benefits earned
during the period $ 358 $ 72 $ 355
Interest cost on projected
benefit obligation 351 486 845
Actual return on plan assets (1,820) (786) (2,288)
Net amortization and deferral 1,243 292 1,257
-------- -------- --------
Net periodic pension expense $ 132 $ 64 $ 169
======== ======== ========
In 1995 and 1996, the plan settled a portion of the liability to
retirees and vested terminated participants through lump sum payments and the
purchase of single premium annuity contracts. In addition to the net periodic
pension expense, the Company recognized a net loss of $475,000 and $1,380,000
in 1996 and 1995, respectively, related to this settlement.
ACE HARDWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
The following table sets forth the funded status of the plans and
amounts recognized in the Company's Consolidated Balance Sheet at December
31, 1997 and 1996 (December 31st measurement date):
1997 1996
-------- ---------
(000's omitted)
Accumulated benefit obligation,
including vested benefits of
$4,072,000 and $3,953,000 $4,305 $4,189
======== ========
Plan assets at fair value $9,122 $7,965
Projected benefit obligation for
service rendered to date 5,041 4,814
-------- --------
Plan assets in excess of projected
benefit obligation $4,081 $3,151
Unrecognized net gain from past
experience different from that
assumed and effects of changes
in assumptions (2,661) (1,538)
Remaining unrecognized net asset
being amortized over participants
average remaining service period (784) (845)
-------- --------
Prepaid pension cost included in
other assets $ 636 $ 768
======== ========
The weighted average discount rate used in determining the actuarial
present value of the projected benefit obligation was 7.25% in 1997 and 7.5%
in 1996. The related expected long-term rate of return was 8.0% in 1997 and
1996. The rate of increase in future compensation was projected using
actuarial salary tables plus 1.0% in 1997 and 1996.
The Company also participates in several multi-employer plans covering
union employees. Amounts charged to expense and contributed to the plans
totaled approximately $225,000, $265,000 and $275,000 in 1997, 1996 and
1995, respectively.
The Company's profit sharing plan contribution for the years ended 1997,
1996 and 1995 was approximately $12,240,000, $11,357,000 and $9,902,000,
respectively.
(7) Income Taxes
As a cooperative, the Company distributes substantially all of its
patronage sourced earnings to its members in the form of patronage dividends.
The 1997, 1996 and 1995 provisions for federal income taxes were $1,501,000,
$860,000 and $939,000, respectively, and for state income taxes were
$409,000, $258,000 and $262,000, respectively.
The Company made tax payments of $2,807,000, $1,524,000 and $1,625,000
during 1997, 1996 and 1995, respectively.
ACE HARDWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(8) Member Dealers' Equity
The Company's classes of stock are described below:
Number of Shares
at December 31,
-----------------------
1997 1996
----------- ----------
Class A Stock, voting, redeemable
at par value -
Authorized 10,000 10,000
Issued and outstanding 3,874 3,937
Class B Stock, nonvoting, redeemable
at not less than twice par value-
Authorized 6,500 6,500
Issued 6,499 6,499
Outstanding 2,716 2,896
Treasury stock 3,783 3,603
Class C Stock, nonvoting, redeemable
at not less than par value -
Authorized 4,000,000 4,000,000
Issued and outstanding 2,136,085 1,967,420
Issuable as patronage dividends 223,660 264,740
Additional Stock Subscribed:
Class A Stock 387 337
Class B Stock - -
Class C Stock 23,920 24,500
At December 31, 1997 and 1996 there were no common shares reserved for
options, warrants, conversions or other rights; nor were any options granted
or exercised during the two years then ended.
Member dealers may subscribe for the Company's stock in various
prescribed combinations. Only one share of Class A Stock may be owned by a
dealer with respect to the first member retail outlet controlled by such
dealer. Only four shares of Class B Stock may be owned by a dealer with
respect to each retail outlet controlled by such dealer, but only if such
outlet was a member of the Company on or before February 20, 1974. An
appropriate number of shares of Class C Stock must be included in any
subscription by a dealer in an amount to provide that such dealer has a par
value of all shares subscribed for equal to $5,000 for each retail outlet.
Unregistered shares of Class C Stock are also issued to dealers in connection
with patronage dividends. No dividends can be declared on any shares of any
class of the Company's Stock.
Upon termination of the Company's membership agreement with any retail
outlet, all shares of stock of the Company, held by the dealer owning or
controlling such outlet, must be sold back to the Company, unless a transfer
of such shares is made to another party accepted by the Company as a member
dealer with respect to the same outlet.
ACE HARDWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
A Class A share is issued to a member dealer only when the share
subscribed has been fully paid. Class B and Class C shares are only issued
when all such shares subscribed with respect to a retail outlet have been
fully paid. Additional Stock Subscribed in the accompanying statements
represents the par value of shares subscribed, reduced by the unpaid portion.
All shares of stock are currently issued and repurchased at par value,
except for Class B Stock which is repurchased at twice its par value, or
$2,000 per share. Upon retirement of Class B shares held in treasury, the
excess of redemption price over par is allocated equally between contributed
capital and retained earnings.
Transactions during 1995, 1996 and 1997 affecting treasury shares follow:
Shares Held in Treasury
---------------------------------
Class A Class B Class C
------- ------- ---------
Balance at December 31, 1994 - 3,251 -
Stock issued - - -
Stock repurchased 256 220 99,975
Stock retired (256) - (99,975)
------- ------- ---------
Balance at December 31, 1995 - 3,471 -
Stock issued - - -
Stock repurchased 236 132 99,290
Stock retired (236) - (99,290)
------- ------- ---------
Balance at December 31, 1996 - 3,603 -
Stock issued - - -
Stock repurchased 299 180 123,964
Stock retired (299) - (123,964)
------- ------- ---------
Balance at December 31, 1997 - 3,783 -
======= ======= =========
(9) Commitments
Leased property under capital leases is included as "Property and
Equipment" in the consolidated balance sheets as follows:
December 31,
--------------------
1997 1996
-------- -------
(000's omitted)
Buildings and improvements $ - $3,422
Data processing equipment 3,633 1,783
Less: accumulated depreciation
and amortization (1,506) (4,678)
-------- -------
$2,127 $ 527
======== =======
ACE HARDWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
The Company rents buildings and warehouse, office and certain other
equipment under capital and operating leases. At December 31, 1997 annual
minimum rental commitments under leases that have initial or remaining
noncancelable terms in excess of one year are as follows:
Year Ending
December 31, Capital Operating
------------ --------- -----------
(000's omitted)
1998 $1,170 $17,372
1999 832 15,648
2000 257 12,831
2001 - 10,613
2002 - 7,697
Thereafter - 25,674
--------- ----------
Total minimum lease payments 2,259 $89,835
Less amount representing interest 88 ==========
---------
Present value of total minimum
lease payments $ 2,171
=========
All leases expire prior to 2010. Under certain leases, the Company pays
real estate taxes, insurance and maintenance expenses in addition to rental
expense. Management expects that in the normal course of business, leases
that expire will be renewed or replaced by other leases. Rent expense was
approximately $33,343,000, $29,747,000 and $25,024,000 in 1997, 1996 and
1995, respectively. Rent expense includes $5,956,000, $5,503,000 and
$4,724,000 in contingent rentals paid in 1997, 1996 and 1995, respectively,
primarily for transportation equipment mileage.
(10) Media Expense
The Company expenses media costs the first time the advertising takes
place. Gross media expense, prior to income offsets from dealers and
suppliers, amounting to $65,013,000, $64,551,000 and $58,963,000 was charged
to operations in 1997, 1996 and 1995, respectively.
(11) Interest Expense
Interest paid was $15,281,000, $12,481,000 and $13,631,000 in 1997, 1996
and 1995, respectively, net of capitalized interest of $1,022,000, $523,000
and $497,000.
ACE HARDWARE CORPORATION
SELECTED FINANCIAL DATA
Income Statement Data:
For The Years Ended December 31,
----------------------------------------------------------
1997 1996 1995 1994 1993
------ ------ ------ ------ ------
(000's omitted)
Net sales $2,907,259 $2,742,451 $2,436,012 $2,326,115 $2,017,763
Cost of sales 2,682,863 2,535,014 2,253,430 2,152,322 1,866,768
---------- ---------- ---------- ---------- ----------
Gross profit 224,396 207,437 182,582 173,793 150,995
Total expenses 148,009 135,130 118,840 109,271 93,903
---------- ---------- ---------- ---------- ----------
Net earnings $ 76,387 $ 72,307 $ 63,742 $ 64,522 $ 57,092
========== ========== ========== ========== ==========
Patronage dividends
(Notes A,B,5 and 8) $ 76,153 $ 73,837 $ 64,716 $ 64,520 $ 59,023
========= ========== ========== ========== ==========
Balance Sheet Data:
Year Ended December 31,
------------------------------------------------
1997 1996 1995 1994 1993
------ ------ ------ ------ ------
(000's omitted)
Total assets $976,571 $916,375 $759,133 $723,610 $666,022
Working capital 159,011 146,911 139,805 150,514 138,652
Long-term debt 96,815 71,837 57,795 64,287 71,286
Patronage refund certificates
payable, long-term 49,044 49,639 54,741 63,666 56,270
Member dealers' equity 245,814 233,363 217,245 199,827 186,028
(A) The Company operates as a cooperative organization, and pays
patronage dividends to member dealers on earnings derived
from business done with such dealers. It is the practice of
the Company to distribute substantially all patronage sourced
earnings in the form of patronage dividends.
(B) The form in which patronage dividends are to be distributed
can only be determined at the end of each year when the
amount distributable to each of the member dealers is known.
For the five years ended December 31, 1997, patronage
dividends were payable as follows:
1997 1996 1995 1994 1993
------- ------- ------- ------- -------
(000's omitted)
In cash $29,943 $28,178 $23,522 $27,302 $25,766
In patronage refund
certificates payable 13,726 9,500 5,032 9,920 12,728
In Class C Stock 22,366 26,474 27,506 21,766 19,064
In patronage financing
deductions 10,118 9,685 8,656 5,532 1,465
------- ------- ------- ------- -------
Total patronage dividends $76,153 $73,837 $64,716 $64,520 $59,023
======= ======= ======= ======= =======
(C) Numbered notes refer to Notes to Consolidated Financial Statements,
beginning on page 40.
(5) & (8) Refers to Notes 5 and 8 of the consolidated financial statements
beginning on page 40 of this Form S-2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Liquidity and Capital Resources
The Company's ability to generate cash adequate to meet its needs
("liquidity") results from internally generated funds, short-term lines of
credit and long-term financing (see Notes 3 and 4 to the financial statements).
The Company's long and short-term liquidity is dependent on retail
growth as described under the "Company's Business." Nothing in the Company's
plans as discussed under the "Company's Business" has led or is expected to
lead to any material change in pricing, margins or product focus or is
expected to materially impact the results or operations or liquidity of the
Company. The Company's long-term strategic plan is only for a renewed focus on
supporting retail growth. Retail growth provides equity growth for the
Company. Recognizing the need for equity growth in order to properly
capitalize the Company, the patronage stock formula for years beginning in
1995 was changed. See "Forms of Patronage Dividend Distributions." The
Company believes that these changes and the retail growth of the membership
will provide adequate liquidity for the long-term.
The Company has an established, unsecured revolving credit facility with
a group of banks. The Company has unsecured lines of credit of $175.0 million
of which $133.0 million was available at December 31, 1997. Any borrowings
under these lines of credit would bear interest at the prime rate or less.
Long-term financings are arranged as determined necessary to meet the
Company's capital or other requirements, with principal amount, timing and
form dependent on prevailing debt markets and general economic conditions.
The Company's credit facilities provide that certain ratios be maintained
with the only material convenant related to fixed charge coverage. The
Company is in compliance with all debt covenants.
Capital expenditures for new and improved facilities were $49.4, $40.4
and $31.3 million in 1997, 1996 and 1995, respectively. During 1997, the
Company financed the $49.4 million of capital expenditures out of current and
accumulated internally generated funds and short-term and long-term
borrowings. 1998 capital expenditures are anticipated to be approximately
$32.0 million primarily for improvements to existing facilities.
As a cooperative, the Company distributes substantially all of its
patronage sourced earnings to its members in the form of patronage dividends,
which are deductible for income tax purposes (see headings "Patronage
Dividend Determinations and Allocations" and "Federal Tax Treatment of
Patronage Dividends"). Prior to 1994, patronage dividends were distributed on
the basis of taxable income. Accordingly, patronage dividends can exceed net
income or be less than net income due to the timing of certain items for
income tax purposes. The Board of Directors does have the authority to
determine reasonable reserves for purposes of ensuring the welfare of the
Company, but it has been the practice of the Company to distribute
substantially all patronage sourced earnings in the form of patronage
dividends.
No adverse trends in revenue or net income have occurred since the end
of the Company's last reported financial period. The Company expects that
existing and new internally generated funds, along with established lines of
credit and long-term financing, will continue to be sufficient to finance the
Company's working capital requirements and patronage dividend and capital
expenditure programs.
Operations-1997 Compared to 1996
Net sales increased 6% due to increases in existing retailer volume,
targeted efforts on new store development and conversions, and a full year of
Canadian operations. Sales of basic hardware and paint merchandise (including
warehouse, bulletin and direct shipments) increased 5.1% while lumber and
building material sales increased 10.3% due to accelerated sales efforts.
Excluding Canadian operations, international sales increased 27.5% primarily
due to new international store development.
Gross profit increased $17.0 million or 8.2% and increased as a percent
of sales to 7.72% vs. 7.56% in 1996. Domestic gross profit as a percent of
sales increased over 1996 due to increased manufacturing gross profit and
additional company-owned stores. Canadian operations also contributed to the
increased gross profit due to a full year of operation.
Warehouse and distribution expenses increased $2.6 million or 7.2% due
to the operation of one additional domestic facility and two Canadian
facilities in 1997. The replacement of an existing facility also contributed
to the increase, partially offset by increased traffic revenues.
Selling, general and administrative expenses increased $4.6 million or
6.7% due to increased data processing costs and additional costs for a full
year of Canadian operations. Excluding Canadian operations, selling, general and
administrative expenses increased 4.8% and decreased slightly as a percent of
sales resulting from continued cost containment and re-engineering efforts.
Retail success and development expenses increased $3.9 million or 18.2%
due to increased new business development costs, reduced retail systems
income and costs associated with additional company-owned stores. Increases
in this category are directly related to retail support of the Ace retailer
as the Company continues to make investments in our dealer base.
Paint Division sales increased 5.0% to $108.3 million. As a separate
division of the Company, the Paint Division produced net manufacturing
profits of $11.3 million in 1997 vs. $8.3 million in 1996. The increased net
manufacturing profit results from the 5.0% sales increase and resulting gross
margin and improved utilization of the Company's second facility. Paint is
the only product manufactured by the Company. As discussed on page 9,
patronage dividends are calculated separately for paint sales and increased
to 10.31% in 1997 vs. 7.98% in 1996.
Interest expense increased $2.9 million due to increased borrowings for
the addition of a new facility in 1996 and 1997 and additional dealer dating
programs. Other income increased due to increased past due service charges
and reduced losses from the sale of property and equipment. Income taxes
increased $792,000 due to improved profitability of the company's non-patronage
operations.
Operations-1996 Compared to 1995
Net sales increased 12.6% due to increases in existing retailer volume,
targeted efforts on new store development and conversions, and the start-up
of Canadian operations. 1996 domestic same store sales increased 9.8% due to
retailer store upgrades and continued emphasis on retail success. Sales of
basic hardware and paint merchandise (including warehouse, bulletin and
direct shipments) increased 11.6%. Lumber and building material sales
experienced slightly higher percentage increases in 1996 due to accelerated
sales efforts and industry-wide lumber price increases. Net dealer outlets
increased in 1996 due to targeted sales efforts on new store development and
conversions to the Ace program and continued emphasis on retail success.
Gross profit increased $24.9 million or 13.6% and increased as a percent
of sales to 7.56% vs. 7.50% in 1995 due primarily to gross profit from
Canadian operations. Domestic gross profit as a percent of sales is
comparable to 1995 as higher merchandise discounts and allowances were
completely offset by lower levels of dealer price increases in 1996.
Emphasis on low upfront pricing continued with total upfront rebates
increasing 16.9% in 1996.
Warehouse and distribution expenses increased $6.8 million or 22.8% due
to start-up costs for the opening of one domestic and two Canadian facilities
in 1996. Excluding Canadian operations, warehouse and distribution expenses
increased 13.6% and increased slightly as a percent of sales due to wage
increases to support the sales growth and start-up costs for the new facility.
Selling, general and administrative expenses increased $7.9 million or
13.2% due to personnel costs for the start-up operations and increased data
processing expenses. Excluding Canadian operations, selling, general and
administrative expenses increased 7.5% and declined as a percent of sales
due to reduced corporate administrative expenses resulting from 1996
re-engineering efforts.
Retail success and development expenses increased $3.0 million or 16.4%
due to increased new business development costs, increased retail training
expenses and reduced retail systems income. Increases in this category are
directly related to retail support of the Ace retailer as the Company
continues to make investments in our dealer base.
Paint Division sales increased 16.5% to $103.1 million. As a separate
division of the Company, the Paint Division produced net manufacturing
profits of $8.3 million in 1996 vs. $5.8 million in 1995. The increased net
manufacturing profit results from the 16.5% sales increase and resulting
gross margin and improved utilization of the Company's second facility
partially offset by increased 1996 advertising expenses. Paint is the only
product manufactured by the Company. As discussed on page 23, patronage
dividends are calculated separately for paint sales and increased to 7.98% in
1996 vs. 6.87% in 1995.
Interest expense decreased $1.3 million or 9.8% due to lower inventory
levels resulting from improved inventory turnover in 1996. Additional dealer
dating programs and long-term debt to fund 1996 capital investments partially
offset the interest expense decline.
Impact of New Accounting Standards
In June, 1997, the FASB issued Statement of Financial Accounting
Standards ("SFAS") No. 130, "Reporting Comprehensive Income," which requires
the prominent display of comprehensive income and its components in the
financial statements. The Company is required to comply with SFAS No. 130 in
fiscal year 1998 and estimates its adoption will not have a material effect
on the consolidated financial statements.
In June, 1997, the FASB issued SFAS No. 131, "Disclosures About Segments
of an Enterprise and Related Information." SFAS No. 131 establishes standards
for reporting information about operating segments in annual financial
statements. The Company is required to comply with SFAS No. 131 in fiscal year
1998 and estimates its adoption will not have a material effect on the
consolidated financial statements.
Inflation and Changes in Prices
The Company's business is not generally governed by contracts that
establish prices substantially in advance of the receipt of goods or
services. As vendors increase their prices for merchandise supplied to the
Company, the Company increases the price to its dealers in an equal amount
plus the normal handling charge on such amounts. In the past, these increases
have provided adequate gross profit to offset the impact of inflation on
operating expenses.
MANAGEMENT
The directors and the executive officers of the Company are:
Name Age Position(s) Held
------ ----- ------------------
Jennifer C. Anderson 47 Director
Eric R. Bibens II 41 Director
Lori L. Bossmann 37 Vice President-Controller
Michael C. Bodzewski 48 Vice President-Merchandising
Lawrence R. Bowman 51 Director
James T. Glenn 38 Director
Ray A. Griffith 44 Vice President-Retail Development
and Marketing
D. William Hagan 40 Director
David F. Hodnik 50 President and Chief Executive
Officer
Paul M. Ingevaldson 52 Senior Vice President-International
and Technology
Mark Jeronimus 49 Director
Rita D. Kahle 41 Senior Vice President-Wholesale
John E. Kingrey 54 Director
Richard E. Laskowski 56 Chairman of the Board and Director
David W. League 58 Vice President-General Counsel and
Secretary
William A. Loftus 59 Executive Vice President-Retail
David F. Myer 52 Vice President-Retail Support
Fred J. Neer 58 Vice President-Human Resources
Roger E. Peterson 60 Director
Donald L. Schuman 59 Vice President-Information
Technology
Jon R. Weiss 62 Director
James R. Williams, Jr. 50 Director
The primary type of business in which each director other than Mr.
Peterson has been engaged during the past 5 years is that of the operation of
one or more retail hardware stores. Prior to his election as director in
June, 1995, Mr. Peterson was President and Chief Executive Officer of the
Company (December, 1989-December, 1994) and Chief Executive Officer of the
Company (January, 1995-May, 1995).
The By-laws of the Company provide that its Board of Directors shall be
comprised of such number of persons, not less than 9 and not greater than 12,
as shall be fixed from time to time by the Board of Directors. A minimum of 9
of the directors shall be dealer directors. A maximum of two of the directors
may be non-dealer directors, but non-dealer directors may not exceed 25% of
the total number of directors in office at any one time. A person shall be
eligible for election or appointment as a non-dealer director without regard
to whether or not such person is the owner of a retail business organization
which is a stockholder of Ace Hardware Corporation, or an executive officer,
general partner or general manager of such a retail business organization.
The By-laws also provide for three classes of directors who are to be elected
for staggered 3-year terms.
The By-laws provide that no person is eligible to serve as a dealer
director unless such person is either the owner of a retail business
organization holding stock in the Company or an executive officer, general
partner or general manager of such a retail business organization. Regional
dealer directors are elected from geographic regions of the United States
established by the Board in accordance with Article IV, Section 1 of the
Company's By-laws. (See Appendix A). If the Board determines that all regions
have representation by regional dealer directors and the maximum number of
directors would not thereby be exceeded, then dealer directors at large may
also be elected.
The current geographic composition of each of the regions established by
the Board of Directors for the election of directors pursuant to the
applicable By-law provisions is as follows:
Region 1 - Maine, New Hampshire, Vermont, Massachusetts,
Connecticut, Rhode Island, New York, Pennsylvania, New
Jersey;
Region 2 - Delaware, Maryland, Virginia, West Virginia, Kentucky,
Tennessee, North Carolina, South Carolina, District of
Columbia;
Region 3 - Alabama, Mississippi, Georgia, Florida;
Region 4 - Ohio, Indiana, Illinois;
Region 5 - Iowa, Missouri, Nebraska, Kansas, Colorado;
Region 6 - Arkansas, Louisiana, Oklahoma, Texas;
Region 7 - Alaska, Washington, Oregon, Idaho, Montana, Wyoming,
Utah;
Region 8 - Arizona, New Mexico, Nevada, California, Hawaii;
Region 9 - Michigan, Minnesota, North Dakota, South Dakota,
Wisconsin.
In accordance with the applicable procedure established by the By-laws,
the following directors have been selected as nominees for reelection at the
annual stockholders meeting to be held on June 1, 1998 as a dealer director
and a non-dealer director, respectively of the classes, from the regions and
for terms as indicated below:
Nominee Class Region Term
- ------- ----- ------ ----
Lawrence R. Bowman 3 7 3 years
Roger E. Peterson 3 N/A* 3 years
Mr. James R. Williams is not eligible for reelection as a director
commencing in 1998. The person named below has been selected as the nominee
for election to the Board for the first time at the 1998 annual meeting as a
dealer director of the class, from the region and for the term indicated:
Nominee Age Class Region Term
- ------- --- ----- ------ ----
Daniel L. Gust 48 3 5 3 years
In addition, Chairman of the Board Richard E. Laskowski is not eligible
for reelection as a director commencing in 1998. The person named below has
been selected as nominee for election to the Board at the 1998 annual meeting
as a non-dealer director from the class, from the region and for the term
indicated:
Nominee Age Class Region Term
- ------- --- ----- ------ ----
Mario R. Nathusius 54 3 N/A* 3 years
The person named below has been selected as the nominee for election to
the Board for the first time at the 1998 annual meeting as a dealer director
at large of the class, from the region and for the term indicated:
Nominee Age Class Region Term
- ------- --- ----- ------ ----
Howard J. Jung 50 3 N/A* 3 years
Mr. Jung previously served on the Board of Directors from 1987 through
May, 1996. If elected, Mr. Jung has been selected to serve as Chairman of the
Board effective June 1, 1998 when Mr. Laskowski's term expires.
*Non-dealer directors and dealer directors at large are not elected with
respect to particular geographic regions.
Reference should be made to Article IV of the copy of the By-laws in
Appendix A for information concerning the qualifications required for
membership on the Board of Directors, the terms of directors, the limitations
on the total period of time for which a director may hold office, the
procedure established for the designation of Nominating Committees to select
certain persons as nominees for election to the Board of Directors, and the
procedure for filling vacancies on the Board for the remaining portion of
unexpired terms.
INDEMNIFICATION OBLIGATIONS OF COMPANY AND
S.E.C. POSITION ON SECURITIES ACT INDEMNIFICATION
Under Article EIGHTH (b) of the restated Certificate of Incorporation of
the Company, and Article XV, Section 1 of the By-laws of the Company, persons
serving as directors, officers, employees or agents of or at the request of
the Company are required to be indemnified by the Company against all expenses,
liabilities and losses (including attorneys' fees, judgments, fines, excise
taxes, or penalties under the U.S. Employee Retirement Income Security Act,
as amended, and amounts paid or to be paid in settlement) reasonably incurred
or suffered by them in connection with any action, suit or proceeding
(whether civil, criminal, administrative or investigative) instituted or
threatened to be instituted against them by reason of their service in any of
the aforementioned capacities on behalf of the Company or at its request. The
same section of the restated Certificate of Incorporation also authorizes the
advancement of litigation expenses to any such person without specific
approval of the Board of Directors in each specific case under certain
circumstances.
Also, Article EIGHTH (a) of the restated Certificate of Incorporation
provides that a director of the Company shall not be personally liable to the
Company or to its stockholders for monetary damages arising solely out of
such director's breach of fiduciary duty as a director. This provision does
not affect a director's liability for monetary damages based upon such grounds
as a breach of the duty of loyalty, a failure to act in good faith,
intentional misconduct, a knowing violation of law, or the receipt of an
improper personal benefit.
The indemnification provisions described above would extend to and
include proceedings under the federal Securities Act of 1933. However,
insofar as indemnification for liabilities arising under said Act may be
permitted to directors, officers and controlling persons of the Company
pursuant to the foregoing provisions, or otherwise, the Company has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in said Act and is,
therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Company of expenses
incurred or paid by a director, officer or controlling person of the Company
in the successful defense of any action, suit or proceeding) is asserted by
such director, officer or controlling person in connection with the
securities being offered by this Prospectus, the Company will, unless in the
opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question of whether such
indemnification by it is against public policy as expressed in said Act and
will be governed by the final adjudication of such issue.
ACE HARDWARE CORPORATION
______ Shares of Class A
(Voting) Stock
$1,000 par value
______ Shares of Class C
(Non-voting) Stock
$100 par value
PROSPECTUS
Dated: ________, 1998
No dealer, salesman, or any other person has been authorized by the
Company to give any information or make any representations other than those
contained in this Prospectus in connection with the offering described
herein. This Prospectus does not constitute an offer to sell, or a
solicitation of an offer to buy, to any person in any state in which it is
unlawful to make such solicitation. The delivery of this Prospectus at any
time does not imply that there has been no change in the affairs of the
Company subsequent to its date of issue.
In Florida the securities covered by this Prospectus are being offered
pursuant to a limited offering exemption which extends to Florida purchasers
the privilege of electing to void their purchases within 3 days after making
any payment on account of the purchase price.
TABLE OF CONTENTS
Item Page
- ----- ------
Available Information 2
Reports to Security Holders 2
Factors to be Considered 2
Summary 3
Use of Proceeds 6
Distribution Plan and Offering Terms 7
Description of Capital Stock 9
Opinions of Experts 14
The Company's Business 14
Properties 30
Index to Consolidated Financial Statements 33
Independent Auditors' Report 34
Consolidated Financial Statements 35
Notes To Consolidated Financial Statements 40
Management's Discussion and Analysis of
Financial Condition and Results of
Operations 49
Management 52
Indemnification Obligations of Company
and S.E.C. Position on Securities Act
Indemnification 54
Appendix A-By-laws of Ace Hardware
Corporation A-1
APPENDIX A
BY-LAWS
OF
ACE HARDWARE CORPORATION
(As Amended through August 19, 1997)
ARTICLE I
OFFICES
SECTION 1. The registered office of the corporation in the State of
Delaware shall be in the City of Wilmington in said State, and the registered
agent in charge thereof shall be Corporation Service Company, 4305 Lancaster
Pike. In the event that the business address of said registered agent in said
State shall at any time be changed, the address of the corporation's
registered office shall be deemed to have changed correspondingly.
SECTION 2. The corporation may also have an office or offices in the
Village of Oak Brook, Illinois, and at such other places as the Board of
Directors may from time to time designate.
ARTICLE II
CORPORATE SEAL
SECTION 1. The corporate seal shall have inscribed thereon the name of
the corporation and the words "Corporate Seal, Delaware".
ARTICLE III
MEETINGS OF STOCKHOLDERS
SECTION 1. The annual meeting of stockholders for the election of
directors shall be held on such date between April 10 and June 10 of each
year as shall be designated in a written communication mailed not less than
160 days prior to the designated date to each holder of record of a share of
Class A stock of the corporation as of a date no earlier than 40 days
preceding the date of such mailing. The Board of Directors shall adopt a
resolution establishing each annual meeting date as designated in such
communication, the purpose of which is to inform the Class A stockholders of
the annual meeting date in advance of the commencement of the time period
specified in Article XXIII, Section 3 of the By-laws for the submission to
the President or Secretary of the corporation of proposed By-law amendments,
director nominations, or other matters by a stockholder or stockholders. At
each annual meeting the stockholders shall elect by plurality vote (and by
written ballot unless the same shall be waived or dispensed with by a majority
vote of the stockholders represented at the meeting) members of the class of
directors whose terms expire at that time, and all directors so elected shall
hold office until the date of the next annual meeting of the stockholders for
the election of directors of such class or until their respective successors
shall have been elected and qualified.
SECTION 2. Special meetings of the stockholders may be called at any
time by the President and shall be called by the President or Secretary on
the request in writing or by vote of a majority of the whole Board of
Directors or at the request in writing of stockholders of record owning ten
percent (10%) in amount of the capital stock outstanding and entitled to
vote. Any special meeting may be called for any specified purpose or
purposes permitted by the General Corporation Law of Delaware and the
Certificate of Incorporation of the corporation.
SECTION 3. All meetings of the stockholders for the election of
directors shall be held at the office of the corporation in Oak Brook,
Illinois, or at such other place within the United States of America as may
from time to time be designated by the Board of Directors and stated in the
notice of the meeting to be given under Article III, Section 6 of the By-laws.
All other meetings of the stockholders shall be held at such place or places
in the United States of America as may from time to time be designated by the
Board of Directors and stated in the notice of meeting. Each meeting of the
stockholders shall be held at such time of day as shall be approved by the
Board of Directors.
SECTION 4. A complete list of the stockholders entitled to vote at any
meeting thereof, arranged in alphabetical order and showing the address of
each stockholder and the number of shares registered in the name of each
stockholder, shall be prepared by the Secretary or by such person as shall be
designated by him to prepare such list. The list shall be kept on file at the
registered office of the corporation in the State of Illinois and shall be
subject to inspection by any stockholder at any time during usual business
hours for a period of ten (10) days prior to the meeting, and the same shall
also be produced and kept open at the time and place of the meeting and shall
be subject to the inspection of any stockholder during the whole time of the
meeting.
SECTION 5. Each stockholder entitled to vote shall, at every meeting of
the stockholders, be entitled to one vote in person or by proxy, signed by
him, for each share of voting stock held by him. Such right to vote shall be
subject to the right of the Board of Directors to close the transfer books or
to fix a record date for voting stockholders not more than sixty (60) nor less
than ten (10) days before the date of the meeting as hereinafter provided,
and if the directors shall not have exercised such right, no share of stock
shall be voted on at any election for directors which shall have been issued
or transferred on the books of the corporation within twenty (20) days next
preceding such election.
SECTION 6. Written notice of the time and place of the annual meeting
and of any special meeting of stockholders shall be mailed or personally
delivered to each stockholder entitled to vote thereat not less than thirty
(30) nor more than sixty (60) days prior to the date of the meeting. If
mailed, such notice shall be deemed to be delivered when deposited in the
United States mail in a sealed envelope addressed to the stockholder at his
address as it appears on the records of the corporation, with postage prepaid
thereon. Notice of any special meeting shall state in general terms the
purposes for which the meeting is to be held.
SECTION 7. The holders of a majority of the stock outstanding and
entitled to vote at any meeting of the stockholders, represented in person or
by proxy, shall constitute a quorum for the transaction of business at such
meeting. In the absence of a quorum, the stockholders attending or
represented at the time and place for such meeting may adjourn the meeting
from time to time, without notice other than announcement of the time and
place of the adjourned meeting at the meeting at which the adjournment is
taken, until a quorum shall be present. At any such adjourned meeting at
which a quorum shall be present, any business may be transacted which might
have been transacted at the meeting as originally scheduled.
ARTICLE IV
DIRECTORS
SECTION 1. The property and business of the corporation shall be
managed and controlled by a Board of Directors, which shall be comprised of
no fewer than 9 and no greater than 12 directors, as shall be fixed from time
to time by the Board of Directors. A minimum of 9 of the directors shall be
dealer directors. No person shall be eligible for election or appointment as
a dealer director (whether as a regional dealer director or as a dealer
director at large), or to continue to hold office as a dealer director,
unless such person is either the owner of a retail business organization
which is a stockholder of Ace Hardware Corporation, or an executive officer,
general partner or general manager of such a retail business organization.
Dealer directors representing the regions established under Article IV,
Section 4 hereof, shall be regional dealer directors. Subject to Article IV,
Section 4(b) hereof, any additional dealer director(s) may be dealer
director(s) at large, rather than regional dealer director(s). A maximum of 2
of the directors of Ace Hardware Corporation may be non-dealer directors. A
person shall be eligible for election or appointment as a non-dealer director
without regard to whether or not such person is the owner of a retail
business organization which is a stockholder of Ace Hardware Corporation, or
an executive officer, general partner or general manager of such a retail
business organization.
SECTION 2. The directors shall be divided into three classes, as nearly
equal in number as possible, as determined by the Board of Directors. The
first of said classes shall include 4 dealer directors elected for 3-year
terms at the annual meeting of stockholders held in 1994. The second of said
classes shall include 3 dealer directors, elected for 3-year terms at the
annual meeting of stockholders held in 1993. The third of said classes shall
include 3 dealer directors and one non-dealer director elected for 3-year
terms at the annual meeting of stockholders held in 1995, plus one non-dealer
director position for a three-year term to be filled at the 1998 annual
meeting of stockholders. At each subsequent annual meeting of the
stockholders, as the terms of each class of directors expire, directors of
the class whose terms expire shall be elected for terms of 3 years. The
directors shall be elected by the stockholders, except that if there be any
vacancies in the Board by reason of death, resignation or otherwise, or if
there be any newly created directorships resulting from any increase in the
authorized number of directors which is to take effect prior to the next
annual meeting of stockholders, a majority of the directors then in office
(though less than a quorum) shall have authority to fill any such vacancy or
any newly created directorship for the unexpired term. In no event shall any
term for which any director is elected exceed three years.
SECTION 3. In the event that, for any reason other than a revision made
by the Board of Directors as to the States to be included within particular
regions or a change made by the Board in the number of regions, a dealer
director ceases to satisfy the eligibility requirements which are applicable
to his/her position as a director, his/her membership on the Board of
Directors shall thereupon immediately terminate. No director elected or
appointed shall be eligible for subsequent election or appointment to any
position on the Board if such election or appointment would result in
his/her being elected or appointed to serve a total of more than 9 years as
such a director, except (1) that a dealer director that has been elected and
holds the office of Chairman of the Board shall be eligible for election for
one additional 3-year term, and (2) the President of the Corporation, if
elected as a director, shall be eligible for election or reelection or
appointment as a director at any time without regard to the period of time
during which he has previously served as a director. However, notwithstanding
the foregoing provisions one director and one former director who would not
otherwise be eligible for election in 1998 may be elected at the annual
meeting of stockholders to be held in 1998, each for one additional three-year
term. At all annual meetings of the stockholders, all holders of Class A
stock of Ace Hardware Corporation as of the record date established for
voting at the meeting shall be eligible to vote in the election for each
position on the Board of Directors to be filled at such meeting.
SECTION 4. The following procedure shall be utilized in determining
dealer director regions:
(a) The Board of Directors shall divide the United States into
such number of geographic regions as it shall deem appropriate as
regions from which regional dealer directors shall be chosen.
(b) No later than the fifteenth day of October
preceding the date of each annual meeting of stockholders,
the Board shall determine the regions from which each regional
dealer director to be elected at such meeting shall be chosen.
No dealer director shall be eligible to serve as a regional
dealer director from a particular region unless the headquarters
store or office of the stockholder of Ace Hardware Corporation
of which he is an owner, executive officer, general partner, or
general manager is located in such region. If the Board
determines that all regions have representation by regional
dealer director(s) and the maximum number of directors would not
thereby be exceeded, then dealer director(s) at large may be
elected.
(c) Each region shall consist of such of the States of
the United States as shall be determined by the Board of
Directors, which shall have authority from time to time to
make revisions as to the States included within particular
regions as well as to change the number of regions, provided that
no such revision or change shall deprive any director holding
office at the time the revision or change is made from
continuing to serve for the balance of the term for which he was
elected or otherwise chosen.
SECTION 5. Without affecting the right of any Class A stockholder to
nominate as a candidate for election to membership on the Board of Directors
any person who would be eligible to serve as a director in accordance with
the procedure specified in Article XXIII, the Board of Directors shall cause
nominees to be selected for election as directors at each annual meeting of
stockholders for whom proxies will be solicited on behalf of the Board. At
the time that the Board determines the regions from which regional dealer
directors are to be elected at the next annual meeting of the stockholders,
the Board shall also determine whether each incumbent director who is
eligible to be reelected for another term at such annual meeting shall be
selected as a Board-endorsed nominee for reelection from any such region at
said meeting. Each such determination shall be made by the Board without
participation in its proceedings by the director who is eligible to be
reelected at such next annual meeting. If the Board determines that proxies
shall be solicited on its behalf for the election of a director at the next
annual meeting of stockholders of a non dealer director or a dealer director
at large, the Board shall make a timely determination to this effect. The
following procedure shall be applied by the Board in selecting all other
Board-endorsed regional dealer director nominees for whom proxies will be
solicited on the Board's behalf at the next annual meeting.
(a) A standing Nominating Committee established by the
Board shall submit to the Board as soon as practicable prior
to the last regularly scheduled meeting of the directors in
each calendar year a list of such number of persons as the
Board shall determine who are recommended by such Committee
to be considered as members of a candidate selection committee
for each director region from which the Board has determined
that a new regional dealer director should be elected at the
next annual meeting of the stockholders.
(b) At or prior to its last regularly scheduled meeting
in each calendar year, the Board shall create such a
candidate selection committee for each such director region
and shall select as members of each such candidate selection
committee five of the persons recommended by the Nominating
Committee plus two incumbent members of the Board. The Board
may also select such alternate members, if any, of any such
candidate selection committee as it deems appropriate.
(c) Each candidate selection committee shall make a
timely designation of one of its eligible members as the
person on whose behalf proxies will be solicited at the next
annual meeting as a Board-endorsed nominee for election as a
regional dealer director.
SECTION 6. Notwithstanding any of the foregoing provisions, in any
instance where a Board-endorsed nominee for election as a director becomes
ineligible under the provisions of the By-Laws for election as a dealer
director or shall decline to run or seek reelection or shall be unable to
run or seek reelection by reason of death or disability, or shall, in the
case of an incumbent director have resigned or been removed from the Board of
Directors subsequent to having been named a Board-endorsed nominee, or in any
instance where the Board of Directors, having endorsed a nominee for election
as a director shall withdraw or revoke such endorsement, then in the case of
a non-dealer director nominee or a dealer director at large nominee, the
Board may endorse another non-dealer candidate or dealer director at large
candidate, as the case may be, on whose behalf proxies will be solicited at
the next annual meeting as a Board-endorsed nominee for election as a
director. In case of a regional dealer director nominee, the standing
Nominating Committee established by the Board shall submit to the Board as
soon as practicable, a list of such number of persons as the Board shall
determine who are recommended by such committee to be considered as members of
a candidate selection committee for that particular director region. The
Board shall at a regularly scheduled meeting or a special meeting of the
directors as soon as practicable, create a candidate selection committee for
that director region and shall select as members of the candidate selection
committee five persons recommended by the nominating committee plus two
incumbent members of the Board. The Board may also select such alternate
members, if any, of any such candidate selection committee as it deems
appropriate. The candidate selection committee shall then make a timely
designation of one of its eligible members as the person on whose behalf
proxies will be solicited at the next annual meeting as a Board-endorsed
nominee for election as a regional dealer director.
SECTION 7. The number of non-dealer directors elected or appointed to
office shall be limited so that non-dealer directors shall not exceed
twenty-five percent (25%) of the total number of directors in office at any
one time. The foregoing twenty-five percent (25%) limitation on the number of
non-dealer directors may be further amended, repealed, or added to only at a
regular or special meeting of the shareholders in accordance with Article
XXIII, Section 2.
ARTICLE V
POWERS OF DIRECTORS
SECTION 1. The Board of Directors shall have, in addition to such powers
as are hereinafter expressly conferred on it, all such powers as may be
exercised by the corporation, subject to the provisions of the statute, the
Certificate of Incorporation and the By-Laws.
SECTION 2. The following powers are hereby expressly conferred upon the
Board of Directors:
(a) to purchase or otherwise acquire property, rights
or privileges for the corporation, which the corporation has
power to take, at such prices and on such terms as the Board
of Directors may deem proper;
(b) to pay for such property, rights or privileges in
whole or in part with money, stock, bonds, debentures or
other securities of the corporation (secured by mortgages or
otherwise), or by the delivery of other property of the
corporation;
(c) to create, make and issue mortgages, bonds, deeds,
leases, trust agreements and negotiable or transferable
instruments and securities, and to do every act and thing
necessary to effectuate the same;
(d) to appoint agents, consultants, advisors and
trustees, and to dismiss them at its discretion, to fix
their duties and emoluments and to change them from time to
time and to require such security as it may deem proper;
(e) to confer on any officer or officers of the
corporation the power of selecting, discharging or
suspending any of the persons referred to in subsection (d)
of this Section;
(f) to determine by whom and in what manner the
corporation's bills, notes, receipts, acceptances,
endorsements, checks, releases, contracts or other documents
shall be signed;
(g) irrespective of any personal interest of any of its
members, to determine the amount of compensation, if any, to
be paid to directors and to members of the Executive Committee
and other Committees established by the Board of Directors for
their services to the corporation as directors or Committee members.
ARTICLE VI
MEETINGS OF DIRECTORS
SECTION 1. An annual organizational meeting of the Board of Directors
as constituted after the election of directors at each annual meeting of the
stockholders shall be held without call or formal notice at a time later in
the same day as the annual meeting of the stockholders or during the day next
following such stockholders meeting. The specific date of each such meeting of
the Board, as well as the time and place thereof, shall be determined at one
of the meetings of the Board held during the time between the most recently
conducted annual stockholders meeting and the next scheduled annual
stockholders meeting. In addition to electing officers of the corporation as
provided for in Article VIII, Section 2, the Board shall select the members of
its standing committees for the period until its next annual organizational
meeting and shall give voting directions to the President as to the persons
to be elected by the corporation as members of the Boards of Directors of
each of its wholly-owned subsidiary corporations at their respective annual
meeting times.
SECTION 2. Additional regular meetings of the Board of Directors may be
held upon such notice, or without notice, and at such time and at such place
as shall from time to time be determined by the Board.
SECTION 3. Special meetings of the directors may be called by the
Chairman of the Board on four (4) days' notice by mail (calculated from the
date of mailing) or on two days' notice by telephone to each director and
shall be called by the Chairman of the Board in like manner on the written
request of not less than four (4) directors. Special meetings of the
directors may be held within or without the State of Delaware at such place
as is indicated in the notice or waiver of notice thereof.
SECTION 4. A majority of the total number of directors then holding
office shall constitute a quorum for the transaction of business. If at any
meeting of the Board there shall be less than a quorum present, a majority of
the directors present may adjourn the meeting from time to time, without
notice other than announcement at the meeting, until a quorum is secured.
ARTICLE VII
COMMITTEES ESTABLISHED BY THE BOARD
SECTION 1. The Board of Directors shall establish as standing committees
of the Board an executive committee and such other committees as it shall
deem from time to time to be appropriate. The Chairman of the Board shall be
an ex-officio member of any standing committee if the resolution adopted by
the Board with regard to the membership of such committee so provides, except
for any committee authorized to grant or withhold consent to the transfer of
shares of the corporation's stock pursuant to Article XVI, Section 9 of these
By-laws. Each such committee shall have such responsibilities and duties as
shall be described in a resolution or resolutions adopted by a majority of
the whole Board. Such resolution or resolutions may also establish the number
(or the minimum and maximum numbers) of persons to be selected to serve on
each of said committees, the voting members of each of which shall be members
of the Board. The Board shall also have authority from time to time to
establish special ad hoc committees comprised of two or more directors, the
specific responsibilities of which shall be described in the resolutions
creating them.
SECTION 2. One or more directors may be designated by the Board as
alternate members of any standing or special ad hoc committee, who may
replace any absent or disqualified committee member at any meeting of the
committee. Vacancies in the membership of any committee established by the
Board shall be filled only by the Board.
SECTION 3. In no event shall the executive committee or any other
committee established by the Board have the power or authority at any time to
take any final action on behalf of the Board with respect to (a) proposing
amendments to the corporation's certificates of incorporation, (b) the
adoption of any amendments to the By-laws of the corporation, (c) the
adoption of an agreement of merger or consolidation, (d) the making of
recommendations to the stockholders for the sale, lease, or exchange of all
or substantially all of the corporation's property or assets, (e) the making
of recommendations to the stockholders for the dissolution of the corporation
or the revocation of a dissolution, (f) the making of any proposals submitted
to the Board with respect to the purchase of all or a controlling portion of
the outstanding capital stock of the corporation, (g) the authorization of
issuance of shares of capital stock of the corporation or (h) the filling of
vacancies in the membership of the Board or any committee thereof.
SECTION 4. Each standing committee of the Board (with the exception of
any committee authorized to grant or withhold consent to the transfer of
shares of the corporation's stock pursuant to Article XVI, Section 9 of
these By-laws) shall select one of its members to act as Chairman thereof
as promptly as feasible after the members of the committee are selected at
each annual organizational meeting of the Board. At the time of establishment
of any special ad hoc committee of the Board, the Board shall designate a
member of such committee to act as its Chairman.
SECTION 5. Regular meetings of each standing committee established by
the Board shall be held as provided for in a resolution adopted by the Board,
or by a particular committee or its Chairman if authorized in a resolution of
the Board. Special meetings of any standing committee, and all meetings of any
special ad hoc committee, shall be held on reasonable notice given to all
members thereof by the Chairman of the committee. Even if he has not been
made a member of a particular standing committee, the Chairman of the Board
shall be provided with the same notice of all regular or special meetings of
such committee as is provided to members of the committee, and he shall have
the right to attend any of the meetings held by the committee in an advisory
non-voting capacity. Subject to the provisions of the resolution describing
the responsibilities and duties of a particular committee established by the
Board, any such committee shall have authority to establish its own rules of
procedure. The Chairman of each committee of the Board which is required by
these By-laws to have one of its members designated as its Chairman shall be
responsible for assuring that: (a) an appropriate agenda is prepared for each
formal meeting of the Committee; (b) minutes of the proceedings of each such
meeting are kept; and (c) either a copy of such minutes or a summarized
written report of the meeting is submitted to the Board at or prior to the
next meeting of the Board.
SECTION 6. A majority of the voting members of any committee hereunder
shall constitute a quorum for meetings thereof, but the affirmative vote of a
majority of all voting members of the whole committee shall be necessary with
respect to all actions taken by the committee.
SECTION 7. With the exception of the Chairman of any committee of the
type described in the first sentence of Section 4 of this Article VII, the
Board may authorize the payment to the Chairman of any standing or special
ad hoc committee of compensation for the services rendered by him in his
capacity as Chairman in such amount as the Board shall deem to be
appropriate. Such compensation shall be in addition to the compensation paid
to dealer directors for their regular services as members of the Board.
ARTICLE VIII
OFFICERS OF THE CORPORATION
SECTION 1. There shall be elected by the Board of Directors the
following executive officers of the corporation: (a) a Chairman of the Board
and, if deemed appropriate by the directors, a Vice Chairman of the Board,
each of whom shall be elected from the membership of the Board of Directors;
(b) a President; (c) a Treasurer; and (d) one or more Executive Vice
Presidents, Senior Vice Presidents, or Vice Presidents as the Board shall
deem the business of the corporation to require from time to time. In
addition the Board of Directors shall elect as corporate (but not executive)
officers of the corporation a Secretary and such Assistant Secretaries as the
Board shall determine to be appropriate. The board shall also elect from time
to time such other additional executive or corporate officers as in its
opinion are desirable for the conduct of the business of the corporation. Any
number of offices filled by election of the Board may be held by the same
person, except the offices of President and Secretary. Any executive officer
of the corporation may bestow upon any employee of the corporation under his
supervision such title or titles descriptive of the position held by such
employee as such executive officer shall deem to be appropriate, provided
that no such title shall be the same as or confusingly similar to the title
of any officer elected by the Board, and provided further that no such title
shall be deemed to bestow the status of an executive officer or corporate
officer upon such employee nor to empower him with any authority to act on
behalf of the corporation other than such authority as shall have expressly
been assigned to him by the executive officer bestowing such title upon him.
SECTION 2. All executive officers and corporate officers of the
corporation shall be elected by the Board of Directors for one-year terms at
the regular meeting thereof following the annual meeting of stockholders,
provided that, in any event, any such officer shall hold office until his
successor has been elected and qualified or until his death, resignation or
removal from office. In the case of any officer with whom an employment
contract employing him to perform the functions of a specific office for a
period extending beyond one year has been entered into, the office or offices
to which he is elected at each such meeting of the Board of Directors shall
constitute the office or offices with respect to which he is employed under
such employment contract during the ensuing year. The Board of Directors
shall have authority to direct that the corporation enter into an employment
contract with any executive officer or other employee for the purpose of
employing him for a specified period of time, and no such contract shall be
legally binding upon the corporation unless the same has been expressly
authorized by the Board and has been executed on behalf of the corporation by
the Chairman of the Board, the President, an Executive Vice President, a
Senior Vice President or a Vice President of the corporation. In no event
shall any such employment contract extend for an initial term of more than
five years, but any such contract may contain a provision whereby the
contract is automatically renewed for additional successive terms of not
less than three years each, provided that the corporation is given the right
to terminate the contract at the end of the initial term or renewal term by
giving notice to the executive officer or other employee involved of its
intention to do so by such specific period of time prior to the last day of
the initial term or the then current renewal term as shall be set forth in
the contract. Authorization of any such employment contract shall require the
affirmative vote of a majority of the whole Board of Directors then in
office. Subject to such contractual rights (if any) as may exist with respect
to his employment, any executive officer or other officer elected or
appointed by the Board of Directors may be removed from office at any time,
with or without cause, by the affirmative vote of a majority of the whole
Board of Directors then in office. If the office of any executive officer or
other officer elected or appointed by the Board of Directors becomes vacant
for any reason, the vacancy shall be filled by the affirmative vote of a
majority of the whole Board of Directors then in office.
SECTION 3. In case of the absence or disability of any executive officer
or any other officer of the corporation elected or appointed by the Board of
Directors, or for any other reason deemed sufficient by a majority of the
whole Board of Directors then in office, and subject to such contractual
rights as may exist with respect to the employment of any such officer, the
Board of Directors may delegate the powers or duties of any such officer to
any other officer, or to any director, for the time being.
SECTION 4. In addition to executive officers, certain employees of the
corporation may be designated from time to time by the President as staff
officers, that is, officers upon whom responsibility is conferred with
respect to the operations of a particular department, division, branch or
function of the corporation. Any such staff officer shall be appointed by the
President and may thereafter be removed at any time, with or without cause,
by the President. However, if the Board of Directors elects or appoints an
Executive Vice President, Senior Vice President, Vice President or other
officer pursuant to the authority vested in it by Section 1. above, such
officer may thereafter be removed only by the affirmative vote of a majority
of the whole Board of Directors then in office even though such officer's
title includes one or more words which are descriptive of the particular
department, division, branch or function of the corporation managed by such
officer. The removal of any officer shall be subject to such contractual
rights (if any) as may exist under any contract of employment which has been
entered into with him.
SECTION 5. Unless his compensation has been expressly specified by a
contract of employment entered into with him, the compensation of any
executive officer shall be such amount as shall be determined from time to
time by the Board of Directors. The President shall have sole authority to
determine from time to time the amount of compensation to be paid to any
other officer, except in the case of an officer whose compensation has been
expressly specified in a contract of employment which has been entered into
with him and except in the case of any such officer whose basic annual
compensation would be or is in an amount which equals or exceeds the basic
annual compensation then being paid to any executive officer (exclusive of
the Secretary or any Assistant Secretary or Assistant Treasurer).
ARTICLE IX
DUTIES OF THE CHAIRMAN OF THE BOARD,
VICE CHAIRMAN OF THE BOARD AND PRESIDENT
SECTION 1. The Chairman of the Board shall preside at all meetings of
the stockholders and the Board of Directors and shall perform such other
duties as may be prescribed from time to time by the Board of Directors or
by the By-laws. His specific duties and responsibilities shall include (a)
acting as the primary liaison between the executive officers of the
corporation on the one hand and its Board of Directors and its dealer-
stockholders on the other hand; (b) bringing to the attention of and
consulting with the corporation's executive officers with respect to any
special concerns of the corporation's dealer-stockholders which come to his
attention or to the attention of the Board of Directors; (c) reviewing from
the perspective of the Board of Directors and the corporation's dealer-
stockholders all reports, financial budgets, and corporate plans as developed
and submitted to him from time to time by the corporation's executive officers;
(d) overseeing and aiding in the implementation of plans for orderly
successions to the positions held by the corporation's executive officers and
other important staff personnel; and (e) seeing that the efforts of the
various executive officers and other key management personnel of the
corporation are carried out in a coordinated manner, particularly in periods
when transitions in important officer or management positions occur. Except
where it is provided by law that the signature of the President is required,
the Chairman of the Board shall possess all of the same powers as the
President to sign all certificates for shares of stock of the corporation and
all contracts and other instruments of the corporation which may be
authorized by the Board of Directors.
SECTION 2. If the Board has elected a Vice Chairman of the Board, he
shall preside at all meetings of the stockholders and the Board of Directors
in the absence of the Chairman of the Board, and he shall be empowered to
perform the other duties and exercise the other powers vested in the Chairman
of the Board in the event that the Chairman of the Board is prevented by his
absence, by disability, or otherwise from being able to perform such duties
and powers in connection with a particular matter within the legally
permitted period of time or within such period of time as shall be deemed to
be reasonable and appropriate for action to be taken by the Chairman with
regard to such matter. If there is no director holding the position of Vice
Chairman of the Board, but there is a director (other than the Chairman of the
Board) holding the position of Chairman of the Executive Committee of the
Board, then the Chairman of the Executive Committee shall perform the duties
and exercise the powers described above for the Vice Chairman of the Board
whenever necessary; otherwise, upon the occurrence of any circumstance in
which a Vice Chairman of the Board would have been vested with authority to
perform the duties and exercise the powers of Chairman of the Board, the
Board shall select one of its members as acting Chairman of the Board who
shall be vested with the same authority.
SECTION 3. The President shall be charged with the general and active
management of the day-to-day operations of the corporation and with seeing
that all orders and resolutions of the Board of Directors are carried into
effect. His specific duties and responsibilities shall include (a) reporting
from time to time to the Chairman of the Board on all significant matters
affecting the operations and interests of the corporation which fall within
his knowledge; (b) seeing that short-term and long-term corporate plans and
budgets consistent with the directions of the Board of Directors are prepared
and developed on a regular basis; (c) seeing that the corporation continually
maintains competent personnel at all levels in order to adequately serve the
needs of the retail hardware dealers supplied by it; (d) consulting with the
Chairman of the Board from time to time with respect to the types of programs,
products and services to be made available to the corporation's retail
hardware dealers in order to serve the best interests of the corporation's
entire network of dealers; (e) submitting to the stockholders at their annual
meetings and/or at dealer conventions sponsored by the corporation such
reports on the operations and affairs of the corporation as shall be
appropriate in order to provide them with information of importance to them
as both customers and stockholders of the corporation; and (f) executing on
behalf of the corporation contracts and other instruments in writing,
including mortgages, bonds and governmental reports of various kinds, in all
instances wherein the signature of the President of the corporation is
required or has been authorized by the Board of Directors or is otherwise
deemed to be appropriate. The Board of Directors, in its discretion, may vest
the person holding the office of President of the corporation at any given
time with the additional title of Chief Executive Officer. Whenever the title
of Chief Executive Officer is used as an additional title for the person
holding the office of President, it shall be deemed to relate specifically to
the duties and responsibilities dealing with the development of plans for
orderly successions to the positions held by the corporation's executive
officers and other management personnel and to the ongoing development of
short-term and long-term strategic plans for the corporation to be presented
to and reviewed by the Board of Directors and to the execution of all such
plans as are approved by the Board.
ARTICLE X
DUTIES OF EXECUTIVE VICE PRESIDENTS, SENIOR
VICE PRESIDENTS AND OTHER VICE PRESIDENTS
SECTION 1. Any Executive Vice President elected by the Board of
Directors shall possess the power and may perform the duties of the President
in his absence or disability. Each officer having the title of Executive Vice
President shall perform such other duties as may be prescribed from time to
the time by the Board of Directors.
SECTION 2. Any Senior Vice President elected by the Board of Directors
shall possess the power and may perform the duties herein authorized to be
performed by an Executive Vice President in the event that there is no person
holding the office of Executive Vice President at the time, or in the event
of the absence or disability of all persons then holding the office of
Executive Vice President. Each officer having the title of Senior Vice
President shall perform such other duties as may be prescribed from time to
time by the Board of Directors.
SECTION 3. Any Vice President elected by the Board of Directors shall
possess the power and may perform the duties herein authorized to be
performed by a Senior Vice President in the event that there is no person
holding the office of Senior Vice President at the time, or in the event of
the absence or disability of all persons then holding the office of Senior
Vice President. Each officer having the title of Vice President shall perform
such other duties as may be prescribed from time to time by the Board of
Directors.
SECTION 4. If there shall be more than one person holding the office of
Executive Vice President at any time, or if there shall be more than one
person holding the office of Senior Vice President at any time, or if there
shall be more than one person holding the office of Vice President at any
time, in each such instance the Board of Directors shall designate the order
in which each of them shall possess the power and perform the duties of an
officer of the next higher rank under the applicable one of the above
Sections in the event of the nonexistence, absence or disability of all
such higher ranking officers.
SECTION 5. Notwithstanding any of the above provisions of this Article
X, if the title given to any Executive Vice President, Senior Vice President,
or Vice President also includes one or more words that are descriptive of a
particular department, division, branch or function of the corporation
managed by such officer, the duties of such officer shall consist only of the
general and active management of the operations or activities of such
department, division, branch or function and such other duties as shall have
been specifically assigned to such officer by the Board of Directors.
ARTICLE XI
DUTIES OF CONTROLLER
SECTION 1. In the event that a Controller shall be elected or appointed
at any time by the Board of Directors, or in the event that a staff officer
having the title of Controller is appointed at any time by the President,
such officer shall be responsible to the Board of Directors, the President,
and the Vice President-Finance (if such office has been created and filled),
for all financial control and internal audit of the corporation and its
subsidiaries. He shall also perform such other duties as may be assigned to
him by the Board of Directors or the President.
ARTICLE XII
DUTIES OF THE SECRETARY AND ASSISTANT SECRETARIES
SECTION 1. The Secretary (or an Assistant Secretary) shall attend all
meetings of the Board of Directors and all meetings of the stockholders and
record all the proceedings of the meetings of the corporation and of the
Board of Directors in a book to be kept for that purpose and shall perform
like duties for the standing committees when required. He shall give, or
cause to be given, notice of all meetings of the stockholders and special
meetings of the Board of Directors, and shall perform such other duties as
may be prescribed by the Board of Directors or President, under whose
supervision he shall be. He shall have custody of the corporate seal of the
corporation and he, or an Assistant Secretary, shall have authority to affix
the same to any instrument requiring it and when so affixed, it may be
attested by his signature or by the signature of such Assistant Secretary.
The Board of Directors may give general authority to any other officer to
affix the seal of the corporation and to attest the affixing by his signature.
SECTION 2. The Secretary shall also keep, or cause to be kept by such
person or persons to whom he shall delegate such duty, a register of all
shares of capital stock issued by the corporation and all transfers of such
shares. Such register shall be maintained in such manner and subject to such
regulations as the Board of Directors may prescribe.
SECTION 3. The Assistant Secretary, or if there be more than one (1),
the Assistant Secretaries in the order determined by the Board of Directors,
shall, in the absence or disability of the Secretary, perform the duties and
exercise the powers of the Secretary and shall perform such other duties and
have such other powers as the Board of Directors may from time to time
prescribe.
ARTICLE XIII
DUTIES OF THE TREASURER
SECTION 1. The Treasurer shall have the custody of the corporate funds
and securities and shall keep full and accurate accounts of receipts and
disbursements in books belonging to the corporation and shall deposit all
moneys and other valuable effects in the name and to the credit of the
corporation in such depositories as may be designated by the Board of
Directors.
SECTION 2. He shall disburse the funds of the corporation, taking
proper vouchers for such disbursements, and shall render to the President and
the Board of Directors at its regular meetings, or when the Board of
Directors so requires, an account of all his transactions as Treasurer and of
the financial condition of the corporation.
SECTION 3. If required by the Board of Directors, he shall give the
corporation a bond in such sum and with such surety or sureties as shall be
satisfactory to the Board of Directors for the faithful performance of the
duties of his office and for the restoration to the corporation, in case of
his death, resignation, retirement or removal from office, of all books,
papers, vouchers, money and other property of whatever kind in his
possession or under his control belonging to the corporation.
ARTICLE XIV
WRITTEN CONSENTS AND CONFERENCE TELEPHONE MEETINGS
SECTION 1. To the extent permitted by the General Corporation Law of
the State of Delaware, and in accordance with the applicable procedure
prescribed by the provisions thereof, whenever a vote or resolution of
stockholders, the Board of Directors, or a committee of the Board at a
meeting is required or permitted in connection with any corporate action by any
provision of law, the Certificate of Incorporation, these By-laws, or any
unrevoked resolution previously adopted by the Board, the meeting and vote or
resolution may be dispensed with and the corporate action may be taken
pursuant to written consent. The writing evidencing such consent shall be
filed with the minutes of the proceedings of the stockholders, Board, or
committee.
SECTION 2. In accordance with the applicable procedure prescribed by the
General Corporation Law of the State of Delaware, members of the Board of
Directors, or of any committee of the board, may participate in a meeting of
the Board, or of any such committee, by means of conference telephone or similar
communications equipment by means of which all persons participating in the
meeting can hear each other, and such participation shall constitute presence
in person at such meeting.
ARTICLE XV
INDEMNIFICATION OF OFFICERS, DIRECTORS,
EMPLOYEES AND AGENTS
SECTION 1. In accordance with the provisions of Section 145 of the
General Corporation Law of the State of Delaware, and as more fully provided
for in Article EIGHTH (b) of the restated Certificate of Incorporation of Ace
Hardware Corporation, as amended, persons serving as directors, officers,
employees or agents of or at the request of the corporation shall be
indemnified against all expenses, liabilities and losses (including attorneys'
fees, judgments, fines, excise taxes or penalties under the U.S. Employee
Retirement Income Security Act, as amended, and amounts paid or to be paid in
settlement) reasonably incurred or suffered by them in connection with any
action, suit or proceeding (whether civil, criminal, administrative or
investigative) instituted or threatened to be instituted against them by
reason of their service in any of the aforementioned capacities on behalf of
the corporation or at its request.
ARTICLE XVI
CERTIFICATES OF STOCK AND TRANSFER THEREOF
SECTION 1. The shares of the corporation shall be represented by
certificates signed by the Chairman of the Board or the President and the
Secretary or an Assistant Secretary or the Treasurer or an Assistant
Treasurer of the corporation and may be sealed with the seal of the
corporation or a facsimile thereof.
SECTION 2. The signatures of the officers of the corporation upon a
certificate may be facsimiles. In case any officer who has signed or whose
facsimile signature has been placed upon such certificate shall have ceased
to be such officer before such certificate is issued, it may be issued by the
corporation with the same effect as if he were such officer at the date of its
issue.
SECTION 3. Each certificate of stock shall have conspicuously noted or
stated thereon a statement of the liens, restrictions and limitations upon
the voting power, ownership, transfer or other rights and privileges of the
holder thereof. All shares of stock in the corporation shall be issued and
accepted in accordance with and subject to the conditions, restrictions, and
offsetting liens stipulated in the Certificate of Incorporation and By-laws
of this corporation and amendments thereto.
SECTION 4. If a certificate of stock be lost or destroyed, another may
be issued in its stead upon proof of such loss or destruction and the giving
of a satisfactory bond of indemnity, in an amount sufficient to indemnify the
corporation against any claim. A new certificate may be issued without
requiring bond when, in the judgment of the directors, it is proper to do so.
SECTION 5. The corporation shall have a first lien upon each share of
its issued and outstanding stock of any class, and upon each certificate of
stock representing a share or shares of stock of any class of the corporation,
for the amount of any indebtedness payable to the corporation by the holder
thereof, and shall have a similar first lien upon all amounts which have
been paid to the corporation pursuant to a subscription agreement for the
purchase of shares of stock of the corporation which will be issuable to the
subscriber upon the completion of payment of the purchase price of the shares.
The interest of each holder of shares of the corporation's stock in and to the
shares issued to such holder and the interest of each subscriber for shares of
the corporation's stock in and to the funds paid to the corporation by such
subscriber on account of the purchase price of the shares being purchased by
such subscriber shall at all times be deemed to be offset by the amount of
any indebtedness payable to the corporation by such holder or subscriber. In
no event shall any transfer of any of the shares owned by any holder or any
transfer of the stock subscription account of any subscriber for shares of
stock of the corporation be made unless and until the stockholder whose
shares are being transferred or the subscriber whose subscription account is
being transferred is free from all indebtedness to the corporation.
SECTION 6. No certificate representing any issued and outstanding share
or shares of any class of stock of the corporation shall be pledged, mortgaged,
hypothecated, sold, assigned or transferred without the prior consent of the
Board of Directors of the corporation. In the event that the Board of
Directors shall refuse to consent to any transfer or assignment of any
certificate or certificates representing any share or shares of issued and
outstanding stock of the corporation of any class, then the corporation shall
have the right and shall be obligated to purchase from the owner thereof all
of the shares of its stock of any class held for the store or other retail
business unit with respect to which the corporation issued the share or shares
as to which such consent has been refused and the franchise granted by this
corporation with regard to the operation of such retail business unit shall
thereby be terminated. In no event shall any transfer or assignment of shares
of any class of stock of the corporation be made to any transferee who is not
eligible to be a holder of such shares under the provisions of Article Fourth
of the restated Certificate of Incorporation of the corporation. In the case
of a proposed transfer of ownership of a store or other retail business unit
owned by a holder of shares of stock of the corporation to a transferee which
the corporation has accepted or is willing to accept as a franchised Ace
Hardware dealer, then the owner of such stock shall have the option of either
(a) selling or otherwise transferring to such transferee such number of shares
of stock of this corporation of any class which the corporation would
otherwise have been required to offer to such transferee in connection with
the franchise granted to such transferee with respect to such store or other
retail business unit, or (b) selling such shares to the corporation. In anycase
where the holder or holders of 50% or more of the outstanding voting
stock of a corporation having a franchise from this corporation for one or
more retail business outlets, or the holder or holders of 50% or more of the
outstanding voting stock of a corporation owning 80% or more of the
outstanding voting stock of a corporation having such a franchise, propose to
sell or otherwise transfer all of the shares of capital stock (both voting and
non-voting) of such corporation held by them, written notice of such proposal
shall be given to this corporation, and upon the consummation of any such sale
or transfer, such corporation shall have the option of either (a) retaining
all of the shares of the capital stock of this corporation then held by it or
(b) selling such shares to this corporation, but in the case of such a sale of
said shares to this corporation, the franchise granted to said corporation by
this corporation for each retail business unit operated by said corporation
shall thereupon be deemed to have terminated by the voluntary action of said
corporation and no such retail business unit shall thereafter operate as a
franchise of this corporation unless a new application for a franchise for
such retail business unit has been submitted to and accepted by this
corporation. Notwithstanding any of the foregoing provisions, this corporation
shall in no event be obligated to treat any of the following types of
transfers as qualifying for purposes of the options provided for in this
Section 6 of selling to this corporation shares of its capital stock: (a) any
transfer of ownership of a retail business outlet or unit or of shares of the
capital stock of a corporation directly or indirectly owning such outlet or
unit which is not complete, unconditional and irrevocable; (b) any such
transfer to an entity in which the transferor retains an ownership interest;
or (c) any such transfer to the spouse of the transferor.
SECTION 7. Subject to the provisions of Section 5 of this Article XVI of
these By-laws, in the event of the termination of the franchise granted by
this corporation with regard to the operation of a retail hardware store or
other retail business unit for which shares of stock of the corporation are
held, the corporation shall be obligated to purchase such shares. Unissued
shares which have been subscribed for with respect to any such store or other
retail business unit shall also be covered by the provisions of this Section
to the extent of the amounts which have been paid on account of the purchase
price thereof, and the corporation shall be obligated to refund all such
amounts, subject only to the provisions of Section 5 of this Article XVI. For
purposes of this Section, termination of the franchise granted for a
particular retail hardware store or other retail business outlet shall
include not only any termination pursuant to formal notice of termination
given by either this corporation or the holder of the franchise but shall
also include each of the following situations which shall be deemed to
constitute such a termination:
(a) The closing down of the store or other retail business unit
with respect to which such shares of stock of the corporation are held,
unless such store or other retail business unit is merely being moved,
with the corporation's consent and approval, to another location or is
being acquired by another dealer which this corporation has accepted
or is willing to accept as a franchised dealer for operation pursuant
to the same franchise at another location;
(b) The death of an individual holder of the shares of stock
of this corporation held for such retail store or other retail business
unit, or of a member of a partnership which is a holder of such shares,
except in a case where the store or other retail business unit with
respect to which such shares are held continues, with the approval of
the officers of the corporation (which approval shall not be
unreasonably withheld), to be operated under a franchise from the
corporation by the decedent's estate or by the person or persons to
whom such shares are to be distributed by the decedent's estate or by
the successor or successors to the decedent's interest in the
partnership holding such shares (it being immaterial for this purpose
that, in connection with such continuation of operation, the legal
form of ownership of the franchised dealer has been changed from an
individual proprietorship or partnership to a corporation or from a
partnership to an individual proprietorship);
(c) An adjudication of the insolvency of the dealer or of the
store or other retail business unit for which the shares of stock of
this corporation are held, or the making of an assignment for the
benefit of creditors or the filing of a voluntary petition in bankruptcy
or similar petition under the U.S. Bankruptcy Code by or on behalf of
such dealer or retail business unit, or the filing of an involuntary
petition in bankruptcy or similar petition under the U.S. Bankruptcy
Code against the dealer or against said retail business unit.
SECTION 8. A transfer of shares of stock of the corporation requiring
the consent of the Board of Directors shall not be deemed to have occurred
upon the death of a person who is the holder of shares of stock of the
corporation jointly with one or more other persons under circumstances
whereby ownership of such shares passes automatically by operation of law to
the surviving holder or holders of such shares, nor shall the corporation
become obligated to purchase such shares upon the death of such person unless
the store or other retail business unit with respect to which such shares are
held either (a) closes down, or (b) ceases to be operated under a franchise
from this corporation.
SECTION 9. The Board of Directors may delegate to a committee composed
of two (2) or more members of the Board authority to act on its behalf with
respect to all matters where the consent of the Board is required in
connection with the transfer or assignment of any shares of any class of
stock of the corporation.
SECTION 10. The price to be paid by the corporation in connection with
the purchase by it of any shares of its stock shall be as follows:
(a) in the case of Class A stock, the par value of the shares;
(b) in the case of Class B stock, an amount per share
equal to the per share price last established by the Board
of Directors as the price to be paid by the corporation in
the event of redemption of shares of its Class B stock,
which shall in no event be less than twice the par value of the
Class B stock and shall also at all times be equal to twenty
(20) times the per share purchase price last established by the
Board of Directors with respect to purchases by it of Shares of
its Class C Stock;
(c) in the case of Class C stock, an amount per share
equal to the per share price last established by the Board
of Directors as the purchase price to be paid by the
Corporation for shares of its Class C stock, which price shall
in no event be less than the par value thereof.
SECTION 11. Any shares of any class of stock of the corporation which
are purchased by it from any stockholder shall become treasury shares which
shall be eligible for sale to any other person, persons or firm which shall
be qualified to hold such shares.
SECTION 12. Effective with respect to all purchases and redemptions of
shares of its capital stock made by the corporation from its stockholders on
or after December 31, 1981, the entire purchase or redemption price to be
paid by the corporation for such shares shall be paid in cash except that, in
any of the situations described in subsection (a) hereof, the purchase or
redemption price for such shares shall be paid in the manner set forth in
subsection (b) hereof.
(a) The situations in which such price shall be paid in
the manner set forth in subsection (b) of this Section are
as follows:
(1) the voluntary termination by a stockholder of
this corporation of the franchise from this corporation
held by such stockholder for a retail business outlet
under circumstances whereby such outlet continues to
engage in substantially the same business under the
ownership or control of the same person, partnership or
corporation that owned or controlled it immediately prior
to such termination; for purposes of this paragraph:
(A) control of an outlet owned by an
unincorporated person or partnership shall be
deemed to be the same if more than fifty percent
(50%) of the assets or profit shares therein, or
more than fifty percent (50%) of the capital stock
of a corporation becoming the owner of such outlet,
continues to be legally or equitably owned by the
same person, partnership or corporation; and
(B) control of an outlet owned by a
corporation shall be deemed to be the same if
more than fifty per cent (50%) of the capital
stock of said corporation, or more than fifty percent
(50%) of the assets or profit shares of an unincorporated
person or partnership becoming the owner of such outlet,
continues to be owned by the same person, partnership
or corporation.
(2) the termination by this corporation of the
franchise from this corporation for a retail business
outlet pursuant to the provisions of the Ace Dealer
Franchise Agreement authorizing such termination by
reason of:
(A) the failure of such retail business
outlet to make any payment owing to the corporation
for merchandise or services supplied by it within
the time period specified in such provisions; or
(B) any default of such retail business
outlet in performing any obligation of such outlet
under the Ace Dealer Franchise Agreement of such
outlet other than the obligation to pay for merchandise
or services supplied by the corporation, provided
that such default is described in the corporation's
notice of termination in such a manner as to reasonably
apprise such retail business outlet as to the nature of
such default.
(b) In each of the situations described in subsection (a)
above, the purchase or redemption price to be paid by the
corporation for the shares of its stock being purchased or
redeemed by it shall be paid in the following manner:
(1) in the case of Class A stock, the entire price
shall be paid by the corporation in cash;
(2) in the case of Class B stock or Class C stock
purchased by a stockholder as part of the shares of capital
stock of the corporation subscribed for in connection with
the granting of a franchise by the corporation for a retail
business outlet, that portion of the purchase or redemption
price to be paid by the corporation which equals the amount paid
to the corporation pursuant to such subscription shall be paid
by the corporation in cash and any remaining balance of the price
(with interest thereon) shall be paid by the corporation in
equal annual installments over a period of four years;
(3) in the case of Class C stock received by a
stockholder as part of the patronage dividends distributed
by the corporation for a retail business outlet, the entire
price (with interest thereon) shall be paid by the corporation
in equal annual installments over a period of four years;
(4) if the total portion of the purchase or redemption
price which would otherwise be payable under the foregoing
paragraphs in equal annual installments over a period of
four years is less than $5,000, the entire purchase or
redemption price shall be paid by the corporation in cash,
notwithstanding the installment provisions of said paragraphs;
(5) in any situation where a stockholder whose shares
of capital stock of the corporation are to be purchased or
redeemed by it is indebted to the corporation at such time,
then, in accordance with the corporation's first lien and
offset rights under Article XVI, Section 5, of these By-laws
and Article Fourth (1) of the restated Certificate of
Incorporation of the corporation, the purchase or redemption
price shall in all cases be applied against such indebtedness to
the extent thereof, with the portion of such price which would
otherwise have been payable in cash being first applied for
such purpose and, if any indebtedness to the corporation still
remains, the portion of the price which would otherwise have
been payable in equal annual installments then being applied for
such purpose to the extent of any such remaining indebtedness;
(6) the corporation's obligation to pay any portion of
the purchase or redemption price of its shares in equal annual
installments shall be evidenced by an installment promissory
note of the corporation delivered to the stockholder whose shares
are being purchased or redeemed, which note shall provide for the
payment of the principal thereof in four equal annual installments
commencing one year from the date of the repurchase or redemption
of the shares and for the payment of interest with each annual
installment payment of principal on the unpaid balance of principal
from time to time at such rate as shall have been established by
the Board of Directors as of the date of issuance thereof, provided,
however, that said rate of interest shall in no event be less than
the greater of (A) the latest interest rate as of the date of
issuance of such note determined by the Board of Directors as the
rate to be paid on patronage refund certificates distributed to
the corporation's member-stockholders as part of their annual
patronage dividends or (B) 6% per annum;
(7) notwithstanding any of the foregoing provisions,
the Board of Directors, in its discretion and after considering
the financial condition and requirements of the corporation,
may authorize and cause payment to be made in cash for all or
any portion of the purchase or redemption price which would
otherwise be payable in four equal annual installments if the
Board of Directors determines that the prescribed method of
payment would impose an undue hardship upon the stockholder
whose shares are being repurchased or redeemed;
(8) the Board of Directors may adopt hardship guidelines to
implement the provisions of paragraph (7) of this Section and may
delegate the authority to make determinations pursuant to said
provisions to a committee comprised of two or more directors or
to a committee comprised of two or more executive officers of
the corporation.
ARTICLE XVII
CLOSING OF TRANSFER BOOKS AND
DETERMINATION OF RECORD DATE
SECTION 1. The Board of Directors shall have power to close the stock
transfer books of the corporation for a period not exceeding sixty (60) days
preceding the date of any meeting of stockholders or the date for the
allotment of rights or the dates when any change or conversion or exchange of
capital stock shall go into effect or for a period of not exceeding sixty (60)
days in connection with obtaining the consent of stockholders for any purpose.
SECTION 2. Notwithstanding the foregoing, in lieu of closing the stock
transfer books as aforesaid, the Board of Directors may fix in advance a date,
not exceeding sixty (60) days preceding the date of any meeting of
stockholders, or the date for the allotment of rights, or the date when any
change or conversion or exchange of capital stock shall go into effect, or a
date in connection with obtaining such consent, as a record date for the
determination of the stockholders entitled to notice of, and to vote, at any
such meeting and any adjournment thereof, or to any such allotment of rights,
or to exercise the rights in respect of any such change, conversion or
exchange of capital stock, or to give such consent, and in such case such
stockholders as shall be stockholders of record on the date so fixed shall be
entitled to such notice of, and to vote at such meeting and any adjournment
thereof, or to receive such allotment of rights, or to exercise such rights,
or to give such consent, as the case may be, notwithstanding any transfer of
any stock on the books of the corporation after any such record date fixed as
aforesaid.
SECTION 3. The corporation shall be entitled to treat the holder of
record of any share or shares of stock as the holder in fact thereof and
accordingly shall not be bound to recognize any equitable or other claim to
or interest in such share on the part of any other person whether or not it
shall have express or other notice thereof, save as expressly provided by the
laws of Delaware.
ARTICLE XVIII
FISCAL YEAR
SECTION 1. Except as from time to time otherwise provided for by the
Board of Directors, the fiscal year of the corporation shall end on the 3lst
day of December in each year.
ARTICLE XIX
DIVIDENDS
SECTION 1. No dividends shall ever be declared on any of the shares of
any class of stock of the corporation.
ARTICLE XX
CHECKS FOR MONEY
SECTION 1. All checks or demands for money and notes of the corporation
shall be signed by such officer or officers or such other person or persons
as the Board of Directors may from time to time designate.
ARTICLE XXI
BOOKS AND RECORDS
SECTION 1. The books, accounts and records of the corporation, except as
otherwise required by the laws of the State of Delaware, may be kept within
or without the State of Delaware, at such place or places as may from time to
time be designated by the By-laws or by resolution of the directors.
ARTICLE XXII
NOTICES
SECTION 1. Notice required to be given under the provisions of these
By-laws to any director, officer or stockholder shall not be construed to
mean personal notice, but may be given in writing by depositing the same in
a post office or letter box, in a postpaid sealed wrapper, addressed to such
stockholder, officer or director at such address as appears on the books of
the corporation, and such notice shall be deemed to be given at the time when
the same shall be thus mailed. Any stockholder, officer or director may waive,
in writing, any notice required to be given under these By-laws, whether
before or after the time stated therein.
ARTICLE XXIII
AMENDMENTS OF BY-LAWS AND ADVANCE NOTIFICATION BY STOCKHOLDERS OF
PROPOSALS FOR AMENDMENTS, DIRECTOR NOMINATIONS OR OTHER
CORPORATE ACTIONS
SECTION 1. Except for any provisions hereof which shall at any time have
been adopted by the stockholders in the manner prescribed in Section 2, these
By-laws may be amended or repealed or added to, or new By-laws may be adopted,
by the affirmative vote of a majority of the Board of Directors at any regular
meeting of the Board or at any special meeting thereof called for that purpose.
If any By-law regulating an impending election of directors is adopted,
amended or repealed by the Board of Directors, there shall be set forth in the
notice of the next meeting of stockholders for the election of directors the
By-law so adopted, amended or repealed, together with a precise statement of
the changes made.
SECTION 2. These By-laws may also be amended or repealed or added to, or
new By-laws may be adopted, at any regular or special meeting of stockholders
at which a quorum is present or represented by the affirmative vote of a
majority of the issued and outstanding shares of Class A stock of the
corporation. Any amendment, repeal, addition to the By-laws, or any new By-laws,
adopted by the stockholders may be further amended, repealed, or added to
only at a regular or special meeting of the stockholders at which a quorum is
present or represented by the affirmative vote of a majority of the issued and
outstanding shares of Class A stock of the corporation in the manner
prescribed herein.
SECTION 3. A written notice shall be given to the President or Secretary
of the corporation of the intent of one or more stockholders to submit at a
forthcoming stockholders meeting (a) a proposed amendment to these By-laws;
(b) the nomination of an eligible person for election as a director; or
(c) any other stockholder proposal for corporate action. Such notice must be
received, either by mail or by personal delivery, not less than seventy-five
(75) nor more than one hundred fifty (150) days prior to the date of the
annual meeting or, in the event of a special meeting of stockholders, not
later than the close of the fifteenth (15th) day following the day on which
notice of the meeting is first mailed to stockholders. In the case of an annual
meeting, the intention of one or more stockholders to submit a proposed By-law
amendment, nomination or other proposal for corporate action which is so
received in proper order shall be mentioned in the formal notice of the
meeting, but neither the name or names of the stockholder or stockholders
intending to make any such submission nor the name of any director nominee
proposed by one or more stockholders shall be mentioned in the notice. No
reference of any kind to any proposal or nomination to be submitted by any
stockholder pursuant to this Section shall be made in the proxy materials
caused to be sent to stockholders by the Board of Directors. At all annual or
special meetings the Chairman shall declare out of order any proposed
amendment, any nomination, or any other stockholder proposal not presented in
accordance with this Section. Every notice given by a stockholder or
stockholders under this Section shall set forth:
(a) the name and the business and residence addresses
of the stockholder (or person authorized by such stockholder
as the stockholder's voting representative) intending to
submit the proposed amendment, nomination, or other matter;
(b) with respect to such notice of intent to submit a
nomination, information concerning the proposed nominee's
business and residence addresses, age and eligibility to
serve as a director; and
(c) with respect to notice of an intent to propose a
By-law amendment or some other corporate action, a
description of the proposed amendment or other action.
Notice of intent to submit a nomination shall be accompanied by the
written consent of each nominee to serve as a director of the corporation
if so elected.
ARTICLE XXIV
MEMBERS' PATRONAGE DIVIDENDS
SECTION 1. A "membership" in the corporation within the meaning of the
term "membership" as used in Section 1388(c)(2)(B) of the U.S. Internal
Revenue Code of 1954, as amended, shall be deemed to be held by (a) each
retail hardware dealer owning a share of Class A stock of the corporation and
(b) each other dealer in hardware or related products which becomes an owner of
a share of Class A stock of the corporation after having been expressly
approved as an Ace Hardware dealer by the Board of Directors of the
corporation. The term "retail hardware dealer" as used in clause (a) of the
preceding sentence shall mean any person or firm purchasing merchandise from
this corporation for the purpose of reselling such merchandise at retail.
However, whenever the term "retail hardware dealer" is used in any of the
subsequent Sections of this Article XXIV of the By-laws, such term shall be
deemed to include all dealers holding memberships in this corporation except
where the context in which such term appears is of such a nature that it is
not practical for such term to be applied to "other dealers" as referred to
in clause (b) of the first sentence of this Section. For purposes of this
Article XXIV of the By-laws a "retail hardware store" shall be deemed to
refer to a business location to which there is delivered for resale from such
location at the retail level any merchandise purchased from this corporation.
Each such retail hardware store owned or controlled, directly or indirectly, by
the same person, partnership or corporation, shall be deemed to constitute
only one (1) retail hardware dealer. An unincorporated person or partnership
shall be deemed controlled by another person, partnership or corporation if
fifty per cent (50%) or more of the assets or profit shares therein are
legally or equitably owned by such other person, partnership or corporation,
or by the legal or equitable owner or owners of fifty per cent (50%) or more
of such other person, partnership or corporation's assets or profit shares
(if unincorporated) or shares of capital stock (if incorporated). A
corporation shall be deemed controlled by another person, partnership or
corporation if fifty percent (50%) or more of the capital stock of said
corporation is owned by such other person, partnership or corporation, or by
the owner or owners of fifty per cent (50%) or more of its capital stock
(if incorporated) or fifty per cent (50%) or more of its assets or profit
shares (if unincorporated).
SECTION 2. In accordance with the policy heretofore established by the
corporation in the Amendment to its By-laws adding Article XXIV thereto by
the resolution adopted by the Board of Directors on July 20, 1973, there shall
be distributed on a patronage basis to such members (that is, dealers holding
memberships, as hereinabove defined, in the corporation) in a manner taking
into account the amount of business done by the corporation with each of
them, all the net savings and overcharges effected by or resulting from the
operations conducted and carried on by the corporation in connection with
sales of merchandise made by the corporation after May 31, 1974, to such
members which remain after paying all operating and administration expenses
of the corporation and all interest on its indebtedness and after the setting
aside by the Board of Directors of such reasonable reserves as they shall
determine from time to time to be appropriate for the purpose of insuring
the safety and welfare of the corporation and for the purpose of providing for
the expectancy of any losses or contingencies. Said distributions shall be
made no later than eight and one-half (8 ) months following the close of the
year of the corporation during which the patronage occurred with respect to
which each such distribution is made. In no event shall less than twenty
percent (20%) of the total patronage distributions made each year to each
member be distributed in cash. The remaining portion shall be distributed in
cash or in written notices of allocation (as defined in Section 1388 of the
U.S. Internal Revenue Code) in whatever proportions shall be determined each
year by the Board of Directors.
SECTION 3. Notwithstanding the foregoing, every such member on becoming
such authorizes and directs that all net savings of every character effected
by this corporation which are distributable to such member, to the extent of
the excess thereof over the twenty per cent (20%) minimum portion of such
distributable amount required to be distributed in cash, may first be applied
by the corporation to the payment of any indebtedness owed to the corporation
by such member. Any such net savings which become distributable with respect
to merchandise sold by this corporation for delivery to any retail hardware
store owned or controlled, directly or indirectly, by the same person,
partnership or corporation which so owns or controls one (1) or more other
retail hardware stores may be so applied against any indebtedness owing with
respect to merchandise sold by this corporation for delivery to any store
which is part of any group deemed hereunder to constitute one (1) retail
hardware dealer. The balance of any such net savings not so applied shall
then be distributed as patronage dividends in the manner set forth in Article
XXIV, Section 2, of these By-laws.
SECTION 4. Each retail hardware dealer who applies for and is accepted
as a member of this corporation shall, by his act of subscribing for a share
of Class A stock of the corporation entitling such dealer to become such a
member, consent that the amount of any patronage dividends with respect to his
purchases of merchandise from this corporation occurring on or after June 1,
1974, which are made in written notices of allocation (as defined in Section
1388 of the U.S. Internal Revenue Code, as amended) and which are received by
such member from this corporation will be taken into account by him at their
stated dollar amounts in the manner provided in Section 1385(a) of said Code
in the taxable year in which such notices of allocation are received by said
member. The term "written notice of allocation" as used here shall be deemed
to include, but not to be limited to, a letter of advice to a member which
discloses to such member an amount which the corporation has elected to apply
against indebtedness owed to the corporation in accordance with the first
sentence of Article XXIV, Section 3, of these By-laws.
SECTION 5. The aforesaid written notices of allocation shall be
redeemable by the corporation in cash at the discretion of the Board of
Directors and/or in accordance with the restated Certificate of Incorporation
of the corporation and these By-laws. As security for the payment to the
corporation of any indebtedness owing at any time to the corporation by any
retail hardware dealer having membership in the corporation or by any retail
hardware dealer who has subscribed for the 1 share of Class A stock of the
corporation which is required to be owned in order to become a member of the
corporation, the corporation shall have a first lien upon any written notice of
allocation held by any such dealer (including all retail hardware stores
treated as being part of a group constituting one "member" or "dealer"). The
interest of each holder of any written notice of allocation in and to the
same shall at all times be deemed to be offset by the amount of any
indebtedness payable to the corporation by such holder.
SECTION 6. Notwithstanding any other provision of these By-laws, and in
accordance with the policy heretofore established by the corporation in the
Amendment to its By-laws adding Section 6 to Article XXIV thereof by the
resolution adopted by the Board of Directors on April 24, 1974, commencing
with respect to purchases of merchandise made from the corporation after May 31,
1974 the corporation shall also make distributions on a patronage basis to
those of its dealers who have franchise or membership agreements with the
corporation and who have executed unrevoked and unexpired written consents of
the type referred to in Section 1388 (c)(2) (A) of the U.S. Internal Revenue
Code to include in their gross income all patronage dividends distributed to
them in the form of written notices of allocation (as defined in Section 1388
of the U.S. Internal Revenue Code), even though such dealers do not then own
any shares of any class of the capital stock of the corporation. Such
patronage dividend distributions shall be made to such dealers in a manner
taking into account the amount of business done by the corporation with each
of them during the periods with respect to which said written consents are
effective for each of them and shall consist of all the net savings and
overcharges effected by or resulting from the business done by the
corporation with such dealers which remain after paying all of the operating
and administration expenses and interest on indebtedness of the corporation
allocable to such business and after the setting aside by the Board of
Directors of such reasonable reserves as they shall determine from time to
time to be appropriate for the purpose of insuring the safety and welfare of
the corporation and for the purpose of providing for the expectancy of any
losses or contingencies. Each such written consent shall provide that it may
be revoked at any time by the dealer, effective with respect to business done
by the corporation with such dealer after the close of the taxable year of
this corporation during which the revocation is filed with it. Each such
written consent shall cease to be effective with respect to all business done
by this corporation with any dealer who has furnished such a written consent
to this corporation immediately upon said dealer's becoming an owner of a
share of Class A stock of this corporation, as of which date such consent
shall expire and such dealer shall be deemed to hold a "membership" in this
corporation so that the provisions of this Article XXIV which are applicable
to the distribution of patronage dividends to its members then become effective
with respect to such dealer. Unless the same shall have been revoked or
otherwise terminated, any such consent which has theretofore been executed by
a dealer shall in any event be deemed to have expired and been rendered
ineffective at the end of one hundred twenty (120) days following the later of
(a) the date as of which an initial Registration Statement and Prospectus with
respect to an offer to sell shares of the capital stock of the corporation
(including shares of its Class A stock) to its dealers have become effective
under the U.S. Securities Act of 1933, or (b) the date as of which such
Prospectus can be used under the securities law of any state in which state
registration of such stock is required. No such dealer shall be eligible to
receive distributions of patronage dividends from the corporation with
respect to business done by the corporation with such dealer after the
expiration of such 120-day period unless such dealer either has. become a
member of the corporation by owning a share of its Class A stock (in which
case such dealer shall thereupon be entitled to patronage dividends as
provided for in Section 2 of this Article XXIV) or has executed a subscription
agreement for the purchase of shares of capital stock of the corporation
(including one (1) share of its Class A stock) which has been accepted by the
corporation. There shall be incorporated in all such subscription agreements
which include a subscription for a share of the Class A stock of the
corporation a provision whereby the subscribing dealer consents to include in
his gross income all patronage dividends distributed to such dealer in the
form of written notices of allocation (as defined in Section 1388 of the U.S.
Internal Revenue Code), and any dealer who has executed such a subscription
agreement but who is not entitled to become the owner of a share of Class A
stock of this corporation until he has completed payment of the purchase price
for such share in accordance with such subscription agreement shall be entitled
to receive patronage dividends pursuant to this Section 6 during the period
for which he makes payments on account of such purchase price as required by
the subscription agreement. Upon the completion of such payments and the
issuance of such share of stock to him, such dealer shall then be entitled to
receive patronage dividends pursuant to Section 2 of this Article XXIV. In no
event shall less than twenty per cent (20%) of the total patronage dividend
distributions made each year to any dealer who is entitled to receive such
distributions pursuant to this Section 6 be distributed in cash. Any amount
in excess of said twenty per cent (20%) minimum portion of the patronage
dividends otherwise distributable to a dealer under this Section 6 may first
be applied by the corporation to the payment of any indebtedness owed to the
corporation by such dealer in the same manner as set forth in Section 3 of this
Article XXIV. Any patronage dividends distributed in the form of written
notices of allocation pursuant to this Section 6 shall be subject to all of
the provisions with respect to distributions made in the form of written
notices of allocation which are set forth in Section 5 of this Article XXIV.
SECTION 7. Notwithstanding any of the foregoing provisions, the portion
of any patronage dividends which would otherwise be distributable in cash
under any provision of this Article XXIV to a retail hardware dealer with
respect to a retail hardware store having a franchise or membership agreement
with this corporation which has been cancelled or terminated at any time
subsequent to the date of the annual meeting of stockholders to be held on the
third Monday of May in 1980 by any means or for any reason whatsoever prior
to the time of distribution of such patronage dividends shall be applied by
the corporation to the payment of any indebtedness owed to the corporation by
or on behalf of such store to the extent of such indebtedness instead of being
distributed in cash, provided, however, that an amount equal to 20% of the
total patronage dividends distributable for the applicable year to any such
dealer with respect to such store shall nevertheless be paid in cash within
8 months following the close of such year if a timely written request for the
payment of such amount in cash is submitted to the corporation by the dealer.
However, in all events no less than 30% of the total annual patronage
dividends distributable to a retail hardware dealer with respect to a retail
business outlet pursuant to any provision of these By-laws shall be paid in
cash if the retail business outlet is located in a jurisdiction as to which
the 30% income tax withholding provisions of Section 1441 or Section 1442
of the U.S. Internal Revenue Code are applicable.
SECTION 8. Effective with respect to business done by them with this
corporation after December 31, 1982, each retail hardware dealer having
membership in this corporation on that date and each retail hardware dealer
who is a subscriber on that date or who becomes a subscriber after that date
for the 1 share of Class A stock of this corporation which is required to be
owned in order to become a member of this corporation shall, solely by such
dealer's act of commencing or continuing to do business with this corporation
after said date, be deemed to have authorized and directed that,
notwithstanding any other provision of this Article XXIV of these By-laws,
the distributions to be made on a patronage basis as provided for in Section
2 and Section 6 of this Article XXIV shall be made in a manner taking
into account the quantity or value of business done with each dealer by each
separate division of the corporation as shall be established on the books of
the corporation with respect to its operations and/or the quantity or value
of business done by the corporation or each such division of the corporation
with each of its dealers with respect to each category of sales as shall be
established on the books of the corporation. Each such dealer shall further
thereby be deemed to have authorized and directed that, in any taxable year
of this corporation during which it incurs a loss in connection with the
operations of any such division or in connection with any such category of
sales, (i) a proportionate share of such loss shall be deducted from the net
earnings of the corporation on the business done during such year by each of
its other divisions or with respect to each of its other sales categories
with its dealers and (ii) the amount of patronage dividends which the
corporation would otherwise be obligated to distribute to its dealers in
connection with their purchases from each such other division of the
corporation or in connection with each of the other sales categories
established by the corporation (as the case may be) shall be reduced by such
proportionate share of said loss. For the foregoing purposes the
proportionate share of any such loss in connection with the operations of any
such division of the corporation or in connection with any such category of
sales which shall be deducted from the net earnings realized by it with
respect to business done by each other division of the corporation or with
respect to each of the other sales categories established by the corporation
shall be determined by multiplying the total amount of such loss by a
fraction having as its numerator the net earnings which would otherwise be
distributable as patronage dividends in connection with the business done
with its members by each such other division or each such other category of
sales and having as its denominator the total of the net earnings which
would otherwise be distributable as patronage dividends in connection with
the business done with its members by all such divisions of this corporation
and/or all such sales categories.
ARTICLE XXV
ESTABLISHMENT OF ACE HARDWARE CORPORATION
DEALERSHIPS AND NON-MEMBER ACCOUNTS
SECTION 1. Except as provided in Article XXV, Section 3 hereof, no
person, partnership or corporation shall be authorized or permitted to use
the name "Ace Hardware" or any trademark or trade name including the word
"Ace" in conjunction with the sale of hardware or related merchandise, to
display any identification sign or emblem indicating that said person,
partnership or corporation is an authorized Ace Hardware dealer, or to
purchase merchandise (including items carried under the Ace brand name) from
Ace Hardware Corporation unless such person, partnership or corporation has
first been accepted by Ace Hardware Corporation as a duly licensed or
franchised dealer and has executed the membership or similar agreement then
utilized by Ace Hardware Corporation for the establishment of such a dealer
relationship and has otherwise complied with the usual requirements of Ace
Hardware Corporation with respect thereto. Any such agreement may contain
such reasonable provisions with respect to the termination thereof as shall
be legally permitted by the laws of the United States of America and by the
laws of the state or other jurisdiction in which the business of the dealer is
located.
SECTION 2. In order for any person, partnership or corporation to be
accepted by Ace Hardware Corporation as a licensed dealer, such person,
partnership or corporation shall also be required to purchase the necessary
number of shares of capital stock of the corporation as required by Article
Fourth (c) and Article Fourth (e) of the restated Certificate of
Incorporation of Ace Hardware Corporation filed with the Secretary of State
of Delaware on September 18, 1974. Accordingly, each such person, partnership
or corporation shall, concurrently with the execution by such person,
partnership or corporation of the Ace Dealer Membership Agreement then
utilized by the corporation, also agree in writing to purchase one (1) share
of Class A stock of the corporation at a price equal to the par value thereof
of $1,000 per share, and forty (40) shares of Class C stock of the
corporation at a price equal to the par value thereof of $100 per share or,
when the store which is licensed under such Membership Agreement is not the
first store owned or controlled by said person, partnership or corporation
which has become accepted by Ace Hardware Corporation as a licensed dealer,
to purchase fifty (50) shares of Class C stock at a price equal to the par
value thereof of $100 per share. The terms of payment with respect to any
shares of capital stock of the corporation purchased by any such person,
partnership or corporation shall be as set forth in such resolution as shall
be adopted from time to time by the Board of Directors of the corporation for
the purpose of establishing such terms of payment.
SECTION 3. In the case of a person, partnership or corporation operating
one or more business outlets, whether located within or outside the United
States of America, its territories and possessions, Ace Hardware Corporation
may approve the sale of merchandise for delivery to such an outlet under the
terms of a written agreement entered into with it by such party in lieu of
the membership or similar agreement utilized with respect to business outlets
by parties who are accepted by Ace Hardware Corporation as member dealers. No
party approved as an International Retail Merchant or other non-member retail
account shall be entitled to purchase or own any shares of the capital stock
of Ace Hardware Corporation, nor shall any patronage dividends be paid on
account of any purchases made from Ace Hardware Corporation by such party.
Such purchases of merchandise shall be made in accordance with the terms of
the applicable written agreement and such other terms as may be imposed by Ace
Hardware Corporation from time to time with regard to particular accounts.
Only with the express written consent of an executive officer whom its
President has vested with authority to grant such consents, can these
purchases include items carried under "Ace" or "Ace Hardware" brand names or
under other private label names owned by, or licensed to, Ace Hardware
Corporation. No such party shall have authority or be permitted to use names
"Ace" or "Ace Hardware" or any other trade name, trademark or service mark
owned or register (sic) by, or licensed to, Ace Hardware Corporation in the
United States of America or elsewhere (including any translations of any of
said names or marks) unless the applicable written agreement specifically
grants the right to such use. All of the terms and conditions contained in the
respective written agreements imposed upon such accounts (including, but not
limited to, those dealing with territorial rights, duration, and service,
handling, or license fees or charges, as well as any terms which vary among
particular accounts) shall be established solely by the executive officer or
officers of Ace Hardware Corporation vested with such authority by its
President, provided, however, that no such party shall be granted any
exclusive area or territorial rights without the prior approval of the Board
of Directors or a committee of the Board to which the Board has delegated the
authority to approve the granting of such rights. In establishing such terms,
consideration shall be given to the relevant business circumstances,
including, but not limited to, specific legal requirements and various costs
associated with serving an account in a particular location.
SECTION 4. Each person, partnership or corporation accepted by Ace
Hardware Corporation as a member dealer or non-member account shall, by
virtue of such acceptance, be deemed to have agreed to assume liability for
and indemnify Ace Hardware Corporation and hold it harmless from and against
any and all claims which may be asserted against it and from any losses
sustained by it (including attorneys' fees and expenses incurred by it in
defending such claims or in attempting to avoid or mitigate such losses) in
connection with or resulting from billings by suppliers of merchandise
purchased by or at the request of such dealer or account from or through Ace
Hardware Corporation in cases where such merchandise is not to be supplied
from the corporation's own inventories.
ARTICLE XXVI
BY-LAWS TO CONSTITUTE BINDING CONTRACT
SECTION 1. These By-laws, as amended from time to time, shall constitute
a binding legal contract between Ace Hardware Corporation and its
stockholders, and shall be legally binding on all stockholders of Ace
Hardware Corporation and the successors, heirs, executors, administrators,
assigns and personal representatives of such stockholders.
SECTION 2. The purchase of shares of any class of stock of this
corporation and the issuance thereof to any stockholder shall constitute and
be equivalent to a consent of the part of the stockholder to whom said shares
are issued to be bound by these By-laws, as amended from time to time, and an
agreement on such stockholder's part to be bound thereby.
SECTION 3. The invalidity of any portion of these By-laws, as amended
from time to time, shall in no way affect any other portion of the By-laws
which can be given effect without such invalidated part, and the remaining
portions of the By-laws shall continue to constitute a legally binding
contract between this corporation and its stockholders.
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 14. Other Expenses of Issuance and Distribution.
The following is an estimate of expenses in connection with the issuance
and distribution of the capital stock being offered:
Printing of Registration Statement and Prospectus $10,000
Accounting Fees and Expenses 12,000
Legal Fees 2,000
Fees and Expenses under "Blue Sky"
Laws of Various States 3,500
Miscellaneous Expenses 500
-------
Total $28,000
=======
Item 15. Indemnification of Directors and Officers.
In accordance with the authority granted by Section 145 of the General
Corporation Law of the State of Delaware, under which the Registrant is
incorporated, Article XV of the Registrant's By-Laws (which Article is
included in the copy of the By-laws designated as Appendix A to the
Prospectus constituting a part of this Registration Statement and is
incorporated herein by reference) provides for indemnification by the
Registrant of its directors, officers, employees or agents. The principal
provisions of said By-law obligate the Registrant to indemnify any such
person against expenses (including attorneys' fees) actually and reasonably
incurred by any such person in connection with his successful defense of any
action, suit or proceeding (whether civil, criminal, administrative or
investigative) instituted against him by reason of the fact that he is or was an
officer, director, employee or agent of the Registrant and further authorize
the Registrant, in any situation where the Board of Directors of the
Registrant, by a majority vote of disinterested directors, determines that
any such person acted in good faith and in a manner he reasonably believed to
be in the best interest of the Registrant, to indemnify him for the amount of
any judgment or fine or settlement payment incurred by him, together with his
expenses and attorneys' fees, in connection with any such action, suit or
proceeding.
Richard Kaup, the late Virgil Poss, and Antone Salel, who constitute the
Trustees of the Ace Dealers' Perpetuation Fund prior to its termination on
November 30, 1976 (as of which date all of the assets of said Fund were
assigned and transferred to the Registrant and the Registrant then assumed
and became responsible for any and all obligations and liabilities,
contingent or otherwise, of the Trustees of said Fund), would also be
afforded indemnification by the Registrant with respect to any of their
activities while acting as such Trustees under the following terms included
in a resolution adopted by unanimous vote of the Board of Directors of the
Registrant on April 24, 1974: "... that the corporation indemnify and hold
harmless each of said Trustees with respect to any claims made against any of
them and any expenses thereby incurred by any of them in connection with any
of their activities as such Trustees".
Insofar as indemnification for liabilities arising under the federal
Securities Act of 1933 may be permitted to directors, officers, or persons
controlling the Registrant, pursuant to the foregoing provisions, or
otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than
the payment by the Registrant of expenses incurred or paid by a director,
officer or controlling person of the Registrant in the successful defense of
any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against
public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
The Registrant also maintains a directors and officers liability and
corporation indemnification insurance policy issued by Illinois National
Insurance Company under which there are to be paid on behalf of the
Registrant all amounts for which the Registrant grants indemnification to a
director or officer of the Registrant with respect to any claim(s) made
against him which arise out of a "Wrongful Act" (as defined in the policy)
committed by such director or officer in his capacity as such a director or
officer and which he has become legally obligated to pay. Said policy also
insures each director or officer of the Registrant against loss arising from
any claim(s) not indemnified by the Registrant which may be made against him
by reason of any such "Wrongful Act" committed by him.
The limits of liability under said policy are $10,000,000 for each loss
and $10,000,000 for each policy year. The Registrant is subject to a $250,000
self-insured retention for a loss in which the Registrant grants
indemnification to the directors and officers. Each director and officer
covered by the policy has first dollar coverage with no deductible for each
loss in which the Registrant does not grant indemnification. Coverage is not
provided for claims under Section 16(b) of the federal Securities Exchange
Act of 1934, which could not arise in any event due to the ownership
limitations and restrictions on transfers which are applicable to the
Registrant's stock. Among the other classes of claims which are excluded from
coverage under the policy are claims based upon alleged violations of the
federal Employee Retirement Income Security Act of 1974.
Item 16. Exhibits
(a) Exhibits:
Exhibit
No.
-------
1 No exhibit.
2 No exhibit.
3-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.
3-B By-laws of the Registrant as amended through
August 19, 1997 (included as Appendix A to
the Prospectus constituting a part of this
Post-Effective Amendment No. 3 to the Registrant's
Form S-2 Registration Statement).
3-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.
3-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.
3-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.
3-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 herein by reference.
Exhibit
No.
-------
3-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.
3-H Certificate of Amendment to the Restated
Certificate of Incorporation of the Registrant
dated June 3, 1996, filed as Exhibit 4-H to
the Post-Effective Amendment No. 2 to the
Registrant's Form S-2 Registration Statement
(Registration No. 33-58191) on or about March 12,
1997 and incorported herein by reference.
4-A Specimen copy of Class B stock certificate as
revised as of November, 1984, filed as Exhibit 4-A
to Post-Effective Amendment No. 2 to the Registrant's
Form S-1 Registration Statement (Registration No.
2-82460) on March 15, 1985 and incorporated herein
by reference.
4-B Specimen copy of Patronage Refund Certificate
as revised in 1988 filed as Exhibit 4-B to
Post-Effective Amendment No. 2 to the
Registrant's Form S-1 Registration Statement
(Registration No. 33-4299) on March 29, 1988 and
incorporated herein by reference.
4-C Specimen copy of Class A stock certificate as
revised in 1987 filed as Exhibit 4-C to
Post-Effective Amendment No. 2 to the
Registrant's Form S-1 Registration Statement
(Registration No. 33-4299) on March 29, 1988 and
incorporated herein by reference.
4-D Specimen copy of Class C stock certificate
filed as Exhibit 4-I to the Registrant's Form
S-1 Registration Statement (Registration No.
2-82460) on March 16, 1983 and incorporated
herein by reference.
4-E Copy of current standard form of Subscription
for Capital Stock Agreement to be used for
dealers to subscribe for shares of the
Registrant's stock in conjunction with new
membership agreements submitted to the
Registrant filed as Exhibit 4-L to Post-Effective
Amendment No. 2 to the Registrant's Form S-2
Registration Statement (Registration No. 33-46449)
on March 23, 1994 and incorporated herein by reference.
4-F Copy of plan for the distribution of patronage
dividends with respect to purchases of merchandise
made from the Registrant from January 1, 1995-
December 31, 1997, adopted by the Board of
Directors of the Registrant on July 26, 1994
(the text of which plan is set forth under the
heading "The Company's Business," subheading
"Forms of Patronage Dividend Distributions"
in the Prospectus constituting a part of
this Post-Effective Amendment No. 3 to the
Registrant's Form S-2 Registration Statement).
4-G Copy of plan for the distribution of patronage
dividends with respect to purchases of merchandise
made from the Registrant on and after January 1,
1998, adopted by the Board of Directors of the
Registrant (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. 3
to the Registrant's Form S-2 Registration Statement).
Exhibit
No.
-------
5 (a) Opinion of David W. League, Vice President,
General Counsel of the Registrant, as to
legality of securities being registered.
(b) Opinion of Messrs. Gatenbey, Law &
League filed as Exhibit 7 to the Registrant's
Form S-1 Registration Statement (Registration
No. 2-82460) on March 16, 1983 and
incorporated herein by reference.
8 Exhibit 5(a) addresses tax matters as
required in Exhibit 8; the opinions of David
W. League, Vice President, General Counsel
and Secretary of the Registrant, as to certain
tax matters are set forth in statements attributed
to him under the sub-heading "Federal Income Tax
Status of Class A and Class C Shares" and subheading
"Federal Income Tax Treatment of Patronage
Dividends" in the Prospectus constituting a part
of this Post-Effective Amendment No. 3 to the
Registrant's Form S-2 Registration Statement.
9 No Exhibit.
10-A Copy of Ace Hardware Corporation Retirement
Benefits Replacement Plan Restated and Adopted
December 7, 1993.
10-B Copy of First Amendment to Restated Ace
Hardware Corporation Retirement Benefits
Replacement Plan adopted on August 19, 1997.
10-C Copy of First Amendment to Ace Hardware Corporation
Deferred Compensation Plan adopted on August 19, 1997.
10-D Copy of Restated PREPPlan (formerly known as
Executive Supplemental Benefit Plans) adopted
August 19, 1997.
10-E Copy of the "Ace Hardware Corporation
Officer's (sic) Incentive Compensation Plan"
as amended and restated effective January 1,
1994 filed as Exhibit 10-G to Post-Effective
Amendment No. 2 to the Registrant's Form S-2
Registration Statement (Registration No. 33-46449)
on March 23, 1994 and incorporated herein by reference.
10-F Second Modification of Amended and Restated
Note Purchase and Private Shelf Agreement
dated as of August 23, 1996, as amended by
the First Modification of Amended and Restated
Purchase and Private Shelf Agreement dated as of
April 2, 1997, with The Prudential Insurance Company
of America.
10-G Copy of Participation Agreement with PNC Commercial
Corp. dated December 17, 1997 establishing a
$10,000,000 discretionary leasing facility for the
purchase of land and construction of retail hardware
stores.
10-H Copy of Form of Executive Officer Employment
Agreement effective January 1, 1996, filed as
Exhibit 10-a-17 to Post-Effective Amendment
No. 1 to the Registrant's Form S-2 Registration
Statement (Registration No. 33-58191) on or
about March 11, 1996 and incorporated herein by
reference.
10-I Copy of Note Purchase and Private Shelf
Agreement with The Prudential Insurance
Company of America dated September 27, 1991
securing 8.74% Senior Series A Notes in the
principal sum of $20,000,000 with a maturity
date of July 1, 2003 filed as Exhibit 10-A-q
to the Registrant's Form S-2 Registration
Statement (Registration No. 33-46449) on March 23,
1992 and incorporated herein by reference.
Exhibit
No.
-------
10-J 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-K Copy of current standard form of Ace Hardware Membership
Agreement filed as Exhibit 10-P to Pre-Effective Amendment
No. 2 to the Registrant's Form S-2 Registration Statement
(Registration No. 33-58191) on or about April 26, 1995
and incorporated herein by reference.
10-L Copy of 6.89% Senior Series B notes in the aggregate
principal sum of $20,000,000 issued July 29, 1992 with
a maturity date of January 1, 2000 pursuant to Note
Purchase and Private Shelf Agreement with the Prudential
Insurance Company of America dated September 27, 1991
filed as Exhibit 10-Q to Post-Effective Amendment
No. 2 to the Registrant's Form S-2 Registration
Statement (Registration No. 33-46449) on March 23,
1994 and incorporated herein by reference.
10-M Copy of 6.47% Senior Series A notes in the aggregate
principal sum of $30,000,000 issued September 22,
1993 with a maturity date of June 22, 2008, and
$20,000,000 Private Shelf Facility, pursuant to Note
Purchase and Private Shelf Agreement with the Prudential
Insurance Company of America dated as of September 22,
1993 filed as Exhibit 10-R to Post-Effective Amendment
No. 2 to the Registrant's Form S-2 Registration
Statement (Registration No. 33-46449) on March 23, 1994
and incorporated herein by reference.
10-N Copy of Lease dated March 24, 1997 for print shop
facility of Registrant in Downers Grove, Illinois.
10-O Copy of Lease dated September 30, 1992 for general
offices of the Registrant in Oak Brook, Illinois filed
as Exhibit 10-A-u to the Post-Effective Amendment No.
1 to the Registrant's Form S-2 Registration Statement
(Registration No. 33-46449) on March 22, 1993 and
incorporated herein by reference.
10-P Copy of Ace Hardware Corporation Deferred Director
Fee Plan as amended on June 8, 1993 filed as Exhibit
10-W to Post-Effective Amendment No. 2 to the
Registrant's Form S-2 Registration Statement
(Registration No. 33-46449) on March 23, 1994 and
incorporated herein by reference.
10-Q Copy of Ace Hardware Corporation Deferred Compensation
Plan effective January 1, 1994 filed as Exhibit 10-X
to Post-Effective Amendment No. 2 to the Registrant's
Form S-2 Registration Statement (Registration No.
33-46449) on March 23, 1994 and incorporated herein by
reference.
10-R Copy of Lease dated September 22, 1994 for bulk
merchandise redistribution center of Registrant in
Carol Stream, Illinois filed as Exhibit 10-Y to the
Registrant's Form S-2 Registration Statement
(Registration No. 33-58191) on or about March 23,
1995 and incorporated herein by reference.
10-S Copy of Lease dated May 4, 1994 for freight
consolidation center of the Registrant in Chicago,
Illinois filed as Exhibit 10-Z to the Registrant's
Form S-2 Registration Statement (Registration No.
33-58191) on or about March 23, 1995 and incorporated
herein by reference.
Exhibit
No.
-------
10-T Copy of Long-Term Incentive Compensation Deferral
Option Plan of the Registrant effective January 1,
1995 adopted by its Board of Directors on December 6,
1994 filed as Exhibit 10-a-1 to the Registrant's Form
S-2 Registration Statement (Registration No. 33-58191)
on or about March 23, 1995 and incorporated herein by
reference.
10-U Copy of Directors' Deferral Option Plan of the
Registrant effective January 1, 1995 adopted by its
Board of Directors on December 6, 1994 filed as
Exhibit 10-a-2 to the Registrant's Form S-2 Registration
Statement (Registration No. 33-58191) on or about
March 23, 1995 and incorporated herein by reference.
10-V Copy of Agreement dated January 6, 1995 between Ace
Hardware Corporation and Roger E. Peterson filed as
Exhibit 10-a-9 to the Registrant's Form S-2 Registration
Statement (Registration No. 33-58191) on or about
March 23, 1995 and incorporated herein by reference.
10-W Copy of Lease dated July 28, 1995 between
A.H.C. Store Development Corp. and Tri-R
Corporation for retail hardware store premises
located in Yorkville, Illinois, filed as Exhibit
10-a-11 to Post-Effective Amendment No. 1 to the
Registrant's Form S-2 Registration Statement
(Registration No. 33-58191) on or about March 11,
1996 and incorporated herein by reference.
10-X Copy of Lease dated October 31, 1995 between Brant
Trade & Industrial Park, Inc. and Ace Hardware Canada
Limited for warehouse space in Brantford, Ontario,
Canada, filed as Exhibit 10-a-6 to Post-Effective
Amendment No. 1 to the Registrant's Form S-2
Registration Statement (Registration No. 33-58191)
on or about March 11, 1996 and incorporated herein
by reference.
10-Y Copy of Lease dated November 27, 1995 between 674573
Ontario Limited and Ace Hardware Canada Limited for
general office space in Markham, Ontario, Canada,
filed as Exhibit 10-a-13 to Post-Effective Amendment
No. 1 to the Registrant's Form S-2 Registration
Statement (Registration No. 33-58191) on or about
March 11, 1996 and incorporated herein by reference.
10-Z Copy of Lease dated February 9, 1995 between Leroy
M. Merritt and the Registrant for its Baltimore,
Maryland redistribution center, filed as Exhibit
10-a-14 to Post-Effective Amendment No. 1 to the
Registrant's Form S-2 Registration Statement
(Registration No. 33-58191) on or about March 11,
1996 and incorporated herein by reference.
10-a-1 Copy of First Amendment to the Ace Hardware Corporation
Long-Term Incentive Compensation Deferral Option Plan
effective December 5, 1995, filed as Exhibit 10-a-15
to Post-Effective Amendment No. 1 to the Registrant's
Form S-2 Registration Statement (Registration No.
33-58191) on or about March 11, 1996 and incorporated
herein by reference.
10-a-2 Copy of First Amendment to the Ace Hardware Corporation
Directors' Deferral Option Plan effective December 5,
1995, filed as Exhibit 10-a-16 to Post-Effective
Amendment No. 1 to the R egistrant's Form S-2
Registration Statement (Registration No. 33-58191)
on or about March 11, 1996 and incorporated herein by
reference.
Exhibit
No.
-------
10-a-3 Copy of Ace Hardware Corporation Executive Benefit
Security Trust Agreement effective July 19, 1995,
filed as Exhibit 10-a-18 to Post-Effective Amendment
No. 1 to the Registrant's Form S-2 Registration
Statement (Registration No. 33-58191) on or about
March 11, 1996 and incorporated herein by reference.
10-a-4 Copy of current standard form License Agreement for
International Retail Merchants adopted in 1996 filed
as Exhibit 10-a-12 to the Post-Effective Amendment
No. 2 to the Registrant's Form S-2 Registration
Statement (Registration No. 33-58191) on or about March
12, 1997 and incorporated herein by reference.
10-a-5 Copy of Lease Agreement dated as of September 1, 1996
for the Registrant's project facility in Wilton, New
York filed as Exhibit 10-a-13 to Post-Effective
Amendment No. 2 to the Registrant's Form S-2
Registration Statement (Registration No. 33-58191) on
or about March 12, 1997 and incorporated herein
by reference.
10-a-6 Copy of 6.47% Series A Senior Notes in the aggregate
principal amount of $30,000,000 issued August 23, 1996
with a maturity date of June 22, 2008, and $70,000,000
Private Shelf Facility, pursuant to Amended and Restated
Note Purchase and Private Shelf Agreement with the
Prudential Insurance Company dated August 23, 1996 filed
as Exhibit 10-a-14 to Post-Effective Amendment No. 2 to
the Registrant's Form S-2 Registration Statement
(Registration No. 33-58191) on or about March 12, 1997
and incorporated herein by reference.
10-a-7 Copy of First Amendment to Ace Hardware Corporation
Officer Incentive Plan adopted on August 19, 1997.
11 No exhibit.
12 No exhibit.
13 No exhibit.
15 No exhibit.
16 No exhibit.
23 (a) Consent of KPMG Peat Marwick LLP, dated March 16, 1998.
(b) Consent of Counsel, Legal Opinion-Exhibit 5(a).
24 Powers of Attorney.
25 No exhibit.
26 No exhibit.
27 Financial Data Schedule.
99 No exhibit.
Item 17. Undertakings.
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
bonafide offering thereof;
(d) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold
at the termination of the offering.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1933,
the registrant certifies that it has reasonable grounds to believe that it
meets all of the requirements for filing on Form S-2 and has duly caused
this Post-Effective Amendment No. 3 to the Registrant's Form S-2 Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the Village of Oak Brook, State of Illinois, on the day of
March 18, 1998.
ACE HARDWARE CORPORATION
By RICHARD E. LASKOWSKI
-----------------------------------
(Richard E. Laskowski,
Chairman of the Board and Director)
Pursuant to the requirement of the Securities Exchange Act of 1933, this
registration statement has been signed below by the following persons in the
capacities and on the dates indicated.
Signature Title Date
RICHARD E. LASKOWSKI Chairman of the Board March 18, 1998
- ------------------------- and Director
(Richard E. Laskowski)
DAVID F. HODNIK President and Chief March 18, 1998
- ------------------------- Executive Officer
(David F. Hodnik)
LORI L. BOSSMANN Vice President-Controller March 18, 1998
- ------------------------ (Principal Financial and
(Lori L. Bossmann) Accounting Officer)
Jennifer C. Anderson, Eric R. Bibens II, Directors
Lawrence R. Bowman, James T. Glenn,
D. William Hagan, Mark Jeronimus,
John E. Kingrey, Roger E. Peterson,
Jon R. Weiss and James R. Williams, Jr.
*By DAVID F. HODNIK
---------------------
(David F. Hodnik)
*By LORI L. BOSSMANN March 18, 1998
---------------------
(Lori L. Bossmann)
*Attorneys-in-fact
INDEX TO EXHIBIT FILED TO
THE POST-EFFECTIVE AMENDMENT NO. 3 TO REGISTRATION STATEMENT
ON FORM S-2 OF ACE HARDWARE CORPORATION
Exhibit
Number Exhibit
------- -------
3-B By-laws of the Registrant as amended through August 19,
1997 (included as Appendix A to the Prospectus
constituting a part of this Post-Effective Amendment
No. 3 to the Registrant's Form S-2 Registration Statement).
4-F Copy of plan for the distribution of patronage dividends
with respect to purchases of merchandise made from the
Registrant from January 1, 1995-December 31, 1997
adopted by the Board of Directors of the Registrant
on July 26, 1994, (the text of which plan is set forth
under the heading "The Company's Business," subheading
"Forms of Patronage Dividend Distributions" in the
Prospectus constituting a part of this Post-Effective
Amendment No. 3 to the Registrant's Form S-2 Registration
Statement).
4-G Copy of plan for the distribution of patronage dividends
with respect to purchases of merchandise made from the
Registrant on and after January 1, 1998, adopted by the
Board of Directors of the Registrant (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. 3 to the Registrant's
Form S-2 Registration Statement).
5 (a) Opinion of David W. League, Vice President and
General Counsel of the Registrant as to legality of
securities being registered.
10-A Copy of Ace Hardware Corporation Retirement Benefits
Replacement Plan Restated and Adopted December 7, 1993.
10-B Copy of First Amendment to Restated Ace Hardware
Corporation Retirement Benefits Replacement Plan adopted
on August 19, 1997.
10-C Copy of First Amendment to Ace Hardware Corporation
Deferred Compensation Plan adopted on August 19, 1997.
10-D Copy of Restated PREP Plan (formerly known as Executive
Supplemental Benefit Plans) adopted August 19, 1997.
10-F Second Modification of Amended and Restated Note Purchase
and Private Shelf Agreement dated as of August 23, 1996,
as amended by the First Modification of Amended and
Restated Purchase and Private Shelf Agreement dated as of
April 2, 1997 (the "Note Agreement"), with The Prudential
Insurance Company of America.
10-G Copy of Participation Agreement with PNC Commercial Corp.
dated December 17, 1997 establishing a $10,000,000
discretionary leasing facility for the purchase of land
and construction of retail hardware stores.
10-N Copy of Lease dated March 24, 1997 for print shop
facility of Registrant in Downers Grove, Illinois.
10-a-7 Copy of First Amendment to Ace Hardware Corporation
Officer Incentive Plan adopted on August 19, 1997.
Exhibit
No.
-------
23 (a) Consent of KPMG Peat Marwick LLP, dated March 16, 1998.
(b) Consent of Counsel, Legal Opinion-Exhibit 5(a).
24 Powers of Attorney.
27 Financial Data Schedule.
The various exhibits incorporated by reference are listed in Item 16 of
this Post-Effective Amendment No. 3 to the Form S-2 Registration Statement of
Ace Hardware Corporation.
March 18, 1998
To the Board of Directors
Ace Hardware Corporation
2200 Kensington Court
Oak Brook, Illinois 60521
Re: Total Shares Offered By Prospectus
1,146 Class A
42,949 Class C
Gentlemen:
This opinion relates to the legality of the 1,146 shares of Class A voting
stock (par value $1,000 per share) and 42,949 shares of Class C nonvoting
stock (par value $100 per share) of Ace Hardware Corporation (the "Company"),
a Delaware corporation, previously registered with the Securities and
Exchange Commission. Of the foregoing shares, 1,146 unsold shares of Class A
stock and 40,000 of Class C stock were previously registered under
Registration Statement No. 33-58191, and 2,949 shares of Class C stock were
previously registered under Registration Statement No. 33-46449. These shares,
pursuant to Rule 429 of Regulation C of the Securities Act of 1933, are being
offered by the Prospectus filed as a part of the Post-Effective Amendment No. 3
to Registration Statement No. 33-58191, with respect to which said opinion is
furnished.
As General Counsel in the Legal Department of the Company since January 1,
1989 and as a partner in the firm of Gatenbey, Law & League which acted as
general counsel to the Company and its Illinois predecessor corporation for
many years prior to that date, I have examined the Company's restated
Certificate of Incorporation (as amended to date), and its corporate
proceedings, and have made such other investigations as I have deemed
necessary or appropriate for the purpose of this opinion.
VALIDITY OF SHARES OF STOCK
Based upon the foregoing, I am of the opinion that:
(1) The Company is duly organized and validly existing as a corporation in good
standing under the laws of the State of Delaware and is also duly qualified to
do business as a foreign corporation in, and is in good standing under the
laws of, the States of Alabama, Arizona, Arkansas, California, Colorado,
Connecticut, Florida, Georgia, Idaho, Illinois, Kentucky, Maryland,
Mississippi, Missouri, Nebraska, New York, North Carolina, Ohio, Oregon,
South Carolina, Texas, Washington and Wisconsin.
(2) The total authorized capital stock of the Company consists of 10,000
shares of Class A Voting Stock (par value $1,000 per share), 6,500 shares of
Class B Nonvoting Stock (par value $1,000 per share) and 4,000,000 shares of
Class C Nonvoting Stock (par value $100 per share).
(3) All of the shares of capital stock of the Company which are to be offered
by the Prospectus filed as a part of the aforesaid Post-Effective Amendment
No. 3 to Registration Statement No. 33-58191 with respect to which this
opinion is furnished (including any shares which may have heretofore been
issued but are not presently outstanding), will, upon issuance in accordance
with the terms set forth in said Prospectus, constitute legally and validly
issued, fully paid and non-assessable shares.
This opinion also relates to the preference in excess of par value to which
shares of Class "B" stock (par value $1,000 per share) of Ace Hardware
Corporation (the "Company"), a Delaware corporation, are entitled in the
event of the involuntary liquidation of the Company. The restated Certificate
of Incorporation authorizes the Company to issue 6,500 shares of Class "B"
stock, of which 2,716 shares are presently issued and outstanding.
I have examined the restated Certificate of Incorporation, as amended, and the
By-laws of the Company, and note that the matter of distribution of the net
assets of the Company in the event of an involuntary liquidation is provided
for in Article Fourth (j) of the restated Certificate of Incorporation. It
is stated therein that, in the event of a liquidation (voluntary or
involuntary), the net assets of the Company shall be distributed among the
holders of all classes of issued and outstanding stock of the Company. In
such event, there shall first be distributed to the holders of outstanding
shares of Class B Stock and Class C Stock amounts equal to the total amounts
which the Company would have been required to pay to them to purchase or
redeem all of their outstanding shares of such stock in accordance with the
purchase or redemption prices for said shares as last determined by the Board
of Directors, but if the net assets are insufficient to pay such amounts to
the holders of said shares, each outstanding share of Class B Stock and each
outstanding share of Class C Stock shall share in the distribution of the
Company's net assets in the proportion which its purchase or redemption price
bears to such total amount. If the net assets exceed said total amount, the
excess is to be distributed in equal portions to each holder of an outstanding
share of Class A Stock, but the amount so distributed to each holder of a
share of Class A Stock cannot exceed such share's par value. Any net assets
still remaining are to be distributed among the holders of all classes of
issued and outstanding shares of stock of the Company pursuant to the
following procedure:
(a) there shall first be determined the sum of the total par value of all of
the outstanding shares of Class A Stock and the total amount which the Company
would have been required to pay to purchase or redeem all of its outstanding
shares of Class B Stock and Class C Stock in accordance with the purchase or
redemption prices thereof last determined by the Board of Directors;
(b) each outstanding share of Class A Stock shall share in said remaining net
assets in the proportion which the par value thereof bears to the sum
determined in the foregoing manner; and
(c) each outstanding share of Class B Stock and each outstanding share of
Class C Stock shall share in said remaining net assets in the proportion
which the purchase or redemption prices thereof last determined by the Board
of Directors bear to said sum.
Since Article Fourth (g) and Article Fourth (h) of the restated Certificate of
Incorporation of the Company provide (i) that the purchase or redemption price
to be paid by the Company for shares of its Class B Stock must at all times be
equal to 20 times the per share purchase or redemption price last established
by the Board of Directors with respect to purchases or redemptions by the
Company of its Class C Stock, (ii) that the purchase or redemption price to
be paid by the Company for its Class C Stock cannot be less than the par value
thereof, and (iii) that the purchase or redemption price to be paid by the
Company for its Class B Stock shall in no event be less than par value
thereof, the shares of Class B Stock could have a preference in excess of par
value in the event of involuntary liquidation.
PREFERENCE OF CLASS B STOCK IN VOLUNTARY LIQUIDATION
In my opinion the provisions of the restated Certificate of Incorporation
providing for such preference with respect to the shares of Class "B" Stock of
the Company are legally permitted and have been legally adopted in accordance
with Section 151(d) of the General Corporation Law of Delaware which provides,
"The holders of the preferred or special stock of any class or of any series
thereof shall be entitled to such rights upon the dissolution of, or upon the
distribution of any assets of, the corporation as shall be stated in the
Certificate of Incorporation or in the resolution or resolutions providing for
the issue of such stock adopted by the Board of Directors as hereinabove
provided."
It is my further opinion that the aforementioned preference of the Class "B"
stock in the event of involuntary liquidation of the Company does not require,
and does not have the effect of, placing any restrictions upon surplus by
reason of the potential preference in excess of par value attached to the
Class "B" shares. In view of the fact that Article Fourth (f) of the restated
Certificate of Incorporation expressly prohibits the Company from declaring
dividends on any of the shares of any class of stock of the Company, it is
also my opinion that no holders of any securities of the Company would have
any remedies before or after payment of any dividend which would reduce
surplus to an amount less than the amount of such excess.
TAX ISSUES
Statements made under subheadings "Federal Income Tax Status of Class A and
Class C Shares," pp. 8-9 and "Federal Income Tax Treatment of Patronage
Dividends," pp. 28-29 of the Prospectus that is part of the aforesaid Post-
Effective Amendment No. 3 to Registration Statement No. 33-58191 also
represent my opinion concerning said matters.
CONSENT
I understand that this opinion is to be used in connection with the aforesaid
Post-Effective Amendment No. 3 to Registration Statement No. 33-58191, and I
consent to the filing of this opinion with the Registration Statement and to
the reference to me in the Prospectus under the heading "Opinion of Experts".
10-K CONSENT
I further consent to "Federal Income Tax Treatment of Patronage Dividends,"
pages 14-16 of the 10-K which is incorporated by reference into the above-
referenced S-2 Registration Statement and which also represents my opinion
concerning said matters.
Sincerely,
DAVID W. LEAGUE
David W. League
Vice President-General Counsel
Ace Hardware Corporation
ACE HARDWARE CORPORATION
RETIREMENT BENEFITS REPLACEMENT PLAN
RESTATED AND ADOPTED DECEMBER 7, 1993
I
PURPOSE
The purpose of this Retirement Benefits Replacement Plan is to continue to
provide on an unfunded basis for certain participants in the Ace
Hardware Corporation Employees' Profit Sharing Plan ("Profit Sharing Plan")
and the Ace Hardware Corporation Employees' Pension Plan ("Pension Plan")
retirement benefits equal to the amounts by which the benefits they would
have been entitled to receive under the Profit Sharing Plan and Pension Plan
are reduced by reason of the limitations on contributions and benefits
imposed by Section 415 of the Internal Revenue Code of 1986 ("Code"), the
limitations on compensation imposed by Section 401(a)(17) of the Code, or by
any future federal legislation which limits compensation or benefits
(the "Limitations"). It is intended that this Plan shall constitute an
"excess benefit plan" as defined in 3(36) of the Employee Retirement Income
Security Act of 1974 ("ERISA") and an unfunded deferred compensation plan for
a select group of highly compensated employees as described in Sections
201(2), 301(a)(3) and 401(a)(1) of ERISA.
II
EFFECTIVE DATE
This Plan shall be effective for all reductions in benefits under the Profit
Sharing Plan and the Pension Plan for participants herein which result from
imposition of the Limitations at any time on or after January 1, 1985. The
Plan was originally adopted on October 1, 1985 and is herein restated
effective as of January 1, 1989, unless specifically provided otherwise.
III
PLAN PARTICIPATION
Participation in this Plan shall be exclusively limited to any officer or
key employee who is designated as a Participant by the Board of Directors of
Ace Hardware Corporation ("Board") and whose benefits under either or both
of the Profit Sharing Plan and the Pension Plan are reduced by reason of the
Limitations. Effective as of January 1, 1994, the following individuals
shall become or continue to be Participants hereunder:
Roger E. Peterson
David F. Hodnik
William A. Loftus
Paul M. Ingevaldson
Michael C. Bodzewski
Rita D. Kahle
David W. League
David F. Myer
Fred J. Neer
Donald L. Schuman
IV
PENSION PLAN REPLACEMENT BENEFITS
Effective until December 31, 1992 there shall be accrued as monthly benefits
for a Participant under this Plan an amount equal to the excess, if any, of
the amount described in paragraph (i) below over the amount described in
paragraph (ii) below:
(i) The amount of benefit to which he would be
entitled under the Pension Plan if such
benefit were computed without giving any
effect to the Limitations imposed by Section
415 of the Code or by Section 401(a)(17) of
the Code,
(ii) The amount of benefit to which he is
entitled under the Pension Plan.
The amount so determined shall be subject to such adjustments as the Board
may from time to time deem appropriate to reflect any changes in the
application of the Limitations.
Any benefits under this Section which become payable to such Participant
and/or surviving spouse or child or children of such Participant shall be
paid in the same manner and at the same time that benefits are payable under
the Pension Plan, except that if the Participant elects to take early
retirement as provided for under the Pension Plan, his monthly benefits
hereunder shall in no event commence to be paid to him earlier than the
date as of which he attains the age of 60 years.
As of January 1, 1993, a Participant shall no longer accrue any Pension Plan
Replacement Benefits and any benefit accrued prior to this time shall be
"frozen" as of December 31, 1992.
V
PROFIT SHARING PLAN REPLACEMENT BENEFITS
(a) Profit Sharing Replacement Benefits. As of the
last day of each calendar year there shall be
accrued for the account of a participant under
this Plan amounts equal to the excess, if any, of
the amount described in paragraph (i) below over
the amount described in paragraph (ii) below:
2
(i) The amount of benefit to which he would
be entitled under the Profit Sharing Plan if such
benefit were computed without giving any effect to
the Limitations imposed by Section 415 of the Code
or by Section 401(a)(17) of the Code,
(ii) The amount of benefit to which he is
entitled under the Profit Sharing Plan.
The amount so determined shall be subject to such adjustments as the
Board may from time to time deem appropriate to reflect any changes
in the application of the Limitations.
At the same time that annual adjustments are made to the
account of such Participant for his proportionate share
of the earnings or losses realized or incurred by the
Trust established under the Profit Sharing Plan,
adjustments bearing the same percentage relationship to
his account balance under this Plan shall be made to said
account balance.
A Participant who dies, retires or becomes disabled
during a calendar year shall be considered a Participant
on the last day of the year in which such event occurs,
for purposes of determining the Profit Sharing
Replacement Benefit, if any, for such year,
(b) Payment of Profit Sharing Plan Replacement Benefits:
Effective January 1, 1993 any benefits accrued under this
Section shall be paid to such Participant upon the
following dates selected by the Participant pursuant to a
valid election:
(A) in one lump sum as soon as practicable after
the date of his retirement disability or death
(as defined in the Profit Sharing Plan); or
(B) in one lump sum at a date specified in the
election, which date can be no later than 10
years after the date of retirement; or
(C) in monthly installment payments beginning when
designated after the date of retirement and
extending for a period of up to 10 years as
designated by the Participant; or
(D) in one lump sum as soon as practicable
following termination of employment other than
retirement, disability or death.
In order to be valid, 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 retirement
or (ii) the last day of the calendar year
preceding the calendar year of the Participant's
retirement.
Payments will be made to the Participant except,
that if termination of employment occurs by reason
of the death of the Participant or upon the death
of a Participant receiving installments, such
benefits shall be paid or continue to be paid to
the beneficiary or beneficiaries designated by him
to receive payment of benefits under the Profit
Sharing Plan, and in accordance with the
Participant's election.
3
In the event a valid election is not on file with
the Plan Administrator, as determined by the
Board, any benefits payable to a Participant or
beneficiary shall be paid in a lump sum as soon as
practicable.
(c) Accumulations on Deferred or Installment Payments.
The benefits accrued for the account of any
Participant in the Plan who has elected to defer
payments or elected to receive installments shall
be augmented by the accumulation of additional
values earned from the retirement (minus any
installment payments) 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 benefit
payment deferrals at any time.
(d) 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 the Participant's financial hardship
or other unforeseeable event.
VI
VESTING
The vesting rules set forth in the Pension Plan shall be applied for
purposes of determining the vested interest of a participant in the
Pension Plan Replacement Benefits accrued for him under this Plan and
the vesting rules set forth in the Profit Sharing Plan shall be applied
for purposes of determining the vested interest of a Participant in the
Profit Sharing Plan Replacement Benefits accrued for his account under
this Plan.
UNFUNDED PLAN
Ace Hardware Corporation shall maintain such records as shall be deemed by
it to be appropriate for the determination at the end of each calendar year
of the Pension Plan Replacement Benefits accrued for a participant hereunder
as of such date and the balances accrued for the account of each participant
hereunder as of such date as Profit Sharing Plan Replacement Benefits, but
annual or other periodic book entries need not be made with respect to any
of the benefits provided for under the Plan unless the same shall otherwise
be required by law or by generally accepted accounting principles. However,
no payments are to be made by Ace Hardware Corporation for the funding of
any of the benefits provided under this Plan, and Ace Hardware Corporation's
only obligation hereunder with respect to any participant, surviving spouse,
or other beneficiary of any participant shall be to pay the benefits provided
hereunder as the same become due and payable in accordance with the terms
hereof. The rights of any participant and of any surviving spouse or other
beneficiary of a participant hereunder shall be solely those of an unsecured
creditor of Ace Hardware Corporation.
4
VIII
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 benefits 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 the 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
payments of benefits provided for by this Plan shall be subject to seizure
for payment of any debts of or judgments against, the Participant. The
right of the Participant or any other person to the payment of benefits
under the Plan shall not be assigned, transferred, pledged or encumbered
except by a 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.
IX
GENERAL PROVISIONS
(a) Administration. This Plan shall be administered by the Company.
The Company shall be the Plan Administrator, within the meaning of ERISA
and shall have authority with respect to this Plan that is co-extensive of
that which the Plan Administrator has with respect to the Pension Plan and
Profit Sharing Plan, including but not limited to the discretionary
authority to construe and to interpret the Plan and to control and manage
the operation and administration of the Plan. The Board may adopt rules
regarding the administration of the Plan and delegate responsibilities as
deemed appropriate. The claims procedure set forth in the Pension Plan and
Profit Sharing Plan shall apply to claims for benefits under this Plan.
(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 my 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.
5
(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 benefits
hereunder any taxes required to be withheld.
X
TERMINATION OR AMENDMENT
The Board reserves the right to amend this Plan from time to time or 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
accrued benefit, as constituted at the time of the amendment or termination,
as may be the case. without written consent of the effected Participant.
6
EXHIBIT A
FIRST AMENDMENT
TO
RESTATED ACE HARDWARE CORPORATION
RETIREMENT BENEFITS REPLACEMENT PLAN
(Adopted on August 19, 1997)
This First Amendment to the Restated Ace Hardware Corporation Retirement
Benefits Replacement Plan is hereby entered into on this 19th day of
August, 1997 and is effective September 1, 1997:
WITNESSETH:
Whereas the Company adopted a Retirement Benefits Replacement Plan on
October 1, 1985 and restated the Plan on December 7, 1993; and
Whereas the Company has amended this Plan to provide for participation by
certain officers of the corporation specifically named in the Plan as
Participants therein;
Now therefore, effective September 1, 1997, the Ace Hardware Corporation
Retirement Benefits Replacement Plan is amended to add certain named
officers and key employees of the corporation as Participants in the Plan
and to restate Article III, Plan Participation, as follows:
III
PLAN PARTICIPATION
Participation in this Plan shall be exclusively limited to any officer or
key employee who is designated as a Participant by the Board of Directors
of Ace Hardware Corporation ("Board") and whose benefits under any of the
Profit Sharing Plan, Money Purchase Plan and the Pension Plan are reduced
by reason of the Limitations. Effective as of January 1, 1998, the
following individuals shall become or continue to be Participants hereunder:
David F. Hodnik
William A. Loftus
Paul M. Ingevaldson
Rita D. Kahle
Michael C. Bodzewski
Lori L. Bossmann
Ray A. Griffith
David W. League
David F. Myer
Fred J. Neer
Donald L. Schuman
Effective 9/01/97
FIRST AMENDMENT
TO
ACE HARDWARE CORPORATION
DEFERRED COMPENSATION PLAN
(Adopted on August 19, 1997)
This First Amendment to the Ace Hardware Corporation Deferred Compensation
Plan is hereby entered into on this 19th day of August, 1997 and is
effective September 1, 1997:
WITNESSETH:
Whereas the Company adopted a Deferred Compensation Plan effective as of
January 1, 1994; and
Whereas the participation in The Plan is exclusively limited to any officer
or key management employee designated as a Participant by the Board of
Directors;
Now therefore, effective September 1, 1997, the Ace Hardware Corporation
Deferred Compensation Plan is amended to add certain officers and key
management employees as Participants in the Plan and to restate Article III,
Eligibility For Plan Participation, as follows:
III
ELIGIBILITY FOR PLAN PARTICIPATION
Participation in this 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, 1998, the following individuals shall become and/or
continue to be Participants hereunder (hereinafter the "Participant"):
David F. Hodnik
William A. Loftus
Paul M. Ingevaldson
Rita D. Kahle
Michael C. Bodzewski
Lori L. Bossmann
Ray A. Griffith
David W. League
David F. Myer
Fred J. Neer
Donald L. Schuman
Effective 9/01/97
RESTATED PREP PLAN
(Formerly Known as Executive Supplemental Benefit Plans)
(Adopted August 19, 1997)
Ace Hardware Corporation PREP Plan is intended to provide part of the
basis for attracting, retaining and rewarding key executives. This Plan
will supplement, as set forth within this document, the Corporation's life
insurance program offered to executive employees.
Compensation and Human Resources Committee
The Compensation and Human Resources Committee of the Board of Directors
shall have overall administrative responsibility for the Plan.
Eligibility
The participants in the Plan are nominated by the President and confirmed
by the Board of Directors.
Executive Tiers
Each participant in the Plan is assigned one of the Tiers listed below
which are reflective of position responsibility and level of benefits
provided.
Supplemental Life Insurance Program
The Corporation will provide, by Tier level, a supplemental universal life
insurance policy to each eligible executive. The reason for providing a
universal life insurance policy, instead of a term life policy, is to
provide an investment vehicle for the supplemental retirement benefit. The
policy will be owned by each individual executive. The Corporation will
pay up to 125% of the standard term life premium rate for each individual
policy. If an individual executive's policy costs more than the established
rate, it will be that individual's responsibility to pay the additional costs
or accept a reduced face amount of life insurance. Listed below are the
face amounts of life insurance to be provided by Tier:
Tier(s) Face Amount
Tier I $600,000
Tier II $400,000
Tier III $200,000
Participants in the Plans for the year 1998 and subsequent years
Tier I President and Chief Executive Officer
David F. Hodnik
Tier II Corporate Vice President
Michael C. Bodzewski
Lori L. Bossmann
Paul M. Ingevaldson
Rita D. Kahle
David W. League
William A. Loftus
David F. Myer
Fred J. Neer
Donald L. Schuman
Tier III Company Vice President
Ray A. Griffith
Plan Administration Policy and Issues
The PREP Plan will be administered by the Compensation and Human Resources
Committee and its interpretation of the plan and determination of the
benefit granted under the plan will be final and binding on all participants
and their estates. Subject to the provisions of the plan, the Compensation
and Human Resources Committee, at any time, will have the authority to
establish, adopt or revise such rules and regulations as it deems necessary
for the administration of the plan.
The Board of Directors has the authority to terminate or amend the
supplemental plan in any respect at the end of each plan year.
The supplemental plan does not constitute an employment contract and does
not alter the fact that plan participant(s),if not under contract, may
resign from the Corporation and the Corporation may discharge plan
participant(s).
The Restated PREP Plan is effective September 1, 1997.
Effective 9/01/97
Prudential Prudential Capital Group
Corporate Finance
Two Prudential Plaza, Suite 5600,
Chicago IL 60601-6716
Tel 3l2 540-0931 Fax 3l2 540-4222
As of January 29, 1998
Ace Hardware Corporation
2200 Kensington Court
Oak Brook, Illinois 60521
Attention: Treasurer
Re: Second Modification of Amended and Restated Note
Purchase and Private Shelf Agreement dated as of
August 23, 1996, as amended by the First Modification
of Amended and Restated Purchase and Private Shelf
Agreement dated as of April 2, 1997 (the "Note
Agreement"), by and between Ace Hardware Corporation
(the "Company") and The Prudential Insurance Company
of America ("Prudential")
Ladies and Gentlemen:
Reference is made to the above-captioned Note Agreement, pursuant to
which the Company issued and sold (or will issue and sell) and Prudential
purchased (or will purchase) the Company's (i) 6.47% Senior Series A Notes
in the original principal amount of $30,000,000, due June 22, 2008,
(ii) 7.49% Senior Series B Notes in the original principal amount of
$20,000,000, due June 15, 2011, (iii) 7.55% Senior Series C Notes in the
original principal amount of $30,000,000, due March 25, 2009 and (iv) 6.61%
Senior Series D Notes in the original principal amount of $25,000,000, due
February 9, 2010. Capitalized terms used and not otherwise defined herein
shall have the meanings assigned to such terms in the Note Agreement.
Pursuant to the request of the Company and in accordance with the
provisions of paragraph 11C of the Note Agreement, the parties hereto agree
as follows:
SECTION 1. Amendment. From and after the date this letter becomes
effective in accordance with its terms, the Note Agreement is amended as
follows:
1.1 Paragraph 1B is amended by deleting "$70,000,000" and substituting
"$75,000,000" therefor. The Company and Prudential agree that, after giving
effect to the sale of the Series D Notes, the amount available under the
Facility is $0.
Ace Hardware Corporation
As of January 29, 1998
Page 2
1.2 Paragraph 9B is amended by deleting in its entirety and
substituting therefor the following:
9B. Source of Funds. The source of the funds
being used by such Purchaser to pay the purchase
price of the Notes being purchased by such Purchaser
hereunder constitutes assets allocated to: (i) the
"insurance company general account" of such Purchaser
(as such term is defined under Section V of the
United States Department of Labor's Prohibited
Transaction Class Exemption ("PTCE") 95-60), and as
of the date of the purchase of the Notes such
Purchaser satisfies all of the applicable
requirements for relief under Sections I and IV of
PTCE 95-60, (ii) a separate account maintained by
such Purchaser in which no 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 or (iii) an investment fund, the assets of which
do not include any assets of any employee benefit
plan. 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.
SECTION 2. Conditions Precedent. This letter shall become effective as
of January 29, 1998 upon the return by the Company to Prudential of a
counterpart hereof duly executed by the Company.
SECTION 3. Reference to and Effect on Note Agreement. Upon the
effectiveness of this letter, each reference to the Note Agreement in any
other document, instrument or agreement shall mean and be a reference to the
Note Agreement as modified by this letter. Except as specifically set forth
in Section I hereof, the Note Agreement shall remain in full force and effect
and is hereby ratified and confirmed in all respects.
SECTION 4. Governing Law. THIS LETTER SHALL BE CONSTRUED AND ENFORCED
IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF ILLINOIS, WITHOUT
REGARD TO PRINCIPLES OF CONFLICT OF LAWS OF SUCH STATE.
Ace Hardware Corporation
As of January 29, 1998
Page 3
SECTION 5. Counterparts; Section Titles. This letter may be executed
in any number of counterparts, each of which when so executed and delivered
shall be deemed to be an original and all of which taken together shall
constitute but one and the same instrument. The section titles contained in
this letter are and shall be without substance, meaning or content of any
kind whatsoever and are not a part of the agreement between the parties
hereto.
Very truly yours,
THE PRUDENTIAL INSURANCE
COMPANY OF AMERICA
By:____________________________
Vice President
Agreed and Accepted:
ACE HARDWARE CORPORATION
By:______________________________
Title:_____________________________
PARTICIPATION AGREEMENT
between
ACE HARDWARE CORPORATION
and
PNC COMMERCIAL CORP
Dated as of December 17, 1997
TABLE OF CONTENTS
Page
ARTICLE I 1
SECTION 1.01. Definitions and Rules of Usage 1
SECTION 1.02. Documentary Conventions 1
ARTICLE II 1
SECTION 2.01. Operative Agreements 1
SECTION 2.02. Contributions; Commitment 1
SECTION 2.03. Use of Proceeds of Contributions 1
SECTION 2.04. Records 2
ARTICLE III 2
SECTION 3.01. Conditions Precedent to Participation 2
SECTION 3.02. Conditions to the Lessor's Obligations 4
SECTION 3.03. Conditions Precedent to the Lessor's
Obligation To Acquire Property 5
SECTION 3.04. Conditions Precedent to the Lessor's
Obligation To Fund Construction on
Any Property 9
SECTION 3.05. Conditions Precedent to the
Commencement of the Basic Term for
any Property 10
ARTICLE IV 11
SECTION 4.01. General Representations and
Warranties of Ace 11
SECTION 4.02. Ace Funding Date Representations
and Warranties 15
SECTION 4.03. Ace Property Closing Date
Representations and Warranties 16
SECTION 4.04. Ace Construction Funding Date
Representations and Warranties 16
SECTION 4.05. Ace Commencement of Basic Term
Representations and Warranties 17
SECTION 4.06. General Representations and
Warranties of Lessor 17
ARTICLE V 18
SECTION 5.01. No Lessor Liens 18
SECTION 5.02. Further Assurances; Etc 19
SECTION 5.03. Payment of Certain Expenses 19
SECTION 5.04. Taxes 20
SECTION 5.05. Tax and Accounting Treatment 20
ARTICLE VI 20
SECTION 6.01. Incorporation of Covenants From Ace
Credit Agreement 20
ARTICLE VII 21
SECTION 7.01. Ace 21
SECTION 7.02. Lessor 21
ARTICLE VIII 22
SECTION 8.01. General Indemnity 22
EXHIBITS, ANNEXES AND SCHEDULES
Annex A Rules of Usage, Definitions and Documentary Conventions
Exhibit A Lease
Exhibit B Opinion of Counsel for Ace
Exhibit C-1 Non-Disturbance and Attornment Agreement (Lender)
Exhibit C-2 Non-Disturbance and Attornment Agreement (Sublessee)
Exhibit C-3 Non-Disturbance and Attornment Agreement (Assignee)
Exhibit D Agency Agreement
Exhibit E Environmental Indemnity Agreement
Schedule 4.01(h) Ace's Subsidiaries
PARTICIPATION AGREEMENT
THIS PARTICIPATION AGREEMENT, dated as of December 17, 1997 is
entered into by and between ACE HARDWARE CORPORATION, a Delaware
corporation, and PNC COMMERCIAL CORP, a Florida corporation.
The parties hereby agree as follows:
ARTICLE I
Definitions, Rules of Usage and Documentary Conventions
SECTION 1.01. Definitions and Rules of Usage. Capitalized terms used
herein have the meanings assigned to them in Annex A hereto. The rules of
usage contained in Annex A hereto are applicable hereto.
SECTION 1.02. Documentary Conventions. The documentary conventions
set forth in Annex A hereto shall apply to this Agreement.
ARTICLE II
Summary of Transactions
SECTION 2.01. Operative Agreements. On the Closing Date, each party
shall execute and deliver each of the Operative Agreements.
SECTION 2.02. Contributions; Commitment. (a) On the terms and
subject to the conditions set forth in this Agreement, the Lessor shall make
Contributions to Ace from time to time, as specified in the applicable
Requisition; provided, however, that the aggregate amount of Contributions
made hereunder shall not exceed $10,000,000; and provided, further, that the
aggregate amount of the Unrecovered Contributions with respect to any
Property at any time shall not exceed the Commitment with respect to such
Property at such time.
(b) At the request of Ace, from time to time, at its sole
discretion, the Lessor may issue a written commitment (each a "Commitment")
to provide Contributions for the Acquisition of, and/or payment of Property
Costs of any Improvements on, any Property; provided, however that the
portion of the Property Costs consisting of "soft costs" for any one
Property shall not exceed ten percent (10%) of the total Property Costs for
such Property.
SECTION 2.03. Use of Proceeds of Contributions. All amounts paid
by the Lessor to Ace as Contributions shall be used by Ace solely to pay
costs and expenses that constitute Property Costs by (i) paying costs and
expenses incurred in connection with the Acquisition of any Property or
(ii) paying invoices therefor that are due and payable and issued to the
Construction Agent.
SECTION 2.04. Records. Ace shall keep accurate records of all
Property Costs, including copies of all relevant invoices and evidence of
payment thereof, with sufficient detail to show each Property to which the
Property Costs have been allocated. Ace shall permit representatives of
the Lessor to have access to such records at all reasonable times and to
make such copies of such records as such representatives deem necessary.
ARTICLE III
Conditions Precedent
SECTION 3.01. Conditions Precedent to Participation. The
obligations of Ace and the Lessor to participate in the transactions
contemplated hereby to occur on the Closing Date shall be subject to the
fulfillment, on or prior to the Closing Date, of the following conditions
precedent as applicable to each such Person (each document, agreement,
instrument or writing referred to below to be satisfactory in form and
substance to each such Person in its reasonable discretion):
(a) Litigation. No Litigation shall have been instituted,
nor shall any written order, judgment or decree have been issued or, to the
best of Ace's knowledge, proposed to be issued by any Governmental Authority,
to set aside, restrain, enjoin or prevent the execution and delivery of this
Agreement or the other Operative Agreements or the consummation of the
transactions contemplated hereby or thereby or that would adversely affect
the ability of any party to any of the Operative Agreements to perform its
obligations under each Operative Agreement to which it is a party.
(b) Consents and Approvals. All Governmental Actions and all
consents, waivers and actions by or from any trustee or holder of any Debt
or obligations of Ace or from any other Person that are necessary in
connection with the execution and delivery of this Agreement and the other
Operative Agreements or the consummation of the transactions contemplated
hereby and thereby shall have been duly taken, given or obtained, shall be
in full force and effect on the Closing Date, shall not be subject to any
pending Litigation and either the time within which any appeal therefrom may
be taken or review thereof may be obtained shall have expired or no review
thereof may be obtained or appeal therefrom taken and shall be adequate to
authorize the consummation of the transactions contemplated by this Agreement
and the other Operative Agreements and the performance by each party of its
obligations hereunder and thereunder.
(c) Governmental Action. No Governmental Action shall be
required for the participation by Ace or the Lessor in the transactions
contemplated by the Operative Agreements.
(d) Authorization, Execution and Delivery of Documents. Each
Operative Agreement shall have been duly authorized, executed and delivered
by the respective parties thereto and shall be in full force and effect.
An executed counterpart of each such Operative Agreement shall have been
delivered to each party thereto and, if not a party thereto, to Ace and the
Lessor or their respective counsel.
(e) Officers' Certificate. The Lessor shall have received an
Officer's Certificate of Ace stating that (i) the representations and
warranties of Ace contained herein and in the other Operative Agreements are
true and correct on and as of the Closing Date as though made on and as of
such date, (ii) no event or condition exists, or would result from the
consummation of any transaction contemplated by the Operative Agreements,
which constitutes a Default or an Event of Default under any Operative
Agreement and (iii) each Operative Agreement to which Ace is a party is in
full force and effect with respect to it.
(f) Corporate Documents of Ace. The Lessor shall have received
the following, all to be satisfactory to the Lessor:
(i) a copy of Ace's articles and/or certificate of
incorporation, together with all amendments, certified by the Secretary of
State of the State of Delaware as of a date which is not more than twenty
(20) days prior to the Closing Date;
(ii) a certificate of good standing as to Ace issued by
the Secretary of State of the State of Delaware dated as of a date which is
not more than twenty (20) days prior to the Closing Date; and
(iii) a certificate of the Secretary or an Assistant
Secretary of Ace dated the Closing Date and certifying (A) that attached
thereto is a true and complete copy of the by-laws of Ace as in effect on the
date of such certification, (B) that attached thereto is a true, correct and
complete copy of resolutions adopted by the Board of Directors of Ace
authorizing the execution, delivery and performance of this Agreement and the
other Operative Agreements to which Ace is a party and that such resolutions
have not been amended or revoked and are in full force and effect on the date
of such certificate, (C) that the articles and/or certificate of
incorporation of Ace have not been amended since the date of the last
amendment thereto indicated on the certificate furnished pursuant to clause
(A) above and (D) as to the incumbency and specimen signature of each officer
of Ace executing this Agreement and the other Operative Agreements to which
Ace is a party or any other document delivered in connection herewith or
therewith and a certification by another officer of Ace as to the incumbency
and signature of the officer signing the certificate referred to in this
clause (iii).
(g) Representations and Performance. All representations and
warranties of each party hereto contained herein and in the other Operative
Agreements shall be true and correct as of the Closing Date and each party
shall have performed and complied with all agreements and conditions
contained herein and in the other Operative Agreements required to be
performed or complied with by it on or prior to the Closing Date; and no
Default or Event of Default shall have occurred and be continuing, or would
result from the consummation of any of the transactions contemplated to
occur on the Closing Date.
(h) Opinion of Counsel. The Lessor shall have received an
opinion of the general counsel for Ace substantially in the form of Exhibit
B hereto.
(i) Transaction Expenses. All Transaction Expenses then due
and payable (including without limitation the reasonable fees, not to exceed
$20,000, and out-of-pocket costs of Lessor's legal counsel) shall have been
paid in full.
SECTION 3.02. Conditions to the Lessor's Obligations. The
obligation of the Lessor to make any Contribution on any Funding Date shall
be subject to the fulfillment, or waiver by the Lessor, on or prior to such
Funding Date, of the following conditions precedent (in addition to the
conditions set forth in Sections 3.03 or 3.04, as applicable):
(a) Commitment. The Lessor shall have issued a Commitment to
make such contribution.
(b) Requisition. Ace shall have delivered to the Lessor
(which it may do only once in each calendar month with respect to any
Property) not less than five (5) Business Days prior to such Funding Date, a
Requisition in a form satisfactory to the Lessor, referring to this Agreement
and specifying:
(i) the amount of the Contribution being requested,
(ii) the applicable Funding Date (which shall be a
Business Day),
(iii) the Property or prospective Property to which such
Requisition relates (a Requisition may only relate to one Property or
prospective Property, although Ace may issue more than one Requisition with
respect to any one Funding Date) and
(iv) whether the Contribution being requested is to be
used to Acquire Property or for the costs and expenses of a Development
Project (each Requisition may only relate to one use of proceeds).
Each Requisition shall be deemed to be a certification by Ace to the Lessor
that (i) all of the representations and warranties set forth in Section 4.01
are true and complete as of the date of the Requisition and the date of the
Contribution made thereunder and (ii) no Event of Default exists or will
result from such Contribution. In addition, each Requisition shall be deemed
to be a representation and warranty by Ace to the Lessor that:
(A) the costs and expenses to be paid out of the
proceeds of the Contributions to be made on the applicable Funding Date, as
specified in such Requisition, (1) constitute or will constitute Property
Costs and (2) represent (a) amounts payable in connection with the
Acquisition by the Lessor of a Property on such Funding Date or within
ten (10) Business Days thereafter, (b) amounts due and payable under invoices
issued to the Construction Agent for services or materials already supplied
or (c) reimbursement of amounts paid by the Construction Agent out of its own
funds in payment of invoices issued to the Construction Agent; and
(B) all the conditions to the obligations of the
Lessor to make such Contributions on such Funding Date (including those
specified in Sections 3.03 or 3.04, as applicable) have been, or on the
applicable Funding Date will have been, fulfilled by Ace or waived by the
Lessor.
(c) Representations and Warranties. Each representation and
warranty of Ace set forth in this Agreement and the other Operative
Agreements shall be true and correct on and as of such Funding Date with the
same effect as though such representation and warranty had been made on and
as of such date, except to the extent that such representation and warranty
expressly relates only to an earlier date.
(d) Compliance with Operative Agreements. Each Operative
Agreement shall be in full force and effect. Ace shall be in compliance with
each term and provision set forth in this Agreement and the other Operative
Agreements on its part to be observed or performed, and immediately before
and immediately after giving effect to the funding of the Contribution to be
made on such Funding Date, no Default or Event of Default shall have occurred
and be continuing.
(e) Payment of Transaction Expenses. All Transaction Expenses
which are due and payable on or prior to such Funding Date shall have been
paid in full.
SECTION 3.03.Conditions Precedent to the Lessor's Obligation To
Acquire Property.
(a) Conditions Precedent to the Lessor's Obligation to Acquire
Land. The obligation of the Lessor to issue a Commitment with respect to any
Land and to make any Contribution on any Funding Date to fund the Acquisition
of any Land by the Lessor on such Funding Date shall be subject to the
fulfillment, on or prior to such Funding Date and in a manner and in form and
substance satisfactory to the Lessor, of the following conditions precedent
(in addition to the conditions set forth in Section 3.02):
(i) Available Commitment. The Lessor shall have issued a
Commitment to finance such Land in accordance with Section 2.02(b).
(ii)Appraisal. The Lessor shall have received a preliminary
appraisal of the Land showing an appraised value that is acceptable to the
Lessor. Ace shall pay the costs of the preliminary appraisal and the report
required under Section 3.05(e) not to exceed $5,000 in the aggregate, and the
Lessor shall pay any excess amount. Upon the request by the Lessee, the
Lessor shall deliver to the Lessee a copy of the preliminary appraisal.
(iii) Deed. The Lessor shall have received a deed
(a "Deed"), in form and substance appropriate for recording with all
applicable Governmental Authorities, with respect to such Land (including
all Improvements located thereon, if any), conveying fee simple title to such
Land and/or Improvements to the Lessor, subject only to Permitted Encumbrances.
(iv)Development Project Notice. Ace shall have delivered to the
Lessor a notice in writing (a "Development Project Notice") stating (i) that
the Lessor is not Acquiring any Improvements on such Funding Date or (ii)
whether, with respect to each parcel of Land being Acquired by the Lessor on
such Funding Date on which Improvements are located, Ace intends (A) to
demolish substantially all such Improvements, (B) to undertake a Development
Project or (C) neither of the above (in which case such notice shall also
describe Ace's intentions with respect to such Improvements).
(v) Land Lease Supplement; Memorandum of Lease; Improvements
Lease Supplement. Ace shall have executed and delivered to the Lessor a Land
Lease Supplement (and, if required by the succeeding sentence, an Improvements
Lease Supplement), and a Memorandum of Lease with respect to such Property.
If any Land to be Acquired by the Lessor on such Funding Date carries any
Improvements (other than Improvements intended to be demolished by Ace, as set
forth in the applicable Development Project Notice delivered pursuant to
Section 3.03(a)(iv)), separate Lease Supplements and Memoranda of Lease shall
have been executed and delivered with respect to such Land and such
Improvements. If any Land to be Acquired by the Lessor on such Funding Date
carries Improvements that Ace intends to demolish (as set forth in the
applicable Development Project Notice delivered pursuant to Section
3.03(a)(iv)), a single Land Lease Supplement and Memorandum of Lease shall
have been executed and delivered with respect to such Land and such
Improvements.
(vi) Environmental Audit. The Lessor shall have received an
Environmental Audit of such Land and shall not have objected to such
Acquisition by reason of the results of such Environmental Audit.
(vii) Financing Statements. Ace shall have executed and
delivered to the Lessor all appropriate Financing Statements.
(viii) Agreement of Sale. The Lessor shall have received a
copy of the final agreement of sale (and shall, if practicable, deliver to
the Lessor copies of preliminary drafts of the agreement of sale as they
become available), bills of sale, if applicable, and other documentation, for
the Acquisition of the Land and any Improvements thereon.
(ix)Site Plan. The Lessor shall have received a copy of a site
plan for such Land.
(x) Zoning. The Lessor shall have received evidence that the
Land has been zoned for its intended use.
(xi)Permits and Approvals. The Lessor shall have received
copies of all Governmental Actions required in connection with the purchase
of the Land, if any.
(xii) Construction Budget. The Lessor shall have received
a copy of a preliminary Construction Budget for the Improvements proposed
for such Property.
(xiii) Title Commitment. The Lessor shall have received a
preliminary title commitment for an owner's policy of title insurance on such
Land from a title insurance company satisfactory to the Lessor, containing
only such Encumbrances and exceptions as are acceptable to the Lessor,
containing such endorsements as are reasonably required by the Lessor, which
shall include but not be limited to the 100/300 series of endorsements and
affirmative coverage for mechanics' liens, if available, and in an amount not
less than the total amount of Contributions to be made by the Lessor for
Property Costs relating to such Property.
(xiv) Local Counsel Advice. The Lessor shall have received
an opinion of counsel in the jurisdiction where the Land is located as to the
mortgage, usury and other relevant local law treatment of the Lease and as to
such other matters as the Lessor may reasonably request. Ace shall pay an
amount not to exceed $5,000 for each local counsel opinion delivered
hereunder; provided that Ace shall pay an amount not to exceed $2,500 for
subsequent local counsel opinions delivered by the same law firm for Land in
the same jurisdiction. The Lessor shall pay any excess amounts for local
counsel opinions.
(xv)Qualification to do Business. If required to do so under
applicable law, the Lessor shall have qualified to do business as a foreign
corporation in the state where the Land is located; provided, however, that
the Lessor's failure to satisfy this condition shall not prevent the Lessor
from issuing a Commitment to fund the Acquisition of any Property.
(xvi) Survey. The Lessor shall have received a recent
survey (which may be a preliminary survey) of the Land, containing such
information and a certificate of the surveyor as are satisfactory to the
Lessor.
(xvii) Soil Report. The Lessor shall have received a copy of
a soil report obtained by Ace with respect to such Property.
(xviii) Insurance. The Lessor shall have received evidence
that the liability insurance requirements contained in Article VIII of the
Lease have been complied with.
(xix) Origination Fee. Ace shall have paid to the Lessor
an origination fee for each parcel of Land in the amount of $5,000.
(xx)Transaction Expenses. All Transaction Expenses which are
due and payable on or prior to such Funding Date shall have been paid in full.
The Lessor shall use its best efforts to either approve or provide
the Lessee with written objections to any report, certificate or other
document or item provided to it under this Section 3.03(a) within thirty (30)
days of its receipt thereof.
(b) Conditions Precedent to the Lessor's Obligation to Make
Contribution for Improvements. The obligation of the Lessor to issue a
Commitment with respect to any Improvements and to make any Contribution on
any Funding Date to fund the Acquisition of any Improvements by the Lessor on
such Funding Date shall be subject to the fulfillment, on or prior to such
Funding Date and in a manner and in form and substance satisfactory to the
Lessor, of the following conditions precedent (in addition to the conditions
set forth in Sections 3.02 and 3.03(a)):
(i) Plans and Specifications. The Lessor shall have received a copy
of the Plans and Specifications for the Improvements proposed for such Property.
(ii)Utilities. The Lessor shall have received evidence that the
utilities required for the intended use of such Property are available.
(iii) Permits and Approvals. The Lessor shall have received
copies of all Governmental Actions required in connection with the
construction and development of such Improvements.
(iv)Construction Budget. The Lessor shall have received a copy of
the final Construction Budget for the Improvements proposed for such Property.
(v) Construction Contract and Architect's Agreement. The Lessor shall
have received fully-executed copies of the construction contract and the
architect's agreement, if any, for the construction of such Improvements.
(vi)Survey. The Lessor shall have received a recent survey of the
Property, showing the location of the Improvements upon the Land and
containing such other information and a certificate of the surveyor as are
satisfactory to the Lessor.
(vii) Report of Inspecting Architect or Engineer. The Lessor
shall have received a report, reasonably satisfactory to it, of an inspecting
architect or engineer selected by the Lessor based on his review of the Plans
and Specifications for the Improvements; provided that the Lessee shall not be
responsible to pay more than $5,000 for such report.
(viii) Insurance. The Lessor shall have received evidence that the
insurance requirements contained in Article VIII of the Lease have been
complied with.
(ix)Transaction Expenses. All Transaction Expenses which are due and
payable on or prior to such Funding Date shall have been paid in full.
The Lessor shall use its best efforts to either approve or provide
the Lessee with written objections to any report, certificate or other
document or item provided to it under this Section 3.04(b) within thirty (30)
days of its receipt thereof.
SECTION 3.04 Conditions Precedent to the Lessor's Obligation To
Fund Construction on Any Property. The obligation of the Lessor to make any
Contribution to finance any Property Costs (other than to Acquire Property)
relating to any Property shall be subject to the fulfillment, on or prior to
the applicable Funding Date and in a manner and in form and substance
satisfactory to the Lessor, of the following conditions precedent (in
addition to the conditions set forth in Section 3.02):
(a) Property Acquisition. Such Property (or the Land underlying
such Property) shall have been Acquired in compliance with Section 3.03 and
all conditions precedent set forth in Section 3.03 shall have been satisfied
in a manner satisfactory to the Lessor.
(b) Agency Agreement Supplement. The Construction Agent shall
have executed and delivered to the Lessor an Agency Agreement Supplement with
respect to such Property.
(c) Cost Overruns. In the case of Property Costs allocable to
Improvements comprising a portion of a Development Project, after taking into
account the Contributions to be made on such Funding Date to finance such
Property Costs, the aggregate Property Costs incurred in connection with such
Development Project shall not exceed 110% of the Projected Completion Cost
with respect to such Development Project.
(d) Transaction Expenses. All TransactionExpenses then due and
payable shall have been paid in full.
The Lessor shall use its best efforts to either approve or provide
the Lessee with written objections to any report, certificate or other
document or item provided to it under this Section 3.04 within thirty (30)
days of its receipt thereof.
SECTION 3.05. Conditions Precedent to the Commencement of the Basic
Term for any Property. The obligation of the Lessor to lease any Property to
Ace for the Basic Term of the Lease with respect thereto on any Lease
Commencement Date, and the commencement of such Basic Term, shall be subject
to the fulfillment of the following conditions precedent in a manner and in
form and substance satisfactory to the Lessor (in addition to the conditions
set forth in Sections 3.02(b) and (c) with respect to such Property):
(a) Improvements Lease Supplement. Ace shall have executed and
delivered to the Lessor an Improvements Lease Supplement (and, if necessary,
a Memorandum of Lease) with respect to such Property.
(b) Financing Statements. Ace shall have executed and delivered
all appropriate Financing Statements.
(c) Completion. The Completion Date for such Property shall
have occurred on or prior to the applicable Outside Completion Date for such
Property.
(d) Certificate of Occupancy. Ace shall have obtained any
Governmental Actions necessary for the use and occupancy of such Property.
(e) Inspecting Architect or Engineer. The Lessor shall have
received an approving report of an inspecting architect or engineer
reasonably acceptable to the Lessor; provided, however, that Ace shall not be
responsible to pay more than $5,000 in the aggregate for such report and the
preliminary appraisal required by Section 3.03(ii).
(f) Design Architect Certificate. The Lessor shall have
received a certificate of substantial completion from the design architect for
the Development Project on such Property.
(g) Title Bring-Down. The Lessor shall have received a
bring-down of the owner's title insurance policy by the title company
confirming that such Property is free and clear of liens and encumbrances
other than Permitted Encumbrances, satisfactory to the Lessor
(h) No Defaults. No Default or Event of Default shall have
occurred or be continuing.
(i) Certificate Regarding Representations and Warranties. Ace
shall have delivered to the Lessor a certificate as to the accuracy of the
representations and warranties made by Ace pursuant to Section 4.05.
The Lessor shall use its best efforts to either approve or provide
the Lessee with written objections to any report, certificate or other
document or item provided to it under this Section 3.05 within thirty (30)
days of its receipt thereof. The Basic Term of such Lease shall commence on
the date on which the conditions in this Section 3.05 have been met, or, if
such date is not the first day of a calendar month, on the first day of the
calendar month next following such date.
ARTICLE IV
Representations and Warranties
SECTION 4.01. General Representations and Warranties of Ace.
Ace represents and warrants to the Lessor, as of the Closing Date, as of each
Funding Date and on each Lease Commencement Date, that:
(a) Corporate Existence. (i) Ace is duly organized, validly
existing and in good standing under the laws of the State of Delaware; and
(ii) Ace has the requisite power and authority to own its properties and
assets and to carry on its business as now conducted and is qualified to do
business in every jurisdiction where such qualification is required. Ace
has all requisite corporate power to execute and deliver and to perform its
obligations under the Operative Agreements.
(b) Authorization; Non-Contravention. The execution, delivery,
and performance by Ace of the Operative Agreements have been duly authorized
by all necessary corporate action and do not and will not (i) require any
consent or approval of the shareholders of Ace, (ii) violate any provision
of any law, rule, regulation, order, writ, judgment, injunction, decree,
determination, or award presently in effect having applicability to Ace or
any Subsidiary or its or their properties, or of the charter or bylaws of Ace,
(iii) result in a breach of or constitute a default under any material
indenture or loan or credit agreement or any other agreement, lease, or
instrument to which Ace or any Subsidiary is a party or by which it or its
properties may be bound or affected (including without limitation the Ace
Credit Agreement), or (iv) result in the creation of an Encumbrance of any
nature upon or with respect to any of the properties now owned or hereafter
acquired by Ace or any Subsidiary, and Ace and its Subsidiaries are not in
default under any such order, writ, judgment, injunction, decree,
determination, or award or any such indenture, agreement, lease, or
instrument or in default under any such law, rule, or regulation, which
default would have a material adverse effect on the consolidated assets,
properties, or financial condition of Ace and its Subsidiaries.
(c) Governmental Approvals. Ace has received all Governmental
Actions from all Governmental Authorities required in connection with the
ownership, construction, operation and maintenance by it of its properties
and the conduct of its present and proposed business, and all such
Governmental Actions have been validly issued and are in full force and
effect. No authorization, consent, approval, license, exemption of, or
filing or registration with, or any other action in respect of any
Governmental Authority, is or will be necessary for the valid execution,
delivery or performance by Ace of the Operative Agreements.
(d) Compliance with Laws. Ace and its properties, business
operations and leaseholds are in compliance with all Governmental Rules
applicable thereto.
(e) Binding Obligations. The Operative Agreements constitute
legal, valid, and binding obligations of Ace enforceable against Ace in
accordance with their respective terms.
(f) Title to Properties. Ace has good and marketable title to
all of the material assets and properties purported to be owned by it, free
and clear of all Encumbrances except such as are permitted by Section 7.05 of
the Lease and except for covenants, restrictions, rights, easements and minor
irregularities in title which do not interfere with the occupation, use and
enjoyment by Ace of such properties and assets in the normal course of
business as presently conducted or materially impair the value thereof for
such business.
(g) Intellectual Property. Ace owns or licenses all of the
material patents, patent applications, trademarks, trademark applications,
permits, service marks, trade names, copyrights, copyright applications,
licenses, franchises, authorizations and other intellectual property rights
that are necessary for the operations, use and occupancy of the Properties,
without infringement upon or conflict with the rights of any other Person
with respect thereto. No slogan or other advertising device, product,
process, method, substance, part or component or other material now employed,
or now contemplated to be employed, by Ace in connection with the Properties
infringes upon or conflicts with any rights owned by any other Person, and
no claim or litigation regarding any of the foregoing is pending or threatened.
(h) Subsidiaries. Ace has no Subsidiaries other than those
listed on Schedule 4.01(h) hereto. All the outstanding shares of Ace's
Subsidiaries shown on Schedule 4.01(h) hereto as being owned by Ace or any of
its Subsidiaries have been duly authorized and validly issued, are fully paid
and nonassessable and are free and clear of any Encumbrances. No Subsidiary
other than A.H.C. Store Development Corp. owns any shares of Ace. Each of the
Subsidiaries of Ace is duly organized, validly existing and in good standing
under the laws of the jurisdiction of its organization; and each of the
Subsidiaries of Ace (i) has the requisite power and authority to own its
property and assets and to carry on its business as now conducted and (ii) is
qualified to do business in every jurisdiction where such qualification is
required, except where the failure so to qualify would not have a material
adverse effect on the condition, financial or otherwise, of Ace or any of
its Subsidiaries taken as a whole.
(i) Financial Statements. The consolidated balance sheet of
Ace and its Subsidiaries as at December 31, 1996 and the related consolidated
statements of operations, shareholders, equity and cash flow of Ace and its
Subsidiaries for the fiscal year then ended, certified by KPMG Peat Marwick,
LLP, independent public accountants, copies of which have been delivered to
the Lessor, fairly present the consolidated financial condition of Ace and
its Subsidiaries as at such date and the consolidated results of the
operations of Ace and its Subsidiaries for the period ended on such date, all
prepared in accordance with GAAP applied on a consistent basis, and there has
been no material adverse change in such condition or operations since
December 31, 1996.
(j) Litigation. Except as otherwise disclosed in writing to the
Lessor, there is no material litigation threatened against or affecting Ace or
any of its Subsidiaries or the properties of Ace or any Subsidiaries before
any Governmental Authority or arbitrator or mediator, and neither Ace nor any
of its Subsidiaries is in default (in any respect which might have a material
adverse effect on the ability of Ace to perform its obligations hereunder)
with respect to any law, rule, regulation, order, writ, judgment, injunction,
decree, determination or award presently in effect and applicable to Ace or
any of its Subsidiaries.
(k) Taxes and Tax Returns. United States federal income tax
returns of Ace and the Subsidiaries have been examined and closed through the
fiscal year of Ace ended December 31, 19____. Ace and its Subsidiaries have
filed all United States federal income tax returns and all other material tax
returns which are required to be filed by them and have paid all material
taxes due pursuant to such returns or pursuant to any assessment received by
Ace or any of its Subsidiaries. The charges, accruals and reserves on the
books of Ace and its Subsidiaries in respect of taxes and other governmental
charges are, in the opinion of Ace, adequate in all material respects.
(l) ERISA. (i) Subject to Section 4.01(l)(iii) hereof, Ace
and the ERISA Affiliates and the plan administrator of each Plan have
fulfilled in all material respects their respective obligations under ERISA
and the Code with respect to each Plan and each Plan is currently in material
compliance with the applicable provisions of ERISA and the Code.
(ii) Subject to Section 4.01(l)(iii) hereof, with respect
to each Plan, there has been no material (A) "reportable event" within the
meaning of Section 4043 of ERISA and the regulations thereunder which is not
subject to the provision for waiver of the 30-day notice requirement to the
PBGC; (B) failure to make or properly accrue any contribution which is due to
any Plan; (C) action under Section 4041 of ERISA to terminate any Pension
Plan; (D) withdrawal from any Pension Plan with two or more contributing
sponsors or the termination of any such Pension Plan resulting in liability
pursuant to Section 4063 or 4064 of ERISA; (E) institution by the PBGC of
proceedings to terminate any Pension Plan, or the occurrence of any event or
condition which might constitute grounds under ERISA for the termination of,
or the appointment of a trustee to administer, any Pension Plan; (F) the
imposition of liability pursuant to Section 4062(e), 4069 or 4212 of ERISA;
(G) complete or partial withdrawal (within the meaning of Sections 4203 and
4205 of ERISA) from any Pension Plan which is a Multiemployer Plan that it is
in reorganization or insolvency pursuant to Sections 4241 or 4245 of ERISA,
or that it intends to terminate or has terminated under Sections 4041A or
4042 of ERISA; (H) prohibited transaction described in Section 406 of ERISA
or 4975 of the Code which could give rise to the imposition of any material
fines, penalties, taxes or related charges; (I) assertion of a material
claim (other than routine claims for benefits) against any Plan (other than a
Multiemployer Plan) which could reasonably be expected to be successful; (J)
receipt from the Internal Revenue Service of notice of the failure of any
Plan to qualify under Section 401(a) of the Code, or the failure of any trust
forming part of any Plan to qualify for exemption from taxation under
Section 501(a) of the Code, if applicable; or (K) imposition of a lien
pursuant to Section 401(a)(29) of the Code or 412(n) of ERISA.
(iii) The representations and warranties set forth in
Sections 4.01l(i) and (ii) shall not be deemed to be breached as a result of
any event, occurrence or condition affecting or relating to a Multiemployer
Plan of which Ace does not have knowledge.
(m) No Default. No Default and no Event of Default has
occurred and is continuing.
(n) Investment Company Act. Ace is not an "investment company"
as defined in, or subject to regulation under, the Investment Company Act of
1940.
(o) Chief Executive Office. The principal place of business and
chief executive office (as used in Article 9 of the Uniform Commercial Code as
in effect in the state of Illinois and each state in which Property is
located) of Ace and the office where its records are maintained concerning the
transactions contemplated by the Operative Agreements is that address provided
in the applicable Lease Supplement.
(p) Full Disclosure. No Operative Document or other document,
certificate or statement furnished to the Lessor by or on behalf of Ace
pursuant to the Operative Documents contain any untrue statement of a material
fact.
(q) Use of Property for Lawful Purposes. Each Property is
owned, operated and occupied by Ace in accordance with all applicable
Governmental Rules.
SECTION 4.02. Ace Funding Date Representations and Warranties. Ace
represents and warrants to the Lessor, as of each Funding Date (in addition
to the representations and warranties set forth in Section 4.01), that:
(a) Compliance with Operative Agreements. The Construction
Agent is in compliance in all material respects with its obligations under
the Operative Agreements. Each Operative Agreement is in full force and
effect. No Default or Event of Default shall occur as a result of, or after
giving effect to, the transactions to be consummated on such Funding Date.
(b) Title to Property. The Lessor has good and marketable title
to each Property in fee simple, subject only to Permitted Encumbrances.
(c) Use of Proceeds. The costs and expenses to be paid or
reimbursed out of the proceeds of the Contributions to be made on such
Funding Date, as specified in the applicable Requisition, (i) constitute or
will constitute Property Costs and (ii) represent (A) amounts due in
connection with the Acquisition by the Lessor of a Property on such Funding
Date, or (B) amounts due and payable under invoices issued to the Construction
Agent.
(d) Unrecovered Contributions. The amount of the Contribution
made on such Funding Date with respect to each Property will be added to the
amount of the Unrecovered Contributions allocable to such Property.
SECTION 4.03. Ace Property Closing Date Representations and
Warranties. Ace represents and warrants to the Lessor, as of each Property
Closing Date (in addition to the representations and warranties set forth in
Sections 4.01 and 4.02), that:
(a) Nature of Property. Each Property to be Acquired on such
Property Closing Date is located in the continental United States and consists
of (i) Land on which a Development Project is to be performed pursuant to the
Agency Agreement or (ii) a Facility on such Land.
(b) Title. Upon the Acquisition by the Lessor of each Property
to be Acquired on such Property Closing Date that consists of Land, the Lessor
shall have good and marketable title to such Property in fee simple, subject
only to Permitted Encumbrances. Upon the Acquisition by the Lessor of each
Property to be Acquired on such Property Closing Date that consists of
Improvements, the Lessor shall have good and marketable title to such
Property, subject only to Permitted Encumbrances.
(c) Insurance. Ace has obtained insurance coverage for each
Property being Acquired by the Lessor on such Property Closing Date which
meets the requirements of Article VIII of the Lease, and has delivered to the
Lessor such evidence of such insurance coverage as requested by the Lessor.
All such coverage is in full force and effect.
(d) Compliance with Governmental Rules. Each Property being
Acquired by the Lessor on such Property Closing Date complies in all material
respects with all applicable Governmental Rules (including all Environmental
Laws).
(e) Approvals for Operation. If any Property consisting of
Improvements is intended to be occupied and operated by Ace in its then
current condition and configuration, all material Governmental Actions
required for the occupancy and operation of such Improvements have been taken
or obtained and are in full force and effect.
(f) Construction. If any Property to be Acquired by the Lessor
on such Property Closing Date consists of Land on which Ace intends to
undertake a Development Project, (i) the Construction Commencement Date with
respect to such Property shall be not later than the date provided in the
applicable Lease Supplement and (ii) the Completion Date with respect to such
Property shall occur on or prior to the Outside Completion Date with respect
to such Property.
SECTION 4.04. Ace Construction Funding Date Representations and
Warranties. Ace represents and warrants to the Lessor, as of each Funding
Date with respect to which any applicable Requisition specifies that the
requested Contribution is to be used to finance the costs and expenses of a
Development Project (in addition to the representations and warranties set
forth in Sections 4.01, 4.02 and 4.03), that:
(a) Compliance. The applicable Facility, as constructed in
accordance with the applicable Plans and Specifications, shall comply in all
material respects with all applicable Governmental Rules (including all
Environmental Laws).
(b) State of Property. There is no Litigation pending or, to
the best of Ace's knowledge, threatened, which materially adversely affects
the title to, or the use, operation or value of, the applicable Facility or
the related Land. No fire or other casualty with respect to such Facility or
the related Land has occurred. All Governmental Actions required for (i) the
construction of such Facility in accordance with the Agency Agreement and (ii)
the use and operation of such Facility following construction for its intended
purposes have either been obtained from the appropriate Governmental
Authorities having jurisdiction or from private parties, as the case may be.
(c) Completion of Construction. Unless Ace has exercised its
right to purchase under Section 4.03 of the Lease (i) the Completion Date with
respect to the applicable Property shall be no later than the applicable
Outside Completion Date and (ii) based upon the Construction Budget for such
Development Project, the Available Commitment for such Development Project
shall be sufficient to complete such Development Project.
SECTION 4.05. Ace Commencement of Basic Term
Representations and Warranties. As of each date on which a Basic Term
commences with respect to any Property, Ace shall be deemed to certify to the
Lessor that the representations and warranties in Sections 4.01, 4.02, 4.03
and 4.04 are true and correct on such date as to such Property.
SECTION 4.06. General Representations and Warranties of Lessor.
Lessor hereby represents and warrants, as of the Closing Date, that:
(a) Organization; Corporate Powers. It (i) is duly organized,
validly existing and in good standing under the laws of the State of Florida,
(ii) has the corporate power and authority to own its properties and to carry
on its business as now conducted, (iii) is qualified to do business in every
jurisdiction where such qualification is necessary and (iv) has the corporate
power to execute and deliver this Agreement and each other Operative
Agreement to which it is a party and perform its obligations hereunder and
thereunder.
(b) Authorization and Enforceability. The execution and delivery
of this Agreement and each other Operative Agreement to which it is a party and
the performance of its obligations hereunder and thereunder (i) have been duly
authorized by all requisite corporate action and (ii) will not (A) violate (I)
any provision of its articles of incorporation or by-laws, (II) any applicable
Governmental Rule or (III) any material contract, agreement or other
instrument to which it is a party or by which it or its property is bound, (B)
be in conflict with, result in a breach of or constitute a default under any
such material contract, agreement or other instrument or (C) result in the
creation or imposition of any Encumbrance upon any of its properties or
assets. This Agreement and each other Operative Agreement to which it is a
party have been duly executed and delivered by it and constitute its legal,
valid and binding obligations, enforceable against it in accordance with its
terms (except as enforcement may be affected by bankruptcy laws or other laws
for the relief of debtors and except as certain remedies may be affected by
the equitable powers of a court of competent jurisdiction).
(c) Governmental Actions. No Governmental Action is required in
connection with the execution and delivery by it of this Agreement or any
other Operative Agreement to which it is a party or the performance by it of
its obligations hereunder and thereunder.
(d) Litigation. There is no material Litigation pending or, to
its knowledge, threatened against or affecting it which individually or in the
aggregate, is likely to materially impair its ability to perform its
obligations under this Agreement and the other Operative Agreements to which
it is a party.
(e) Compliance with Governmental Rules. It is not in violation
of or in default with respect to any Governmental Rule where such violation or
default is likely to materially impair its ability to perform its obligations
under this Agreement and the other Operative Agreements to which it is a party.
ARTICLE V
Covenants
SECTION 5.01. No Lessor Liens. The Lessor agrees that it shall not
directly or indirectly create, incur or suffer to exist (and will, at its own
cost and expense, promptly take such action as may be necessary to discharge)
any Encumbrance with respect to any Property (i) in favor of any taxing
authority by reason of the nonpayment by it of any Tax (other than Taxes for
which it is indemnified under the Lease) imposed on it or (ii) resulting from
or related to any act of or claim against it not related to or connected with
any transaction contemplated hereby or by any of the other Operative
Agreements. The foregoing shall not apply to an Encumbrance granted by the
Lessor to a Lender in accordance with Section 7.02(b) hereof, except that the
Lessor will, at its own cost and expense, take such action as may be necessary
to discharge any such Encumbrance prior to the time it is required to convey any
Property to Ace.
SECTION 5.02. Further Assurances; Etc.
(a) Ace's Agreement Regarding Further Assurances. Ace shall
cause to be promptly and duly taken, executed, acknowledged and delivered all
such further acts, conveyances, documents and assurances as the Lessor may
from time to time reasonably request in order to carry out the intent and
purposes of any of the Operative Agreements or to more fully vest in the
Lessor the interests in any Property contemplated hereunder to be transferred
to and held by the Lessor. Without limiting the generality of this Section
5.02(a), on any Property Closing Date (i) Ace shall provide all documents
requested by the Lessor necessary to record, or file or deliver to any title
insurance company issuing title insurance with respect to the applicable
Property for recording, each Deed, Memorandum of Lease and Lease Supplement
(if applicable) executed or delivered on or in connection with such Property
Closing Date and (ii) Ace shall provide all documents requested by the Lessor
so that the Lessor can file the Financing Statements executed or delivered on
or in connection with such Property Closing Date. Ace shall direct that
copies of the filed Financing Statements be sent to the Lessor or its counsel
and that any such title company provide the Lessor or its counsel with
evidence of all such filings.
(b) Lender Non-Disturbance Agreements. Upon the request of the
Lessor, Ace will (and will cause any assignee or sublessee to) promptly
execute and deliver to any Lender designated by the Lessor a Non-Disturbance
and Attornment Agreement substantially in the form of Exhibit C-1, with such
changes thereto consistent with the Operative Agreements as shall be
reasonably necessary to conform to the circumstances of the applicable loan
transaction.
SECTION 5.03. Payment of Certain Expenses.
(a) Closing Date Expenses. Ace shall pay on the Closing Date
all Transaction Expenses then due in connection with the Closing Date,
including all such expenses relating to all Taxes for the recording,
registration and filing of documents executed on the Closing Date.
(b) Funding Date Expenses. Ace shall pay, or cause to be paid
when due or upon demand by the Lessor, whichever is earlier, all Transaction
Expenses in connection with each request for Contributions and each Funding
Date, including all such expenses relating to each Environmental Audit, each
Appraisal and all Taxes for the recording, registration and filing of
documents.
(c) Brokers' Fees and Stamp Taxes. Ace shall pay or cause to be
paid any brokers' fees and any and all stamp, transfer, recording and other
similar fees and Taxes, if any, that are payable in connection with the
transactions contemplated by this Agreement and the other Operative
Agreements; provided, however, that such fees and Taxes shall not include any
brokerage fees or Taxes relating to any transfer by the Lessor of its interest
in any Property or any Operative Agreement unless an Event of Default has
occurred and is continuing or the transfer is to Ace or a Subsidiary of Ace.
(d) Lessor to Provide Invoices. The Lessor shall deliver to Ace
copies of invoices for expenses which Ace is required to pay for pursuant to
the Operative Documents and for matters commissioned or arranged by the Lessor.
SECTION 5.04. Taxes. Any and all payments by Ace under any Operative
Agreement shall be made free and clear of and without deduction for any and
all current or future Taxes other than Excluded Taxes. If Ace shall be
required to deduct any Taxes other than Excluded Taxes from or in respect of
any sum payable under any Operative Agreement, (i) the sum payable shall be
increased by the amount (an "Additional Amount") necessary so that after
making all required deductions (including deductions applicable to additional
amounts payable under this Section) the payee shall receive an amount equal to
the sum it would have received had no such deductions been made, (ii) the
payor shall make such deductions and (iii) the payor shall pay the full amount
deducted to the relevant Governmental Authority in accordance with applicable
Governmental Rules.
SECTION 5.05. Tax and Accounting Treatment. It is expressly
understood and agreed to by Ace that the Lessor is not making any
representation as to the tax or accounting treatment to be given to Ace with
respect to the Lease. The Lessor shall take no position which is
inconsistent with the tax or accounting treatment which is desired by Ace
with respect to the Lease.
ARTICLE VI
Additional Covenants of Ace
SECTION 6.01. Incorporation of Covenants From Ace Credit Agreement.
Ace covenants and agrees with the Lessor that Ace shall comply with the
covenants set forth in Section 8 of the Ace Credit Agreement for the benefit
of the Lessor. All of such covenants are incorporated into this Agreement by
reference as though set forth herein, and all amendments, deletions and
additions to or of such covenants shall automatically be deemed to be
incorporated herein by reference as though set forth herein. All references
to the "Banks" or the "Agent" set forth in Section 8 of the Ace Credit
Agreement shall, for purposes of this Section 6.01, be deemed to be references
to the Lessor. If the Ace Credit Agreement ceases to be in effect for any
reason, or if PNC Bank, National Association, ceases to be a "Bank", as
defined in the Ace Credit Agreement, the provisions of Section 8 thereof as in
effect immediately prior thereto shall continue to be incorporated herein by
reference as though set forth herein. Ace shall deliver to the Lessor from
time to time prompt written notice of any amendment, addition or deletion to
Section 8 of the Ace Credit Agreement, along with copies thereof.
ARTICLE VII
Transfers of Interests
SECTION 7.01. Ace. Ace shall not assign, convey or otherwise
transfer all or any part of its rights, title or interest in, to or under any
of the Operative Agreements to, or cause any of its obligations under any of
the Operative Agreements to be assumed by, any Person, other than (a) as
specifically permitted by (i) Section 12.01 of the Lease or (ii) Section 2.05
of the Agency Agreement or (b) in connection with a merger of Ace permitted
pursuant to the covenants incorporated into Section 6.01. Any purported
assignment, conveyance or transfer by Ace (other than as permitted in the
immediately preceding sentence) shall be void and of no effect.
SECTION 7.02. Lessor. (a) The Lessor may from time to time assign,
pledge, mortgage, transfer or otherwise dispose of, in whole or in part (an
"Assignment") any of its rights under the Operative Agreements to any
financial institution which has a minimum capital, surplus and undivided
profits aggregating at least $50,000,000 without the consent of Ace. Any
other assignment by the Lessor shall require the prior written consent of Ace.
(b) In addition to the Lessor's right to make assignments set
forth in Section 7.02 (a), the Lessor may assign its rights in this Agreement
and the other Operative Agreements to, and may grant a mortgage lien upon, any
Property in favor of, a bank or other financial institution extending credit
to the Lessor (hereinafter a "Lender") without the consent of Ace; provided
that (i) Ace and the Lender shall enter into a Nondisturbance and Attornment
Agreement substantially in the form of Exhibit C-1, (ii) Ace, upon the request
of the Lender, shall certify that this Agreement and the other Operative
Agreements are in full force and effect and that no defaults thereunder have
occurred and are continuing and (iii) Ace shall agree for the benefit of the
Lender that any payments of Rent or Supplemental Rent or other amounts due the
Lessor under this Agreement and the other Operative Agreements which have been
assigned to the Lender shall be paid without offset or recoupment in
accordance with the provisions of the Lease.
(c) No Person to which an Assignment permitted by this Section
7.02 is made (an "Assignee") shall be obligated to perform any duty, covenant
or condition required to be performed by the Lessor under the terms of any
Operative Agreement unless such obligations are expressly assumed in writing
and in the absence of such written assumption, the Lessor shall remain
obligated with respect thereto. An Assignee shall have all rights, powers and
remedies given to the Lessor by the Operative Agreements and shall be named as
lender loss payee or co-insured under all policies of insurance maintained
pursuant to the Operative Agreements. If the Lessor assigns this Agreement or
the other Operative Agreements or the monies due or to become due hereunder or
thereunder or any other interest herein or therein, Ace agrees not to assert
against the Assignee any defense, set- off, recoupment, claim or counterclaim
which Ace may have against the Lessor, whether arising under the Operative
Agreements or any other transaction between the Lessor and Ace.
ARTICLE VIII
Indemnification
SECTION 8.01. General Indemnity. (a) Ace, whether or not any of
the transactions contemplated hereby shall be consummated, hereby assumes
liability for and agrees to defend, indemnify and hold harmless each
Indemnified Person from and against any Claims (including Claims by a
purchaser from such Indemnified Person) imposed on, incurred by or asserted
against such Indemnified Person (other than to the extent such Claims arise
from the gross negligence or willful misconduct of such Indemnified Person or
to the extent such Claims arise from the breach by such Indemnified Person of
its obligations under the Operative Agreements) in any way relating to or
arising or alleged to arise out of the execution, delivery, performance or
enforcement of this Agreement or any other Operative Agreement or on or with
respect to any Property or Improvements thereon, including without limitation
Claims in any way relating to or arising or alleged to arise out of:
(i) the purchase, acceptance, rejection, ownership,
design, construction, delivery, acceptance, nondelivery, leasing, subleasing,
possession, use, operation, repair, modification, transportation, condition,
sale, return, repossession (whether by summary proceedings or otherwise), or
any other disposition of any Property or part thereof;
(ii) any latent or other defects in any Property, whether
or not discoverable by an Indemnified Person or Ace and whether arising before
or during the Term of this Lease;
(iii) any loss of or damage to any property or the
environment relating to or arising out of any Property, the performance by Ace
of its obligations under the Lease and the Agency Agreement or any other
action or omission by Ace;
(iv) the Operative Agreements, or any transaction
contemplated thereby;
(v) any breach by Ace of any of its representations or
warranties set forth in the Operative Agreements or any failure by Ace to
perform or observe any covenant or agreement to be performed by it under any
of the Operative Agreements;
(vi) personal injury, death or property damage, including
Claims based on strict liability in tort; and
(vii) the failure of the Lessor to have good and marketable
title to any Property, subject only to Stated Title Exceptions.
(b) The foregoing indemnity shall remain in full force and effect
notwithstanding the termination or expiration of this Agreement or any of the
other Operative Agreements. The Lessor agrees to use reasonable efforts to
cooperate with Ace in connection with Ace's defense of any claims covered by
this indemnification. Unless the Lessor has notified Ace that the Lessor
wishes to control or stay involved in the defense of any such claim, Ace may
control the defense of any such claim.
(c) The Lessor must notify Ace in writing within two years of the
date on which an officer of the Lessor holding the title of Vice President or
higher had actual notice of the existence or occurrence of any event giving
rise to a claim by such Indemnified Person.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
IN WITNESS WHEREOF, the parties hereto, intending to be legally bound
hereby, have duly executed this Participation Agreement as of the day and year
first written above.
PNC COMMERCIAL CORP
By:____________________________________(SEAL)
Name:
Title:
ACE HARDWARE CORPORATION
By:___________________________________(SEAL)
Name:
Title:
BF 60511.14: 12/11/97: 6805-14359
CAUTION: Consult a lawyer before using or acting under this form.
All warranties, including merchantability and fitness, are excluded.
INDUSTRIAL BUILDING LEASE
DATE OF LEASE TERM OF LEASE MONTHLY RENT
BEGINNING ENDING
March 24, 1997 May 1, 1997 April 30, 2002 SEE RIDER ATTACHED HERETO
Location of Premises:
1528 Brook Drive, Downers Grove, Illinois 60515
Purpose:
Office, warehousing, and operation of printing facility.
LESSEE LESSOR
NAME ACE HARDWARE CORPORATION NAME AND COLE TAYLOR BANK
BUSINESS Successor to MAIN BANK
u/t/a 76-1238
ADDRESS 2200 Kensington Court ADDRESS c/o United Industrial
Oak Brook, IL 60521 Company
1935 Techny Road, Unit 15
Northbrook,IL 60062
In consideration of the mutual covenants and agreements herein stated,
Lessor hereby leases to Lessee and Lessee hereby leases from Lessor solely
for the above purpose, the premises designated above (the "Premises"),
together with the appurtenances thereto, for the above Term. All Lessee's
payments to be made payable to United Industrial Development Company.
RENT 1. Lessee shall pay Lessor or beneficiaries or Lessor's agent
as rent for the Premises the sum stated above, monthly in
advance, until termination of this lease, at Lessor's address
stated above or such other address as Lessos may designate in
writing.
CONDITION 2. Lessee received the premises in good order and repair,
AND UPKEEP and acknowledges that no representations as to the condition
OF PREMISES and repair thereof have been made by Lessor, or his agent, prior
to or at the execution of this lease that are not herein
expressed; Lessee will keep the Premises including all appurte-
nances, in good repair, replacing all broken glass with glass
of the same size and quality as that broken, and will replace
all damaged plumbing fixtures with others of equal quality, and
will keep the Premises, including adjoining alleys, in a clean
and healthful condition according to the applicable municipal
ordinances an the direction of the proper public officers during
the term of this lease at Lessee's expense, and will with out
injury to the roof, remove all snow and ice from the same when
necessary, and will remove the snow and ice from the sidewalk
abutting the Premises; and upon the termination of this lease,
in any way, will yield up the Premises to Lessor, in good
condition and repair, loss by fire and ordinary wear excepted,
and will deliver the keys therefor at the place of payment of
said rent. (*) see reverse side hereof.
LESSEE NOT 3. Lessee will not allow the Premises to be used for any
TO MISUSE; purpose that will increase the rate of insurance thereon, nor
SUBLET; any purpose other than that herein before specified, and will
ASSIGNMENT not load floors with machinery or goods beyond the floor load
rating prescribed by applicable municipal ordinances, and will
not allow the premises to be occupied in whole or in part, by
any other person, and will not sublet the same or any part
without in each case the written consent of the Lessor first
had, and Lessee will not permit any transfer by operation of
law of the interest in the Premises acquired through this lease,
to be used for any unlawful purpose, or for any purpose that
will injure the reputation of the building or increase the fire
hazard of the building, or disturb the tenants or the
neighborhood and will not permit the same to remain vacant or
unoccupied for more than ten consecutive days; and will not
allow any signs, cards or placards to be posted, or placed
thereon, nor permit any alteration of or addition to any part of
the Premises, except by written consent of Lessor; all
alterations and additions to the Premises shall remain for the
benefit of Lessor unless otherwise provided in the consent
aforesaid. Lessee's right to sublease is not to be unreasonably
withheld.
MECHANIC'S 4. Lessee will not permit any mechanic's lien or liens to
LIEN be placed upon the Premises or any building or improvement
thereon during the termhereof, and in case of the filing of such
lien Lesseewill promptly pay same. If default in payment thereof
shall continue for thirty (30) days after written notice thereof
from Lessor to the Lessee, the Lessor shall have the right and
privilege at Lessor's option of paying the same or any portion
thereof without inquiry as to the validity thereof, and any
amounts so paid, including expenses and interest, shall be so
much additional indebtedness hereunder due from Lessee to Lessor
and shall be repaid to Lessor immediately on rendition of bill
therefor.
INDEMNITY 5. Lessee covenants and agrees that he will protect and
FOR save and keep the Lessor forever harmless and indemnified
ACCIDENTS against and from any penalty or damages or charges imposed for
any violation of any laws or ordinances, whether occasioned by
the neglect of Lessee or those holding under Lessee, and that
Lessee will at all times protect indemnify and save and keep
harmless the Lessor against and from any and all loss, cost,
PAGE 3
damage or expense, arising out of or from any accident or other
occurrence on or about the Premises, causing injury to any
person or property whomsoever or whatsoever and will protect,
indemnify and save and keep from any and all claims and against
and from any and all loss, cost, damage failure of Lessee in any
respect to comply with and perform all the requirements and
provisions hereof.
NON- 6. Except as provided by Illinois statute, Lessor shall
LIABILITY not be liable for any damage occasioned by failure to keep the
OF LESSOR Premises in repair nor for any damage done or occasioned by or
from plumbing sprinkler, steam or other pipes or sewerage or the
bursting leaking or running of any pipes, tank or plumbing
fixtures, in, above, upon or about Premises or any building or
improvement thereon nor for any damage occasioned by water, snow
or ice being upon or coming through the roof, skylights, trap
door or otherwise, nor for any damages arising from acts or
neglect of any owners or occupants of adjacent or contiguous
property.
WATER, 7. Lessee will pay, in addition to the rent above specified
GAS AND all water rents, gas and electric light and power bills taxed,
ELECTRIC levied, or charged on the Premises, for and during the time for
CHARGES which this lease is granted and in case said water rents and
bills for gas, electric light and power shall not be paid when
due, Lessor shall have the right to pay the same, which amounts
so paid, together with any sums paid by Lessor to keep the
Premises in a clean and healthy condition, as above specified
are declared to be so much additional rent and payable with the
installment of rent next due thereafter.
KEEP 8. Lessor shall not be obliged to incur any expense for
PREMISES repairing any improvements upon said demised Premises or
IN REPAIR connected therewith, and the Lessee at his own expense will
keep all improvements in good repair (injury by fire, or other
causes beyond Lessee's control excepted) as well as in a good
tenantable and wholesome condition, and will comply with all
local or general regulations, laws and ordinances applicable
thereto, as well as lawful requirements of all competent
authorities in that behalf. Lessee will, as far is possible,
keep said improvements from deterioration due to ordinary wear
and from falling temporarily out of repair. If Lessee does not
make repairs as required hereunder promptly and adequately,
Lessor may but need not make such repairs and pay the costs
thereof, and such costs shall be so much additional rent imme-
diately due from and payable by Lessee to Lessor.
ACCESS TO 9. Lessee will allow Lessor free access to the premises
PREMISES for the purpose of examining or exhibiting the same, or to make
any needful repairs, or alterations thereof which Lessor may see
fit to make and will allow to have placed upon the Premises at
all times notice of "For Sale" and "To Rent", and will not
interfere with the same.
PAGE 4
ABANDON- 10. If Lessee shall abandon or vacate the Premises, or if
MENT AND Lessee's right to occupy the Premises be terminated by Lessor
RELETTING by reason of Lessee's breach of any of theft covenants herein,
the same may be re-let by Lessor for such rent and upon such
terms as Lessor may deem fit; and if a sufficient sum shall not
thus be realized monthly, after paying the expenses of such
re-letting and collecting to satisfy the rent hereby reserved,
Lessee agrees to satisfy and pay all deficiency monthly during
the remaining period of this lease.
HOLDING 11. Lessee will, at the termination of this lease by lapse
OVER of time or otherwise, yield up immediate possession to Lessor
but the provisions of this clause shall not be held as a waiver
by Lessor of any right of re-entry as hereinafter set forth;
nor shall the receipt of said rent or any part thereof, or any
other act in apparent affirmance of tenancy, operate as a waiver
of the right to forfeit this lease and the term hereby granted
for the period still unexpired, for a breach of any of the
covenants herein.
EXTRA 12. There shall not be allowed, kept, or used on the Premises
FIRE any inflammable or explosive liquids or materials save such as
HAZARD may be necessary for use in the business of the Lessee, and in
such case, any such substances shall be delivered and stored in
amount, and used, in accordance with the rules of the applicable
Board of Underwriters and statutes and ordinances now or
hereafter in force.
DEFAULT 13. If default be made in the payment of the above rent, or
BY any part thereof, or in any of the covenants herein contained
LESSEE to be kept by the Lessee, Lessor may at any time thereafter at
his election declare said term ended and reenter the Premises or
any part thereof, with or (to the extent permitted by law)
without notice or process of law, and remove Lessee or any
persons occupying the same, without prejudice to any remedies
which might otherwise be used for arrears of rent, and Lessor
shall have at all times the right to distrain for rent due, and
shall have a valid and first Lien upon all personal property
which Lessee now owns, or may hereafter acquire or have an
interest in, which is by law subject to such distraint, as
security for payment of the rent herein reserved.
NO RENT 14. Lessee's covenant to pay rent is and shall be independent
DEDUCTION of each and every other covenant of this lease. Lessee agrees
OR SET OFF that any claim by Lessee against Lessor shall not be deducted
from rent nor set off against any claim for rent in any action.
RENT AFTER 15. It is further agreed, by the parties hereto, that after
NOTICE the service of notice, or the commencement of a suit or after
OR SUIT final judgment for possession of the Premises, Lessor may receive
PAGE 5
and collect any rent due, and the payment of said rent shall not
waive or affect said notice, said suit, or said judgment.
PAYMENT OF 16. [DELETED]
COSTS
RIGHTS 17. The rights and remedies of Lessor under this lease are
CUMULATIVE cumulative. The exercise or use of any one or more thereof
shall not bar Lessor from exercise or use of any other right or
remedy provided herein or otherwise provided by law, nor shall
exercise nor use of any right or remedy by Lessor waive any
other remedy.
FIRE AND 18. [DELETED]
CASUALTY
SUBORDINATION 19. This lease is subordinate to all mortgages which may now or
hereafter affect the Premises.
PLURALS: 20. The words "Lessor" and "Lessee" wherever herein occuring
SUCCESSORS and used shall be construed to mean "Lessors" and "Lessees" in
case more than one person constitutes either party to this
lease; and all the covenants and agreements contained shall be
binding upon, and inure to, their respective successors, heirs,
executors administrators and assigns and may be exercised by his
or their attorney or agent.
SEVERABILITY 21. Wherever possible, each provision of this lease shall be
interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this lease shall be
prohibited by or invalid under applicable law, such provision
shall be ineffective to the extent of such prohibition or
invalidity, without invalidating the remainder of such provision
or the remaining provisions of this lease.
RIDER ATTACHED HERETO AND MADE A PART OF THE
INDUSTRIAL BUILDING LEASE BETWEEN ACE HARDWARE
CORPORATION, AS LESSEE AND COLE TAYLOR BANK,
SUCCESSOR TO MAIN BANK U/T/A 761238,
AS LESSOR DATED MARCH 24, 1997
22. BASE RENT. During the term hereof, the Base Rent due
hereunder shall be as follows:
Period Annual Base Monthly Base
Rent Rent
May 1, 1997-April 30, 2000 $150,000.00 $ 12,500.00
May 1, 2000-April 30, 2002 $160,000.00 $ 13,333.33
23. CASUALTY. In case the Premises shall be rendered wholly
or partially untenantable by fire or other casualty,
subject to the approval of Lessor's mortgagee, Lessor
shall use any insurance proceeds to repair and restore the
Premises. It is further provided that during the period
while the Premises are wholly or partially untenantable,
rent shall abate on a prorata basis, provided however that
if the Premises are not substantially restored within one
hundred twenty (120) days from the date of said fire or
other casualty, then Lessee may, at its option, within
said period of time, rescind and cancel the within Lease,
which would be Lessee's exclusive remedy if so elected.
24. MAINTENANCE AND REPAIR. Notwithstanding anything to the
contrary herein contained, Lessee agrees to make all
necessary repairs and replacements, both interior and
exterior, of any kind, nature and description, and to
supply its own heat and hot water and other utilities
during the term of this Lease, provided however that
Lessor shall remain responsible for all necessary repairs
to the roof and ordinary and usual structural repairs on
the subject building arising out of ordinary wear and
tear. It is understood that any damage to the roof or
structural parts of the subject building resulting from
fire or other peril, whether or not encompassed by the
fire and extended coverage insurance provided for herein,
shall be the responsibility of Lessee.
25. REAL ESTATE TAXES. Lessee agrees to pay as additional
rent, the general real estate taxes and any special tax
assessment attributable to the subject real estate during
the term of the Lease and any renewals thereof within
thirty (30) days of receipt of any such tax bills from
Lessor, provided however that Lessee shall have the right
to challenge and contest any increase in the real estate
tax assessment attributable to the Premises, and that
Lessor will fully cooperate in connection therewith so
long as any such action and fees paid in connection
therewith shall be at the sole cost and expense of Lessee
and so long as any such tax or assessment is paid within
thirty (30) days of the issuance of a bill therefor.
26. SUBORDINATION. Lessor shall have the right from time to
time and at any time during the term of this Lease or any
extension thereof, to mortgage the Premises, and Lessee
agrees that this Lease is subject and subordinate to the
terms of a mortgage to be placed on or encumbering the
Premises. Lessee further agrees to execute any and all
documents required by any mortgagee to evidence the
subordination of this lease. Lessor is appointed as agent
for Lessee to execute such instruments of subordination or
estoppel.
27. INSURANCE. Lessee shall furnish and maintain fire and
extended coverage insurance in the amount of ONE MILLION
SIX HUNDRED THOUSAND ($1,600,000.00) DOLLARS at its cost
and expense covering the Premises, which will name the
Lessor as an additional insured and any mortgagee to the
extent of its interest. Lessee shall also furnish to
Lessor O.L.T. Policies of Insurance naming Lessor as an
additional party insured with liability limits of THREE
HUNDRED THOUSAND ($300,000.00) DOLLARS and ONE MILLION
($1,000,000.00) DOLLARS and property limits damage of ONE
HUNDRED THOUSAND ($100,000.00) DOLLARS. All such policies
shall provide that the same shall not be canceled except
on no less than thirty (30) days prior written notice to
Lessor. Certificates of such insurance will be delivered
to Lessor by Lessee and Lessee shall maintain coverage
during the entire term of the Lease or any extension
thereof.
If Lessee shall fail within the period herein above
fixed for such purpose, to obtain any insurance required
hereunder or to pay all premiums with respect thereto,
Lessor shall have the right, but shall not be obligated
to, obtain any such insurance and/or pay any such premiums
not so paid by Lessee. Any monies advanced by Lessor for
such purpose shall be deemed additional rent and shall be
payable immediately by Lessee to Lessor.
28. WAIVER OF SUBROGATION. When (a), any loss, cost, damage
or expense resulting from fire, explosion or any other
casualty or occurrence is incurred by either of the
parties to this Lease in connection with the Premises, and
(b) the subject parties are then covered in whole or in
part by insurance with respect to such loss, cost, damage
or expense, then the party so insured hereby releases the
other party from any liability it may have on account of
such loss, cost, damage or expense, and waives any right
of subrogation which might otherwise exist in and accrue
to any person on account thereof, provided that such lease
or liability and waiver of the right of subrogation shall
not be operative in cases where the effect thereof is to
render invalid such insurance coverage.
29. QUIET ENJOYMENT. So long as Lessee is not in default
under the covenants and agreements of this Lease, Lessee's
quiet and peaceable enjoyment of the Premises shall not be
disturbed or interfered with by Lessor or by any person
claiming by, through or under Lessor. Notwithstanding
anything to the contrary contained herein, it is
understood that so long as Lessee fulfills its obligations
hereunder, it will not be denied occupancy of the Premises
incidental to any action taken by any mortgagee of Lessor.
30. NOTICES. Notwithstanding anything to the contrary herein
contained, there shall be no breach or default of any
nature or kind unless and until the breaching or
defaulting party receives written notice by Certified
Mail, Return Receipt Requested and fails to cure said
breach or default within ten (10) days after the aforesaid
notice if said breach constitutes a failure to pay any
monetary amount as required hereunder, and fails to
commence to cure and to proceed with diligence in curing
any non-monetary breach or default within fifteen (15)
days after the aforesaid notice.
All notices required hereunder shall be by Certified
Mail, Return Receipt Requested, where to the Lessor it
shall be mailed in care of Sam Rothbart, United Industrial
Development Company, 1935 Techny Road, Unit 15,
Northbrook, Illinois 60062, and where to it shall be
mailed to Lessee, Ace Hardware Corporation, 2200
Kensington Court, Oak Brook, Illinois 60521.
31. CONDEMNATION. In the event that the whole of the Premises
shall be permanently taken or condemned for a public or
quasi public use or purpose by a competent governmental
authority, then and in that event, the term of this Lease
shall terminate from the date when possession of the
Premises shall be required for such use or purpose, and
any award, compensation or damages, shall belong solely to
Lessor, but nothing herein shall preclude Lessee from
proving to the extent allowable by law, its damages with
respect to leasehold improvements, moving expenses, and
loss of profits and receiving an award therefor. Current
rental due shall in that case be prorated as of the date
of termination of the Lease.
In the event that a part of the Premises, exceeding
one-third (1/3) of the total square footage of the subject
building, shall be taken or condemned by any competent
governmental authority for a public or quasi-public use or
purpose, then Lessee, may, at its option, if the Premises
cannot be restored to any economic unit for Lessee's use
and purpose by expenditure of the award arising from such
condemnation, which determination, if the parties shall
not agree thereon, shall be made by an architect or
engineer approved by both parties, terminate this Lease
and the terms hereof, on the date when possession of such
part of the Premises shall be required for such use or
purpose upon which the condemnation is based, and any
award shall belong to the Lessor solely, but nothing
herein contained shall preclude Lessee from proving to the
extent allowable by law, the damages with respect to the
leasehold improvements, moving expenses, and loss of
profits and receiving an award therefor. Such option to
terminate shall be exercised by the Lessee by notice to
the Lessor not less than sixty (60) days after the date of
the first offer by the condemning body or after the filing
in Court of a petition to condemn, whichever is sooner.
If the condemnation is not completed after the offer is
made, the election to terminate shall be null and void.
In any event, the termination shall not be effective
unless possession of a portion of the Premises is taken by
the condemning body. If the Lessee shall not so elect to
terminate this Lease in the event of a partial taking,
including the taking of a portion of the subject building,
or in the event of any other partial taking, the, upon the
payment of any award arising from said condemnation, the
amount received shall be used promptly in defraying to the
extent that it suffices, the cost and expense in making
repairs to, alteration of, or additions to the
improvements of the Premises for the use of restoring the
same to the economic unit for Lessee's use and purpose, to
the extent that may have been made necessary by such
condemnation. The balance, if any, remaining shall be
retained by the Lessor. In the event of such partial
taking, including the taking of a portion of the subject
building or in the event of any other partial taking, the
Lessee shall be entitled to an equitable reduction in the
rent due, based upon the restored value of the Premises.
In any event the attorney handling the condemnation shall
be chosen by the Lessor and Lessor shall have the sole
right to determine settlement of the proceedings, but not
settlement of Lessee's claim for damages.
32. BROKERS. The parties hereto each represent to each other
that no brokers were involved in connection with the
within transaction.
33. SIGNS. It is further understood that Lessee may continue
to maintain a sign on the Premises provided same complies
with applicable ordinances of the Village of Downers
Grove.
34. PERMITTED ALTERATIONS. Lessor grants Lessee unconditional
permission to:
(a) Seal all concrete floors.
(b) Paint all interior cement block walls.
(c) Install at Lessee's cost, humidifiers sufficient in
capacity to meet moisture requirements for Lessee's
printing business.
(d) Install interior partitions as needed in the conduct
of Lessee's business.
35. EXAMINATION OF PREMISES ON TERMINATION. It is further
agreed upon termination of this Lease or any extension
thereof that Lessee shall prior to said termination: move
any and all debris from the interior and exterior of the
Premises; repair any and all heating, air-conditioning,
and mechanical appurtenances and/or fixtures so that same
are in good working order; replace any and all broken
glass in and about the Premises; clean the Premises so
that they are returned to Lessor in a clean and orderly
condition, which shall include but not be limited removal
of any and all foreign materials on the floor of the
Premises, including oil and other chemicals and
substances.
It is understood that wherever possible the parties
will mutually inspect the Premises thirty (30) days prior
to termination of the within Lease for the purpose of
evaluating any and all repair or restoration work to be
performed by Lessee in order to return the Premises to
Lessor in its condition prior to Lessee's taking
possession of the Premises, ordinary wear and tear
excepted. It is further understood that upon vacation of
the Premises by Lessee, that Lessor shall, as soon as
reasonably possible after Lessee's tender of possession to
Lessor, re-inspect the Premises for the purpose of
determining whether or not all repairs and restoration
required of Lessee have been made, and that after such
inspection any and all security deposits with Lessor shall
be returned to Lessee, after deducting therefrom the
estimated costs of any and all repairs and/or restoration
required to be performed by Lessee which have not been
made as of the time of Lessee's vacation of the Premises
and after the further deduction therefrom of any and all
monies estimated to be due from Lessee for the payment of
any taxes, insurance, or other obligations of Lessee
hereunder. Upon finalization of any amounts estimated
hereunder any additional amounts owed by Lessee shall be
paid to Lessor forthwith and any additional amounts
retained by Lessor shall be returned to Lessee.
36. COMPLIANCE WITH LAW. The parties acknowledge that there
are certain federal, state and local laws, regulations and
guidelines now in effect, and that additional laws,
regulations and guidelines may hereafter by enacted,
relating to or affecting the Premises, concerning the
impact on the environment of construction, land use, the
maintenance and operation of structures and the conduct of
business. Lessee will not cause, or permit to be caused
any act or practice, by negligence, omission, or
otherwise, that would adversely affect the environment or
do anything to permit anything to be done that would
violate any of said laws, regulations or guidelines. Any
violation of this covenant shall be an event of default
under this Lease.
Nor will Lessee engage in an activity or undertaking
which would give rise to that violation of said laws,
regulations, or guidelines, and in the event Lessee
receives any notice, correspondence or transmittal
purporting any violations of the above, then Lessee will
promptly notify Lessor, and further Lessee will
immediately rectify said violation and hereby agrees to
indemnify and defend Lessor for all costs, including but
not limited to cleanup of said violation, consulting fees
of environmental consultants, and any and all attorneys
fees that Lessor may incur as a result of Lessee's
activities. The provisions of the within paragraph shall
survive termination of this Lease and shall be binding
upon and shall inure to the benefit of the parties hereto,
their respective successors and assigns, and mortgagees
thereof.
37. OPTION TO EXTEND. So long as TENANT is not in default
hereunder, TENANT shall have the right to extend the term
of the within Lease for two (2), one (1) year periods upon
the same terms and conditions except for rental upon not
less than nine (9) months prior written notice, certified
mail, return receipt required. Failure to send such
notice not less than nine (9) months prior to the
expiration of the initial term hereof shall render both
options null and void and of no further force or effect.
In the event that the exercise of the first option,
failure to send such notice not less than nine (9) months
prior to the expiration of the first option term shall
render the second option null and void and of no further
force or effect.
In the event of the exercise of either or both of the
aforesaid options, the Base Rent for the renewal terms
shall be as follows:
Period Annual Base Monthly Base
Rent Rent
May 1, 2002-April 30, 2003 $165,000.00 $13,750.00
May 1, 2003-April 30, 2004 $170,000.00 $14,166.66
LESSEE:
ACE HARDWARE CORPORATION,
BY:____________________________
LESSOR:
COLE TAYLOR BANK, Successor to
MAIN BANK, not personally but as
Trustee under Trust No. 76-1238,
BY:____________________________
1
SAM ROTHBART
ACE HARDWARE LEASE
FILE NO: 95-13
CLEAN MARKED: ACEROTHB.T2
UNDERLINED MARKED: ACEROTHB.T2R
2This is RED.MAC - format for first page of redline legal
Use REDPG2.MAC - for second page.
(*)Notwithstanding anything to the contrary herein contained, it is
understood that Lessee shall further be responsible and hereby
agrees indemnify and hold harmless Lessor and its beneficiaries
from any-and all-damages resulting from any violation of any law,
ordinance, rule or regulation or relating to hazardous or toxic
wastes and/or environmental requirements arising by or through
Lessee's occupancy of the premises.
LESSOR EXONERATION RIDER
This LEASE is executed as lessor by COLE TAYLOR BANK, not personally, but
solely as Trustee as aforesaid and it is expressly understood and agreed by
and between the parties hereto, anything in this Lease to the contrary
notwithstanding, that each and all of the covenants, undertakings and
agreements in this Lease contained are made and intended not as personal
covenants, undertakings and agreements of COLE TAYLOR BANK, or any of its
officers, agents or employees, but this Lease is executed and delivered by
the undersigned Lessor solely as Trustee as aforesaid and no personal
liability or personal responsibility is assumed by, or shall at any time be
asserted or enforced against COLE TAYLOR BANK, its officers agents or
employees, on account of any covenants, representations, undertakings or
agreements in this Lease contained, or otherwise either express or implied,
all such personal liability, if any, being hereby expressly waived and
released, it being understood that the Lessee or anyone claiming by through
or under the Lease shall look solely to the trust property for the
enforcement or collection of any such liability. By way of illustration only
and without limitation of the foregoing, it is further understood and agreed
that neither the Lessor nor the said COLE TAYLOR BANK individually shall have
any duty whatsoever with reference to the condition of, or the title to, said
premises. The Lessee hereunder is hereby charged with knowledge that the
Lessor does not, in fact, have possession of nor exercise any dominion over
the trust property or the income or avails therefrom. It is further
expressly understood and agreed that this lease is signed by the undersigned
Lessor solely for the purpose of subjecting the title to the trust property
to the terms of this Lease and for no other purpose whatsoever. Any
conveyance of the demised premises by the undersigned Lessor shall operate to
release the Lessor and COLE TAYLOR BANK in every capacity from any and all
obligations, if any, under this Lease. It is further expressly understood and
agreed that no duty shall rest upon the Lessor or COLE TAYLOR BANK to
sequester the trust property or the rents, issues and profits arising
therefrom, or the profits arising from any sale or other disposition thereof.
Trustee's Exoneration Rider Attached hereto And Made A Part Hereof
If this instrument is executed by a corporation, such execution has been
authorized by a duly adopted resolution of the Board of Directors of such
corporation.
This lease consists of pages numbered 1 to including a rider
consisting of page identified by Lessor and Lessee.
IN WITNESS WHEREOF, the parties hereto have executed this instrument as of
the Date of Lease Stated above.
LESSEE: LESSOR:
Donald Schuman (Seal) COLE TAYLOR BANK (Seal)
(Seal) as Trustee under Its Trust No.
and not individually
BY (Seal)
Trust Officer
ASSIGNMENT BY LESSOR
On this ,19 , for value received, Lessor hereby transfers,
assigns and sets over to all right, title
and interest in and to the above Lease and the rent thereby reserved, except
rent due and payable prior to , 19 .
(SEAL)
(SEAL)
GUARANTEE
On this ,19 , In consideration of Ten Dollars ($10.00) and
other good and valuable consideration, the receipt and sufficiency of which
is hereby acknowledged, the undersigned Guarantor hereby guarantees the
payment of rent and performance by Lessee, Lessee's heirs, executors,
administrators, successors or assigns of all covenants and agreements of
the above Lease.
(SEAL)
(SEAL)
FIRST AMENDMENT
TO
ACE HARDWARE CORPORATION
OFFICER INCENTIVE PLAN
(Adopted on August 19, 1997)
This First Amendment to the Ace Hardware Corporation Officer Incentive
Plan (Plan) is hereby entered into on this ____ day of December, 1997
and is effective January 1, 1998:
WITNESSETH:
Whereas the Company adopted the Officer Incentive Plan on June 7, 1994; and
Whereas the Company desires to clarify certain terms and exhibits; and
Whereas the Company also desires to amend the Plan to provide for
participation by certain officers and key management employees and to
vary participation; and
Whereas the Plan consists of a Short-Term Incentive Plan (The ST Plan)
and a Value Added Long-Term Incentive Plan (The VA Plan);
Now therefore, the Ace Hardware Corporation Officer Incentive Plan is
hereby amended as follows:
1. The portion of the Plan consisting of the Value Added Long-Term
Incentive Plan (the VA Plan) is also known as the Ace Hardware
Corporation Long-Term Incentive Compensation Plan.
2. That Exhibit A shall be amended to read as follows:
Exhibit A
ELIGIBLE PARTICIPANTS
David F. Hodnik (the VA Plan only)
William A. Loftus
Paul M. Ingevaldson
Michael C. Bodzewski
Lori L. Bossmann
Ray A. Griffith (the VA Plan only)
Rita D. Kahle
David W. League
David F. Myer
Fred J. Neer
Donald L. Schuman
3. That the individual targets in the Award Opportunities Section of
the ST Plan Design in Article 6 are amended and determined as
follows. The Matrix Chart attached hereto as Exhibit C shall apply
to the team portion of the ST Plan Award Opportunity for the year 1998.
ST Plan
Tiers and Participants Award Opportunities
1998 1999
Individual Team Individual Team
Tier I 15% 20% 15% 25%
Rita D. Kahle
William A. Loftus
Tier II 15% 15% 15% 20%
Michael C. Bodzewski
Paul M. Ingevaldson
David F. Myer
Tier III 15% 10% 15% 15%
Lori L. Bossmann
David W. League
Fred J. Neer
Donald L. Schuman
Example listed below:
Individual Opportunity Formula:
Base Salary x % Eligible (15%) x Actual % of Individual
Incentive Earned (Accomplished) = Award Payment.
Example: $200 x 15% x 82% = $24,600 Award Payment
Team Opportunity Formula:
Base Salary x % Eligible (Depends Upon Tier Level) x Matrix
Multiplier (Return on Sales/Wholesale Sales Growth) Percent
Earned (See Attached Chart) = Award Payment.
Example: $200 x 20% x 100% = $40,000 Award Payment
Total: $24,600 + $40,000 = $64,600 Total Award Payment
4. That the individual targets in the Award Opportunities Section of
the VA Plan Design in Article 7 are amended and determined for each
individual participant as follows:
VA Plan VA Plan
Participant Target Award Opportunity Vesting
David F. Hodnik 80% 2/3-1/3 as per original Plan
William A. Loftus 30% 2/3-1/3 as per original Plan
Paul M. Ingevaldson 30% 2/3-1/3 as per original Plan
Michael C. Bodzewski 30% 2/3-1/3 as per original Plan
Rita D. Kahle 30% 2/3-1/3 as per original Plan
David W. League 30% 2/3-1/3 as per original Plan
David F. Myer 30% 2/3-1/3 as per original Plan
Fred J. Neer 30% 2/3-1/3 as per original Plan
Donald L. Schuman 30% 2/3-1/3 as per original Plan
New participants beginning January 1, 1998
Lori L. Bossmann 30% 2/3-1/3 as per original Plan
Ray A. Griffith 10% as per paragraph 6 herein
The VA Plan is a rolling 3 year plan. New participants beginning
January 1, 1998 will have prorated payment in first two years, a 33%
payment at the end of 1998 and a 66% payment at the end of 1999.
5. The Permanent Sharing Ratio set forth in the Performance Measure
Section of the VA Plan Design in Article 7 is changed from 3.9 percent
to 4.4 percent for the year 1998.
6. VA PLAN VESTING AND DISTRIBUTION FOR LISTED PARTICIPANTS
A Listed Participant immediately vests in one-half of the calculated
award at the end of each Performance Period. Of the vested amount,
half will be paid in cash or deferred at employee's option within the
first quarter of the subsequent Fiscal Year. The other half may be
invested in the Pacific Mutual or deferred at employee's option
(See Section 10 of the Original Plan).
With regard to the remaining one-half award, it may be immediately
deferred, but it becomes vested one year following the end of the
Performance Period. For example the non-vested award portion
applicable for the 1996-1998 VA Plan will become vested as of the end
of Fiscal Year 1999.
Listed Participants
Ray A. Griffith
IN WITNESS WHEREOF, The Corporation has adopted this First Amendment to
the Ace Hardware Corporation Officer Incentive Plan.
Ace Hardware Corporation,
A Delaware Corporation
By:
Chairman of The Board of Directors
and
By:
President and CEO
AUDITORS' CONSENT
The Board of Directors
Ace Hardware Corporation:
We consent to the use of our report included herein and the reference
to our firm under the heading "Experts" in the prospectus.
KPMG Peat Marwick, LLP
Chicago, Illinois
March 16, 1998
ACE HARDWARE CORPORATION: POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that each of the undersigned directors
of ACE HARDWARE CORPORATION, a Delaware corporation, hereby constitutes and
appoints DAVID F. HODNIK and LORI L. BOSSMANN, and each of them, his true
and lawful attorneys-in-fact and agents, each with full power to act without
the other, with full power of substitution, for him and in his name, place
and stead, in any and all capacities, to sign the Post-Effective Amendment
No. 3 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 18th day of March, 1998.
JENNIFER C. ANDERSON JOHN E. KINGREY
Jennifer C. Anderson John E. Kingrey
ERIC R. BIBENS II RICHARD E. LASKOWSKI
Eric R. Bibens II Richard E. Laskowski
LAWRENCE R. BOWMAN ROGER E. PETERSON
Lawrence R. Bowman Roger E. Peterson
JAMES T. GLENN JON R. WEISS
James T. Glenn Jon R. Weiss
D. WILLIAM HAGAN JAMES R. WILLIAMS, JR.
D. William Hagan James R. Williams, Jr.
MARK JERONIMUS
Mark Jeronimus
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from SEC Form S-2
Post-Effective Amendment No. 3 and is qualified in its entirety by reference to
such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 14,171
<SECURITIES> 0
<RECEIVABLES> 365,720
<ALLOWANCES> 2,086
<INVENTORY> 338,509
<CURRENT-ASSETS> 729,187
<PP&E> 396,149
<DEPRECIATION> 153,170
<TOTAL-ASSETS> 976,571
<CURRENT-LIABILITIES> 570,176
<BONDS> 0
0
0
<COMMON> 246,348
<OTHER-SE> 7,032
<TOTAL-LIABILITY-AND-EQUITY> 976,571
<SALES> 2,907,259
<TOTAL-REVENUES> 2,907,259
<CGS> 2,682,863
<TOTAL-COSTS> 2,682,863
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 14,751
<INCOME-PRETAX> 78,297
<INCOME-TAX> 1,910
<INCOME-CONTINUING> 76,387
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 76,387
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
