As filed with the Securities and Exchange Commission-subject to change.
Registration No. 33-58191
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Post-Effective Amendment No. 4
To
Form S-2
REGISTRATION STATEMENT
Under the
SECURITIES ACT OF 1933
Ace Hardware Corporation
(Exact Name of Registrant as Specified in its Charter)
Delaware
(State of Incorporation)
36-0700810
(I.R.S. Employer Identification No.)
2200 Kensington Court
Oak Brook, Illinois 60523
(630) 990-6600
(Address and telephone number of registrant's principal executive offices)
David W. League
Vice President, General Counsel and Secretary
Ace Hardware Corporation
2200 Kensington Court
Oak Brook, Illinois 60523
(630) 990-6600
(Name, address and telephone number of agent for service)
Approximate date of commencement of proposed sale to the public:
As soon as practicable after the effective date of this
Post-Effective Amendment to the Registration Statement.
If any of the securities being registered on this form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, check the following box X
If the registrant elects to deliver its latest annual report to security-
holders, or a complete and legible facsimile thereof, pursuant to Item
11(a)(1) of this form, check the following box.
ACE HARDWARE CORPORATION
Cross Reference Sheet Pursuant to Item 501(b) of Regulation S-K
Between Items in Part I of Form S-2 and the Prospectus
Item Number and Caption Heading in Prospectus
1. Forepart of the Registration Statement
and Outside Front Cover Page of Prospectus Outside Front Cover Page
2. Inside Front and Outside Back Cover Pages Inside Front and Outside
of Prospectus Back Cover Pages
3. Summary Information, Risk Factors and
Ratio of Earnings to Fixed Charges Factors To Be Considered;
Summary
4. Use of Proceeds Use of Proceeds
5. Determination of Offering Price Not Applicable
6. Dilution Not Applicable
7. Selling Security Holders Not Applicable
8. Plan of Distribution Distribution Plan and
Offering Terms
9. Description of Securities to be Registered Outside Front Cover Page;
Description of Capital
Stock
10. Interests of Named Experts and Counsel Opinions of Experts
11. Information with Respect to the Registrant The Company's Business;
Properties; Index to
Financial Statements;
Selected Financial Data;
Management's Discussion
and Analysis of Financial
Condition and Results of
Operations; Management.
12. Incorporation of Certain Information
by Reference Documents Incorporated by
Reference
13. Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities Indemnification
Obligations of Company
and S.E.C. Position on
Securities Act
Indemnification
PROSPECTUS
ACE HARDWARE CORPORATION
2200 Kensington Court
Oak Brook, Illinois 60523
(630) 990-6600
904 Shares Class A (Voting) Stock, $1,000 par value
31,289 Shares Class C (Non-Voting) Stock, $100 par value
We only offer Class A Voting Stock together with Class C Non-voting Stock to
hardware retailers for their initial membership in our cooperative. We offer
Class C Non-voting Stock without any Class A Voting Stock to our existing
members when they have additional store locations that also become members of
our cooperative.
(See "Distribution Plan and Offering Terms")
There is no existing market for the Capital Stock that is being offered in
this Prospectus, and we do not expect any market to develop.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY
THE SECURITIES AND EXCHANGE COMMISSION NOR HAS THE
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
Underwriting
Price to Discounts and Proceeds to
Public Commissions(4) Company
----------- -------------- -----------
Class A Stock
Per Share(1)(2) $ 1,000 None $ 1,000
Total $ 904,000 None $ 904,000
----------- -------------- -----------
Class C Stock
Per Share(1)(3)(4)(6) $ 100 None $ 100
Total $ 3,128,900 None $ 3,128,900
(1) The shares are offered in a unit of $5,000 to each hardware retailer.
Class A Stock is included only if the hardware retailer does not have
a store location that is already a member of our cooperative.
(2) 1 share of Class A Stock and 40 shares of Class C Stock are offered to
each hardware retailer for the first store location that becomes a
member of our cooperative.
(3) 50 shares of Class C Stock are offered to each existing member who has
another store location that also becomes a member of our cooperative.
(4) There are no underwriters. We sell this stock directly to our members.
An applicant must pay a $400 fee to have a membership application
processed. If all of the stock in this offering is sold, the total
proceeds will be the amount shown above before deducting estimated
expenses of approximately $28,000.
(5) All of the shares of Class C Stock included in this offering can be
purchased for cash, but the purchaser can also choose to pay for the
stock in bi-weekly installments. We also plan to issue additional shares
of Class C Stock to our members as a part of their patronage dividends
for business that they do with our cooperative.
This offering is exempt from the registration provisions of the New York
Franchise/Disclosure Statute. Our agent for service of process in New York is
C T Corporation, 1633 Broadway, New York, New York 10019. (See back cover page
regarding the special revocation rights that Florida purchasers have.) No
state securities commission has passed upon the accuracy of this Prospectus.
PLEASE REFER TO THE "FACTORS TO BE CONSIDERED" ON PAGE 2 OF THIS PROSPECTUS.
This is a continuous offering that terminates no later than April 30, 2000.
The date of this Prospectus is __________ __, 1999
AVAILABLE INFORMATION
The terms "Ace," "Company," "cooperative," "we," "us," "our" and similar
words refer to Ace Hardware Corporation. The terms "member," "retailer,"
"dealer," "you," "your" and similar words refer to someone who purchases our
stock. We are subject to the informational requirements of Section 15(d) of
the Securities Exchange Act of 1934. Therefore, we file annual reports,
quarterly reports, and other information with the Securities and Exchange
Commission. You may read and copy these materials at the SEC's Public
Reference Room at 450 5th Street, N.W., Washington, D. C. 20549. You may
obtain information on the operation of the Public Reference Room by calling
the SEC at 1-800-SEC-0330. The SEC has an Internet site that contains
reports, proxy and information statements and other information about
issuers that file electronically with the SEC. The address of that
Internet site is http://www.sec.gov. We also have an Internet site whose
address is http://www.acehardware.com.
REPORTS TO SECURITY HOLDERS
After the end of each fiscal year, we furnish our stockholders with an annual
report. This report contains financial information that has been examined and
reported upon by a certified public accounting firm, which issues a formal
opinion on it.
DOCUMENTS INCORPORATED BY REFERENCE
We file an Annual Report on Form 10-K for our 1998 fiscal year ending
January 2, 1999 under Section 15(d) of the Exchange Act. That Form 10-K
Annual Report is incorporated by reference into this Registration Statement.
Someone to whom we deliver a Prospectus can request (in writing or verbally)
a free copy of the documents that we have incorporated by reference into this
Registration Statement. If those documents also have exhibits, we will not
include copies of the exhibits unless they are also expressly incorporated by
reference into the documents being copied. To request these copies, please
contact David League, Vice President-General Counsel and Secretary, Ace
Hardware Corporation, 2200 Kensington Court, Oak Brook, Illinois 60523,
(630) 990-6600.
FACTORS TO BE CONSIDERED
Limitations on Value and Marketability of Stock
Although we pay "patronage dividends" or "patronage rebates" to our
stockholders on the basis of the quantity or value of business that we do
with them, our corporate charter prohibits us from declaring dividends on
shares of our capital stock. Your ability to transfer these shares is limited
and there is no trading market for them. If you have a store location that is
a member of our cooperative and it closes down or if your Ace membership is
terminated, you can only sell your shares to another hardware dealer whom we
approve as a member for a particular store location. If you do not sell the
shares in this way, then we must repurchase them. (See the heading
"Description of Capital Stock".) We do not expressly set aside any funds to
repurchase these shares, and repurchases can be made only as permitted under
the General Corporation Law of Delaware. (See the heading "Summary," subheading
"Repurchase of Shares by Company".) Therefore, except for the voting rights
which the Class A Stock has, our stock has value to you only if your
membership terminates or if our Company is liquidated.
Income Tax Liability Incidental to Patronage Dividends
If you purchase shares, you must report the total amount of your patronage
dividends from us as gross income on your federal income tax return. Therefore,
your gross income will include any shares of Class C Stock that we distribute
to you as patronage dividends, as well as patronage refund certificates that
you may receive in the form of written notices of allocation. These patronage
refund certificates are non-negotiable. They have a maturity date and pay
annual interest at a rate that is determined by our Board of Directors before
the certificates are issued. A minimum of 20% of your total annual patronage
dividends must be paid in cash, unless this cash portion has been applied
against your indebtedness to us. The cash portion would be applied against
your indebtedness if your membership had terminated and you had not requested
payment of the 20% minimum in cash. Depending on your income tax bracket, this
cash portion may not be enough to pay all of your federal income tax liability
on your patronage dividend distributions. (See the heading "The Company's
Business", subheading "Federal Income Tax Treatment of Patronage Dividends".)
Sale of All Shares Offered Not Assured
Since only hardware retailers for particular store locations that have
memberships approved can purchase our stock, it is not certain that all of
the shares of stock in this offering will be sold.
Company's First Lien Rights on Shares
All of your shares of our stock, including any Class C shares that we
distribute to you as patronage dividends and any patronage refund certificates,
are subject to our first lien rights to ensure that you pay your debts to us.
(See the heading "Description of Capital Stock", subheading "Other Restrictions
and Rights" and the heading "The Company's Business", subheading "Forms of
Patronage Dividend Distributions".)
Full Payment Required for Issuance of Shares
You may pay for your shares of stock in full in advance, or you may pay for
them over time by having charges billed to your regular bi-weekly statement
from us. You will not receive your stock certificate(s) until the purchase
price for the share(s) of a particular class has been paid in full. (See the
heading "Distribution Plan and Offering Terms".)
By-law Provisions Constitute a Legal Contract with the Company
Our By-laws state that they are a legal contract between the Company and its
stockholders. (See Article XXVI of the By-laws.) A full copy of these By-laws,
amended as of August 19, 1997, is printed in this Prospectus as Appendix A.) We
particularly encourage you to review: 1) Article XVI, Sections 5 through 12,
which limit transfers of our stock and govern our repurchase of shares;
2) Article XXIV titled "Members' Patronage Dividends"; and 3) Article XXV,
which addresses a member's rights and obligations.
Documents Accompanying Prospectus
Our most recent annual report to shareholders and the current standard form of
our Membership Agreement accompany this Prospectus. (See the heading "The
Company's Business," subheading "Membership Agreement.")
SUMMARY
The Company and Its Business
The mailing address and telephone number of our main executive offices are:
2200 Kensington Court, Oak Brook, Illinois 60523, (630) 990-6600.
We are a wholesaler of hardware and related products. We also manufacture
paint products. We sell products mainly to retail hardware dealers who have
Membership Agreements with us. These Membership Agreements entitle our dealers
to purchase merchandise and services from us and grant a license to use some
of our trademarks. (See the heading "The Company's Business," subheading
"Membership Agreement.") Our dealers are subject to "Member Operational
Requirements" and other important requirements. The number of hardware store
locations that had Membership Agreements with us as of the end of our 1998
fiscal year on January 2, 1999 were 5,039. (See the heading "The Company's
Business.")
Basic Distinctions Between Classes of Stock
Our capital stock is divided into three classes, Class A, Class B, and
Class C. Class A Stock is the only class of stock that has voting rights for
the election of directors and most other matters. Class B Stock was previously
offered for memberships that we granted on or before February 20, 1974, but
Class B Stock has not been offered since March 31, 1979. Our Board of
Directors has the right to redeem some or all of the outstanding shares of
Class B Stock. The Board can also redeem any outstanding shares of Class C
Stock that we issued for patronage dividends distributions. If our Company is
ever liquidated, the outstanding shares of Class B Stock and Class C Stock
have priority over the outstanding shares of Class A Stock in the distribution
of our net assets. This priority only extends up to the amount we would have
to pay to purchase or redeem all of our outstanding shares of Class B Stock
and Class C Stock. If our net assets exceeded the total amount which we would
have been required to pay for that redemption, then the excess would be
distributed in equal portions to the Class A Stockholders (up to the $1,000
par value of the Class A Stock). After that, any net assets left over would
be proportionately distributed among the stockholders of all three classes of
our stock. A Class A Stockholder would participate in this distribution based
on the proportion which the par value of his share of Class A Stock bears to
the sum of the total par value of all outstanding shares of Class A Stock and
the total amount which we would have been required to pay to purchase or
redeem all of the outstanding shares of Class B Stock and Class C Stock.
Each share of Class B Stock and Class C Stock would participate in the
distribution in the proportion which the applicable purchase or redemption
prices of these types of stock would bear to the same sum. (See the heading
"Description of Capital Stock", subheadings "Voting Rights," "Liquidation
Rights," and "Redemption Provisions.")
The declaring of dividends on any shares of our stock in any class is
expressly prohibited by our Certificate of Incorporation and By-laws (See
the heading "Description of Capital Stock", subheading "Dividend Rights.")
Basic Features of Offering
This offering is being made only to approved retailers of hardware and
related products who apply for membership in Ace Hardware Corporation. The
offering price for each share of Class A Stock is $1,000 and the offering
price for each share of Class C Stock is $100.
Our Company operates as a retailer-owned cooperative. This offering enables
retailers to obtain membership in our Company. Membership entitles our dealers
to use certain trademarks that we own, to purchase merchandise from us, and
also to receive patronage dividends on an equitable basis.
For an initial membership, you must subscribe for 1 share of Class A Stock
plus 40 shares of Class C Stock. If you apply for membership for an additional
store location that you own or control, then you must subscribe for 50 shares
of Class C Stock for that location. You must also pay us a $400 charge for
processing your application.
If you do not pay for your shares in advance, then we bill you for them on
the bi-weekly billing statement that we send you for your purchases of
merchandise and services from us. You can prepay the purchase price of your
shares at any time. For a more detailed explanation of this offering, please
see the information under the heading "Distribution Plan and Offering Terms".
Repurchase of Shares by Company
If your membership for a store location terminates, then all of your shares
for that location must be sold back to us unless the shares are transferred
to another party whom we agree to accept as a member for that location. If we
repurchase your shares, we must do so at the following prices: 1) $1,000 par
value for Class A Stock, 2) not less than twice the $1,000 par value for
Class B Stock, and 3) not less than the $100 par value for Class C Stock.
[(See the heading "Description of Capital Stock", subheading "Other
Restrictions and Rights", paragraph (g).)] We pay some of the repurchase
price by issuing you an interest-bearing 4-year installment note if your
membership terminates in either of two basic types of situations. (See the
heading "Description of Capital Stock", subheading "Other Restrictions and
Rights", paragraph (h), of this Prospectus and Section 12 of Article XVI of
the By-laws, in Appendix A of this Prospectus, for further details concerning
those situations.)
As of the end of our 1998 fiscal year on January 2, 1999, the number of
outstanding shares of our stock was as follows: Class A Stock 3,846 shares,
Class B Stock 2,592 shares, and Class C Stock 2,265,718 shares. At the
completion of this offering, assuming that all Class A stock is sold, the
number of outstanding shares of our stock would be as follows: Class A stock
4,751 shares, Class B stock 2,576 shares, and Class C stock 2,286,496 shares.
Under Delaware corporate law, we are not allowed to repurchase any of our
shares if our assets are less than the amount of our aggregate outstanding
shares of capital stock or if our assets would be reduced below that amount
because of the repurchase.
The number of shares of stock that we repurchased and the price per share
that we paid during each of our past three fiscal years is summarized in the
table below.
Class of Stock
--------------
A B C
--- --- ---
No. of Purchase No. of Purchase No. of Purchase Aggregate
Shares Price Shares Price Shares Price Cost
----- -------- ------ -------- ------ -------- ---------
1998 Fiscal
Year ended
January 2,
1999 243 $1,000 124 $2,000 105,639 $100 $11,054,900
1997 Fiscal
Year ended
December 31,
1997 299 $1,000 180 $2,000 123,964 $100 $13,055,400
1996 Fiscal
Year ended
December 31,
1996 236 $1,000 132 $2,000 199,290 $100 $10,429,000
Patronage Dividends and Income Tax Treatment
We operate on a cooperative basis for purchases of merchandise that our
shareholders and subscribers for shares make from us. We distribute annual
patronage dividends to these shareholders and subscribers on an equitable
basis. Please see the table under the heading "The Company's Business,"
subheading "Distribution of Patronage Dividends" for information about the
percentages of sales of merchandise we made during the fiscal years 1996
through 1998 that we distributed as patronage dividends. Under our current
plan, a portion of patronage dividends (which can never be less than 20% nor
more than 45% of the total annual patronage dividends we distribute to each
dealer) are paid in cash except to terminated dealers. The cash portion of
any patronage dividends which would have been paid to a terminated dealer is
applied against that dealer's indebtedness to us unless the terminated dealer
makes a timely request for the payment of the minimum 20% in cash. Shares of
Class C Stock or non-negotiable patronage refund certificates, or a combination
of them are used to pay the entire remaining portion of patronage dividends.
Dealers whose volume of purchases entitles them to larger total annual
patronage dividend distributions receive larger percentages of their patronage
dividends in cash. (See the heading "The Company's Business", subheadings
"Distribution of Patronage Dividends", "Patronage Dividend Determinations and
Allocations", and "Forms of Patronage Dividend Distributions.") The amount of
patronage dividends allocated over the past five fiscal years is shown in Note
(B) to Selected Financial Data.
The cash payments and dollar amounts of Class C Stock and patronage refund
certificates that we distribute as patronage dividends must be taken into your
gross income for federal income tax purposes. (See the heading "The Company's
Business", subheading "Federal Income Tax Treatment of Patronage Dividends.")
Members whose businesses are located in foreign countries or Puerto Rico
(except for unincorporated Puerto Rico dealers owned by individuals with U.S.
citizenship) can be subject to a 30% U.S. withholding tax imposed on
nonresident alien individuals and foreign corporations (except for some Guam,
American Samoa, Northern Mariana Islands, or U.S. Virgin Islands corporations).
These dealers have a minimum 30% portion of their annual patronage dividends
distributed in cash, and we withhold that amount for the payment of U.S.
income tax. (See the heading "The Company's Business", subheadings "Forms of
Patronage Dividend Distributions", and "Federal Income Tax Treatment of
Patronage Dividends.")
USE OF PROCEEDS
We use the proceeds that we receive from this stock offering mainly for
general working capital purposes (including purchasing the merchandise that
we resell and maintaining adequate inventories of this merchandise) and also
for the capital expenditures that we make in order to serve our business. We
currently have no other specific plan for these proceeds. We also have no plan
if less than all the shares in this offering are sold as the main reason for
the offering is to enable us to accept new members in accordance with our
By-laws. (See the heading "The Company's Business," subheadings "Patronage
Dividend Determinations and Allocations" and "Forms of Patronage Dividend
Distributions", for a discussion of how we plan to obtain most of the balance
of our operating capital. (See the heading "Factors to be Considered,"
subheading "Sale of All Shares Offered Not Assured.")
DISTRIBUTION PLAN AND OFFERING TERMS
Offering Made Through Company Officers
Our officers make all of the sales of stock under this offering. We employ
approximately 229 field sales personnel including retail consultants,
management and retail development personnel. Their duties include contacting
retail dealers and promoting our business and programs. Among these field
sales personnel are Market Development Managers, New Business Sales Managers
and Retail Sales Managers whose duties include initial contact with potential
members. Our field sales personnel, however, are not allowed to accept new
members, and they are not authorized to make sales of any shares of our stock.
Also, we do not pay any commission, bonus or other separate compensation to
any officers, field sales personnel, or other employees in connection with
the sale of our stock.
Limitation of Offering to Applicants for Ace Dealer Memberships
This offering is limited to dealers in hardware or similar merchandise who
submit membership applications to us for designated retail outlets that we
choose to accept. Applicants for membership must submit the following for
each store location that desires to become a member:
1. A signed Membership Agreement in acceptable form;
2. A check for the $400 application processing fee; and
3. A signed Subscription Agreement for the purchase of shares of our stock.
Offering Price and Terms of Payment
Each applicant for membership must subscribe for shares of our stock having
a total purchase price of $5,000 per member store. If a dealer does not
already have a Membership Agreement with us for any store location, the
subscription for shares for the first store location includes 1 share of
Class A Voting Stock at a price of $1,000 per share plus 40 shares of Class C
Nonvoting Stock at a price of $100 per share. The subscription for shares for
each additional store location owned or controlled by the same dealer consists
entirely of 50 shares of Class C Nonvoting Stock at a price of $100 per share.
Unless you prepay your stock subscription, you pay for your shares through a
series of charges that we add to your bi-weekly billing statement from us. The
amount of each of these charges is the larger of $40 or 2% of the purchase
price of the merchandise and services you purchase from us during each bi-
weekly period. These charges continue until the stock subscription for your
store location is paid for in full. We do not add any interest or other
finance charges to the unpaid balance of your stock subscription so long
as all of your payments are made by the due date of the billing statement.
If we accept the Membership Agreement and Stock Subscription Agreement for
your store location, you are entitled to participate in our patronage dividend
distributions even though you have not finished paying the full purchase price
for that store's shares of stock.
Right of Prepayment
If you subscribe for shares of our stock, you have the right at any time to
prepay some or the entire purchase price as discussed in the section above.
Time of Issuance of Stock Certificates
Immediately upon your full payment of the $1,000 purchase price for your 1
share of Class A Voting Stock, we issue you a certificate for that share. If
your stock subscription includes a share of Class A stock, all of your payments
are first applied to the purchase price for this share. You do not have any
voting rights until you are issued a share of Class A Voting Stock. We issue
certificates for your shares of Class C Nonvoting Stock only when you have
paid the full purchase price for all of your Class C shares for your
particular store location. If the membership for your store location terminates
before its shares have been fully paid for and issued, then we give you a
refund for the amount that you previously paid toward the purchase of these
shares.
Termination of Membership Upon Transfer or Repurchase of Shares
Unless we expressly consent to the continuation of your membership, it will
automatically terminate when any of your shares of our stock (whether you
purchased them or whether you received them as patronage dividends) are
transferred to another eligible shareholder or we repurchase them.
Federal Income Tax Status of Class A and Class C Shares (See the Heading
"Opinions of Experts").
If your membership terminates for all of your member store locations and we
repurchase your shares of Ace stock, that repurchase would include your one
share of Class A Voting Stock. Since we must repurchase the share of Class A
Stock at its $1,000 par value, you would not realize taxable income from our
repurchase of that share.
If we repurchase your shares of Class C stock, you could realize taxable
income under the U.S. Internal Revenue Code if the price we had to pay for
the shares to redeem them exceeded the $100 par value that you originally paid
for them under this offering. This could occur if our Board of Directors set a
higher offering price for Class C shares at some future date. In this example,
unless you still owned our stock for other store locations that remained
members, the taxable income you realized at the time of our repurchase of your
Class C shares might qualify for capital gains treatment.
If you still continued to own shares of our stock for other store locations
after we repurchased your shares for one or more of your locations, then the
entire amount we would pay you for the repurchased shares might be treated
under the Internal Revenue Code as a dividend and be taxed to you as ordinary
income. In that case, the income tax basis of the shares of our stock that
you still held might be increased by an amount equal to the original basis of
the shares you purchased from us.
Section 483 of the U.S. Internal Revenue Code may apply if you pay for your
shares in periodic installments extending for more than 1 year from the date
of the sale. In that case, all payments that are due more than 6 months after
the date of the sale may be deemed to include "unstated interest." Although
you might deduct this interest, it could also reduce the cost basis of your
shares.
"Unstated interest" that is taxable income to you can also occur under
Section 483 of the U.S. Internal Revenue Code if your membership is terminated
and you receive a 4-year installment note from us in partial payment for your
stock. [(See the heading "Description of Capital Stock," subheading "Other
Restrictions and Rights," subparagraph (h))]. This could happen if the sum of
the total payments to be made to you for the repurchase of stock exceeded the
sum of the present values of those payments plus the present values of any
interest payments due under the note. The present value of a payment is figured
using a discount rate that is equal to the applicable Federal rate in effect as
of the date of the note, compounded twice a year.
DESCRIPTION OF CAPITAL STOCK
Dividend Rights
Our Certificate of Incorporation and By-laws prohibit us from declaring
dividends on any shares of any class of our stock. However, we may distribute
shares of Class C Stock to you as a part of your annual patronage dividends.
(See the heading "The Company's Business," subheading "Forms of Patronage
Dividend Distributions," as well as Note 5 to Financial Statements, and Note
(B) to "Selected Financial Data").
Voting Rights
Our Class A Stock is voting stock, but Class B Stock and Class C Stock can
vote separately by class upon any increase or decrease in the number of
authorized shares of their classes, any change in the par value of those
shares, or anything that would change the power, preferences or special rights
of one of those classes to adversely affect its shares. Any class of stock
that has the right to vote has one vote per share. Cumulative voting of shares
for the election of directors or other reasons is not allowed.
Liquidation Rights
If our Company voluntarily or involuntarily liquidates or goes out of
business, our net assets will be distributed among the shareholders of all
classes of our issued and outstanding stock. In that case, our Class B and
Class C shareholders would first receive the total amounts which we would have
had to pay them to repurchase all of their outstanding shares of those classes
at the prices previously set by our Board of Directors. However, if we did
not have enough net assets to pay that amount, then each outstanding share of
Class B Stock and each outstanding share of Class C Stock would share in the
distribution of our net assets in the proportion which its purchase or
redemption price would bear to the total available for payment. (See the
subheading "Redemption Provisions" below). If our net assets were more than
that, the excess would be distributed equally to each Class A stockholder up
to the Class A stock par value of $1,000 per share. Any net assets that were
left would be distributed among the shareholders of all classes of stock as
follows:
(a) first, we would take the amount of the total $1,000 par value for
all of the outstanding shares of Class A Stock and we would add
this to the total amount we would have been required to pay to
purchase or redeem all of our outstanding shares of Class B Stock
and Class C Stock at the prices previously set by our Board of
Directors. The sum of these two figures would be used in the steps
below;
(b) next, each outstanding share of Class A Stock would receive part
of the remaining net assets in the proportion which its $1,000 par
value bears to the sum determined in (a) above; and
(c) each outstanding share of Class B Stock and each outstanding
share of Class C Stock would share in the remaining net assets
in the proportion which its price, as previously set by our Board
of Directors, bears to the sum determined in (a) above.
Preemptive Rights
No stockholder has any special right or preference to purchase any present
or future shares of our stock, notes, debentures, bonds or other securities,
including any convertible stock, options or warrants.
Redemption Provisions
Redemption provisions do not apply to any shares of Class A Stock, and they
only apply to the shares of our Class B Stock and our Class C Stock that have
been issued as annual patronage dividends. These redemptions may be made at
any time as determined by our Board of Directors. The redemption price would
also be determined by our Board of Directors, but the redemption price to be
paid for Class C Stock cannot be less than its $100 par value per share and
the redemption price to be paid for Class B Stock cannot be less than twice
its $1,000 par value per share. (The redemption price for Class B Stock, has
to be equal to twenty times the per share price that our Board of Directors
establishes for purchases or redemptions of our Class C Stock.) If we decided
to redeem our stock as discussed above, we would have to mail notice to each
stockholder of that class at least 30 days before the redemption date. If not
all of the outstanding Class B or C shares were being redeemed, then the number
of shares and the method of redemption, whether by lot or prorata or some other
way, would be determined by our Board of Directors.
Other Restrictions and Rights
(a) We do not have any conversion rights, sinking fund provisions, or
liability to further calls or assessments for any shares of our
stock.
(b) As security for your indebtedness to us, we retain a first lien
upon all your shares of Ace stock and all amounts that you pay us
under your Stock Subscription Agreement before your shares are
issued. Your interest in your Ace stock and the amounts you pay us
under your Stock Subscription Agreement are always offset by the
amount of any indebtedness that you owe us. We will not transfer
any of your shares or any funds in your stock subscription account
unless you are free from all indebtedness to us. If we would issue
an installment note to partially pay for the stock that we are
buying back from a terminated dealer in one of the situations
described in section (h) below, then the cash portion we would
normally pay toward those shares would first be applied toward
any indebtedness which that terminated member owed to us. The
portion of the purchase price of those shares that we would
normally pay with an installment note would then be applied
toward any indebtedness that still remained.
(c) Since we first issued shares of our stock to members and
continuing to the present time, the ownership of all classes
of our stock has been limited to approved dealers in hardware
and related products who have Membership Agreements with us.
Ownership of Class B Stock has been limited to dealers whose
Membership Agreements with us began on February 20, 1974 or
earlier. You are not allowed to transfer your shares of our stock
or to sell, assign or pledge them, or to post them as collateral
or give lien rights in them to anyone other than Ace without the
prior consent of our Board of Directors. If our Board of Directors
refuses to consent to a transfer or assignment of your stock
certificates to another retail hardware dealer, then we have to
purchase that stock back from you as described in section (g)
below. You are not entitled to make a transfer or assignment to
anyone who is ineligible to become a member of our Company. In
other words, approved transfers can only be made to other dealers
who either have Membership Agreements with us or whom we are
willing to accept as members. Where you propose to transfer the
ownership of your member store location to another member, (or to
someone whom we are willing to accept as a member), then you have
the option of either (i) selling or transferring to that person
the same number of shares that we would have been required to
offer him as a member for that store location, or (ii) selling
those shares back to us. However, there are certain types of
transfers of your business where you do not have the option of
selling those shares back to us. These situations involve (i)
any transfer which is not complete, unconditional and irrevocable;
(ii) any transfer to an entity in which you retain an ownership
interest; or (iii) any transfer to your spouse.
(d) If your membership terminates for your store location, then we
must repurchase your shares of Ace stock. Our repurchase
obligation is subject to our first lien and our right to set off
your indebtedness to us as described in section (b) above. (If your
stock has not yet been paid for and your shares have not yet been
issued, we would instead refund the amounts that you paid under
your Stock Subscription Agreement, again subject to our first lien
and offset rights described in section (b) above). Your membership
can be terminated by a formal notice of termination, and it can
also be terminated automatically under our By-laws in each of the
following three situations without a formal notice:
(i) If your store closes down or ceases business unless your
store is moved, with our consent and approval, to another
location, or unless your store is being acquired by another
dealer whom we are willing to accept as a member for
operation under the same membership at another location;
(ii) If an individual holder of our shares or a member of a
partnership that is a holder of our shares dies, except
where the store location having the Ace membership continues,
with our approval (which we will not unreasonably refuse to
give), to be operated by the deceased person's estate, heirs
or partnership successors. Changes in the legal form of
ownership of the member store from an individual
proprietorship or partnership to a corporation or from a
partnership to an individual proprietorship are not
considered significant in these cases;
(iii) If a court or other official body rules that a member is
insolvent, or the member assigns the business to be operated
for the benefit of creditors, or a voluntary or involuntary
bankruptcy or similar petition is filed under the U.S.
Bankruptcy Code regarding the dealer or the store or business
unit for which our shares of stock are held.
(e) Our Board of Directors does not need to consent to a transfer of
shares of Ace stock that occurs when the shares are held jointly
with others and the ownership of the shares automatically passes
under law to the survivor(s), nor are we obligated to repurchase
the shares in that case unless the store location either (i)
closes down, or (ii) stops being operated as a member of our
Company.
(f) If you hold your Ace membership in the form of a corporation
(the "member corporation"), you must give us written notice of
any proposal where the holders of 50% or more of the voting stock
of the member corporation proposes to sell or transfer all of
their shares of capital stock (both voting and non-voting) of that
member corporation. If there is a member corporation but another
corporation (the "controlling company") holds 80% or more of the
voting stock of the member corporation, then you must also give
us written notice if the holders of 50% or more of the voting
stock of the controlling company propose to sell or transfer all
of their shares of capital stock (both voting and non-voting) in
the controlling company. In these cases, when the sale or transfer
occurs, the corporation whose shares were sold or transferred can
either keep all the shares of Ace stock that it owns for the
member corporation or sell all of those shares of Ace stock back
to us. If it chooses to sell all of the shares of Ace stock back
to us, then the memberships for all of the store locations
represented by that stock are considered terminated by the
member's voluntary action. Once terminated in this way, any store
location that wishes to continue being a member must submit a new
application for our acceptance. However, there are certain types of
transfers of their own company stock by the shareholders of member
corporations that do not result in the option of selling any Ace
shares back to us. These situations involve (i) any transfer which
is not complete, unconditional and irrevocable; (ii) any transfer to
an entity in which the person making the transfer retains an
ownership interest; or (iii) any transfer to the spouse of the
person making the transfer.
(g) The price that we pay when we repurchase shares of Ace stock is
as follows:
(i) For Class A Stock, the $1,000 par value of the shares;
(ii) For Class B Stock, the per share price last set by our Board
of Directors, currently $2,000 per share. This price cannot
be less than twice the $1,000 par value of the Class B Stock
and must be equal to twenty times the per share repurchase
price set by our Board of Directors for repurchases of our
Class C Stock;
(iii) For Class C Stock, the per share price last set by our Board
of Directors, currently $100 per share. This price may not be
less than the $100 par value of each of these shares.
There is no market for the sale or trading of our stock, and the
redemption prices last established by our Board of Directors have
not been adjusted since 1974 when the Company first became a
cooperative.
(h) When we repurchase our stock from a terminated member in either
of the two situations described below, we issue an installment
note for part of the purchase price. That note is payable in
four equal annual installments plus accrued interest. The
situations where we use an installment note are where:
(i) the dealer voluntarily terminates his Ace membership, but
continues basically the same business at the store location,
and the store continues being controlled (more than 50%) by
the same person, partnership or corporation; or
(ii) we terminate the dealer's Ace membership for being
delinquent in payment to us or because of some other
default under the Membership Agreement.
Even in the above situations, though, the amount originally paid
in by the dealer under the Stock Subscription Agreement is
subject to being refunded in cash. We also pay cash when the
entire remaining portion of the purchase price is less that
$5,000. Where the remaining portion is $5,000 or more in these
cases, however, we only pay cash for the amount originally paid
in by the dealer under the Stock Subscription Agreement, and we
pay the rest by an installment note as described above. The
interest rate on this installment note is the rate established
by our Board of Directors at the time the note is issued. This
interest rate is a minimum of 6% per annum, and is at least as
high as the interest rate that applies to the patronage refund
certificates that are issued as a part of our annual patronage
dividends. Our Board of Directors may authorize higher levels of
cash payments for dealer hardship situations, but this depends
on our financial condition and requirements at the time.
(i) There is no restriction on our repurchase or redemption of any
shares of our stock if we fall behind in making any sinking fund
installment payments which we may become obliged to make in the
future. Since we are prohibited from declaring dividends on any
shares of our stock, there can be no past due situation in the
payment of dividends that could impose any restriction on our
repurchase or redemption of our stock. Under the General
Corporation Law of Delaware, we are not allowed to repurchase
any of our shares if our assets are less than the amount of the
aggregate outstanding shares of our capital stock or would be
reduced below that amount after the repurchase.
OPINIONS OF EXPERTS
The shares of our stock in this offering are valid shares in the opinion of
our Vice President, General Counsel and Secretary, David W. League. He has
also issued his opinion to the effect that if our Company had an involuntary
liquidation, the shares of our Class B Stock would have a preference greater
than their par value in the distribution of our net assets. The statements
made under the subheadings "Federal Income Tax Status of Class A and Class C
Shares," "Federal Income Tax Treatment of Patronage Dividends," "Income Tax
Liability Incidental to Patronage Dividends" and "Patronage Dividends and
Income Tax Treatment Thereof" are also his opinions.
The consolidated financial statements of Ace Hardware Corporation and
subsidiaries as of January 2, 1999 and December 31, 1997 and for each of the
years in the three-year period ended January 2, 1999, have been included
herein and in the Registration Statement in reliance upon the report of KPMG
LLP, independent certified public accountants, appearing elsewhere herein and
upon the authority of said firm as experts in accounting and auditing.
THE COMPANY'S BUSINESS
Ace Hardware Corporation was formally organized as a Delaware corporation in
1964. In 1973, as the result of a corporate merger, it became the successor of
Ace Hardware Corporation, an Illinois corporation that was organized in 1928.
Until 1973, the Illinois corporation conducted the business now being engaged
in by our Company. Our main executive offices are located at 2200 Kensington
Court, Oak Brook, Illinois 60523. Our main telephone number is (630) 990-6600.
We operate primarily as a wholesaler of hardware and related products, and
we also manufacture paint products. We mainly sell our products to hardware
dealers who have Membership Agreements with us. These Membership Agreements
allow the hardware dealers to purchase merchandise and services from us and
to license some of our marks, such as "Ace" and "Ace Hardware." (See the
heading "Factors To Be Considered," subheading "Documents Accompanying
Prospectus," and the heading "The Company's Business" subheading "Membership
Agreement").
We operate on a cooperative basis and distribute patronage dividends to our
eligible member dealers each year on the basis of quantity or value of
business that we do with them. (See the subheading "Distribution of Patronage
Dividends").
As of the end of our 1998 fiscal year on January 2, 1999, there were 5,039
stores having Membership Agreements with us. The States with the largest
concentration of members are California (approximately 9%), Texas
(approximately 7%), Illinois (approximately 6%), Florida (approximately 5%),
and Michigan and Georgia (approximately 4% each). The States where we shipped
the largest percentages of merchandise in fiscal year 1998 are California
(approximately 11%), Illinois (approximately 7%), Florida (approximately 6%),
Texas (approximately 5%), and Michigan and Georgia (approximately 4% each).
Approximately 7% of our sales are made to locations outside of the United
States and its territories.
The number of member locations that we had during each of our past three
fiscal years is summarized in the following table:
1998 1997 1996
----- ----- -----
Member outlets at beginning of period 5,032 5,067 5,007
New member outlets 231 208 272
Member outlets terminated 224 243 212
----- ----- -----
Member outlets at end of period 5,039 5,032 5,067
===== ===== =====
Dealers having one or more member
outlets at end of period 3,963 4,022 4,084
We service our dealers by buying merchandise in quantity lots, mainly from
manufacturers. We then warehouse large quantities of this merchandise and sell
it in smaller lots to our dealers. Most of the products that we distribute to
our members from our warehouses are sold at a price that we establish
("dealer cost"), to which a 10% adder ("handling charge") is generally added.
In fiscal year 1998, warehouse sales were 61% of our total sales and bulletin
sales were 3% of our total sales with the balance of 36% being direct shipment
sales, including lumber and building materials.
The following is a breakdown of our total warehouse sales among various
general classes of merchandise for each of the past three fiscal years:
Class of Merchandise 1998 1997 1996
-------------------- ---- ---- ----
Paint, cleaning and related supplies 20% 21% 20%
Plumbing and heating supplies 15% 15% 16%
Hand and power tools 14% 14% 14%
Garden, rural equipment and related supplies 13% 13% 13%
Electrical supplies 13% 12% 12%
General hardware 12% 12% 12%
Sundry 7% 7% 7%
Housewares and appliances 6% 6% 6%
We sponsor two major hardware conventions each year at various locations,
as well as one lumber convention. We invite dealers and vendors to attend,
and dealers generally place orders that are delivered before the next
convention. During the convention, there are exhibits of regular merchandise,
new merchandise and seasonal merchandise. Lawn and garden supplies, building
materials and exterior paints are seasonal merchandise in many parts of the
country. Some types of goods such as holiday decorations are also seasonal.
Warehouse sales involve the sale of merchandise that we inventory at
our warehouses. Direct shipment sales involve sales where the merchandise is
shipped directly to dealers by vendors. Bulletin sales involve our special
bulletin offers where we order specific merchandise after dealers sign up to buy
particular quantities of it.
Dealers place direct shipment orders with our vendors using special purchase
orders. The vendors then bill us for these orders, which are shipped directly to
dealers. We, in turn, bill the ordering dealers with an adder
("handling charge") that varies according to the following schedule (except for
sales under the LTL Plus program discussed below):
Invoice Amount Adder (Handling Charge)
-------------- -----------------------
$ 0.00 to $ 999.99 2.00% or $1.00 whichever is greater
$1,000.00 to $1,999.99 1.75%
$2,000.00 to $2,999.99 1.50%
$3,000.00 to $3,999.99 1.25%
$4,000.00 to $4,999.99 1.00%
$5,000.00 to $5,999.99 .75%
$6,000.00 to $6,999.99 .50%
$7,000.00 to $7,999.99 .25%
$8,000.00 and over .00%
We make bulletin sales based upon notices from dealers that they wish to
participate in one of the special bulletins offer. Generally, we notify
dealers of our intention to purchase certain products for bulletin shipment. We
then purchase these products in the quantities that the dealers order. When the
bulletin shipment arrives, we do not place it into warehouse inventory. Rather,
we break it up into smaller quantities and deliver it to the dealers who ordered
it. We generally apply a 6% adder ("handling charge") to this category of sales.
We typically apply an additional adder of 3% to merchandise that is exported
outside of the United States, its territories and possessions. Ace dealers
located outside of the United States, its territories and possessions who are
not subject to the additional 3% adder are assessed a flat 2% adder on all
direct shipment sales. We maintain inventories to meet only normal resupply
orders. Resupply orders help keep our inventories at normal levels. Usually
these resupply orders are filled within one day of receipt. Bulletin orders are
somewhat similar to resupply orders, but can be for future delivery. We do not
backlog normal resupply orders and therefore, no significant backlog exists at
any point in time.
We have also created special sales programs for lumber and building materials
products, for products that we periodically assign to an "extreme competitive
price sales" classification, and for products from specified vendors for
delivery to our dealers on a direct shipment basis (LTL Plus Program). Under our
lumber and building materials ("LBM") program, we do not impose any adder or
national advertising assessment on direct shipment orders for these products.
Our LBM program enables our dealers to realize important savings from our
closely monitored lumber and building materials purchasing procedures. Also, our
LBM program offers our dealers the opportunity to order less-than-truckload
quantities of many lumber and building materials products at economical prices
under the LTL warehouse redistribution procedure which we have with certain
major vendors.
Our Store Traffic Opportunity Program ("STOP") is a program where we offer our
dealers specific products that we assign to a "competitive price sales"
classification. These products are delivered from our warehouses without the
addition of freight charges and with an adder (if any) of up to 5%, determined
on an item by item basis. Our officers have the authority to add and withdraw
items from the STOP program, and to establish reasonable minimum or multiple
item purchase requirements for this program. We do not make any patronage
dividend distributions for purchases under the STOP program. We do, however,
consider STOP purchases to be either warehouse purchases or bulletin purchases,
as applicable, in determining the forms of patronage dividend distributions.
(See the heading "The Company's Business" subheading, "Forms of Patronage
Dividend Distributions.")
Our LTL Plus Program allows dealers to purchase full or partial truckloads of
products from specific vendors for direct shipment delivery. No adder or
national advertising assessment applies to these purchases. The current maximum
amount of patronage dividends for products in the LTL Plus category is .5% of
these sales. (See heading "The Company's Business," subheading "Patronage
Dividend Determinations and Allocations.")
In addition to hosting conventions as well as other shows and product exhibits
for our dealers, we also provide many special services. We offer these services
at established charges. These services include inventory control systems, as
well as price and bin ticketing. We also provide dealers with a checklist
service so that they can have current information about the merchandise that we
offer. We also provide a choice of ongoing educational and training programs for
dealers. (See the heading "The Company's Business," subheading "Special Charges
and Assessments.")
Our wholly owned subsidiary, Ace Insurance Agency, Inc., offers a Group Dealer
Insurance Program so that dealers can purchase different types of insurance
coverage. This program offers "all risk" property insurance and business
interruption, crime, liability and workers' compensation insurance, in addition
to medical insurance for store employees. AHC Realty Corporation, another wholly
owned subsidiary, offers broker services to dealers who want to buy or sell
stores. Loss Prevention Services, Inc., another wholly owned subsidiary, offers
security training and other loss prevention services to dealers.
During 1996, our wholly owned subsidiary, Ace Hardware Canada, Limited, began
operations as a wholesaler of hardware and related merchandise in Canada. It has
two distribution facilities located in Calgary, Alberta and Brantford, Ontario.
Ace Hardware Canada, Limited generated less than three percent (3%) of our
consolidated revenue during fiscal year 1998.
We operate our Company-owned retail hardware stores though our wholly owned
subsidiaries A.H.C. Store Development Corp. and Ace Corporate Stores, Inc. For
further information about these stores, please see the heading "Properties"
which appears later in this Prospectus.
We manufacture paint and similar coating products at our factories in
Matteson and Chicago Heights, Illinois. These factories are the main source of
the paint products that we offer for sale. We operate our paint manufacturing
business as a separate Division of our Company for accounting purposes. We
purchase all our raw materials for paint manufacturing from outside sources. We
have had adequate sources of raw materials in the past, and we do not currently
expect any shortages of raw materials that would have a major impact on our
paint operations. Paint manufacturing is seasonal in the sense that greater
paint sales occur from April through September. Historically, our need to
comply with environmental laws and regulations has not had a major effect on
our ability to conduct our paint manufacturing operations.
Our business, both hardware wholesaling and paint manufacturing, is not
dependent on any major suppliers and we feel that any seasonal fluctuations do
not have a major effect on our operations. For more discussion of our business,
see "Management's Discussion and Analysis of Financial Condition and Results of
Operations," which appears after the "Notes to Financial Statements."
We also offer services to members that relate to the operation of their
retail businesses. We provide these services (such as advertising,
merchandising and training programs) to assist our members and in some cases,
to maximize our centralized buying power.
Strategic Planning
We have a strategic planning process that results in goals, objectives and
programs that we want to develop in the future for our Company and our members.
Because strategic plans deal with the future, this discussion of them contains
"forward looking statements," which are based on our current expectations. The
actual results of our efforts can differ greatly from the results that we might
desire. We believe that we have the facilities, the employees and the resources
for ongoing success as we implement our plans and programs, but the future is
difficult to forecast, especially things like revenues, costs, margins and
profits which are influenced by many factors. Some of these factors are
discussed below.
The effects of future growth in the hardware and hardlines-related
industries, are uncertain. By "hardlines-related industries" we mean
lumber/building materials, home center, do-it-yourself, rental and
commercial/industrial categories. The future condition of the economy is also
uncertain, when viewed domestically, internationally or in specific
geographical regions. Some other uncertainties that could affect our plans
include possible future changes in merchandise and inventory prices, and the
effect of increasingly intense competition. There could be potential shifts in
market demand for some products. Future lawsuits and laws, especially laws
dealing with franchising, licensing and environmental matters could affect our
business. We cannot predict whether these uncertainties might cause future
costs or liabilities or have some other effect on our future ability to achieve
our plans.
Through our ongoing strategic planning process we have focused our plans
around four cornerstones for future growth and success in our competitive
industry. These four cornerstones are: Retail Success (store operations),
Wholesale Success (distribution), International growth and new member growth.
Retail success for our dealers is a primary objective because, in our opinion,
it drives both their retail performance and our wholesale growth. We have
therefore increased our efforts to assist members in our "retail success
initiatives," which are designed to improve their retail performance and
competitiveness. These retail success initiatives include retail goals that we
urge dealers to strive for within their stores and in locally competitive
markets. These goals do not, however, impose major restrictions or requirements
on members. Our minimum requirements for the acceptance of new members are
outlined in the current Membership Agreement and in the Member Operational
Requirements that apply under that Agreement. The Operational Requirements do
require that, within one year the member must make us the primary source of
supply and terminate any previous participation in the program of any other
major hardware wholesaler. There are currently no general requirements (apart
from special voluntary programs) where members have to make particular
percentages of purchases from us or have to achieve minimum retail performance
levels, such as sales dollars per square foot.
The four cornerstones described above also include our strategic plans to
focus on the consumer through research, target marketing and the development of
a suitable long-term advertising strategy. They also include our review of
merger and acquisition opportunities and our development of international and
domestic nonshareholder programs. The term "Encore Growth" refers to an
extension of our earlier efforts which we called "The New Retail Age of Ace,"
"The New Age of Ace" and "Ace 2000." Our present strategy is a further
development of these earlier efforts and is not in conflict with them.
Special Charges and Assessments
We sponsor a national advertising program. To pay for this program, we assess
dealers an amount equal to 1.3% of their purchases (except purchases of lumber,
LTL, LTL Plus, building materials products and certain computer systems), with
minimum and maximum yearly assessments for each store location. Through
December 31, 1998, the minimum assessment was $1,622.40 and the maximum
assessment was $5,500.00 for each store location. Effective January 1, 1999,
the minimum assessment is $1,825.20 and the maximum assessment is $6,500.00 for
each store location. We grant exemptions from these assessments and make
various adjustments to them for stores located outside the continental United
States. These exemptions and adjustments are based on our management's
evaluation of the number and types of television broadcasts that are received
in these areas. The amount of our national advertising assessment can be
changed from time to time by our Board of Directors. We can also impose
assessments for regional advertising of up to 2% of a dealer's annual
purchases. Regional advertising assessments are subject to the same minimum and
maximum amounts as the National Advertising assessment.
Every two weeks, we bill your member store for a special low volume account
service charge of $50 if your annual purchases from us (except for lumber and
LTL purchases) are less than $50,000. Effective January 1, 1999, every two
weeks, we will bill your store for a special low volume account service charge
of $30 if your annual purchases from us are between $50,000 and $140,400.
(Through December 31, 1998, we billed your store for this charge if your annual
purchases from us were between $50,000 and $124,800.) The low volume service
charges that we bill to your store in a specific year are automatically
refunded if that store's total purchases (not including lumber and LTL
purchases) increase to over $140,400 during the year. (This limit was $124,800
through December 31, 1998). Your store is excused from this low volume account
service charge during the first 12 months that it is a member. There are some
exceptions to our low volume account service charges that are described below:
1. If you purchase $140,400 of merchandise from us (not counting carload
lumber purchases) during the year (or $124,800 through December 31,1998),
we give you credit on your next billing statement for any low volume
charges which we billed to you earlier in the year. We then stop billing
you for low volume account service charges for the rest of the year, even
if your current purchases on a billing statement are less than $5,400 (or
$4,800 through December 31, 1998); and
2. We do not bill low volume account service charges every two weeks if your
store's sales volume with us the year before was at our minimum ($140,400
effective January 1, 1999 and $124,800 through December 31, 1998), but we
will bill these charges in a lump sum to your last statement of the year
if you do not reach our applicable minimum by that time.
An Ace store that falls below our minimum purchase levels can also be subject
to termination.
We add a late payment service charge on any past due balance that you owe us
for merchandise, services, or your stock subscription. The current rate for the
late payment service charge is .77% per biweekly statement period, except in
Texas where the charge is .384% and Georgia where the charge is .692%. We
consider a past due balance to exist whenever we do not receive payment of the
amount shown as due on your billing statement within 10 days after the date of
that statement. We can change the rate of our late payment service charge from
time to time.
Our retail training program called the "S.T.A.R. Program" was in effect
through June 30, 1998. Under this program, our members were required to
subscribe to video training tapes and related course materials if their stores
were located in the United States or U.S. Territories. The initial monthly
charge for this program was $16 for a single store or parent store and $11 for
each branch store. A single store or parent store is one that has a share of
our Class A voting stock (or one that involves a stock subscription for a share
of our Class A stock.) A branch store is one whose membership involves only
shares (or a subscription for shares) of our nonvoting Class C Stock. (See
Article XXV, Section 2 of our By-laws which are reprinted in Appendix A of this
Prospectus.) Branch stores could request an exemption from this monthly charge.
The "S.T.A.R. Program" was replaced by a new retail training program called
the "Ace Training Network" effective July 1,1998. This new program, like the
"S.T.A.R. Program" is required for all member stores in the United States and
U.S. Territories. Under the "Ace Training Network," we will bill you a monthly
fee which we call a "monthly training assessment." This assessment is $16 per
month for each single store or parent store and $11 for each branch store. A
single store or parent store is one that has a share of our Class A voting
stock (or one that involves a stock subscription for a share of our Class A
Stock.) A branch store is one whose membership involves only shares (or a
subscription for shares) of our nonvoting Class C Stock. (See Article XXV,
Section 2 of our By-laws which are reprinted in Appendix A.) Branch stores can
request an exemption from the monthly training assessment.
With the Ace Training Network, you have the option of choosing how your
monthly training assessment dollars will be spent. Under this program, you are
initially issued 200 points, and one point equals one dollar in your training
account. We credit you with another point for each dollar you pay for your
monthly training assessment. Thus, a single store or parent store can earn 16
points per month and a branch store can earn 11 points per month. You may use
your points at any time to buy one of the training programs that we offer. If
you do not have enough points for the program that you want, you can use the
points that you have and we will bill you for the difference. Multiple stores
and member groups can pool their points together to purchase our training
programs. As of July 1, 1998, there were over 10 of these training programs
available at a variety of prices.
We also have a mandatory subscription service for Material Safety Data Sheet
information for all member stores located in the United States. As of the date
of this filing, the initial yearly assessment for these subscriptions is $20
for each single store or parent store and $10 for each branch store.
Trademark and Service Mark Registrations
The names "ACE HARDWARE" and "ACE" are used extensively by members and
ourselves in the promotion, advertising and marketing of products and services
that we sell. We have had the following Trademark and Service Mark
Registrations issued by the U.S. Patent and Trademark Office for our marks:
Registration
Description of Mark Type of Mark Number Expiration Date
------------------- ------------ ------------ ---------------
"ACE HARDWARE" with winged
emblem design Service Mark 840,176 December 5, 2007
"ACE HARDWARE" with winged
emblem design Trademark 898,070 September 8, 2000
"THE PAINTIN' PLACE" Service Mark 1,138,654 August 12, 2000
"HARDWARE UNIVERSITY"
with design Service Mark 1,180,539 December 1, 2001
Registration
Description of Mark Type of Mark Number Expiration Date
------------------- ------------ ------------ ---------------
"SUPER STRIKER" Trademark 1,182,330 December 15, 2001
"PACE" with design Service Mark 1,208,887 September 14, 2002
"ACE HARDWARE" with winged
emblem design Trademark 1,277,581 May 15, 2004
"ACE HARDWARE" in stylized
lettering design Trademark 1,426,137 January 27, 2007
"ACE" in stylized
lettering design Service Mark 1,464,025 November 3, 2007
"ACE HARDWARE" in stylized
lettering design Service Mark 1,486,528 April 26, 2008
"ACE HARDWARE AND
GARDEN CENTER" in
stylized lettering design Service Mark 1,487,216 May 3, 2008
"ACE NEW EXPERIENCE" in
stylized lettering design Trademark 1,554,322 September 5, 2009
"ACE SEVEN STAR" in stylized
lettering design Trademark 1,556,389 September 19, 2009
"ACE BEST BUYS" in circle
design Service Mark 1,560,250 October 10, 2009
"ACENET" Service Mark 1,574,019 December 26, 1999
"ACE IS THE PLACE" Service Mark 1,602,715 June 19, 2000
"LUBE" Trademark 1,615,386 October 2, 2000
"ACE PRO" Trademark 1,632,078 January 22, 2001
"ASK ACE" Service Mark 1,653,263 August 6, 2001
Christmas Elves design Trademark 1,669,306 December 24, 2001
"ACE 2000" Service Mark 1,682,467 April 7, 2002
"ACE" in stylized
lettering design Trademark 1,683,538 April 21, 2002
"HARMONY" in stylized
lettering design Trademark 1,700,526 July 14, 2002
"SEVEN STAR SATISFACTION
GUARANTEED QUALITY
ACE PAINTS" with design Service Mark 1,705,321 August 4, 2002
"THE OAKBROOK COLLECTION"
in stylized lettering
design Trademark 1,707,986 August 18, 2002
"ACE HARDWARE BROWN BAG
BONANZA" with design Service Mark 1,761,277 April 13, 2003
"ACE HARDWARE
COMMITTED TO A QUALITY
ENVIRONMENT" design Service Mark 1,764,803 April 13, 2003
"THE OAKBROOK COLLECTION"
in stylized lettering
design Trademark 1,783,335 July 20, 2003
"STORE 2000 THE
STORE OF THE FUTURE" Service Mark 1,811,032 December 14, 2003
"ENVIROCHOICE" Trademark 1,811,392 December 14, 2003
"CELEBRATIONS" Service Mark 1,918,785 September 12, 2005
Repetitive Stylized "A"
design Service Mark 1,926,798 October 10, 2005
"The NEW AGE OF ACE" design Service Mark 1,937,008 November 21, 2005
"ACE RENTAL PLACE" in
stylized lettering design Service Mark 1,943,140 December 19, 2005
"HELPFUL HARDWARE FOLKS" Service Mark 1,970,828 April 30, 2006
"ACE HOME CENTER" Service Mark 1,982,130 June 25, 2006
"SEALTECH" Trademark 2,007,132 October 8, 2006
"GREAT FINISHES" Trademark 2,019,696 November 26, 2006
"WOODROYAL" Trademark 2,065,927 May 27, 2007
"ROYAL SHIELD" Trademark 2,070,848 June 10, 2007
"ROYAL TOUCH" Trademark 2,070,849 June 10, 2007
Registration
Description of Mark Type of Mark Number Expiration Date
------------------- ------------ ------------ ---------------
"QUALITY SHIELD" Trademark 2,102,305 September 30, 2007
"QUALITY TOUCH" Trademark 2,102,306 September 30, 2007
"STAINHALT" Trademark 2,122,418 December 16, 2007
"ACE CONTRACTOR CENTER" Service Mark 2,158,681 May 19, 2008
"NHS NATIONAL
HARDLINES SUPPLY" Service Mark 2,171,775 July 7, 2008
"ACE COMMERCIAL &
INDUSTRIAL SUPPLY" Service Mark 2,186,394 September 1, 2008
"THE OAKBROOK COLLECTION" Trademark 2,187,586 September 8, 2008
As of the date of this filing, we also have the following applications for
new registrations pending in the U.S. Patent and Trademark Office:
Mark Type of goods/services
- ---- ----------------------
"ACE ROYAL" interior and exterior paint
"ACE CONTRACTOR PRO" paints, primers and varnishes
"ACE DRY GUARD" waterproofing paint
"HEALTHY HOME" interior and exterior paint
"HELPFUL HARDWARE CLUB" promoting the goods and services of
others through various incentive
programs offered to preferred
customers
"ACE GARDEN PLACE" retail store services in the field of
hardware, garden products and
building materials
"SEE THE FOLKS IN THE RED VEST" retail store services in the field of
hardware and related goods
"ACE SOLUTIONS PLACE" retail store services in the field of
hardware and related goods
"YOUR NEIGHBORHOOD SOLUTIONS PLACE" retail store services in the field of
hardware and related goods
"ACE" with accent design retail store services in the field of
hardware and related goods
Competition
Competitive conditions in the wholesale hardware industry are intense and
increasing. Independent hardware retailers must remain competitive with
discount stores and chain stores, such as WalMart, Home Depot, Menard's, Sears,
and Lowe's, and with other mass merchandisers. Retail hardware stores have been
slowly shifting their locations to high rent shopping centers. There has also
been a trend toward longer store hours. There is intense pressure on hardware
retailers to obtain low cost wholesale supply sources. In several markets in
the United States, we also compete directly with other dealer-owned wholesalers
such as TruServ Corporation, Do it Best Corporation, and United Hardware
Distributing Co.
Employees
We have 4,672 full-time employees, of which 1,399 are salaried employees. We
also have union contracts covering one (1) truck drivers' bargaining unit(s)
and three (3) warehouse bargaining unit(s). We consider our employee relations
with both union and non-union employees to be good, and we have had no strikes
in the past five years. In general, our employees are covered by either
negotiated or nonnegotiated benefit plans that include hospitalization, death
benefits and, with few exceptions, retirement benefits.
Limitations on Ownership of Stock
Our members own all of our outstanding shares of capital stock. Membership in
our Company is limited to approved dealers in hardware and related products who
have Membership Agreements with us. These are the only ones eligible to own or
purchase shares of any class of our stock.
No dealer is allowed to own more than 1 share of our Class A voting stock, no
matter how many store locations that dealer owns or controls. This ensures that
each stockholder in our cooperative has equal voting power no matter how many
member store locations the stockholder owns or controls. We treat an
unincorporated member or a partnership member as being controlled by someone
else if 50% or more of the assets or profit shares of that member are owned by
(i) another person, partnership or corporation; or (ii) the owner(s) of 50% or
more of the assets or profit shares of another unincorporated business firm or
(iii) the owner(s) of at least 50% of the capital stock of a corporation. We
treat a member that is a corporation as being controlled by someone else if at
least 50% of the capital stock of that member is owned by (i) another person,
partnership or corporation; or (ii) the owner(s) of at least 50% of the capital
stock of another corporation; or (iii) the owner(s) of at least 50% of the
assets or profit shares of another unincorporated business.
Distribution of Patronage Dividends
We operate on a cooperative basis for purchases of merchandise from us that
are made by dealers who have become members of our Company. We also operate on
a cooperative basis with dealers who have subscribed for shares of our stock
but who have not yet actually become "members" because they have not yet fully
paid for their $1,000 par value shares of our Class A voting stock. The dealers
in either of these two categories are entitled to receive patronage dividends
once a year on an equitable basis.
We made patronage dividend distributions at the following percentages of our
sales in the warehouse, bulletin and direct shipment categories and on the
total sales of products manufactured by our Paint Division during the past
three fiscal years:
1998 1997 1996
---- ---- ----
Warehouse Sales 4.78251% 4.32753% 4.53912%
Bulletin Sales 2.0% 2.0% 2.0%
Direct Shipment Sales 1.0% 1.0% 1.0%
Paint Sales 9.1653% 10.3088% 7.9773%
There are other patronage dividends that are calculated separately for
distribution on sales of lumber products, building material and millwork
products and less-than-truckload (LTL) sales of lumber and building material
products. We distributed patronage dividends equal to .4668%, .4593%, and
.4328% of the total sales of these categories (calculated separately by
category) to our members who purchased these products in fiscal years 1998,
1997, and 1996. Under our LTL Plus Program, we also calculate patronage
dividends separately on sales of full or partial truckloads of products
purchased by eligible dealers from certain vendors (see discussion of LTL Plus
Program under the heading "The Company's Business.") The amount of patronage
dividends that we currently allocate to LTL Plus sales is .5% of these sales.
The LTL Plus Program patronage dividend was .5% of these sales for fiscal year
1998, 1997, and 1996.
Patronage Dividend Determinations and Allocations
The amounts that we distribute as patronage dividends consist of our gross
profits on business that we do with dealers who qualify for patronage dividend
distributions, less a proportionate share of our expenses for administration
and operations. Our gross profits consist of the difference between our selling
price for the merchandise that these dealers buy from us and our purchase price
for that merchandise. Our computation of patronage dividends excludes all of
our income and expenses from activities that are not directly related to
patronage transactions. The excluded items primarily consist of profits on
business that we do with dealers who do not qualify for patronage dividend
distributions and any income or loss that we realize from the disposition of
property and equipment. If that occurred, then the income we would derive from
this type of recapture would be included in computing patronage dividends.
Our By-laws provide that, by virtue of dealers being "members" of our Company
(that is, by owning shares of our Class A voting stock), they consent to
include in their gross income for federal income tax purposes all patronage
dividends that we distribute to them. These distributions must be included in
gross income for taxable year in which the dealer receives them. Dealers who
have not yet fully paid the $1,000 purchase price for their shares of our Class
A voting stock are also required to include all patronage dividends we
distribute to them in their gross income as explained above. Under our Stock
Subscription Agreement, dealers must expressly consent to take these patronage
dividend distributions into their gross incomes.
The amount of the patronage dividends which dealers must include in their
gross incomes includes both the cash portion of patronage dividends and any
portion of patronage dividends that we apply against any indebtedness the
dealer owes to us in accordance with Section 7 of Article XXIV of our By-laws.
It also includes any portion of patronage dividends that they receive in shares
of our Class C non-voting stock and in patronage refund certificates.
Under our present program, patronage dividends on each of our three basic
categories of sales (warehouse sales, bulletin sales and direct shipment sales)
are allocated separately, as are patronage dividends under our LTL Plus
Program. Dividend percentage calculations are made with reference to the net
earnings derived from each of the respective categories. The 1998 patronage
dividend rate for the LTL Plus Program is currently .5% of our LTL Plus sales.
The 1998 dividend rates for direct shipment and bulletin sales are 1% and 2%,
respectively, while the current warehouse dividend rate is 4.78%.
We do not include sales of lumber and building materials products as part of
warehouse sales, bulletin sales, or direct shipment sales for patronage
dividend purposes. Patronage dividends for lumber and building materials are
calculated separately for purchases within each of four sales categories
involving these types of products. These four categories are: (a) lumber
products (other than less-than-truckload sales); (b) building materials
products (other than less-than-truckload sales); (c) millwork products and (d)
less-than-truckload ("LTL") sales of lumber and building material products.
Patronage dividends are also calculated separately for full and partial
truckloads of products purchased under the LTL Plus Program. (See the heading
"The Company's Business", discussion of LTL Plus Program, and the subheading
"Forms of Patronage Dividend Distributions", subparagraphs 2(a)-(b) below.)
Any manufacturing profit realized on intracompany sales of products
manufactured by our Paint Division is allocated and distributed as patronage
dividends to eligible dealers in proportion to their respective annual dollar
purchases of paint and related products from that division. The earnings we
realize on wholesale sales of the Paint Division's products to our eligible
dealers are currently distributed as patronage dividends to them as part of the
patronage dividends which they receive each year in the basic patronage
dividend categories of warehouse sales, bulletin sales, and direct shipment
sales. Under Section 8 of Article XXIV of our By-laws, if the Paint Division's
manufacturing operations for any year result in a net loss instead of a profit
to the Paint Division, this loss would be netted against the earnings we
realized from our other activities during the year, so that the earnings
available for distribution as patronage dividends from these other activities
would be reduced for the year.
Forms of Patronage Dividend Distributions
We make patronage dividend distributions to our eligible dealers in cash,
shares of our Class C Stock and patronage refund certificates according to a
specific plan that has been adopted by our Board of Directors. This plan can be
changed from time to time by the Board as they deem fit depending on business
conditions and our Company's needs.
This plan is summarized below for the purchases that our eligible dealers
make from us on or after January 1, 1998.
1. For each of your eligible stores, we initially calculate the minimum cash
patronage dividend distribution as follows:
(a) 20% of the first $5,000 of the total patronage dividends allocated for
distribution each year to you based on the purchases made for the
eligible store;
(b) 25% of the portion of the total patronage dividends allocated for that
store which exceed $5,000 but do not exceed $7,500;
(c) 30% of the portion of the total patronage dividends allocated for that
store which exceed $7,500 but do not exceed $10,000;
(d) 35% of the portion of the total patronage dividends allocated for that
store which exceed $10,000 but do not exceed $12,500;
(e) 40% of the portion of the total patronage dividends allocated for that
store which exceed $12,500.
2. We distribute the portion of patronage dividends in excess of the cash
amount above in the form of shares of our Class C Non-voting Stock (par
value $100 per share) until the total par value of all shares of all
classes of our capital stock that you hold for the eligible store equals
the greater of:
(a) $20,000; or
(b) the sum of purchases in the following categories that you made for the
eligible store during the most recent calendar year:
(i) 15% of the volume of Ace manufactured paint and related
products purchases, plus
(ii) 3% of the volume of drop-shipment or direct purchases
(excluding Ace manufactured paint and related products), plus
(iii) 15% of the volume of warehouse and bulletin purchases
(including Stop and excluding Ace manufactured paint and
related products), plus
(iv) 3% of the volume of lumber and building material (excluding
LTL) purchases, subject to a maximum lumber and building
material capital stock requirement of $25,000, plus
(v) 4% of the volume of LTL Plus purchases.
Please note, however, that we do not issue fractional shares of Class C
Stock. We take any amount that would result in a fractional share of stock
and distribute it in cash or patronage refund certificates instead.
3. The portion of your total patronage dividends for each of your eligible
stores which exceeds the sum of:
(a) the cash amount determined under Paragraph 1 above and
(b) the amount of Class C Stock determined under Paragraph 2 above is
distributed to you in cash up to certain limits. The total amount that
you receive in cash for an eligible store cannot exceed 45% of that
store's total patronage dividends for the year. If a store's total
cash distribution would exceed this 45% limit, then the distribution
over that amount is made instead in the form of a non-negotiable
patronage refund certificate. Our Board of Directors determines the
maturity dates and interest rates of these patronage refund
certificates before they are issued. These certificates include
provisions that give us a first lien on the amount of any
indebtedness that you owe us. The certificates also contain language
subordinating them to all the rights and claims of our secured
creditors, general creditors and our bank creditors. Historically,
these patronage refund certificates have matured within five years
from the date we issued them.
With some modifications, the plan described above is applied separately in
determining patronage dividends on our sales of lumber and building materials.
The combined patronage dividends allocated annually to a store from:
* sales of lumber products (other than LTL sales),
* sales of building materials (other than LTL sales),
* sales of millwork product, and
* LTL sales to the store
are used to calculate the minimum cash distribution percentages that we apply
under Paragraph 1 above. A store's patronage dividends from any other sales
category are not taken into account in determining either the minimum portion
or any additional portion of the store's patronage dividends from its purchases
of lumber and building materials products that are distributed in cash. Also,
Paragraphs 2 and 3 above are applied separately for patronage dividends on
lumber and building materials. We do not consider the requirements of Paragraph
2 to be satisfied in the cases of:
* purchases of lumber products (other than LTL purchases)
* purchases of building materials products (other than LTL purchases), or
* purchases of millwork product
until the store's holdings of our Class C Stock from patronage dividends or our
sales to that store from other eligible categories equal 3% of the store's
purchases within the category during the most recent calendar year. This is
subject to a maximum of lumber and building materials capital stock requirement
of $25,000 under the 1998 plan. No similar special Class C Stock requirement
applies to patronage dividends accrued on LTL purchases, however.
Article XXIV, Section 7 of our By-laws requires the cash portion of any
patronage dividends to be applied against any indebtedness a member owes us
where the membership for his store is terminated before the distribution of
patronage dividends. Despite this, however, 20% of a terminated store's total
annual patronage dividends will be paid in cash if we receive a timely request
for this form of payment.
Because of the requirement of the U. S. Internal Revenue Code that we
withhold 30% of the annual patronage dividends distributed to eligible dealers
whose places of business are located in foreign countries or Puerto Rico, the
cash portion of patronage dividends to these dealers is a minimum of 30%. There
are exceptions to this 30% cash payment in the case of 1) unincorporated Puerto
Rico dealers owned by individuals who are U.S. citizens, and 2) certain dealers
incorporated in Guam, American Samoa, the Northern Mariana Islands, or the U.S.
Virgin Islands. These exceptions apply if less than 25% of the stock of these
dealers is owned by foreign persons, and at least 65% of their gross income for
the last three years has been sufficiently connected with a trade or business
in one of these locations or in the United States.
We also have certain loan programs that allow dealers to pay us back with
part of their patronage dividend distributions. For example, to help members
buy standardized exterior signs identifying their stores, our Board of
Directors has authorized a loan program. Under this program, a dealer may apply
to borrow between $100 to $20,000 per location from us for this purpose. If you
obtain a loan under this program, you may either repay it in twelve payments
billed on your regular bi-weekly billing statement, or you may apply the
non-cash portion of your annual patronage dividends (for up to the next three
annual patronage dividend distributions) toward payment of your loan.
Our Board of Directors has also authorized finance programs to help qualified
dealers buy certain computer systems from us and to finance capital
improvements with patronage dividends. The amount financed cannot exceed 80% of
the cost of any system. For PAINTMAKER computers, members have applied to
borrow between $1,000 to $15,000 per location repayable over a period of three
(3) years. For PACE computers, members have applied to borrow between $5,000 to
$50,000 per location repayable over a period of five (5) years. For capital
improvements, members have applied to borrow up to $2.00 per square foot of
retail space repayable over a period of three (3) years. Under these programs,
members have directed us to first apply the patronage refund certificate
portion of their patronage dividend distributions toward the balance owed on
these financed items and next to apply patronage dividends which would
otherwise be payable for the same year in the form of our class C stock.
These signage, computer financing and store retrofit programs may be revised
or discontinued by our Board at any time.
Federal Income Tax Treatment of Patronage Dividends (See Previous Heading
"Opinions of the Experts")
Both the shares of Class C nonvoting Stock and the patronage refund
certificates that we use to pay patronage dividends are "qualified written
notices of allocation" within the meaning of Sections 1381 through 1388 of the
U.S. Internal Revenue Code. These Sections of the Internal Revenue Code deal
with the income tax treatment of cooperatives and their patrons, and have been
in effect since 1963. The dollar amount stated on a qualified written notice
of allocation must be taken into the gross income of the person to whom the
notice is issued, even though the dollar amount may not actually be paid to the
person in the same year as it is taxed.
In order for us to receive a deduction from our gross income for federal
income tax purposes for the amount of any patronage dividends that we pay to a
patron (that is, to one of our eligible and qualifying dealers) in the form of
qualified written notices of allocation, we have to pay (or apply against any
indebtedness that the patron owes us in accordance with Section 7 of Article
XXIV of our By-laws) not less than 20% of each patron's total patronage
dividend distribution in cash and the patron also has to consent to having the
written notices of allocation, at their stated dollar amounts, included in his
gross income for the taxable year in which he receives them. The Internal
Revenue Code also requires that any patronage dividend distributions that we
deduct on our federal income tax return for business we do with patrons must
be paid to those patrons within 8 months after the end of that taxable year.
If you become one of our "members" by owning 1 share of Class A Voting Stock,
you are deemed under the U.S. Internal Revenue Code to have consented to take
the written notices of allocation that we distribute to you into your gross
income. Your consent is deemed because of 1) your act of obtaining or retaining
membership in our Company and 2) because our By-laws provide that your
membership constitutes this consent, and we give you written notification of
that By-law provision. Under another provision of the Internal Revenue Code,
dealers who have subscribed for shares of our stock are also deemed to have
consented to take the dollar amounts of their written notices of allocation
into their gross incomes. This occurs because of the consent provisions
included in the Subscription Agreement for our stock.
If you receive a patronage refund certificate as part of your patronage
dividends (see the subheading "Forms of Patronage Dividend Distributions"),
you may be deemed to have received interest income. This interest would arise
in the form of an original issue discount to the extent that the face amount of
the certificate exceeds the present value of the stated principal and interest
payments that we have to pay you under the terms of the certificate. This
interest income would be taxable to you "ratably" over the term of the
certificate under Section 7872(b) (2) of the U.S. Internal Revenue Code.
Present value for this purpose is determined by using a discount rate equal to
the applicable Federal rate in effect as of the day of issuance of the
certificate, compounded twice a year.
We are required to withhold for federal income tax on the total patronage
dividend distribution we make to anyone who has not furnished us with a correct
taxpayer identification number. We can also be required to withhold federal
taxes on the cash portion of each patronage dividend distribution made to
someone who fails to certify to us that he is not subject to backup
withholding. This withholding obligation based on a failure to certify may not
be applicable, however, unless 50% or more of the total distribution is made in
cash. Since we distribute all of our patronage dividends for a given year at
the same time and since our current patronage dividend plan (see the subheading
"Forms of Patronage Dividend Distributions") does not permit any member store
to receive more than 45% of its patronage dividends for the year in cash, we
believe that a certification failure like this should not ordinarily have any
effect on our Company or any of its dealers.
Patronage dividends that we distribute to patrons who are located in foreign
countries or certain U.S. possessions (including those who are incorporated in
Puerto Rico or who reside in Puerto Rico but have not become citizens of the
United States) have been held to be "fixed or determinable annual or periodic
income." Patrons who receive this type of income are currently required to pay
a tax of 30% of the amount received under Sections 871(a)(1)(A) and 881(a)(1)
of the Internal Revenue Code. When dealers are subject to this 30% tax, we must
withhold it from their patronage dividends and pay it over to the U.S. Internal
Revenue Service. The above does not apply to a corporation organized in Guam,
American Samoa, the Northern Mariana Islands, or the U. S. Virgin Islands if
less than 25% of its stock is owned by foreign persons and at least 65% of its
gross income for the last three years has been effectively connected with the
conduct of a trade or business in that location or in the United States.
The 20% minimum portion of the patronage dividends that must be paid in cash
to patrons other than those discussed above may not be enough, depending upon
the patron's income tax bracket, to pay all of the patron's federal income tax
on his annual patronage dividend distributions. In our management's opinion,
the payment of a minimum of 20% of total patronage dividends in cash each year
will not have a material adverse affect on our operations or on our ability to
obtain sufficient working capital for the normal requirements of our business.
Membership Agreement
If you apply to become an Ace member, you must sign a Subscription Agreement
to purchase our stock. You must also sign our customary Membership Agreement.
You must submit a payment of $400 with your signed Membership Agreement. We use
the $400 fee toward our estimated costs of processing your membership
application. If you submit a membership application and we accept it, we sign
both your Membership Agreement and Stock Subscription Agreement and send them
back to you for your records. Your membership may generally be terminated upon
various notice periods and for various reasons (including voluntary termination
by either of us). The details of these reasons and notice periods are in the
Membership Agreement. These reasons for termination and notice periods apply
except where special laws or regulations in certain locations limit our right
to terminate memberships, or require longer notice periods.
Non-Shareholder Programs
In 1989, our Board of Directors first authorized us to affiliate
non-shareholder international dealers who operate retail businesses outside the
United States, its territories and possessions. These international dealers
sign agreements that differ from our regular Membership Agreement. They may be
granted a license to use certain of our trademarks and service marks, but they
do not sign stock subscription agreements or become shareholders, nor do they
receive patronage dividends.
In 1995, our Board of Directors first authorized us to affiliate
non-shareholder retail accounts other than international dealers. These
accounts, which are generally served through our subsidiary National Hardlines
Supply, Inc. ("NHS"), are not granted an ongoing license to use our trademarks
and service marks. They can purchase selected types of products from us for
resale. They are not members of our cooperative, and therefore do not own our
stock or receive patronage dividends.
In 1996, we established a license program for international non-shareholder
dealers. These international licensees typically receive the exclusive right to
use our trademarks and service marks, as well as exclusive rights to distribute
the merchandise they purchase from us in their home countries. International
licensees pay us a negotiated license fee and ongoing royalties on their retail
sales in exchange for these rights, and for our ongoing training and support.
In 1996, we also began operations through our subsidiary Ace Hardware Canada,
Limited ("Ace Canada"). The majority of Ace Canada's customers are
non-shareholders who do not receive patronage dividends from us, and who are
not licensed to use our trademarks and service marks.
In 1998, we also established a domestic franchise program whose franchisees
will not be shareholders of our cooperative, and will not therefore receive
patronage dividends. These franchisees will pay us a franchise fee and ongoing
royalties on their retail sales. In turn, they receive exclusive rights to a
designated area, a license to use our trademarks and service marks, and various
initial and ongoing training and support.
In October, 1998, we entered into a joint venture with one of our dealers.
The joint venture will operate approximately 12 leased stores in Massachusetts,
New Hampshire and Rhode Island. In January, 1999, we announced that we had
entered into another joint venture with another Ace dealer. This joint venture
plans to open approximately 10 stores in southwest Florida over the next eight
years, and plans to open the first 3 of them within the next two years. In the
future, we will explore other joint venture opportunities with our dealers;
however, we consider each situation unique and we evaluate each opportunity on
its own merits.
As of the end of fiscal years 1998, 1997 and 1996, sales to international
non-shareholder dealers accounted for approximately 7% of our total sales for
fiscal years 1998 and 1997, and less than 5% of our total sales for fiscal year
1996. As of the end of fiscal years 1998, 1997 and 1996, sales to domestic
non-shareholder locations accounted for less than 1% of our total sales in each
year. (See Appendix A, Article XXV, Sections 3 and 4 of our By-laws regarding
International Retail Merchants and non-member accounts.)
Year 2000
A detailed plan has been established to identify and track progress on the
identification of systems, changing of non-compliant systems and testing of
those systems for Year 2000 compliance. Project completion is planned for the
middle of 1999. In addition, a plan has been developed for all devices (time
clocks, power systems, etc.) within the Company. The Company is approximately
60% complete with the project as of January 2, 1999. The remaining 40% will be
dedicated to the Enterprise testing in the first half of 1999. The Company
expects its Year 2000 date conversion project to be completed on a timely
basis.
The Company expects to incur internal staff costs as well as incremental
consulting and other expenses related to infrastructure and facilities
enhancements necessary to prepare the systems for the Year 2000. A significant
portion of these costs will represent the re-deployment of existing information
technology resources. Based upon current estimates, such operating costs could
range between $5.0 million and $6.5 million. The Company has expended
approximately $3.7 million through January 2, 1999 which was primarily incurred
in 1998.
To date, correspondence has been received from the Company's primary vendors
that plans are being developed to address processing of transactions in the
Year 2000. However, there can be no assurance that the systems of other
companies on which the Company's system rely will be converted timely or that
any such failure to convert by another company would not have an adverse affect
on the Company's systems.
The Company is in the process of identifying specific business risks as they
relate to Year 2000 and is developing a Contingency Plan. It is anticipated
that the Contingency Plan will be completed in the first half of 1999.
PROPERTIES
Our general offices are located at 2200 Kensington Court, Oak Brook, Illinois
60523. Information about our main properties appears below:
Square Feet Owned Lease
of Facility or Expiration
Location (Land in Acres) Leased Date
-------- --------------- ------ ----------
General Offices:
Oak Brook, Illinois 206,030 Leased September 30, 2009
Oak Brook, Illinois 70,508 Owned
Markham, Ontario, Canada(1) 15,372 Leased February 28, 2006
Distribution Warehouses:
Lincoln, Nebraska 346,000 Leased December 31, 2006
Arlington, Texas 313,000 Leased July 31, 2002
Perrysburg, Ohio 396,000 Leased November 1, 2004
Tampa, Florida 391,760 Owned
Harmans, Maryland 277,000 Owned
Yakima, Washington 502,400 Owned
Maumelle, Arkansas 585,500 Owned
LaCrosse, Wisconsin 363,000 Owned
Huntersville, North Carolina 354,000 Owned
Rocklin, California 470,000 Owned
Gainesville, Georgia 478,000 Owned
Prescott Valley, Arizona 633,000 Owned
Princeton, Illinois 1,080,000 Owned
Carol Stream, Illinois (2) 250,000 Leased September 30, 1999
Chicago, Illinois (3) 18,168 Leased May 31, 1999
Hanover, Maryland 57,500 Leased June 26, 2003
Colorado Springs, Colorado 493,000 Owned
Wilton, New York 795,000 Leased September 1, 2007
Brantford, Ontario, Canada(4) 434,000 Leased March 31, 2006
Calgary, Alberta, Canada (4) 240,000 Leased December 31, 2001
Print Shop Facility:
Downers Grove, Illinois 41,000 Leased April 30, 2002
Paint Manufacturing Facilities:
Matteson, Illinois 356,000 Owned
Chicago Heights, Illinois 194,000 Owned
Other Property:
Aurora, Illinois 72 acres Owned
LaCrosse, Wisconsin (5) 3 acres Owned
- -------
(1) This property is leased by our subsidiary Ace Hardware Canada, Limited for
its corporate office.
(2) We leased this property in October, 1994, for our bulk merchandise
redistribution center.
(3) We leased this property in June, 1994 for our freight consolidation center.
(4) Our subsidiary, Ace Hardware Canada, Limited leases this property for a
distribution warehouse. The Brantford property includes 80,000 square feet
leased for a two-year period from January 1, 1998-December 31, 2000.
(5) This land is next to our LaCrosse, Wisconsin warehouse.
In addition to the above, we or our subsidiaries, A.H.C. Store Development
Corp. and Ace Corporate Stores, Inc. lease other property for retail hardware
stores ranging from approximately 13,000 to 20,000 square feet in size. The
numbers and locations of these leased retail stores as of the date of this
filing are summarized in the table below:
Number of
State Retail Store Leases
----- -------------------
Georgia 6
Illinois 3
Washington 3
Wisconsin 1
We also lease a fleet of trucks and equipment for the main purpose of
delivering merchandise from our warehouses to our dealers.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Independent Auditors' Report 30
Consolidated Balance Sheets as of January 2, 1999 and
December 31, 1997 31
Consolidated Statements of Earnings and Consolidated
Statements of Comprehensive Income for each of the years
in the three-year period ended January 2, 1999 33
Consolidated Statements of Member Dealers' Equity for
each of the years in the three-year period ended
January 2, 1999 34
Consolidated Statements of Cash Flows for each of the
years in the three-year period ended January 2, 1999 35
Notes to Consolidated Financial Statements 36
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Ace Hardware Corporation:
We have audited the accompanying consolidated balance sheets of Ace Hardware
Corporation and subsidiaries as of January 2, 1999 and December 31, 1997, and
the related consolidated statements of earnings, comprehensive income, member
dealers' equity and cash flows for each of the years in the three-year period
ended January 2, 1999. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Ace
Hardware Corporation and subsidiaries as of January 2, 1999 and
December 31, 1997, and the results of their operations and their cash flows for
each of the years in the three-year period ended January 2, 1999 in conformity
with generally accepted accounting principles.
KPMG LLP
Chicago, Illinois
January 27, 1999
ACE HARDWARE CORPORATION
----------
CONSOLIDATED BALANCE SHEETS
January 2, 1999 and December 31, 1997
ASSETS
January 2, December 31,
1999 1997
---------- ------------
(000's omitted)
Current assets:
Cash and cash equivalents $ 53,901 $ 14,171
Receivables:
Trade 345,328 320,166
Other 54,517 45,719
----------- -----------
399,845 365,885
Less allowance for doubtful
receivables (2,725) (2,086)
----------- -----------
Net receivables 397,120 363,799
Inventories (Note 2) 334,405 338,509
Prepaid expenses and other current assets 15,146 13,615
----------- -----------
Total current assets 800,572 730,094
----------- -----------
Property and equipment (Note 10):
Land 16,952 17,480
Buildings and improvements 180,850 188,967
Warehouse equipment 70,315 66,330
Office equipment 74,567 71,578
Manufacturing equipment 13,817 13,686
Transportation equipment 16,076 15,312
Leasehold improvements 18,049 16,110
Construction in progress 12,395 6,686
----------- -----------
403,021 396,149
Less accumulated depreciation and
amortization (163,176) (153,170)
----------- -----------
Net property and equipment 239,845 242,979
Other assets 7,309 4,405
----------- -----------
$1,047,726 $ 977,478
=========== ===========
See accompanying notes to consolidated financial statements.
ACE HARDWARE CORPORATION
----------
CONSOLIDATED BALANCE SHEETS
January 2, 1999 and December 31, 1997
LIABILITIES AND MEMBER DEALERS' EQUITY
January 2, December 31,
1999 1997
------------ ------------
(000's omitted)
Current liabilities:
Current installments of long-term debt
(Note 4) $ 7,433 $ 7,515
Short-term borrowings (Note 3) 25,000 42,000
Accounts payable 466,008 423,762
Patronage dividends payable in cash
(Note 5) 34,826 29,943
Patronage refund certificates payable
(Note 5) 20,655 13,636
Accrued expenses 54,724 54,562
------------ ------------
Total current liabilities 608,646 571,418
Long-term debt (Note 4) 115,421 96,815
Patronage refund certificates payable
(Note 5) 43,465 49,044
Other long-term liabilities 18,682 14,722
------------ ------------
Total liabilities 786,214 731,999
------------ ------------
Member dealers' equity (Notes 5 and 8):
Class A Stock of $1,000 par value 3,846 3,874
Class B Stock of $1,000 par value 6,499 6,499
Class C Stock of $100 par value 226,571 213,609
Class C Stock of $100 par value,
issuable to dealers for patronage
dividends 26,170 22,366
Additional stock subscribed, net 471 383
Retained earnings 3,292 3,354
Contributed capital 3,295 3,295
Accumulated other comprehensive income (818) (335)
------------ ------------
269,326 253,045
Less: Treasury stock, at cost (7,814) (7,566)
------------ ------------
Total member dealers' equity 261,512 245,479
Commitments (Notes 6 and 10)
------------ ------------
$1,047,726 $ 977,478
============ ============
See accompanying notes to consolidated financial statements.
ACE HARDWARE CORPORATION
----------
CONSOLIDATED STATEMENTS OF EARNINGS
Year Ended
-------------------------------------------
January 2, December 31, December 31,
1999 1997 1996
---------- ------------ ------------
(000's omitted)
Net sales $3,120,380 $2,907,259 $2,742,451
Cost of sales 2,868,974 2,682,863 2,535,014
------------ ------------ ------------
Gross profit 251,406 224,396 207,437
------------ ------------ ------------
Operating expenses:
Warehouse and distribution 38,289 39,292 36,658
Selling, general, and
administrative 79,650 72,218 67,661
Retail success and development 32,907 25,573 21,644
------------ ------------ -------------
Total operating expenses 150,846 137,083 125,963
------------ ------------ -------------
Operating income 100,560 87,313 81,474
Interest expense (Note 12) (17,161) (14,751) (11,855)
Other income, net 6,297 5,735 3,806
Income taxes (Note 7) (1,736) (1,910) (1,118)
----------- ------------ -------------
Net earnings $ 87,960 $ 76,387 $ 72,307
=========== ============ =============
Retained earnings at beginning of
year $ 3,354 $ 3,120 $ 4,650
Net earnings 87,960 76,387 72,307
Patronage dividends (Notes 5 and 8) (88,022) (76,153) (73,837)
----------- ------------ -------------
Retained earnings at end of year $ 3,292 $ 3,354 $ 3,120
=========== ============ =============
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Year Ended
----------------------------------------------
January 2, December 31, December 31,
1999 1997 1996
---------- ------------ ------------
(000's omitted)
Net earnings $ 87,960 $ 76,387 $ 72,307
Foreign currency translation,
net (483) (285) (50)
----------- ----------- -----------
Comprehensive income $ 87,477 $ 76,102 $ 72,257
=========== =========== ===========
See accompanying notes to consolidated financial statements.
<TABLE>
ACE HARDWARE CORPORATION
----------
CONSOLIDATED STATEMENTS OF MEMBER DEALERS' EQUITY
Three Years Ended January 2, 1999 (000's omitted)
Class C Stock
Issuable to Accumulated
Dealers for Additional Other
Class A Class B Class C Patronage Stock Retained Contributed Comprehensive Treasury
Stock Stock Stock Dividends Subscribed* Earnings Capital Income Stock Total
<S> ----- ----- ----- --------- ----------- -------- ------------ ------ ----- -----
Balance at December 31, <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1995 $3,905 $6,499 $177,817 $27,506 $ 515 $4,650 $3,295 -- $(6,942) $217,245
Net earnings -- -- -- -- -- 72,307 -- -- -- 72,307
Net payments on
subscriptions -- -- -- -- 1,603 -- -- -- -- 1,603
Patronage financing
deductions -- -- -- (43) -- -- -- -- -- (43)
Stock issued 268 -- 28,854 (27,463) (1,616) -- -- -- -- 43
Stock repurchased -- -- -- -- -- -- -- -- (10,429) (10,429)
Stock retired (236) -- (9,929) -- -- -- -- -- 10,165 --
Stock issuable as patronage
dividends -- -- -- 26,474 -- -- -- -- -- 26,474
Patronage dividends payable -- -- -- -- -- (73,837) -- -- -- (73,837)
Accumulated other
comprehensive income -- -- -- -- -- -- -- (50) -- (50)
------ ------ -------- ------- ---- ------ ------ ------- ------- --------
Balance at December 31,
1996 $3,937 $6,499 $196,742 $26,474 $502 $3,120 $3,295 $(50) $(7,206) $233,313
Net earnings -- -- -- -- -- 76,387 -- -- -- 76,387
Net payments on
subscriptions -- -- -- -- 2,906 -- -- -- -- 2,906
Patronage financing
deductions -- -- -- (119) -- -- -- -- -- (119)
Stock issued 236 -- 29,263 (26,355) (3,025) -- -- -- -- 119
Stock repurchased -- -- -- -- -- -- -- -- (13,055) (13,055)
Stock retired (299) -- (12,396) -- -- -- -- -- 12,695 --
Stock issuable as
patronage dividends -- -- -- 22,366 -- -- -- -- -- 22,366
Patronage dividends payable -- -- -- -- -- (76,153) -- -- -- (76,153)
Accumulated other
comprehensive income -- -- -- -- -- -- -- (285) -- (285)
------- ------ ------ ------ ----- ------- ----- ------ ------- ---------
Balance at December 31,
1997 $3,874 $6,499 $213,609 $22,366 $383 $3,354 $3,295 $(335) $(7,566) $245,479
Net earnings -- -- -- -- -- 87,960 -- -- -- 87,960
Net payments on
subscriptions -- -- -- -- 1,463 -- -- -- -- 1,463
Patronage financing
deductions -- -- -- (485) -- -- -- -- -- (485)
Stock issued 215 -- 23,526 (21,881) (1,375) -- -- -- -- 485
Stock repurchased -- -- -- -- -- -- -- -- (11,055) (11,055)
Stock retired (243) -- (10,564) -- -- -- -- -- 10,807 --
Stock issuable as
patronage dividends -- -- -- 26,170 -- -- -- -- -- 26,170
Patronage dividends
payable -- -- -- -- -- (88,022) -- -- -- (88,022)
Accumulated other
comprehensive income -- -- -- -- -- -- -- (483) -- (483)
------ ------ -------- ------- ---- ------ ------ ------ -------- -------
Balance at January 2,
1999 $3,846 $6,499 $226,571 $26,170 $471 $3,292 $3,295 $(818) $(7,814) $261,512
====== ====== ======== ======= ==== ====== ====== ====== ======== ========
*Additional stock subscribed is comprised of the following amounts at December
31, 1996, 1997 and January 2, 1999:
1996 1997 1998
---- ---- ----
Class A Stock $139 $ 86 $ 60
Class B Stock -- -- --
Class C Stock 1,653 1,085 955
----- ----- -----
1,792 1,171 1,015
Less unpaid portion 1,290 788 544
----- ----- -----
$ 502 $ 383 $ 471
===== ===== =====
See accompanying notes to consolidated financial statements.
</TABLE>
ACE HARDWARE CORPORATION
----------
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended
--------------------------------------------
January 2, December 31, December 31,
1999 1997 1996
---------- ------------ ------------
(000's omitted)
Operating Activities:
Net Earnings $87,960 $76,387 $72,307
Adjustments to reconcile net
earnings to net cash provided
by operating activities:
Depreciation 21,536 19,494 17,517
Loss on sale of property
and equipment 425 285 712
Increase in accounts
receivable, net (32,207) (15,835) (60,170)
Decrease (Increase) in
inventories 2,713 (12,067) (72,694)
Increase in prepaid expenses
and other current assets (1,531) (1,735) (2,556)
Increase in accounts payable
and accrued expenses 42,204 46,000 64,616
Increase in other long-term
liabilities 3,960 5,205 4,066
-------- -------- --------
Net Cash Provided by
Operating Activities 125,060 117,734 23,798
-------- -------- --------
Investing Activities:
Purchase of property and
equipment (26,975) (49,373) (40,379)
Proceeds from sale of property
and equipment 8,148 149 120
Decrease(Increase) in other assets (2,904) (494) 12
--------- --------- ---------
Net Cash Used in Investing
Activities (21,731) (49,718) (40,247)
--------- --------- ---------
Financing Activities:
Proceeds (payments) of short-term
borrowings (17,000) (29,000) 58,000
Proceeds from notes payable 26,117 32,994 20,853
Payments on long-term debt (7,593) (7,228) (7,462)
Payment of cash portion of
patronage dividend (29,943) (28,178) (23,522)
Payments of patronage refund
certificates and patronage
financing deductions (25,588) (24,941) (22,790)
Proceeds from sale of common stock 1,463 2,906 1,603
Repurchase of common stock (11,055) (13,055) (10,429)
--------- --------- ---------
Net Cash Provided by (Used in)
Financing Activities (63,599) (66,502) 16,253
--------- --------- ---------
Increase (Decrease) in Cash and
Cash Equivalents 39,730 1,514 (196)
Cash and Cash Equivalents at
beginning of year 14,171 12,657 12,853
--------- --------- ---------
Cash and Cash Equivalents at end
of year $53,901 $14,171 $12,657
========= ========= =========
See accompanying notes to consolidated financial statements.
ACE HARDWARE CORPORATION
----------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Summary of Significant Accounting Policies
(a) The Company and Its Business
Ace Hardware Corporation (the Company) operates as a wholesaler of hardware
and related products and manufactures paint products. As a dealer-owned
cooperative, the Company distributes substantially all of its patronage sourced
earnings in the form of patronage dividends to member dealers based on their
volume of merchandise purchases. The accompanying consolidated financial
statements include the accounts of the Company and subsidiaries, all of which
are wholly-owned. All significant intercompany transactions have been
eliminated.
(b) Cash Equivalents
The Company considers all highly liquid investments with an original maturity
of three months or less to be cash equivalents.
(c) Receivables
Receivables from dealers include amounts due from the sale of merchandise and
special equipment used in the operation of dealers' businesses. Other
receivables are principally amounts due from suppliers for promotional and
advertising allowances.
(d) Inventories
Inventories are valued at the lower of cost or net realizable value. Cost is
determined primarily using the last-in, first-out method.
(e) Property and Equipment
Property and equipment are stated at cost less accumulated depreciation and
amortization. Expenditures for maintenance, repairs and renewals of relatively
minor items are generally charged to earnings. Significant improvements or
renewals are capitalized.
Depreciation expense is computed on both straight-line and accelerated
methods based on estimated useful lives as follows:
Useful Life Principal
Years Depreciation Method
----------- -------------------
Buildings and improvements 10-40 Straight line
Warehouse equipment 5-10 Accelerated
Office equipment 3-10 Various
Manufacturing equipment 3-20 Straight line
Transportation equipment 3-7 Straight line
Leasehold improvements are generally amortized on a straight-line basis over
the term of the respective lease.
(f) Foreign Currency Translation
Substantially all assets and liabilities of foreign operations are translated
at the rate of exchange in effect at the balance sheet date while revenues and
expenses are translated at the average monthly exchange rates prevailing
during the year. The Company has utilized foreign exchange forward contracts to
hedge non-U.S. equity investments. Foreign currency translation adjustments,
net of gains on foreign exchange contracts, are reflected in the accompanying
Consolidated Statement of Comprehensive Income for 1998, 1997 and 1996.
ACE HARDWARE CORPORATION
----------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(g) Financial Instruments
The carrying value of assets and liabilities that meet the definition of a
financial instrument included in the accompanying Consolidated Balance Sheets
approximate fair value.
(h) Retirement Plans
The Company has retirement plans covering substantially all non-union
employees. Costs with respect to the noncontributory pension plans are
determined actuarially and consist of current costs and amounts to amortize
prior service costs and unrecognized gains and losses. The Company contribution
under the profit sharing plan is determined annually by the Board of Directors.
(i) Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
(j) Fiscal Year
Effective January 1, 1998 the company changed its fiscal year from
December 31st to the Saturday nearest December 31st. Accordingly, 1998 ended on
January 2, 1999.
(k) Reclassifications
Certain financial statement reclassifications have been made to prior year
amounts to conform to comparable classifications followed in 1998.
(2) Inventories
Inventories consist primarily of merchandise inventories. Substantially all
of the Company's domestic inventories are valued on the last-in, first-out
(LIFO) method; the excess of replacement cost over the LIFO value of inventory
was approximately $62,093,000 and $67,151,000 at January 2, 1999 and
December 31, 1997, respectively. Indirect costs, consisting primarily of
warehousing costs, are absorbed as inventory costs rather than period costs.
(3) Short-Term Borrowings
Short-term borrowings were utilized during 1998 and 1997. The maximum amount
outstanding at any month-end during the period was $67.0 million in 1998 and
$113.0 million in 1997. The weighted average interest rate effective as of
January 2, 1999 and December 31, 1997 was 5.03% and 6.60%, respectively.
Short-term borrowings outstanding as of January 2, 1999 and December 31, 1997
were $25.0 million and $42.0 million, respectively. At January 2, 1999 the
Company has available a revolving credit facility with a group of banks
providing for $125 million in committed lines and also has available $65
million in uncommitted lines. The aggregate unused line of credit available at
January 2, 1999 and December 31, 1997 was $165 million and $133 million,
respectively. At January 2, 1999 the Company had no compensating balance
requirements.
ACE HARDWARE CORPORATION
----------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(4) Long-Term Debt
Long-term debt is comprised of the following:
January 2, December 31,
1999 1997
---------- ------------
(000's omitted)
Notes Payable:
$20,000,000 due in quarterly installments of
$540,500 with interest payable quarterly at
a fixed rate of 8.74% $10,270 $12,432
$20,000,000 due in quarterly installments of
$952,400 with interest payable quarterly at
a fixed rate of 6.89% 4,762 8,571
$30,000,000 due in semi-annual installments
of $2,000,000 commencing June 22, 2001 with
interest payable quarterly at a fixed rate
of 6.47% 30,000 30,000
$20,000,000 due in quarterly installments of
$714,300 commencing September 15, 2004 with
interest payable quarterly at a fixed rate
of 7.49% 20,000 20,000
$30,000,000 due in annual installments of
$6,000,000 commencing March 25, 2005 with
interest payable quarterly at a fixed rate
of 7.55% 30,000 30,000
$25,000,000 due in annual installments of
$5,000,000 commencing February 9, 2006 with
interest payable quarterly at a fixed rate
of 6.61% 25,000 --
Liability under capitalized leases (see Note 10) 1,370 2,171
Installment notes with maturities through 2002
with various interest rates 1,452 1,156
-------- --------
122,854 104,330
Less current installments 7,433 7,515
--------- --------
$115,421 $96,815
========= ========
Aggregate maturities of long-term debt are $7,433,000, $3,923,000,
$6,526,000, $6,350,000 and $5,622,000 in 1999 through 2003, respectively, and
$93,000,000 thereafter.
(5) Patronage Dividends and Refund Certificates Payable
The Company operates as a cooperative organization and has paid or will pay
patronage dividends to member dealers on the portion of earnings derived from
business done with such dealers. Patronage dividends are allocated in
proportion to the volume of purchases by member dealers during the period. The
amount of patronage dividends to be remitted in cash depends upon the level of
dividends earned by each member outlet, varying from 20% on the total dividends
under $5,000 and increasing by 5% on total dividends for each subsequent $2,500
earned to a maximum of 40% on total dividends exceeding $12,500. All amounts
exceeding the cash portions will be distributed in the form of Class C $100 par
value stock, to a maximum based upon the current year purchase volume or
$20,000 whichever is greater, and thereafter in a combination of additional
cash and patronage refund certificates having maturity dates and bearing
interest as determined by the Board of Directors. A portion of the dealer's
annual patronage dividends distributed under the above plan in a form other
than cash can be applied toward payment of principal and interest on any
balances outstanding for approved exterior signage, computer equipment and
store retrofit financing.
ACE HARDWARE CORPORATION
----------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
The patronage dividend composition for 1998, 1997 and 1996 follows:
Subordinated Class Patronage Total
Cash Refund C Financing Patronage
Portion Certificates Stock Deductions Dividend
------- ------------ ----- ---------- ---------
(000's omitted)
1998 $34,826 $15,720 $26,170 $11,306 $88,022
1997 29,943 13,726 22,366 10,118 76,153
1996 28,178 9,500 26,474 9,685 73,837
Patronage dividends are allocated on a fiscal year basis with issuance in the
following year.
The patronage refund certificates outstanding or issuable at January 2, 1999
are payable as follows:
Interest
Amount Rate
------ --------
(000's omitted)
1999 $11,460 6.00%
2000 9,195 7.00
2001 4,930 6.00
2002 9,272 6.25
2003 13,543 6.00
2004 15,720 6.00
A portion of the patronage refund certificates payable on January 1, 2000
will be prepaid, and accordingly, is classified as current liabilities in the
accompanying January 2, 1999 Consolidated Balance Sheet.
(6) Retirement Plans
The Company has defined benefit pension plans covering substantially all
non-union employees. Benefits are based on years of service, highest average
compensation (as defined) and the related profit sharing and primary social
security benefit. Contributions to the plan are based on the Entry Age Normal,
Frozen Initial Liability actuarial funding method and are limited to amounts
that are currently deductible for tax reporting purposes. As of January 2, 1999
plan assets were held primarily in equities, mutual funds and group annuity
contracts.
Pension expense for the years included the following components:
January 2, December 31, December 31,
1999 1997 1996
---------- ------------ ------------
(000's omitted)
Service cost - benefits earned
during the period $ 293 $ 358 $ 144
Interest cost on projected
benefit obligation 428 351 558
Expected return on plan assets (710) (630) (867)
Net amortization and deferral 87 53 229
-------- -------- ---------
Net periodic pension expense $ 98 $ 132 $ 64
======== ======== =========
In 1996, the plan settled a portion of the liability to retirees and vested
terminated participants through lump sum payments and the purchase of single
premium annuity contracts. In addition to the net periodic pension expense, the
Company recognized a net loss of $475,000 in 1996 related to this settlement.
ACE HARDWARE CORPORATION
-----------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
The following table sets forth the funded status of the plans and amounts
recognized in the Company's Consolidated Balance Sheets at January 2, 1999 and
1997 (December 31st measurement date):
January 2, December 31,
1999 1997
---------- ------------
(000's omitted)
Change in benefit obligation:
Benefit obligation at beginning of year $5,041 $4,813
Service cost 293 358
Interest cost 428 351
Actuarial losses 325 181
Benefits paid (746) (662)
---------- ------------
Benefit obligation at end of year 5,341 5,041
---------- ------------
Change in plan assets:
Fair value of plan assets at beginning
of year 9,122 7,964
Actual return on plan assets 1,001 1,820
Employer contribution 71 -
Benefits paid (746) (662)
---------- ------------
Fair value of plan assets at end of year 9,448 9,122
---------- ------------
Funded status 4,107 4,081
Unrecognized transition asset (91) (104)
Unamortized prior service cost (631) (680)
Unrecognized net actuarial gains (2,776) (2,661)
---------- ------------
Prepaid pension cost included in other
assets $ 609 $ 636
========== ============
The weighted average discount rate used in determining the actuarial present
value of the projected benefit obligation was 7.0% in 1998 and 7.25% in 1997.
The related expected long-term rate of return was 8.0% in 1998 and 1997. The
rate of increase in future compensation was projected using actuarial salary
tables plus 1.0% in 1998 and 1997.
The Company also participates in several multi-employer plans covering union
employees. Amounts charged to expense and contributed to the plans totaled
approximately $216,000, $225,000 and $265,000 in 1998, 1997 and 1996,
respectively.
The Company's profit sharing plan contribution for 1998, 1997 and 1996 was
approximately $13,746,000, $12,240,000 and $11,357,000, respectively.
(7) Income Taxes
As a cooperative, the Company distributes substantially all of its patronage
sourced earnings to its members in the form of patronage dividends. The 1998,
1997 and 1996 provisions for federal income taxes were $1,105,000, $1,501,000
and $860,000, respectively, and for state income taxes were $631,000, $409,000
and $258,000, respectively.
The Company made tax payments of $1,374,000, $2,807,000 and $1,524,000 during
1998, 1997 and 1996, respectively.
ACE HARDWARE CORPORATION
----------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(8) Member Dealers' Equity
The Company's classes of stock are described below:
Number of Shares at
-------------------
January 2, December 31,
1999 1997
---------- ------------
Class A Stock, voting, redeemable at
par value -
Authorized 10,000 10,000
Issued and outstanding 3,846 3,874
Class B Stock, nonvoting, redeemable at
not less than twice par value-
Authorized 6,500 6,500
Issued 6,499 6,499
Outstanding 2,592 2,716
Treasury stock 3,907 3,783
Class C Stock, nonvoting, redeemable at
not less than par value -
Authorized 4,000,000 4,000,000
Issued and outstanding 2,265,718 2,136,085
Issuable as patronage dividends 261,700 223,660
Additional Stock Subscribed:
Class A Stock 60 86
Class B Stock - -
Class C Stock 9,550 10,850
At January 2, 1999 and December 31, 1997 there were no common shares reserved
for options, warrants, conversions or other rights; nor were any options
granted or exercised during the two years then ended.
Member dealers may subscribe for the Company's stock in various prescribed
combinations. Only one share of Class A Stock may be owned by a dealer with
respect to the first member retail outlet controlled by such dealer. Only four
shares of Class B Stock may be owned by a dealer with respect to each retail
outlet controlled by such dealer, but only if such outlet was a member of the
Company on or before February 20, 1974. An appropriate number of shares of
Class C Stock must be included in any subscription by a dealer in an amount to
provide that such dealer has a par value of all shares subscribed for equal to
$5,000 for each retail outlet. Unregistered shares of Class C Stock are also
issued to dealers in connection with patronage dividends. No dividends can be
declared on any shares of any class of the Company's Stock.
Upon termination of the Company's membership agreement with any retail
outlet, all shares of stock of the Company, held by the dealer owning or
controlling such outlet, must be sold back to the Company, unless a transfer of
such shares is made to another party accepted by the Company as a member dealer
with respect to the same outlet.
ACE HARDWARE CORPORATION
----------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
A Class A share is issued to a member dealer only when the share subscribed
has been fully paid. Class B and Class C shares are only issued when all such
shares subscribed with respect to a retail outlet have been fully paid.
Additional Stock Subscribed in the accompanying statements represents the par
value of shares subscribed, reduced by the unpaid portion.
All shares of stock are currently issued and repurchased at par value, except
for Class B Stock which is repurchased at twice its par value, or $2,000 per
share. Upon retirement of Class B shares held in treasury, the excess of
redemption price over par is allocated equally between contributed capital and
retained earnings.
Transactions during 1996, 1997 and 1998 affecting treasury shares follow:
Shares Held in Treasury
-----------------------
Class A Class B Class C
------- ------- -------
Balance at December 31, 1995 -- 3,471 --
Stock issued -- -- --
Stock repurchased 236 132 99,290
Stock retired (236) -- (99,290)
-------- -------- --------
Balance at December 31, 1996 -- 3,603 --
Stock issued -- -- --
Stock repurchased 299 180 123,964
Stock retired (299) -- (123,964)
-------- -------- --------
Balance at December 31, 1997 -- 3,783 --
Stock issued -- -- --
Stock repurchased 243 124 105,639
Stock retired (243) -- (105,639)
-------- -------- --------
Balance at January 2, 1999 -- 3,907 --
======== ======== ========
(9) Segments
The Company is principally engaged as a wholesaler of hardware and related
products and manufactures paint products. In June 1997, the Financial
Accounting Standards Board issued Statement of Financial Accounting Standard
No. 131, Disclosures about Segments of an Enterprise and Related Information,
which the Company has adopted in the current year.
The Company identifies segments based on management responsibility and the
nature of the business activities of each component of the Company. The Company
measures segment earnings as operating earnings including an allocation for
interest expense and income taxes. Information regarding the identified
segments and the related reconciliation to consolidated information are as
follows:
ACE HARDWARE CORPORATION
----------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
January 2, 1999
---------------
(000's omitted)
Elimination of
Paint Intersegment
Wholesale Manufacturing Other Activities Consolidated
--------- ------------- ----- -------------- ------------
Net sales from
external customers $3,086,913 $20,798 $12,669 -- $3,120,380
Intersegment
sales 13,701 93,536 -- (107,237) --
Interest expense 17,161 1,464 244 (1,708) 17,161
Depreciation 19,808 1,392 336 -- 21,536
Segment earnings
(loss) 78,442 10,364 (382) (464) 87,960
Identifiable
segment assets 987,832 29,883 39,030 (9,019) 1,047,726
Expenditures for
long-lived
assets 22,270 937 3,768 -- 26,975
December 31, 1997
-----------------
(000's omitted)
Elimination of
Paint Intersegment
Wholesale Manufacturing Other Activities Consolidated
--------- ------------- ----- -------------- ------------
Net sales from
external customers $2,882,457 $18,788 $6,014 -- $2,907,259
Intersegment
sales 4,377 89,490 -- (93,867) --
Interest expense 14,751 1,005 88 (1,093) 14,751
Depreciation 17,977 1,371 146 -- 19,494
Segment earnings
(loss) 64,844 11,306 432 (195) 76,387
Identifiable
segment assets 928,401 28,957 24,206 (4,086) 977,478
Expenditures for
long-lived
assets 47,312 806 1,255 -- 49,373
December 31, 1996
-----------------
(000's omitted)
Elimination of
Paint Intersegment
Wholesale Manufacturing Other Activities Consolidated
--------- ------------- ----- -------------- ------------
Net sales from
external customers $2,721,531 $19,080 $1,840 -- $2,742,451
Intersegment
sales 1,119 83,992 -- (85,111) --
Interest expense 11,855 1,003 33 (1,036) 11,855
Depreciation 16,030 1,439 48 -- 17,517
Segment earnings
(loss) 63,925 8,281 176 (75) 72,307
Identifiable
segment assets 874,215 28,036 16,266 (2,142) 916,375
Expenditures for
long-lived
assets 39,056 968 355 -- 40,379
Net sales and long-lived assets by geographic region based upon customer
location for 1998, 1997 and 1996 were as follows:
January 2, 1999 December 31, 1997 December 31, 1996
--------------- ----------------- -----------------
(000's omitted)
Net sales:
United States $2,903,906 $2,717,881 $2,610,573
Foreign countries 216,474 189,378 131,878
---------- ---------- ----------
Total $3,120,380 $2,907,259 $2,742,451
========== ========== ==========
Long-lived assets, net:
United States $234,539 $236,488 $206,184
Foreign countries 5,306 6,491 7,350
---------- ---------- ----------
Total $239,845 $242,979 $213,534
========== ========== ==========
ACE HARDWARE CORPORATION
----------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(10) Commitments
Leased property under capital leases is included as "Property and Equipment"
in the Consolidated Balance Sheets as follows:
January 2, December 31,
1999 1997
---------- ------------
(000's omitted)
Data processing equipment $3,600 $3,633
Less: accumulated depreciation
and amortization (1,905) (1,506)
---------- ------------
$1,695 $2,127
========== ============
The Company rents buildings and warehouse, office and certain other equipment
under capital and operating leases. At January 2, 1999 annual minimum rental
commitments under leases that have initial or remaining noncancelable terms in
excess of one year are as follows:
Year Ending, Capital Operating
- ------------ ------- ---------
(000's omitted)
1999 $ 963 $18,905
2000 413 16,110
2001 76 12,520
2002 -- 8,613
2003 -- 6,636
Thereafter -- 22,984
------- ---------
Total minimum lease payments 1,452 $85,768
=========
Less amount representing interest 82
-------
Present value of total minimum lease payments $ 1,370
=======
All leases expire prior to 2013. Under certain leases, the Company pays real
estate taxes, insurance and maintenance expenses in addition to rental expense.
Management expects that in the normal course of business, leases that expire
will be renewed or replaced by other leases. Rent expense was approximately
$37,023,000, $33,343,000 and $29,747,000 in 1998, 1997 and 1996, respectively.
Rent expense includes $6,004,000, $5,956,000 and $5,503,000 in contingent
rentals paid in 1998, 1997 and 1996, respectively, primarily for transportation
equipment mileage.
(11) Media Expense
The Company expenses media costs the first time the advertising takes place.
Gross media expense, prior to income offsets from dealers and suppliers,
amounting to $70,254,000, $65,013,000 and $64,551,000 was charged to operations
in 1998, 1997 and 1996, respectively.
(12) Interest Expense
Interest paid was $16,553,000, $15,281,000 and $12,481,000 in 1998, 1997 and
1996, respectively, net of capitalized interest of $1,022,000 and $523,000 in
1997 and 1996.
ACE HARDWARE CORPORATION
----------
SELECTED FINANCIAL DATA
Income Statement Data:
January 2, December 31, December 31, December 31, December 31,
1999 1997 1996 1995 1994
---------- ------------ ------------ ------------ ------------
(000's omitted)
Net sales $3,120,380 $2,907,259 $2,742,451 $2,436,012 $2,326,115
Cost of sales 2,868,974 2,682,863 2,535,014 2,253,430 2,152,322
---------- ------------ ------------ ------------ ------------
Gross profit 251,406 224,396 207,437 182,582 173,793
Total expenses 163,446 148,009 135,130 118,840 109,271
---------- ------------ ------------ ------------ ------------
Net earnings $ 87,960 $ 76,387 $ 72,307 $ 63,742 $ 64,522
========== ============ ============ ============ ============
Patronage divi-
dends (Notes A,
B,5 and 8) $ 88,022 $ 76,153 $ 73,837 $ 64,716 $ 64,520
Balance Sheet Data:
January 2, December 31, December 31, December 31, December 31,
1999 1997 1996 1995 1994
---------- ------------ ------------ ------------ ------------
(000's omitted)
Total assets $1,047,726 $977,478 $916,375 $759,133 $723,610
Working
capital 191,926 158,676 146,862 139,805 150,514
Long-term
debt 115,421 96,815 71,837 57,795 64,287
Patronage
refund
certificates
payable,
long-term 43,465 49,044 49,639 54,741 63,666
Member
dealers'
equity 261,512 245,479 233,314 217,245 199,827
(A) The Company operates as a cooperative organization, and pays patronage
dividends to member dealers on earnings derived from business done with
such dealers. It is the practice of the Company to distribute
substantially all patronage sourced earnings in the form of patronage
dividends.
(B) The form in which patronage dividends are to be distributed can only be
determined at the end of each year when the amount distributable to each
of the member dealers is known. Patronage dividends were payable as
follows:
January 2, December 31, December 31, December 31, December 31,
1999 1997 1996 1995 1994
---------- ------------ ------------ ------------ ------------
(000's omitted)
In cash $ 34,826 $ 29,943 $ 28,178 $ 23,522 $ 27,302
In patronage
refund
certificates
payable 15,720 13,726 9,500 5,032 9,920
In Class C Stock 26,170 22,366 26,474 27,506 21,766
In patronage
financing
deductions 11,306 10,118 9,685 8,656 5,532
Total patronage ---------- ---------- ---------- ---------- ----------
dividends $ 88,022 $ 76,153 $ 73,837 $ 64,716 $ 64,520
========== ========== ========== ========== ==========
(C) Numbered notes refer to Notes to Consolidated Financial Statements,
beginning on page 36.
(5) & (8) Refers to Notes 5 and 8 of the Consolidated Financial Statements
beginning on page 36 of this Form S-2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Liquidity and Capital Resources
The Company's ability to generate cash adequate to meet its needs
("liquidity") results from internally generated funds, short-term lines of
credit and long-term financing.
The Company has an established, unsecured revolving credit facility with a
group of banks. The Company has unsecured lines of credit of $190 million of
which $165 million was available at January 2, 1999. Any borrowings under these
lines of credit would bear interest at the prime rate or less. Long-term
financing is arranged as determined necessary to meet the Company's capital
or other requirements, with principal amount, timing and form dependent on
prevailing debt markets and general economic conditions.
Capital expenditures for new and improved facilities were $27.0, $49.4 and
$40.4 million in 1998, 1997, and 1996, respectively. During 1998, the Company
financed the $27.0 million of capital expenditures out of current and
accumulated internally generated funds, short-term borrowings and long-term
borrowings. 1999 capital expenditures are anticipated to be approximately $49.3
million primarily for a new distribution facility and improvements to existing
facilities.
As a cooperative, the Company distributes substantially all of its patronage
source earnings to its members in the form of patronage dividends, which are
deductible for income tax purposes.
The Company expects that existing and new internally generated funds, along
with established lines of credit and long-term financing, will continue to be
sufficient to finance the Company's working capital requirements and patronage
dividend and capital expenditures programs.
Operations-1998 Compared to 1997
Net sales increased 7.3% due to increases in existing retailer volume,
targeted efforts on new store development and conversions. Sales of basic
hardware and paint merchandise (including warehouse, bulletin and direct
shipments) increased 8.1% while lumber and building material sales increased
4.2%. Lumber sales were negatively impacted by price deflation. Excluding
Canada, international sales increased 22.2% primarily due to new international
store development. Net dealer outlets increased in 1998 due to targeted sales
efforts on new store development and conversions to the Ace program and
continued emphasis on retail success.
Gross profit increased $27.0 million or 12.0% and increased as a percent of
sales to 8.06% vs. 7.72% in 1997. Domestic gross profit increased as a percent
of sales due to increased handling charges from sales mix shifts, increased
vendor rebates and lower warehouse costs absorbed into inventory. Gross profit
from additional company-owned stores also contributed to the increase.
Warehouse and distribution expenses decreased $1.0 million and decreased as a
percent of sales from 1.35% in 1997 to 1.23% in 1998. The decrease was due to
increased logistic revenues, non-recurring start-up facility costs in 1997 and
improved warehouse productivity.
Selling, general and administrative expenses increased $7.4 million or
10.3% and increased slightly as a percent to sales due to increased information
technology costs to support our year 2000 efforts and lower costs absorbed into
inventory.
Retail success and development expenses increased $7.3 million or 28.7% due
to costs associated with additional company-owned stores, costs to support
retail initiatives and new business development costs. Increases in this
category are directly related to retail support of the Ace retailer as the
Company continues to make retail investments in our dealer base.
Paint Division sales increased 5.6% to $114.3 million. As a separate division
of the Company, the Paint Division produced net manufacturing profits of $10.4
million in 1998 vs. $11.3 million in 1997. The decrease in net manufacturing
profit is due to unfavorable production variances incurred in 1998. Paint is
the only product manufactured by the Company. As discussed on page 8, patronage
dividends are calculated separately for paint sales and decreased to 9.17% in
1998 vs. 10.31% in 1997 as a result of the decreased net profit.
Interest expense increased $2.4 million or 16.3% due to increased dealer
dating programs and long-term debt issued during 1998 to fund the replacement
of a facility.
Operations-1997 Compared to 1996
Net sales increased 6% due to increases in existing retailer volume, targeted
efforts on new store development and conversions, and a full year of Canadian
operations. Sales of basic hardware and paint merchandise (including warehouse,
bulletin and direct shipments) increased 5.1% while lumber and building
material sales increased 10.3% due to accelerated sales efforts. Excluding
Canadian operations, international sales increased 27.5% primarily due to new
international store development.
Gross profit increased $17.0 million or 8.2% and increased as a percent of
sales to 7.72% vs. 7.56% in 1996. Domestic gross profit as a percent of sales
increased over 1996 due to increased manufacturing gross profit and additional
company-owned stores. Canadian operations also contributed to the increased
gross profit due to a full year of operation.
Warehouse and distribution expenses increased $2.6 million or 7.2% due to the
operation of one additional domestic facility and two Canadian facilities in
1997. The replacement of an existing facility also contributed to the increase,
partially offset by increased logistic revenues.
Selling, general and administrative expenses increased $4.6 million or 6.7%
due to increased data processing costs and additional costs for a full year of
Canadian operations. Excluding Canadian operations, selling, general and
administrative expenses increased 4.8% and decreased slightly as a percent of
sales resulting from continued cost containment and re-engineering efforts.
Retail success and development expenses increased $3.9 million or 18.2% due
to increased new business development costs, reduced retail systems income and
costs associated with additional company-owned stores. Increases in this
category are directly related to retail support of the Ace retailer as the
Company continues to make investments in our dealer base.
Paint Division sales increased 5.0% to $108.3 million. As a separate division
of the Company, the Paint Division produced net manufacturing profits of $11.3
million in 1997 vs. $8.3 million in 1996. The increased net manufacturing
profit results from the 5.0% sales increase and resulting gross margin and
improved utilization of the Company's second facility. Paint is the only
product manufactured by the Company. As discussed on page 9, patronage
dividends are calculated separately for paint sales and increased to 10.31% in
1997 vs. 7.98% in 1996.
Interest expense increased $2.9 million due to increased borrowings for the
addition of a new facility in 1996 and 1997 and additional dealer dating
programs. Other income increased due to increased past due service charges and
reduced losses from the sale of property and equipment. Income taxes increased
$792,000 due to improved profitability of the Company's non-patronage
operations.
Impact of New Accounting Standards
In June, 1998, the FASB issued Statement of Financial Accounting Standards
("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging
Activities," which establishes accounting and reporting for derivative
instruments and hedging activities. The Company is required to comply with SFAS
No. 133 in fiscal year 2000. The Company has not evaluated the impact of SFAS
No. 133 on the consolidated financial statements.
Inflation and Changes in Prices
The Company's business is not generally governed by contracts that establish
prices substantially in advance of the receipt of goods or services. As vendors
increase their prices for merchandise supplied to the Company, the Company
increases the price to its dealers in an equal amount plus the normal handling
charge on such amounts. In the past, these increases have provided adequate
gross profit to offset the impact of inflation on operating expenses.
MANAGEMENT
Our directors and executive officers are:
Position(s) Currently Held
and Business Experience
Name Age (for the past 5 years)
---- --- --------------------------
Jennifer C. Anderson 48 Director since June 6, 1994; term expires
2000; President of Davis Lumber and Ace
Hardware, Inc., Davis, California since
November, 1985.
Eric R. Bibens II 42 Director since June 2, 1997; term expires
2000; President of Bibens Home Center,
Inc., Springfield, Vermont since 1983.
Michael C. Bodzewski 48 Vice President - Sales and Marketing
effective October, 1998; Vice President -
Merchandising effective June, 1990.
Lori L. Bossmann 38 Vice President-Controller effective
September, 1997; Controller effective
January, 1994.
Lawrence R. Bowman 52 Director since February 4, 1991; term
expires 2001; President of Owenhouse
Hardware Co., Inc., Bozeman, Montana since
February, 1996 and Vice President of that
company from March, 1988 until February,
1996.
James T. Glenn 39 Director since June 3, 1996; term expires
1999; President of Ace Hardware of
Chattanooga, Chattanooga, Tennessee since
January, 1990.
Ray A. Griffith 45 Vice President, Merchandising effective
October, 1998; Vice President - Retail
Development and Marketing effective
September, 1997; Director - Retail
Operations, Western Division effective
September, 1994; from July, 1993-April,
1994, President and Chief Executive
Officer of Servistar/Coast to Coast
Corporation.
Daniel L. Gust 49 Director since June 1, 1998; term expires
2001; President of Garden Acres Ace
Hardware, Longmont, Colorado since
January, 1991.
Position(s) Currently Held
and Business Experience
Name Age (for the past 5 years)
---- --- --------------------------
D. William Hagan 41 Director since June 2, 1997; term expires
2000; President of Hagan Ace Hardware,
Orange Park, Florida since February, 1980.
David F. Hodnik 51 President and Chief Executive Officer
effective January 1, 1996; President and
Chief Operating Officer effective
January 1, 1995; Executive Vice President
and Chief Operating Officer effective
January, 1994.
Paul M. Ingevaldson 53 Senior Vice President - International and
Technology effective September, 1997; Vice
President - Corporate Strategy and
International Business effective
September, 1992.
Mark Jeronimus 50 Director since June 3, 1991; term expires
2000; President of Duluth Hardware, Inc.,
Duluth, Minnesota since February, 1984.
Howard J. Jung 51 Chairman of the Board and Director since
June, 1998; term expires 2001; Vice
President of Ace Hardware Stores, Inc.,
Raleigh, North Carolina since June, 1997.
Rita D. Kahle 42 Senior Vice President - Wholesale
effective September, 1997; Vice President -
Finance effective January, 1994.
John E. Kingrey 55 Director since May 17, 1992; term expires
1999; President of WK&K Corp., Wimberley,
Texas since May, 1972.
David W. League 59 Vice President-General Counsel and
Secretary effective June, 1990.
William A. Loftus 60 Executive Vice President - Retail
effective September, 1997; Senior Vice
President - Retail Operations and
Marketing effective October, 1994; Senior
Vice President - Marketing and Advertising
effective September, 1992.
David F. Myer 53 Vice President - Retail Support effective
September, 1997; Vice President - Retail
Support and New Business effective
October, 1994; Vice President - Retail
Support effective August, 1992.
Fred J. Neer 59 Vice President - Human Resources effective
April, 1989.
Mario R. Nathusius 55 Director since June 1, 1998; term expires
2001; President of Cemaco S.A. Guatemala
City, Guatemala since March, 1978.
Roger E. Peterson 61 Director since June 5, 1995; term expires
2001; Chief Executive Officer effective
January 1, 1995.
Donald L. Schuman 60 Vice President - Information Technology
effective June, 1990.
Position(s) Currently Held
and Business Experience
Name Age (for the past 5 years)
---- --- --------------------------
Jon R. Weiss 63 Director since June 4, 1990; term
expires 1999; President of Jon W.
Weiss Hardware Company, Glenview,
Illinois since June, 1956.
Our By-laws provide that our Board shall have between 9 and 12 directors. A
minimum of 9 directors must be dealer directors. A maximum of two directors may
be non-dealer directors. Non-dealer directors cannot exceed 25% of the total
number of directors in office at any one time. Non-dealer directors may (but do
not have to be) shareholders of ours who are in the retail hardware business.
Our By-laws provide for three classes of directors who are to be elected for
staggered 3-year terms.
Our By-laws also provide that no one can serve as a dealer director unless
that person is an owner, executive officer, general partner or general manager
of a retail business organization that is a shareholder of ours. Regional
dealer directors are elected from geographic regions of the United States. The
Board under Article IV, Section 1 of our By-laws, determines these regions.
(See Appendix A). If the Board finds that regional dealer directors represent
all regions, then dealer directors at large may be elected, so long as the
maximum number of directors allowed under our By-laws is not exceeded.
A geographic breakdown of our current regions for the election of directors
at our 1999 annual stockholders meeting to be held on June 7, 1999 appears
below:
Region 1 - Maine, New Hampshire, Vermont, Massachusetts, Connecticut, Rhode
Island, New York, Pennsylvania, New Jersey;
Region 2 - Delaware, Maryland, Virginia, West Virginia, Kentucky,
Tennessee, North Carolina, South Carolina, District of Columbia,
Ohio;
Region 3 - Alabama, Mississippi, Georgia, Florida;
Region 4 - Indiana, Illinois, Michigan, Wisconsin;
Region 5 - Colorado, Idaho, Iowa, Kansas, Minnesota, Missouri, Montana,
Nebraska, North Dakota, South Dakota, Utah, Wyoming;
Region 6 - Arkansas, Louisiana, Oklahoma, Texas, New Mexico, Arizona;
Region 7 - Hawaii, California, Nevada, Oregon, Washington, Alaska
Under the procedure required by our By-laws, the following director has
been selected as a nominee for reelection as a dealer director at the 1999
annual stockholders meeting:
Nominee Age Class Region Term
- ------- --- ----- ------ ----
James T. Glenn 39 Second 2 3 years
Jon Weiss and John Kingrey are not eligible for reelection as directors
beginning in 1999. The persons named below have been selected as nominees for
election to the Board for the first time at the 1999 annual meeting as a dealer
director of the class, from the region and for the term indicated:
Nominee Age Class Region Term
- ------- --- ----- ------ ----
Richard F. Baalmann, Jr. 39 Second 4 3 years
Richard W. Stine 54 Second 6 3 years
Non-dealer directors and dealer directors at large are not elected from
particular geographic regions.
Article IV of our By-laws has information about the qualifications for
membership on the Board of Directors, the terms of directors, the limitations
on the total period of time that a director may hold office, the procedure for
Nominating Committees to select candidates and nominees for election to the
Board of Directors, and the procedure for filling vacancies on the Board if one
occurs during an unexpired term.
INDEMNIFICATION OBLIGATIONS OF COMPANY AND
S.E.C. POSITION ON SECURITIES ACT INDEMNIFICATION
Under Article EIGHTH (b) of our restated Certificate of Incorporation, and
Article XV, Section 1 of our By-laws, we must indemnify people who serve as our
directors, officers, employees or agents against all expenses, liabilities and
losses [including attorneys' fees, judgments, fines, excise taxes, or penalties
under the U.S. Employee Retirement Income Security Act, as amended, and amounts
paid (or to be paid) in settlement] that they reasonably incur or suffer in
connection with any action, suit or proceeding (whether civil, criminal,
administrative or investigative) that is brought or threatened against them
because of their service in any of these capacities on our behalf or at our
request. The same section of our restated Certificate of Incorporation also
permits litigation expenses to be advanced to these people without the specific
approval of the Board of Directors under certain circumstances.
Also, Article EIGHTH (a) of our restated Certificate of Incorporation
provides that a person who serves as our director will not be personally liable
either to us or to our stockholders for money damages arising solely out of
that person's breach of fiduciary duty as a director. This provision does not
affect a director's liability for monetary damages based upon such grounds as a
breach of the duty of loyalty, a failure to act in good faith, intentional
misconduct, a knowing violation of law, or the receipt of an improper personal
benefit.
This indemnification would cover proceedings under the federal Securities Act
of 1933. However, we have been advised that in the opinion of the Securities
and Exchange Commission this type of indemnification is against public policy
as expressed in the federal Securities Act of 1933 and is therefore
unenforceable. If a claim for indemnification (other than for our payment of
expenses of a director, officer or controlling person in the successful defense
of any action, suit or proceeding) is made by a director, officer or
controlling person in connection with the securities being offered by this
Prospectus, (unless in the opinion of our legal counsel the matter has been
settled by controlling precedent), we will submit the question of whether our
indemnification would be against public policy under the Act to an appropriate
court so that the issue can be finally determined.
We have not authorized any dealer,
salesman, or any other person to give
ACE HARDWARE CORPORATION any information or make any
representations other than those
contained in this Prospectus in
connection with this offering. This
Prospectus is not an offer to sell, or
a solicitation of an offer to buy, to
any person in any state where it is
unlawful to make that type of
-------Shares of Class A solicitation. The delivery of this
(Voting) Stock Prospectus at any time does not imply
$1,000 par value that there has been no change in our
Company's affairs afterward.
In Florida the securities covered by
-------Shares of Class C this Prospectus are being offered under
(Non-voting) Stock a limited offering exemption which
$100 par value allows Florida purchasers to cancel
their purchases of this stock within
3 days after making any payment on
account of the purchase price.
TABLE OF CONTENTS
----------
Item Page
Prospectus ---- ----
---------- Available Information 2
Reports to Security Holders 2
Factors to be Considered 2
Summary 3
Use of Proceeds 6
Distribution Plan and Offering
Terms 6
Dated: Description of Capital Stock 8
Opinions of Experts 12
The Company's Business 12
Properties 27
Index to Consolidated Financial
Statements 29
Independant Auditors' Report 30
Consolidated Financial
Statements 31
Notes to Consolidated Financial
Statements 36
Management's Discussion and
Analysis of Financial
Condition and Results of
Operations 46
Management 48
Indemnification Obligations of
Company and S.E.C. Position
on Securities Act
Indemnification 51
Appendix A--By-laws of Ace
Hardware Corporation A-1
APPENDIX A
BY-LAWS
OF
ACE HARDWARE CORPORATION
(As Amended through August 19, 1997)
ARTICLE I
OFFICES
SECTION 1. The registered office of the corporation in the State of
Delaware shall be in the City of Wilmington in said State, and the registered
agent in charge thereof shall be Corporation Service Company, 4305 Lancaster
Pike. In the event that the business address of said registered agent in said
State shall at any time be changed, the address of the corporation's
registered office shall be deemed to have changed correspondingly.
SECTION 2. The corporation may also have an office or offices in the
Village of Oak Brook, Illinois, and at such other places as the Board of
Directors may from time to time designate.
ARTICLE II
CORPORATE SEAL
SECTION 1. The corporate seal shall have inscribed thereon the name of
the corporation and the words "Corporate Seal, Delaware".
ARTICLE III
MEETINGS OF STOCKHOLDERS
SECTION 1. The annual meeting of stockholders for the election of
directors shall be held on such date between April 10 and June 10 of each
year as shall be designated in a written communication mailed not less than
160 days prior to the designated date to each holder of record of a share of
Class A stock of the corporation as of a date no earlier than 40 days
preceding the date of such mailing. The Board of Directors shall adopt a
resolution establishing each annual meeting date as designated in such
communication, the purpose of which is to inform the Class A stockholders of
the annual meeting date in advance of the commencement of the time period
specified in Article XXIII, Section 3 of the By-laws for the submission to
the President or Secretary of the corporation of proposed By-law amendments,
director nominations, or other matters by a stockholder or stockholders. At
each annual meeting the stockholders shall elect by plurality vote (and by
written ballot unless the same shall be waived or dispensed with by a majority
vote of the stockholders represented at the meeting) members of the class of
directors whose terms expire at that time, and all directors so elected shall
hold office until the date of the next annual meeting of the stockholders for
the election of directors of such class or until their respective successors
shall have been elected and qualified.
SECTION 2. Special meetings of the stockholders may be called at any
time by the President and shall be called by the President or Secretary on
the request in writing or by vote of a majority of the whole Board of
Directors or at the request in writing of stockholders of record owning ten
percent (10%) in amount of the capital stock outstanding and entitled to
vote. Any special meeting may be called for any specified purpose or
purposes permitted by the General Corporation Law of Delaware and the
Certificate of Incorporation of the corporation.
SECTION 3. All meetings of the stockholders for the election of
directors shall be held at the office of the corporation in Oak Brook,
Illinois, or at such other place within the United States of America as may
from time to time be designated by the Board of Directors and stated in the
notice of the meeting to be given under Article III, Section 6 of the By-laws.
All other meetings of the stockholders shall be held at such place or places
in the United States of America as may from time to time be designated by the
Board of Directors and stated in the notice of meeting. Each meeting of the
stockholders shall be held at such time of day as shall be approved by the
Board of Directors.
SECTION 4. A complete list of the stockholders entitled to vote at any
meeting thereof, arranged in alphabetical order and showing the address of
each stockholder and the number of shares registered in the name of each
stockholder, shall be prepared by the Secretary or by such person as shall be
designated by him to prepare such list. The list shall be kept on file at the
registered office of the corporation in the State of Illinois and shall be
subject to inspection by any stockholder at any time during usual business
hours for a period of ten (10) days prior to the meeting, and the same shall
also be produced and kept open at the time and place of the meeting and shall
be subject to the inspection of any stockholder during the whole time of the
meeting.
SECTION 5. Each stockholder entitled to vote shall, at every meeting of
the stockholders, be entitled to one vote in person or by proxy, signed by
him, for each share of voting stock held by him. Such right to vote shall be
subject to the right of the Board of Directors to close the transfer books or
to fix a record date for voting stockholders not more than sixty (60) nor less
than ten (10) days before the date of the meeting as hereinafter provided,
and if the directors shall not have exercised such right, no share of stock
shall be voted on at any election for directors which shall have been issued
or transferred on the books of the corporation within twenty (20) days next
preceding such election.
SECTION 6. Written notice of the time and place of the annual meeting
and of any special meeting of stockholders shall be mailed or personally
delivered to each stockholder entitled to vote thereat not less than thirty
(30) nor more than sixty (60) days prior to the date of the meeting. If
mailed, such notice shall be deemed to be delivered when deposited in the
United States mail in a sealed envelope addressed to the stockholder at his
address as it appears on the records of the corporation, with postage prepaid
thereon. Notice of any special meeting shall state in general terms the
purposes for which the meeting is to be held.
SECTION 7. The holders of a majority of the stock outstanding and
entitled to vote at any meeting of the stockholders, represented in person or
by proxy, shall constitute a quorum for the transaction of business at such
meeting. In the absence of a quorum, the stockholders attending or
represented at the time and place for such meeting may adjourn the meeting
from time to time, without notice other than announcement of the time and
place of the adjourned meeting at the meeting at which the adjournment is
taken, until a quorum shall be present. At any such adjourned meeting at
which a quorum shall be present, any business may be transacted which might
have been transacted at the meeting as originally scheduled.
ARTICLE IV
DIRECTORS
SECTION 1. The property and business of the corporation shall be
managed and controlled by a Board of Directors, which shall be comprised of
no fewer than 9 and no greater than 12 directors, as shall be fixed from time
to time by the Board of Directors. A minimum of 9 of the directors shall be
dealer directors. No person shall be eligible for election or appointment as
a dealer director (whether as a regional dealer director or as a dealer
director at large), or to continue to hold office as a dealer director,
unless such person is either the owner of a retail business organization
which is a stockholder of Ace Hardware Corporation, or an executive officer,
general partner or general manager of such a retail business organization.
Dealer directors representing the regions established under Article IV,
Section 4 hereof, shall be regional dealer directors. Subject to Article IV,
Section 4(b) hereof, any additional dealer director(s) may be dealer
director(s) at large, rather than regional dealer director(s). A maximum of 2
of the directors of Ace Hardware Corporation may be non-dealer directors. A
person shall be eligible for election or appointment as a non-dealer director
without regard to whether or not such person is the owner of a retail
business organization which is a stockholder of Ace Hardware Corporation, or
an executive officer, general partner or general manager of such a retail
business organization.
SECTION 2. The directors shall be divided into three classes, as nearly
equal in number as possible, as determined by the Board of Directors. The
first of said classes shall include 4 dealer directors elected for 3-year
terms at the annual meeting of stockholders held in 1994. The second of said
classes shall include 3 dealer directors, elected for 3-year terms at the
annual meeting of stockholders held in 1993. The third of said classes shall
include 3 dealer directors and one non-dealer director elected for 3-year
terms at the annual meeting of stockholders held in 1995, plus one non-dealer
director position for a three-year term to be filled at the 1998 annual
meeting of stockholders. At each subsequent annual meeting of the
stockholders, as the terms of each class of directors expire, directors of
the class whose terms expire shall be elected for terms of 3 years. The
directors shall be elected by the stockholders, except that if there be any
vacancies in the Board by reason of death, resignation or otherwise, or if
there be any newly created directorships resulting from any increase in the
authorized number of directors which is to take effect prior to the next
annual meeting of stockholders, a majority of the directors then in office
(though less than a quorum) shall have authority to fill any such vacancy or
any newly created directorship for the unexpired term. In no event shall any
term for which any director is elected exceed three years.
SECTION 3. In the event that, for any reason other than a revision made
by the Board of Directors as to the States to be included within particular
regions or a change made by the Board in the number of regions, a dealer
director ceases to satisfy the eligibility requirements which are applicable
to his/her position as a director, his/her membership on the Board of
Directors shall thereupon immediately terminate. No director elected or
appointed shall be eligible for subsequent election or appointment to any
position on the Board if such election or appointment would result in
his/her being elected or appointed to serve a total of more than 9 years as
such a director, except (1) that a dealer director that has been elected and
holds the office of Chairman of the Board shall be eligible for election for
one additional 3-year term, and (2) the President of the Corporation, if
elected as a director, shall be eligible for election or reelection or
appointment as a director at any time without regard to the period of time
during which he has previously served as a director. However, notwithstanding
the foregoing provisions one director and one former director who would not
otherwise be eligible for election in 1998 may be elected at the annual
meeting of stockholders to be held in 1998, each for one additional three-year
term. At all annual meetings of the stockholders, all holders of Class A
stock of Ace Hardware Corporation as of the record date established for
voting at the meeting shall be eligible to vote in the election for each
position on the Board of Directors to be filled at such meeting.
SECTION 4. The following procedure shall be utilized in determining
dealer director regions:
(a) The Board of Directors shall divide the United States into
such number of geographic regions as it shall deem appropriate as
regions from which regional dealer directors shall be chosen.
(b) No later than the fifteenth day of October
preceding the date of each annual meeting of stockholders,
the Board shall determine the regions from which each regional
dealer director to be elected at such meeting shall be chosen.
No dealer director shall be eligible to serve as a regional
dealer director from a particular region unless the headquarters
store or office of the stockholder of Ace Hardware Corporation
of which he is an owner, executive officer, general partner, or
general manager is located in such region. If the Board
determines that all regions have representation by regional
dealer director(s) and the maximum number of directors would not
thereby be exceeded, then dealer director(s) at large may be
elected.
(c) Each region shall consist of such of the States of
the United States as shall be determined by the Board of
Directors, which shall have authority from time to time to
make revisions as to the States included within particular
regions as well as to change the number of regions, provided that
no such revision or change shall deprive any director holding
office at the time the revision or change is made from
continuing to serve for the balance of the term for which he was
elected or otherwise chosen.
SECTION 5. Without affecting the right of any Class A stockholder to
nominate as a candidate for election to membership on the Board of Directors
any person who would be eligible to serve as a director in accordance with
the procedure specified in Article XXIII, the Board of Directors shall cause
nominees to be selected for election as directors at each annual meeting of
stockholders for whom proxies will be solicited on behalf of the Board. At
the time that the Board determines the regions from which regional dealer
directors are to be elected at the next annual meeting of the stockholders,
the Board shall also determine whether each incumbent director who is
eligible to be reelected for another term at such annual meeting shall be
selected as a Board-endorsed nominee for reelection from any such region at
said meeting. Each such determination shall be made by the Board without
participation in its proceedings by the director who is eligible to be
reelected at such next annual meeting. If the Board determines that proxies
shall be solicited on its behalf for the election of a director at the next
annual meeting of stockholders of a non dealer director or a dealer director
at large, the Board shall make a timely determination to this effect. The
following procedure shall be applied by the Board in selecting all other
Board-endorsed regional dealer director nominees for whom proxies will be
solicited on the Board's behalf at the next annual meeting.
(a) A standing Nominating Committee established by the
Board shall submit to the Board as soon as practicable prior
to the last regularly scheduled meeting of the directors in
each calendar year a list of such number of persons as the
Board shall determine who are recommended by such Committee
to be considered as members of a candidate selection committee
for each director region from which the Board has determined
that a new regional dealer director should be elected at the
next annual meeting of the stockholders.
(b) At or prior to its last regularly scheduled meeting
in each calendar year, the Board shall create such a
candidate selection committee for each such director region
and shall select as members of each such candidate selection
committee five of the persons recommended by the Nominating
Committee plus two incumbent members of the Board. The Board
may also select such alternate members, if any, of any such
candidate selection committee as it deems appropriate.
(c) Each candidate selection committee shall make a
timely designation of one of its eligible members as the
person on whose behalf proxies will be solicited at the next
annual meeting as a Board-endorsed nominee for election as a
regional dealer director.
SECTION 6. Notwithstanding any of the foregoing provisions, in any
instance where a Board-endorsed nominee for election as a director becomes
ineligible under the provisions of the By-Laws for election as a dealer
director or shall decline to run or seek reelection or shall be unable to
run or seek reelection by reason of death or disability, or shall, in the
case of an incumbent director have resigned or been removed from the Board of
Directors subsequent to having been named a Board-endorsed nominee, or in any
instance where the Board of Directors, having endorsed a nominee for election
as a director shall withdraw or revoke such endorsement, then in the case of
a non-dealer director nominee or a dealer director at large nominee, the
Board may endorse another non-dealer candidate or dealer director at large
candidate, as the case may be, on whose behalf proxies will be solicited at
the next annual meeting as a Board-endorsed nominee for election as a
director. In case of a regional dealer director nominee, the standing
Nominating Committee established by the Board shall submit to the Board as
soon as practicable, a list of such number of persons as the Board shall
determine who are recommended by such committee to be considered as members of
a candidate selection committee for that particular director region. The
Board shall at a regularly scheduled meeting or a special meeting of the
directors as soon as practicable, create a candidate selection committee for
that director region and shall select as members of the candidate selection
committee five persons recommended by the nominating committee plus two
incumbent members of the Board. The Board may also select such alternate
members, if any, of any such candidate selection committee as it deems
appropriate. The candidate selection committee shall then make a timely
designation of one of its eligible members as the person on whose behalf
proxies will be solicited at the next annual meeting as a Board-endorsed
nominee for election as a regional dealer director.
SECTION 7. The number of non-dealer directors elected or appointed to
office shall be limited so that non-dealer directors shall not exceed
twenty-five percent (25%) of the total number of directors in office at any
one time. The foregoing twenty-five percent (25%) limitation on the number of
non-dealer directors may be further amended, repealed, or added to only at a
regular or special meeting of the shareholders in accordance with Article
XXIII, Section 2.
ARTICLE V
POWERS OF DIRECTORS
SECTION 1. The Board of Directors shall have, in addition to such powers
as are hereinafter expressly conferred on it, all such powers as may be
exercised by the corporation, subject to the provisions of the statute, the
Certificate of Incorporation and the By-Laws.
SECTION 2. The following powers are hereby expressly conferred upon the
Board of Directors:
(a) to purchase or otherwise acquire property, rights
or privileges for the corporation, which the corporation has
power to take, at such prices and on such terms as the Board
of Directors may deem proper;
(b) to pay for such property, rights or privileges in
whole or in part with money, stock, bonds, debentures or
other securities of the corporation (secured by mortgages or
otherwise), or by the delivery of other property of the
corporation;
(c) to create, make and issue mortgages, bonds, deeds,
leases, trust agreements and negotiable or transferable
instruments and securities, and to do every act and thing
necessary to effectuate the same;
(d) to appoint agents, consultants, advisors and
trustees, and to dismiss them at its discretion, to fix
their duties and emoluments and to change them from time to
time and to require such security as it may deem proper;
(e) to confer on any officer or officers of the
corporation the power of selecting, discharging or
suspending any of the persons referred to in subsection (d)
of this Section;
(f) to determine by whom and in what manner the
corporation's bills, notes, receipts, acceptances,
endorsements, checks, releases, contracts or other documents
shall be signed;
(g) irrespective of any personal interest of any of its
members, to determine the amount of compensation, if any, to
be paid to directors and to members of the Executive Committee
and other Committees established by the Board of Directors for
their services to the corporation as directors or Committee members.
ARTICLE VI
MEETINGS OF DIRECTORS
SECTION 1. An annual organizational meeting of the Board of Directors
as constituted after the election of directors at each annual meeting of the
stockholders shall be held without call or formal notice at a time later in
the same day as the annual meeting of the stockholders or during the day next
following such stockholders meeting. The specific date of each such meeting of
the Board, as well as the time and place thereof, shall be determined at one
of the meetings of the Board held during the time between the most recently
conducted annual stockholders meeting and the next scheduled annual
stockholders meeting. In addition to electing officers of the corporation as
provided for in Article VIII, Section 2, the Board shall select the members of
its standing committees for the period until its next annual organizational
meeting and shall give voting directions to the President as to the persons
to be elected by the corporation as members of the Boards of Directors of
each of its wholly-owned subsidiary corporations at their respective annual
meeting times.
SECTION 2. Additional regular meetings of the Board of Directors may be
held upon such notice, or without notice, and at such time and at such place
as shall from time to time be determined by the Board.
SECTION 3. Special meetings of the directors may be called by the
Chairman of the Board on four (4) days' notice by mail (calculated from the
date of mailing) or on two days' notice by telephone to each director and
shall be called by the Chairman of the Board in like manner on the written
request of not less than four (4) directors. Special meetings of the
directors may be held within or without the State of Delaware at such place
as is indicated in the notice or waiver of notice thereof.
SECTION 4. A majority of the total number of directors then holding
office shall constitute a quorum for the transaction of business. If at any
meeting of the Board there shall be less than a quorum present, a majority of
the directors present may adjourn the meeting from time to time, without
notice other than announcement at the meeting, until a quorum is secured.
ARTICLE VII
COMMITTEES ESTABLISHED BY THE BOARD
SECTION 1. The Board of Directors shall establish as standing committees
of the Board an executive committee and such other committees as it shall
deem from time to time to be appropriate. The Chairman of the Board shall be
an ex-officio member of any standing committee if the resolution adopted by
the Board with regard to the membership of such committee so provides, except
for any committee authorized to grant or withhold consent to the transfer of
shares of the corporation's stock pursuant to Article XVI, Section 9 of these
By-laws. Each such committee shall have such responsibilities and duties as
shall be described in a resolution or resolutions adopted by a majority of
the whole Board. Such resolution or resolutions may also establish the number
(or the minimum and maximum numbers) of persons to be selected to serve on
each of said committees, the voting members of each of which shall be members
of the Board. The Board shall also have authority from time to time to
establish special ad hoc committees comprised of two or more directors, the
specific responsibilities of which shall be described in the resolutions
creating them.
SECTION 2. One or more directors may be designated by the Board as
alternate members of any standing or special ad hoc committee, who may
replace any absent or disqualified committee member at any meeting of the
committee. Vacancies in the membership of any committee established by the
Board shall be filled only by the Board.
SECTION 3. In no event shall the executive committee or any other
committee established by the Board have the power or authority at any time to
take any final action on behalf of the Board with respect to (a) proposing
amendments to the corporation's certificates of incorporation, (b) the
adoption of any amendments to the By-laws of the corporation, (c) the
adoption of an agreement of merger or consolidation, (d) the making of
recommendations to the stockholders for the sale, lease, or exchange of all
or substantially all of the corporation's property or assets, (e) the making
of recommendations to the stockholders for the dissolution of the corporation
or the revocation of a dissolution, (f) the making of any proposals submitted
to the Board with respect to the purchase of all or a controlling portion of
the outstanding capital stock of the corporation, (g) the authorization of
issuance of shares of capital stock of the corporation or (h) the filling of
vacancies in the membership of the Board or any committee thereof.
SECTION 4. Each standing committee of the Board (with the exception of
any committee authorized to grant or withhold consent to the transfer of
shares of the corporation's stock pursuant to Article XVI, Section 9 of
these By-laws) shall select one of its members to act as Chairman thereof
as promptly as feasible after the members of the committee are selected at
each annual organizational meeting of the Board. At the time of establishment
of any special ad hoc committee of the Board, the Board shall designate a
member of such committee to act as its Chairman.
SECTION 5. Regular meetings of each standing committee established by
the Board shall be held as provided for in a resolution adopted by the Board,
or by a particular committee or its Chairman if authorized in a resolution of
the Board. Special meetings of any standing committee, and all meetings of any
special ad hoc committee, shall be held on reasonable notice given to all
members thereof by the Chairman of the committee. Even if he has not been
made a member of a particular standing committee, the Chairman of the Board
shall be provided with the same notice of all regular or special meetings of
such committee as is provided to members of the committee, and he shall have
the right to attend any of the meetings held by the committee in an advisory
non-voting capacity. Subject to the provisions of the resolution describing
the responsibilities and duties of a particular committee established by the
Board, any such committee shall have authority to establish its own rules of
procedure. The Chairman of each committee of the Board which is required by
these By-laws to have one of its members designated as its Chairman shall be
responsible for assuring that: (a) an appropriate agenda is prepared for each
formal meeting of the Committee; (b) minutes of the proceedings of each such
meeting are kept; and (c) either a copy of such minutes or a summarized
written report of the meeting is submitted to the Board at or prior to the
next meeting of the Board.
SECTION 6. A majority of the voting members of any committee hereunder
shall constitute a quorum for meetings thereof, but the affirmative vote of a
majority of all voting members of the whole committee shall be necessary with
respect to all actions taken by the committee.
SECTION 7. With the exception of the Chairman of any committee of the
type described in the first sentence of Section 4 of this Article VII, the
Board may authorize the payment to the Chairman of any standing or special
ad hoc committee of compensation for the services rendered by him in his
capacity as Chairman in such amount as the Board shall deem to be
appropriate. Such compensation shall be in addition to the compensation paid
to dealer directors for their regular services as members of the Board.
ARTICLE VIII
OFFICERS OF THE CORPORATION
SECTION 1. There shall be elected by the Board of Directors the
following executive officers of the corporation: (a) a Chairman of the Board
and, if deemed appropriate by the directors, a Vice Chairman of the Board,
each of whom shall be elected from the membership of the Board of Directors;
(b) a President; (c) a Treasurer; and (d) one or more Executive Vice
Presidents, Senior Vice Presidents, or Vice Presidents as the Board shall
deem the business of the corporation to require from time to time. In
addition the Board of Directors shall elect as corporate (but not executive)
officers of the corporation a Secretary and such Assistant Secretaries as the
Board shall determine to be appropriate. The board shall also elect from time
to time such other additional executive or corporate officers as in its
opinion are desirable for the conduct of the business of the corporation. Any
number of offices filled by election of the Board may be held by the same
person, except the offices of President and Secretary. Any executive officer
of the corporation may bestow upon any employee of the corporation under his
supervision such title or titles descriptive of the position held by such
employee as such executive officer shall deem to be appropriate, provided
that no such title shall be the same as or confusingly similar to the title
of any officer elected by the Board, and provided further that no such title
shall be deemed to bestow the status of an executive officer or corporate
officer upon such employee nor to empower him with any authority to act on
behalf of the corporation other than such authority as shall have expressly
been assigned to him by the executive officer bestowing such title upon him.
SECTION 2. All executive officers and corporate officers of the
corporation shall be elected by the Board of Directors for one-year terms at
the regular meeting thereof following the annual meeting of stockholders,
provided that, in any event, any such officer shall hold office until his
successor has been elected and qualified or until his death, resignation or
removal from office. In the case of any officer with whom an employment
contract employing him to perform the functions of a specific office for a
period extending beyond one year has been entered into, the office or offices
to which he is elected at each such meeting of the Board of Directors shall
constitute the office or offices with respect to which he is employed under
such employment contract during the ensuing year. The Board of Directors
shall have authority to direct that the corporation enter into an employment
contract with any executive officer or other employee for the purpose of
employing him for a specified period of time, and no such contract shall be
legally binding upon the corporation unless the same has been expressly
authorized by the Board and has been executed on behalf of the corporation by
the Chairman of the Board, the President, an Executive Vice President, a
Senior Vice President or a Vice President of the corporation. In no event
shall any such employment contract extend for an initial term of more than
five years, but any such contract may contain a provision whereby the
contract is automatically renewed for additional successive terms of not
less than three years each, provided that the corporation is given the right
to terminate the contract at the end of the initial term or renewal term by
giving notice to the executive officer or other employee involved of its
intention to do so by such specific period of time prior to the last day of
the initial term or the then current renewal term as shall be set forth in
the contract. Authorization of any such employment contract shall require the
affirmative vote of a majority of the whole Board of Directors then in
office. Subject to such contractual rights (if any) as may exist with respect
to his employment, any executive officer or other officer elected or
appointed by the Board of Directors may be removed from office at any time,
with or without cause, by the affirmative vote of a majority of the whole
Board of Directors then in office. If the office of any executive officer or
other officer elected or appointed by the Board of Directors becomes vacant
for any reason, the vacancy shall be filled by the affirmative vote of a
majority of the whole Board of Directors then in office.
SECTION 3. In case of the absence or disability of any executive officer
or any other officer of the corporation elected or appointed by the Board of
Directors, or for any other reason deemed sufficient by a majority of the
whole Board of Directors then in office, and subject to such contractual
rights as may exist with respect to the employment of any such officer, the
Board of Directors may delegate the powers or duties of any such officer to
any other officer, or to any director, for the time being.
SECTION 4. In addition to executive officers, certain employees of the
corporation may be designated from time to time by the President as staff
officers, that is, officers upon whom responsibility is conferred with
respect to the operations of a particular department, division, branch or
function of the corporation. Any such staff officer shall be appointed by the
President and may thereafter be removed at any time, with or without cause,
by the President. However, if the Board of Directors elects or appoints an
Executive Vice President, Senior Vice President, Vice President or other
officer pursuant to the authority vested in it by Section 1. above, such
officer may thereafter be removed only by the affirmative vote of a majority
of the whole Board of Directors then in office even though such officer's
title includes one or more words which are descriptive of the particular
department, division, branch or function of the corporation managed by such
officer. The removal of any officer shall be subject to such contractual
rights (if any) as may exist under any contract of employment which has been
entered into with him.
SECTION 5. Unless his compensation has been expressly specified by a
contract of employment entered into with him, the compensation of any
executive officer shall be such amount as shall be determined from time to
time by the Board of Directors. The President shall have sole authority to
determine from time to time the amount of compensation to be paid to any
other officer, except in the case of an officer whose compensation has been
expressly specified in a contract of employment which has been entered into
with him and except in the case of any such officer whose basic annual
compensation would be or is in an amount which equals or exceeds the basic
annual compensation then being paid to any executive officer (exclusive of
the Secretary or any Assistant Secretary or Assistant Treasurer).
ARTICLE IX
DUTIES OF THE CHAIRMAN OF THE BOARD,
VICE CHAIRMAN OF THE BOARD AND PRESIDENT
SECTION 1. The Chairman of the Board shall preside at all meetings of
the stockholders and the Board of Directors and shall perform such other
duties as may be prescribed from time to time by the Board of Directors or
by the By-laws. His specific duties and responsibilities shall include (a)
acting as the primary liaison between the executive officers of the
corporation on the one hand and its Board of Directors and its dealer-
stockholders on the other hand; (b) bringing to the attention of and
consulting with the corporation's executive officers with respect to any
special concerns of the corporation's dealer-stockholders which come to his
attention or to the attention of the Board of Directors; (c) reviewing from
the perspective of the Board of Directors and the corporation's dealer-
stockholders all reports, financial budgets, and corporate plans as developed
and submitted to him from time to time by the corporation's executive officers;
(d) overseeing and aiding in the implementation of plans for orderly
successions to the positions held by the corporation's executive officers and
other important staff personnel; and (e) seeing that the efforts of the
various executive officers and other key management personnel of the
corporation are carried out in a coordinated manner, particularly in periods
when transitions in important officer or management positions occur. Except
where it is provided by law that the signature of the President is required,
the Chairman of the Board shall possess all of the same powers as the
President to sign all certificates for shares of stock of the corporation and
all contracts and other instruments of the corporation which may be
authorized by the Board of Directors.
SECTION 2. If the Board has elected a Vice Chairman of the Board, he
shall preside at all meetings of the stockholders and the Board of Directors
in the absence of the Chairman of the Board, and he shall be empowered to
perform the other duties and exercise the other powers vested in the Chairman
of the Board in the event that the Chairman of the Board is prevented by his
absence, by disability, or otherwise from being able to perform such duties
and powers in connection with a particular matter within the legally
permitted period of time or within such period of time as shall be deemed to
be reasonable and appropriate for action to be taken by the Chairman with
regard to such matter. If there is no director holding the position of Vice
Chairman of the Board, but there is a director (other than the Chairman of the
Board) holding the position of Chairman of the Executive Committee of the
Board, then the Chairman of the Executive Committee shall perform the duties
and exercise the powers described above for the Vice Chairman of the Board
whenever necessary; otherwise, upon the occurrence of any circumstance in
which a Vice Chairman of the Board would have been vested with authority to
perform the duties and exercise the powers of Chairman of the Board, the
Board shall select one of its members as acting Chairman of the Board who
shall be vested with the same authority.
SECTION 3. The President shall be charged with the general and active
management of the day-to-day operations of the corporation and with seeing
that all orders and resolutions of the Board of Directors are carried into
effect. His specific duties and responsibilities shall include (a) reporting
from time to time to the Chairman of the Board on all significant matters
affecting the operations and interests of the corporation which fall within
his knowledge; (b) seeing that short-term and long-term corporate plans and
budgets consistent with the directions of the Board of Directors are prepared
and developed on a regular basis; (c) seeing that the corporation continually
maintains competent personnel at all levels in order to adequately serve the
needs of the retail hardware dealers supplied by it; (d) consulting with the
Chairman of the Board from time to time with respect to the types of programs,
products and services to be made available to the corporation's retail
hardware dealers in order to serve the best interests of the corporation's
entire network of dealers; (e) submitting to the stockholders at their annual
meetings and/or at dealer conventions sponsored by the corporation such
reports on the operations and affairs of the corporation as shall be
appropriate in order to provide them with information of importance to them
as both customers and stockholders of the corporation; and (f) executing on
behalf of the corporation contracts and other instruments in writing,
including mortgages, bonds and governmental reports of various kinds, in all
instances wherein the signature of the President of the corporation is
required or has been authorized by the Board of Directors or is otherwise
deemed to be appropriate. The Board of Directors, in its discretion, may vest
the person holding the office of President of the corporation at any given
time with the additional title of Chief Executive Officer. Whenever the title
of Chief Executive Officer is used as an additional title for the person
holding the office of President, it shall be deemed to relate specifically to
the duties and responsibilities dealing with the development of plans for
orderly successions to the positions held by the corporation's executive
officers and other management personnel and to the ongoing development of
short-term and long-term strategic plans for the corporation to be presented
to and reviewed by the Board of Directors and to the execution of all such
plans as are approved by the Board.
ARTICLE X
DUTIES OF EXECUTIVE VICE PRESIDENTS, SENIOR
VICE PRESIDENTS AND OTHER VICE PRESIDENTS
SECTION 1. Any Executive Vice President elected by the Board of
Directors shall possess the power and may perform the duties of the President
in his absence or disability. Each officer having the title of Executive Vice
President shall perform such other duties as may be prescribed from time to
the time by the Board of Directors.
SECTION 2. Any Senior Vice President elected by the Board of Directors
shall possess the power and may perform the duties herein authorized to be
performed by an Executive Vice President in the event that there is no person
holding the office of Executive Vice President at the time, or in the event
of the absence or disability of all persons then holding the office of
Executive Vice President. Each officer having the title of Senior Vice
President shall perform such other duties as may be prescribed from time to
time by the Board of Directors.
SECTION 3. Any Vice President elected by the Board of Directors shall
possess the power and may perform the duties herein authorized to be
performed by a Senior Vice President in the event that there is no person
holding the office of Senior Vice President at the time, or in the event of
the absence or disability of all persons then holding the office of Senior
Vice President. Each officer having the title of Vice President shall perform
such other duties as may be prescribed from time to time by the Board of
Directors.
SECTION 4. If there shall be more than one person holding the office of
Executive Vice President at any time, or if there shall be more than one
person holding the office of Senior Vice President at any time, or if there
shall be more than one person holding the office of Vice President at any
time, in each such instance the Board of Directors shall designate the order
in which each of them shall possess the power and perform the duties of an
officer of the next higher rank under the applicable one of the above
Sections in the event of the nonexistence, absence or disability of all
such higher ranking officers.
SECTION 5. Notwithstanding any of the above provisions of this Article
X, if the title given to any Executive Vice President, Senior Vice President,
or Vice President also includes one or more words that are descriptive of a
particular department, division, branch or function of the corporation
managed by such officer, the duties of such officer shall consist only of the
general and active management of the operations or activities of such
department, division, branch or function and such other duties as shall have
been specifically assigned to such officer by the Board of Directors.
ARTICLE XI
DUTIES OF CONTROLLER
SECTION 1. In the event that a Controller shall be elected or appointed
at any time by the Board of Directors, or in the event that a staff officer
having the title of Controller is appointed at any time by the President,
such officer shall be responsible to the Board of Directors, the President,
and the Vice President-Finance (if such office has been created and filled),
for all financial control and internal audit of the corporation and its
subsidiaries. He shall also perform such other duties as may be assigned to
him by the Board of Directors or the President.
ARTICLE XII
DUTIES OF THE SECRETARY AND ASSISTANT SECRETARIES
SECTION 1. The Secretary (or an Assistant Secretary) shall attend all
meetings of the Board of Directors and all meetings of the stockholders and
record all the proceedings of the meetings of the corporation and of the
Board of Directors in a book to be kept for that purpose and shall perform
like duties for the standing committees when required. He shall give, or
cause to be given, notice of all meetings of the stockholders and special
meetings of the Board of Directors, and shall perform such other duties as
may be prescribed by the Board of Directors or President, under whose
supervision he shall be. He shall have custody of the corporate seal of the
corporation and he, or an Assistant Secretary, shall have authority to affix
the same to any instrument requiring it and when so affixed, it may be
attested by his signature or by the signature of such Assistant Secretary.
The Board of Directors may give general authority to any other officer to
affix the seal of the corporation and to attest the affixing by his signature.
SECTION 2. The Secretary shall also keep, or cause to be kept by such
person or persons to whom he shall delegate such duty, a register of all
shares of capital stock issued by the corporation and all transfers of such
shares. Such register shall be maintained in such manner and subject to such
regulations as the Board of Directors may prescribe.
SECTION 3. The Assistant Secretary, or if there be more than one (1),
the Assistant Secretaries in the order determined by the Board of Directors,
shall, in the absence or disability of the Secretary, perform the duties and
exercise the powers of the Secretary and shall perform such other duties and
have such other powers as the Board of Directors may from time to time
prescribe.
ARTICLE XIII
DUTIES OF THE TREASURER
SECTION 1. The Treasurer shall have the custody of the corporate funds
and securities and shall keep full and accurate accounts of receipts and
disbursements in books belonging to the corporation and shall deposit all
moneys and other valuable effects in the name and to the credit of the
corporation in such depositories as may be designated by the Board of
Directors.
SECTION 2. He shall disburse the funds of the corporation, taking
proper vouchers for such disbursements, and shall render to the President and
the Board of Directors at its regular meetings, or when the Board of
Directors so requires, an account of all his transactions as Treasurer and of
the financial condition of the corporation.
SECTION 3. If required by the Board of Directors, he shall give the
corporation a bond in such sum and with such surety or sureties as shall be
satisfactory to the Board of Directors for the faithful performance of the
duties of his office and for the restoration to the corporation, in case of
his death, resignation, retirement or removal from office, of all books,
papers, vouchers, money and other property of whatever kind in his
possession or under his control belonging to the corporation.
ARTICLE XIV
WRITTEN CONSENTS AND CONFERENCE TELEPHONE MEETINGS
SECTION 1. To the extent permitted by the General Corporation Law of
the State of Delaware, and in accordance with the applicable procedure
prescribed by the provisions thereof, whenever a vote or resolution of
stockholders, the Board of Directors, or a committee of the Board at a
meeting is required or permitted in connection with any corporate action by any
provision of law, the Certificate of Incorporation, these By-laws, or any
unrevoked resolution previously adopted by the Board, the meeting and vote or
resolution may be dispensed with and the corporate action may be taken
pursuant to written consent. The writing evidencing such consent shall be
filed with the minutes of the proceedings of the stockholders, Board, or
committee.
SECTION 2. In accordance with the applicable procedure prescribed by the
General Corporation Law of the State of Delaware, members of the Board of
Directors, or of any committee of the board, may participate in a meeting of
the Board, or of any such committee, by means of conference telephone or similar
communications equipment by means of which all persons participating in the
meeting can hear each other, and such participation shall constitute presence
in person at such meeting.
ARTICLE XV
INDEMNIFICATION OF OFFICERS, DIRECTORS,
EMPLOYEES AND AGENTS
SECTION 1. In accordance with the provisions of Section 145 of the
General Corporation Law of the State of Delaware, and as more fully provided
for in Article EIGHTH (b) of the restated Certificate of Incorporation of Ace
Hardware Corporation, as amended, persons serving as directors, officers,
employees or agents of or at the request of the corporation shall be
indemnified against all expenses, liabilities and losses (including attorneys'
fees, judgments, fines, excise taxes or penalties under the U.S. Employee
Retirement Income Security Act, as amended, and amounts paid or to be paid in
settlement) reasonably incurred or suffered by them in connection with any
action, suit or proceeding (whether civil, criminal, administrative or
investigative) instituted or threatened to be instituted against them by
reason of their service in any of the aforementioned capacities on behalf of
the corporation or at its request.
ARTICLE XVI
CERTIFICATES OF STOCK AND TRANSFER THEREOF
SECTION 1. The shares of the corporation shall be represented by
certificates signed by the Chairman of the Board or the President and the
Secretary or an Assistant Secretary or the Treasurer or an Assistant
Treasurer of the corporation and may be sealed with the seal of the
corporation or a facsimile thereof.
SECTION 2. The signatures of the officers of the corporation upon a
certificate may be facsimiles. In case any officer who has signed or whose
facsimile signature has been placed upon such certificate shall have ceased
to be such officer before such certificate is issued, it may be issued by the
corporation with the same effect as if he were such officer at the date of its
issue.
SECTION 3. Each certificate of stock shall have conspicuously noted or
stated thereon a statement of the liens, restrictions and limitations upon
the voting power, ownership, transfer or other rights and privileges of the
holder thereof. All shares of stock in the corporation shall be issued and
accepted in accordance with and subject to the conditions, restrictions, and
offsetting liens stipulated in the Certificate of Incorporation and By-laws
of this corporation and amendments thereto.
SECTION 4. If a certificate of stock be lost or destroyed, another may
be issued in its stead upon proof of such loss or destruction and the giving
of a satisfactory bond of indemnity, in an amount sufficient to indemnify the
corporation against any claim. A new certificate may be issued without
requiring bond when, in the judgment of the directors, it is proper to do so.
SECTION 5. The corporation shall have a first lien upon each share of
its issued and outstanding stock of any class, and upon each certificate of
stock representing a share or shares of stock of any class of the corporation,
for the amount of any indebtedness payable to the corporation by the holder
thereof, and shall have a similar first lien upon all amounts which have
been paid to the corporation pursuant to a subscription agreement for the
purchase of shares of stock of the corporation which will be issuable to the
subscriber upon the completion of payment of the purchase price of the shares.
The interest of each holder of shares of the corporation's stock in and to the
shares issued to such holder and the interest of each subscriber for shares of
the corporation's stock in and to the funds paid to the corporation by such
subscriber on account of the purchase price of the shares being purchased by
such subscriber shall at all times be deemed to be offset by the amount of
any indebtedness payable to the corporation by such holder or subscriber. In
no event shall any transfer of any of the shares owned by any holder or any
transfer of the stock subscription account of any subscriber for shares of
stock of the corporation be made unless and until the stockholder whose
shares are being transferred or the subscriber whose subscription account is
being transferred is free from all indebtedness to the corporation.
SECTION 6. No certificate representing any issued and outstanding share
or shares of any class of stock of the corporation shall be pledged, mortgaged,
hypothecated, sold, assigned or transferred without the prior consent of the
Board of Directors of the corporation. In the event that the Board of
Directors shall refuse to consent to any transfer or assignment of any
certificate or certificates representing any share or shares of issued and
outstanding stock of the corporation of any class, then the corporation shall
have the right and shall be obligated to purchase from the owner thereof all
of the shares of its stock of any class held for the store or other retail
business unit with respect to which the corporation issued the share or shares
as to which such consent has been refused and the franchise granted by this
corporation with regard to the operation of such retail business unit shall
thereby be terminated. In no event shall any transfer or assignment of shares
of any class of stock of the corporation be made to any transferee who is not
eligible to be a holder of such shares under the provisions of Article Fourth
of the restated Certificate of Incorporation of the corporation. In the case
of a proposed transfer of ownership of a store or other retail business unit
owned by a holder of shares of stock of the corporation to a transferee which
the corporation has accepted or is willing to accept as a franchised Ace
Hardware dealer, then the owner of such stock shall have the option of either
(a) selling or otherwise transferring to such transferee such number of shares
of stock of this corporation of any class which the corporation would
otherwise have been required to offer to such transferee in connection with
the franchise granted to such transferee with respect to such store or other
retail business unit, or (b) selling such shares to the corporation. In anycase
where the holder or holders of 50% or more of the outstanding voting
stock of a corporation having a franchise from this corporation for one or
more retail business outlets, or the holder or holders of 50% or more of the
outstanding voting stock of a corporation owning 80% or more of the
outstanding voting stock of a corporation having such a franchise, propose to
sell or otherwise transfer all of the shares of capital stock (both voting and
non-voting) of such corporation held by them, written notice of such proposal
shall be given to this corporation, and upon the consummation of any such sale
or transfer, such corporation shall have the option of either (a) retaining
all of the shares of the capital stock of this corporation then held by it or
(b) selling such shares to this corporation, but in the case of such a sale of
said shares to this corporation, the franchise granted to said corporation by
this corporation for each retail business unit operated by said corporation
shall thereupon be deemed to have terminated by the voluntary action of said
corporation and no such retail business unit shall thereafter operate as a
franchise of this corporation unless a new application for a franchise for
such retail business unit has been submitted to and accepted by this
corporation. Notwithstanding any of the foregoing provisions, this corporation
shall in no event be obligated to treat any of the following types of
transfers as qualifying for purposes of the options provided for in this
Section 6 of selling to this corporation shares of its capital stock: (a) any
transfer of ownership of a retail business outlet or unit or of shares of the
capital stock of a corporation directly or indirectly owning such outlet or
unit which is not complete, unconditional and irrevocable; (b) any such
transfer to an entity in which the transferor retains an ownership interest;
or (c) any such transfer to the spouse of the transferor.
SECTION 7. Subject to the provisions of Section 5 of this Article XVI of
these By-laws, in the event of the termination of the franchise granted by
this corporation with regard to the operation of a retail hardware store or
other retail business unit for which shares of stock of the corporation are
held, the corporation shall be obligated to purchase such shares. Unissued
shares which have been subscribed for with respect to any such store or other
retail business unit shall also be covered by the provisions of this Section
to the extent of the amounts which have been paid on account of the purchase
price thereof, and the corporation shall be obligated to refund all such
amounts, subject only to the provisions of Section 5 of this Article XVI. For
purposes of this Section, termination of the franchise granted for a
particular retail hardware store or other retail business outlet shall
include not only any termination pursuant to formal notice of termination
given by either this corporation or the holder of the franchise but shall
also include each of the following situations which shall be deemed to
constitute such a termination:
(a) The closing down of the store or other retail business unit
with respect to which such shares of stock of the corporation are held,
unless such store or other retail business unit is merely being moved,
with the corporation's consent and approval, to another location or is
being acquired by another dealer which this corporation has accepted
or is willing to accept as a franchised dealer for operation pursuant
to the same franchise at another location;
(b) The death of an individual holder of the shares of stock
of this corporation held for such retail store or other retail business
unit, or of a member of a partnership which is a holder of such shares,
except in a case where the store or other retail business unit with
respect to which such shares are held continues, with the approval of
the officers of the corporation (which approval shall not be
unreasonably withheld), to be operated under a franchise from the
corporation by the decedent's estate or by the person or persons to
whom such shares are to be distributed by the decedent's estate or by
the successor or successors to the decedent's interest in the
partnership holding such shares (it being immaterial for this purpose
that, in connection with such continuation of operation, the legal
form of ownership of the franchised dealer has been changed from an
individual proprietorship or partnership to a corporation or from a
partnership to an individual proprietorship);
(c) An adjudication of the insolvency of the dealer or of the
store or other retail business unit for which the shares of stock of
this corporation are held, or the making of an assignment for the
benefit of creditors or the filing of a voluntary petition in bankruptcy
or similar petition under the U.S. Bankruptcy Code by or on behalf of
such dealer or retail business unit, or the filing of an involuntary
petition in bankruptcy or similar petition under the U.S. Bankruptcy
Code against the dealer or against said retail business unit.
SECTION 8. A transfer of shares of stock of the corporation requiring
the consent of the Board of Directors shall not be deemed to have occurred
upon the death of a person who is the holder of shares of stock of the
corporation jointly with one or more other persons under circumstances
whereby ownership of such shares passes automatically by operation of law to
the surviving holder or holders of such shares, nor shall the corporation
become obligated to purchase such shares upon the death of such person unless
the store or other retail business unit with respect to which such shares are
held either (a) closes down, or (b) ceases to be operated under a franchise
from this corporation.
SECTION 9. The Board of Directors may delegate to a committee composed
of two (2) or more members of the Board authority to act on its behalf with
respect to all matters where the consent of the Board is required in
connection with the transfer or assignment of any shares of any class of
stock of the corporation.
SECTION 10. The price to be paid by the corporation in connection with
the purchase by it of any shares of its stock shall be as follows:
(a) in the case of Class A stock, the par value of the shares;
(b) in the case of Class B stock, an amount per share
equal to the per share price last established by the Board
of Directors as the price to be paid by the corporation in
the event of redemption of shares of its Class B stock,
which shall in no event be less than twice the par value of the
Class B stock and shall also at all times be equal to twenty
(20) times the per share purchase price last established by the
Board of Directors with respect to purchases by it of Shares of
its Class C Stock;
(c) in the case of Class C stock, an amount per share
equal to the per share price last established by the Board
of Directors as the purchase price to be paid by the
Corporation for shares of its Class C stock, which price shall
in no event be less than the par value thereof.
SECTION 11. Any shares of any class of stock of the corporation which
are purchased by it from any stockholder shall become treasury shares which
shall be eligible for sale to any other person, persons or firm which shall
be qualified to hold such shares.
SECTION 12. Effective with respect to all purchases and redemptions of
shares of its capital stock made by the corporation from its stockholders on
or after December 31, 1981, the entire purchase or redemption price to be
paid by the corporation for such shares shall be paid in cash except that, in
any of the situations described in subsection (a) hereof, the purchase or
redemption price for such shares shall be paid in the manner set forth in
subsection (b) hereof.
(a) The situations in which such price shall be paid in
the manner set forth in subsection (b) of this Section are
as follows:
(1) the voluntary termination by a stockholder of
this corporation of the franchise from this corporation
held by such stockholder for a retail business outlet
under circumstances whereby such outlet continues to
engage in substantially the same business under the
ownership or control of the same person, partnership or
corporation that owned or controlled it immediately prior
to such termination; for purposes of this paragraph:
(A) control of an outlet owned by an
unincorporated person or partnership shall be
deemed to be the same if more than fifty percent
(50%) of the assets or profit shares therein, or
more than fifty percent (50%) of the capital stock
of a corporation becoming the owner of such outlet,
continues to be legally or equitably owned by the
same person, partnership or corporation; and
(B) control of an outlet owned by a
corporation shall be deemed to be the same if
more than fifty per cent (50%) of the capital
stock of said corporation, or more than fifty percent
(50%) of the assets or profit shares of an unincorporated
person or partnership becoming the owner of such outlet,
continues to be owned by the same person, partnership
or corporation.
(2) the termination by this corporation of the
franchise from this corporation for a retail business
outlet pursuant to the provisions of the Ace Dealer
Franchise Agreement authorizing such termination by
reason of:
(A) the failure of such retail business
outlet to make any payment owing to the corporation
for merchandise or services supplied by it within
the time period specified in such provisions; or
(B) any default of such retail business
outlet in performing any obligation of such outlet
under the Ace Dealer Franchise Agreement of such
outlet other than the obligation to pay for merchandise
or services supplied by the corporation, provided
that such default is described in the corporation's
notice of termination in such a manner as to reasonably
apprise such retail business outlet as to the nature of
such default.
(b) In each of the situations described in subsection (a)
above, the purchase or redemption price to be paid by the
corporation for the shares of its stock being purchased or
redeemed by it shall be paid in the following manner:
(1) in the case of Class A stock, the entire price
shall be paid by the corporation in cash;
(2) in the case of Class B stock or Class C stock
purchased by a stockholder as part of the shares of capital
stock of the corporation subscribed for in connection with
the granting of a franchise by the corporation for a retail
business outlet, that portion of the purchase or redemption
price to be paid by the corporation which equals the amount paid
to the corporation pursuant to such subscription shall be paid
by the corporation in cash and any remaining balance of the price
(with interest thereon) shall be paid by the corporation in
equal annual installments over a period of four years;
(3) in the case of Class C stock received by a
stockholder as part of the patronage dividends distributed
by the corporation for a retail business outlet, the entire
price (with interest thereon) shall be paid by the corporation
in equal annual installments over a period of four years;
(4) if the total portion of the purchase or redemption
price which would otherwise be payable under the foregoing
paragraphs in equal annual installments over a period of
four years is less than $5,000, the entire purchase or
redemption price shall be paid by the corporation in cash,
notwithstanding the installment provisions of said paragraphs;
(5) in any situation where a stockholder whose shares
of capital stock of the corporation are to be purchased or
redeemed by it is indebted to the corporation at such time,
then, in accordance with the corporation's first lien and
offset rights under Article XVI, Section 5, of these By-laws
and Article Fourth (1) of the restated Certificate of
Incorporation of the corporation, the purchase or redemption
price shall in all cases be applied against such indebtedness to
the extent thereof, with the portion of such price which would
otherwise have been payable in cash being first applied for
such purpose and, if any indebtedness to the corporation still
remains, the portion of the price which would otherwise have
been payable in equal annual installments then being applied for
such purpose to the extent of any such remaining indebtedness;
(6) the corporation's obligation to pay any portion of
the purchase or redemption price of its shares in equal annual
installments shall be evidenced by an installment promissory
note of the corporation delivered to the stockholder whose shares
are being purchased or redeemed, which note shall provide for the
payment of the principal thereof in four equal annual installments
commencing one year from the date of the repurchase or redemption
of the shares and for the payment of interest with each annual
installment payment of principal on the unpaid balance of principal
from time to time at such rate as shall have been established by
the Board of Directors as of the date of issuance thereof, provided,
however, that said rate of interest shall in no event be less than
the greater of (A) the latest interest rate as of the date of
issuance of such note determined by the Board of Directors as the
rate to be paid on patronage refund certificates distributed to
the corporation's member-stockholders as part of their annual
patronage dividends or (B) 6% per annum;
(7) notwithstanding any of the foregoing provisions,
the Board of Directors, in its discretion and after considering
the financial condition and requirements of the corporation,
may authorize and cause payment to be made in cash for all or
any portion of the purchase or redemption price which would
otherwise be payable in four equal annual installments if the
Board of Directors determines that the prescribed method of
payment would impose an undue hardship upon the stockholder
whose shares are being repurchased or redeemed;
(8) the Board of Directors may adopt hardship guidelines to
implement the provisions of paragraph (7) of this Section and may
delegate the authority to make determinations pursuant to said
provisions to a committee comprised of two or more directors or
to a committee comprised of two or more executive officers of
the corporation.
ARTICLE XVII
CLOSING OF TRANSFER BOOKS AND
DETERMINATION OF RECORD DATE
SECTION 1. The Board of Directors shall have power to close the stock
transfer books of the corporation for a period not exceeding sixty (60) days
preceding the date of any meeting of stockholders or the date for the
allotment of rights or the dates when any change or conversion or exchange of
capital stock shall go into effect or for a period of not exceeding sixty (60)
days in connection with obtaining the consent of stockholders for any purpose.
SECTION 2. Notwithstanding the foregoing, in lieu of closing the stock
transfer books as aforesaid, the Board of Directors may fix in advance a date,
not exceeding sixty (60) days preceding the date of any meeting of
stockholders, or the date for the allotment of rights, or the date when any
change or conversion or exchange of capital stock shall go into effect, or a
date in connection with obtaining such consent, as a record date for the
determination of the stockholders entitled to notice of, and to vote, at any
such meeting and any adjournment thereof, or to any such allotment of rights,
or to exercise the rights in respect of any such change, conversion or
exchange of capital stock, or to give such consent, and in such case such
stockholders as shall be stockholders of record on the date so fixed shall be
entitled to such notice of, and to vote at such meeting and any adjournment
thereof, or to receive such allotment of rights, or to exercise such rights,
or to give such consent, as the case may be, notwithstanding any transfer of
any stock on the books of the corporation after any such record date fixed as
aforesaid.
SECTION 3. The corporation shall be entitled to treat the holder of
record of any share or shares of stock as the holder in fact thereof and
accordingly shall not be bound to recognize any equitable or other claim to
or interest in such share on the part of any other person whether or not it
shall have express or other notice thereof, save as expressly provided by the
laws of Delaware.
ARTICLE XVIII
FISCAL YEAR
SECTION 1. Except as from time to time otherwise provided for by the
Board of Directors, the fiscal year of the corporation shall end on the 3lst
day of December in each year.
ARTICLE XIX
DIVIDENDS
SECTION 1. No dividends shall ever be declared on any of the shares of
any class of stock of the corporation.
ARTICLE XX
CHECKS FOR MONEY
SECTION 1. All checks or demands for money and notes of the corporation
shall be signed by such officer or officers or such other person or persons
as the Board of Directors may from time to time designate.
ARTICLE XXI
BOOKS AND RECORDS
SECTION 1. The books, accounts and records of the corporation, except as
otherwise required by the laws of the State of Delaware, may be kept within
or without the State of Delaware, at such place or places as may from time to
time be designated by the By-laws or by resolution of the directors.
ARTICLE XXII
NOTICES
SECTION 1. Notice required to be given under the provisions of these
By-laws to any director, officer or stockholder shall not be construed to
mean personal notice, but may be given in writing by depositing the same in
a post office or letter box, in a postpaid sealed wrapper, addressed to such
stockholder, officer or director at such address as appears on the books of
the corporation, and such notice shall be deemed to be given at the time when
the same shall be thus mailed. Any stockholder, officer or director may waive,
in writing, any notice required to be given under these By-laws, whether
before or after the time stated therein.
ARTICLE XXIII
AMENDMENTS OF BY-LAWS AND ADVANCE NOTIFICATION BY STOCKHOLDERS OF
PROPOSALS FOR AMENDMENTS, DIRECTOR NOMINATIONS OR OTHER
CORPORATE ACTIONS
SECTION 1. Except for any provisions hereof which shall at any time have
been adopted by the stockholders in the manner prescribed in Section 2, these
By-laws may be amended or repealed or added to, or new By-laws may be adopted,
by the affirmative vote of a majority of the Board of Directors at any regular
meeting of the Board or at any special meeting thereof called for that purpose.
If any By-law regulating an impending election of directors is adopted,
amended or repealed by the Board of Directors, there shall be set forth in the
notice of the next meeting of stockholders for the election of directors the
By-law so adopted, amended or repealed, together with a precise statement of
the changes made.
SECTION 2. These By-laws may also be amended or repealed or added to, or
new By-laws may be adopted, at any regular or special meeting of stockholders
at which a quorum is present or represented by the affirmative vote of a
majority of the issued and outstanding shares of Class A stock of the
corporation. Any amendment, repeal, addition to the By-laws, or any new By-laws,
adopted by the stockholders may be further amended, repealed, or added to
only at a regular or special meeting of the stockholders at which a quorum is
present or represented by the affirmative vote of a majority of the issued and
outstanding shares of Class A stock of the corporation in the manner
prescribed herein.
SECTION 3. A written notice shall be given to the President or Secretary
of the corporation of the intent of one or more stockholders to submit at a
forthcoming stockholders meeting (a) a proposed amendment to these By-laws;
(b) the nomination of an eligible person for election as a director; or
(c) any other stockholder proposal for corporate action. Such notice must be
received, either by mail or by personal delivery, not less than seventy-five
(75) nor more than one hundred fifty (150) days prior to the date of the
annual meeting or, in the event of a special meeting of stockholders, not
later than the close of the fifteenth (15th) day following the day on which
notice of the meeting is first mailed to stockholders. In the case of an annual
meeting, the intention of one or more stockholders to submit a proposed By-law
amendment, nomination or other proposal for corporate action which is so
received in proper order shall be mentioned in the formal notice of the
meeting, but neither the name or names of the stockholder or stockholders
intending to make any such submission nor the name of any director nominee
proposed by one or more stockholders shall be mentioned in the notice. No
reference of any kind to any proposal or nomination to be submitted by any
stockholder pursuant to this Section shall be made in the proxy materials
caused to be sent to stockholders by the Board of Directors. At all annual or
special meetings the Chairman shall declare out of order any proposed
amendment, any nomination, or any other stockholder proposal not presented in
accordance with this Section. Every notice given by a stockholder or
stockholders under this Section shall set forth:
(a) the name and the business and residence addresses
of the stockholder (or person authorized by such stockholder
as the stockholder's voting representative) intending to
submit the proposed amendment, nomination, or other matter;
(b) with respect to such notice of intent to submit a
nomination, information concerning the proposed nominee's
business and residence addresses, age and eligibility to
serve as a director; and
(c) with respect to notice of an intent to propose a
By-law amendment or some other corporate action, a
description of the proposed amendment or other action.
Notice of intent to submit a nomination shall be accompanied by the
written consent of each nominee to serve as a director of the corporation
if so elected.
ARTICLE XXIV
MEMBERS' PATRONAGE DIVIDENDS
SECTION 1. A "membership" in the corporation within the meaning of the
term "membership" as used in Section 1388(c)(2)(B) of the U.S. Internal
Revenue Code of 1954, as amended, shall be deemed to be held by (a) each
retail hardware dealer owning a share of Class A stock of the corporation and
(b) each other dealer in hardware or related products which becomes an owner of
a share of Class A stock of the corporation after having been expressly
approved as an Ace Hardware dealer by the Board of Directors of the
corporation. The term "retail hardware dealer" as used in clause (a) of the
preceding sentence shall mean any person or firm purchasing merchandise from
this corporation for the purpose of reselling such merchandise at retail.
However, whenever the term "retail hardware dealer" is used in any of the
subsequent Sections of this Article XXIV of the By-laws, such term shall be
deemed to include all dealers holding memberships in this corporation except
where the context in which such term appears is of such a nature that it is
not practical for such term to be applied to "other dealers" as referred to
in clause (b) of the first sentence of this Section. For purposes of this
Article XXIV of the By-laws a "retail hardware store" shall be deemed to
refer to a business location to which there is delivered for resale from such
location at the retail level any merchandise purchased from this corporation.
Each such retail hardware store owned or controlled, directly or indirectly, by
the same person, partnership or corporation, shall be deemed to constitute
only one (1) retail hardware dealer. An unincorporated person or partnership
shall be deemed controlled by another person, partnership or corporation if
fifty per cent (50%) or more of the assets or profit shares therein are
legally or equitably owned by such other person, partnership or corporation,
or by the legal or equitable owner or owners of fifty per cent (50%) or more
of such other person, partnership or corporation's assets or profit shares
(if unincorporated) or shares of capital stock (if incorporated). A
corporation shall be deemed controlled by another person, partnership or
corporation if fifty percent (50%) or more of the capital stock of said
corporation is owned by such other person, partnership or corporation, or by
the owner or owners of fifty per cent (50%) or more of its capital stock
(if incorporated) or fifty per cent (50%) or more of its assets or profit
shares (if unincorporated).
SECTION 2. In accordance with the policy heretofore established by the
corporation in the Amendment to its By-laws adding Article XXIV thereto by
the resolution adopted by the Board of Directors on July 20, 1973, there shall
be distributed on a patronage basis to such members (that is, dealers holding
memberships, as hereinabove defined, in the corporation) in a manner taking
into account the amount of business done by the corporation with each of
them, all the net savings and overcharges effected by or resulting from the
operations conducted and carried on by the corporation in connection with
sales of merchandise made by the corporation after May 31, 1974, to such
members which remain after paying all operating and administration expenses
of the corporation and all interest on its indebtedness and after the setting
aside by the Board of Directors of such reasonable reserves as they shall
determine from time to time to be appropriate for the purpose of insuring
the safety and welfare of the corporation and for the purpose of providing for
the expectancy of any losses or contingencies. Said distributions shall be
made no later than eight and one-half (8 ) months following the close of the
year of the corporation during which the patronage occurred with respect to
which each such distribution is made. In no event shall less than twenty
percent (20%) of the total patronage distributions made each year to each
member be distributed in cash. The remaining portion shall be distributed in
cash or in written notices of allocation (as defined in Section 1388 of the
U.S. Internal Revenue Code) in whatever proportions shall be determined each
year by the Board of Directors.
SECTION 3. Notwithstanding the foregoing, every such member on becoming
such authorizes and directs that all net savings of every character effected
by this corporation which are distributable to such member, to the extent of
the excess thereof over the twenty per cent (20%) minimum portion of such
distributable amount required to be distributed in cash, may first be applied
by the corporation to the payment of any indebtedness owed to the corporation
by such member. Any such net savings which become distributable with respect
to merchandise sold by this corporation for delivery to any retail hardware
store owned or controlled, directly or indirectly, by the same person,
partnership or corporation which so owns or controls one (1) or more other
retail hardware stores may be so applied against any indebtedness owing with
respect to merchandise sold by this corporation for delivery to any store
which is part of any group deemed hereunder to constitute one (1) retail
hardware dealer. The balance of any such net savings not so applied shall
then be distributed as patronage dividends in the manner set forth in Article
XXIV, Section 2, of these By-laws.
SECTION 4. Each retail hardware dealer who applies for and is accepted
as a member of this corporation shall, by his act of subscribing for a share
of Class A stock of the corporation entitling such dealer to become such a
member, consent that the amount of any patronage dividends with respect to his
purchases of merchandise from this corporation occurring on or after June 1,
1974, which are made in written notices of allocation (as defined in Section
1388 of the U.S. Internal Revenue Code, as amended) and which are received by
such member from this corporation will be taken into account by him at their
stated dollar amounts in the manner provided in Section 1385(a) of said Code
in the taxable year in which such notices of allocation are received by said
member. The term "written notice of allocation" as used here shall be deemed
to include, but not to be limited to, a letter of advice to a member which
discloses to such member an amount which the corporation has elected to apply
against indebtedness owed to the corporation in accordance with the first
sentence of Article XXIV, Section 3, of these By-laws.
SECTION 5. The aforesaid written notices of allocation shall be
redeemable by the corporation in cash at the discretion of the Board of
Directors and/or in accordance with the restated Certificate of Incorporation
of the corporation and these By-laws. As security for the payment to the
corporation of any indebtedness owing at any time to the corporation by any
retail hardware dealer having membership in the corporation or by any retail
hardware dealer who has subscribed for the 1 share of Class A stock of the
corporation which is required to be owned in order to become a member of the
corporation, the corporation shall have a first lien upon any written notice of
allocation held by any such dealer (including all retail hardware stores
treated as being part of a group constituting one "member" or "dealer"). The
interest of each holder of any written notice of allocation in and to the
same shall at all times be deemed to be offset by the amount of any
indebtedness payable to the corporation by such holder.
SECTION 6. Notwithstanding any other provision of these By-laws, and in
accordance with the policy heretofore established by the corporation in the
Amendment to its By-laws adding Section 6 to Article XXIV thereof by the
resolution adopted by the Board of Directors on April 24, 1974, commencing
with respect to purchases of merchandise made from the corporation after May 31,
1974 the corporation shall also make distributions on a patronage basis to
those of its dealers who have franchise or membership agreements with the
corporation and who have executed unrevoked and unexpired written consents of
the type referred to in Section 1388 (c)(2) (A) of the U.S. Internal Revenue
Code to include in their gross income all patronage dividends distributed to
them in the form of written notices of allocation (as defined in Section 1388
of the U.S. Internal Revenue Code), even though such dealers do not then own
any shares of any class of the capital stock of the corporation. Such
patronage dividend distributions shall be made to such dealers in a manner
taking into account the amount of business done by the corporation with each
of them during the periods with respect to which said written consents are
effective for each of them and shall consist of all the net savings and
overcharges effected by or resulting from the business done by the
corporation with such dealers which remain after paying all of the operating
and administration expenses and interest on indebtedness of the corporation
allocable to such business and after the setting aside by the Board of
Directors of such reasonable reserves as they shall determine from time to
time to be appropriate for the purpose of insuring the safety and welfare of
the corporation and for the purpose of providing for the expectancy of any
losses or contingencies. Each such written consent shall provide that it may
be revoked at any time by the dealer, effective with respect to business done
by the corporation with such dealer after the close of the taxable year of
this corporation during which the revocation is filed with it. Each such
written consent shall cease to be effective with respect to all business done
by this corporation with any dealer who has furnished such a written consent
to this corporation immediately upon said dealer's becoming an owner of a
share of Class A stock of this corporation, as of which date such consent
shall expire and such dealer shall be deemed to hold a "membership" in this
corporation so that the provisions of this Article XXIV which are applicable
to the distribution of patronage dividends to its members then become effective
with respect to such dealer. Unless the same shall have been revoked or
otherwise terminated, any such consent which has theretofore been executed by
a dealer shall in any event be deemed to have expired and been rendered
ineffective at the end of one hundred twenty (120) days following the later of
(a) the date as of which an initial Registration Statement and Prospectus with
respect to an offer to sell shares of the capital stock of the corporation
(including shares of its Class A stock) to its dealers have become effective
under the U.S. Securities Act of 1933, or (b) the date as of which such
Prospectus can be used under the securities law of any state in which state
registration of such stock is required. No such dealer shall be eligible to
receive distributions of patronage dividends from the corporation with
respect to business done by the corporation with such dealer after the
expiration of such 120-day period unless such dealer either has. become a
member of the corporation by owning a share of its Class A stock (in which
case such dealer shall thereupon be entitled to patronage dividends as
provided for in Section 2 of this Article XXIV) or has executed a subscription
agreement for the purchase of shares of capital stock of the corporation
(including one (1) share of its Class A stock) which has been accepted by the
corporation. There shall be incorporated in all such subscription agreements
which include a subscription for a share of the Class A stock of the
corporation a provision whereby the subscribing dealer consents to include in
his gross income all patronage dividends distributed to such dealer in the
form of written notices of allocation (as defined in Section 1388 of the U.S.
Internal Revenue Code), and any dealer who has executed such a subscription
agreement but who is not entitled to become the owner of a share of Class A
stock of this corporation until he has completed payment of the purchase price
for such share in accordance with such subscription agreement shall be entitled
to receive patronage dividends pursuant to this Section 6 during the period
for which he makes payments on account of such purchase price as required by
the subscription agreement. Upon the completion of such payments and the
issuance of such share of stock to him, such dealer shall then be entitled to
receive patronage dividends pursuant to Section 2 of this Article XXIV. In no
event shall less than twenty per cent (20%) of the total patronage dividend
distributions made each year to any dealer who is entitled to receive such
distributions pursuant to this Section 6 be distributed in cash. Any amount
in excess of said twenty per cent (20%) minimum portion of the patronage
dividends otherwise distributable to a dealer under this Section 6 may first
be applied by the corporation to the payment of any indebtedness owed to the
corporation by such dealer in the same manner as set forth in Section 3 of this
Article XXIV. Any patronage dividends distributed in the form of written
notices of allocation pursuant to this Section 6 shall be subject to all of
the provisions with respect to distributions made in the form of written
notices of allocation which are set forth in Section 5 of this Article XXIV.
SECTION 7. Notwithstanding any of the foregoing provisions, the portion
of any patronage dividends which would otherwise be distributable in cash
under any provision of this Article XXIV to a retail hardware dealer with
respect to a retail hardware store having a franchise or membership agreement
with this corporation which has been cancelled or terminated at any time
subsequent to the date of the annual meeting of stockholders to be held on the
third Monday of May in 1980 by any means or for any reason whatsoever prior
to the time of distribution of such patronage dividends shall be applied by
the corporation to the payment of any indebtedness owed to the corporation by
or on behalf of such store to the extent of such indebtedness instead of being
distributed in cash, provided, however, that an amount equal to 20% of the
total patronage dividends distributable for the applicable year to any such
dealer with respect to such store shall nevertheless be paid in cash within
8 months following the close of such year if a timely written request for the
payment of such amount in cash is submitted to the corporation by the dealer.
However, in all events no less than 30% of the total annual patronage
dividends distributable to a retail hardware dealer with respect to a retail
business outlet pursuant to any provision of these By-laws shall be paid in
cash if the retail business outlet is located in a jurisdiction as to which
the 30% income tax withholding provisions of Section 1441 or Section 1442
of the U.S. Internal Revenue Code are applicable.
SECTION 8. Effective with respect to business done by them with this
corporation after December 31, 1982, each retail hardware dealer having
membership in this corporation on that date and each retail hardware dealer
who is a subscriber on that date or who becomes a subscriber after that date
for the 1 share of Class A stock of this corporation which is required to be
owned in order to become a member of this corporation shall, solely by such
dealer's act of commencing or continuing to do business with this corporation
after said date, be deemed to have authorized and directed that,
notwithstanding any other provision of this Article XXIV of these By-laws,
the distributions to be made on a patronage basis as provided for in Section
2 and Section 6 of this Article XXIV shall be made in a manner taking
into account the quantity or value of business done with each dealer by each
separate division of the corporation as shall be established on the books of
the corporation with respect to its operations and/or the quantity or value
of business done by the corporation or each such division of the corporation
with each of its dealers with respect to each category of sales as shall be
established on the books of the corporation. Each such dealer shall further
thereby be deemed to have authorized and directed that, in any taxable year
of this corporation during which it incurs a loss in connection with the
operations of any such division or in connection with any such category of
sales, (i) a proportionate share of such loss shall be deducted from the net
earnings of the corporation on the business done during such year by each of
its other divisions or with respect to each of its other sales categories
with its dealers and (ii) the amount of patronage dividends which the
corporation would otherwise be obligated to distribute to its dealers in
connection with their purchases from each such other division of the
corporation or in connection with each of the other sales categories
established by the corporation (as the case may be) shall be reduced by such
proportionate share of said loss. For the foregoing purposes the
proportionate share of any such loss in connection with the operations of any
such division of the corporation or in connection with any such category of
sales which shall be deducted from the net earnings realized by it with
respect to business done by each other division of the corporation or with
respect to each of the other sales categories established by the corporation
shall be determined by multiplying the total amount of such loss by a
fraction having as its numerator the net earnings which would otherwise be
distributable as patronage dividends in connection with the business done
with its members by each such other division or each such other category of
sales and having as its denominator the total of the net earnings which
would otherwise be distributable as patronage dividends in connection with
the business done with its members by all such divisions of this corporation
and/or all such sales categories.
ARTICLE XXV
ESTABLISHMENT OF ACE HARDWARE CORPORATION
DEALERSHIPS AND NON-MEMBER ACCOUNTS
SECTION 1. Except as provided in Article XXV, Section 3 hereof, no
person, partnership or corporation shall be authorized or permitted to use
the name "Ace Hardware" or any trademark or trade name including the word
"Ace" in conjunction with the sale of hardware or related merchandise, to
display any identification sign or emblem indicating that said person,
partnership or corporation is an authorized Ace Hardware dealer, or to
purchase merchandise (including items carried under the Ace brand name) from
Ace Hardware Corporation unless such person, partnership or corporation has
first been accepted by Ace Hardware Corporation as a duly licensed or
franchised dealer and has executed the membership or similar agreement then
utilized by Ace Hardware Corporation for the establishment of such a dealer
relationship and has otherwise complied with the usual requirements of Ace
Hardware Corporation with respect thereto. Any such agreement may contain
such reasonable provisions with respect to the termination thereof as shall
be legally permitted by the laws of the United States of America and by the
laws of the state or other jurisdiction in which the business of the dealer is
located.
SECTION 2. In order for any person, partnership or corporation to be
accepted by Ace Hardware Corporation as a licensed dealer, such person,
partnership or corporation shall also be required to purchase the necessary
number of shares of capital stock of the corporation as required by Article
Fourth (c) and Article Fourth (e) of the restated Certificate of
Incorporation of Ace Hardware Corporation filed with the Secretary of State
of Delaware on September 18, 1974. Accordingly, each such person, partnership
or corporation shall, concurrently with the execution by such person,
partnership or corporation of the Ace Dealer Membership Agreement then
utilized by the corporation, also agree in writing to purchase one (1) share
of Class A stock of the corporation at a price equal to the par value thereof
of $1,000 per share, and forty (40) shares of Class C stock of the
corporation at a price equal to the par value thereof of $100 per share or,
when the store which is licensed under such Membership Agreement is not the
first store owned or controlled by said person, partnership or corporation
which has become accepted by Ace Hardware Corporation as a licensed dealer,
to purchase fifty (50) shares of Class C stock at a price equal to the par
value thereof of $100 per share. The terms of payment with respect to any
shares of capital stock of the corporation purchased by any such person,
partnership or corporation shall be as set forth in such resolution as shall
be adopted from time to time by the Board of Directors of the corporation for
the purpose of establishing such terms of payment.
SECTION 3. In the case of a person, partnership or corporation operating
one or more business outlets, whether located within or outside the United
States of America, its territories and possessions, Ace Hardware Corporation
may approve the sale of merchandise for delivery to such an outlet under the
terms of a written agreement entered into with it by such party in lieu of
the membership or similar agreement utilized with respect to business outlets
by parties who are accepted by Ace Hardware Corporation as member dealers. No
party approved as an International Retail Merchant or other non-member retail
account shall be entitled to purchase or own any shares of the capital stock
of Ace Hardware Corporation, nor shall any patronage dividends be paid on
account of any purchases made from Ace Hardware Corporation by such party.
Such purchases of merchandise shall be made in accordance with the terms of
the applicable written agreement and such other terms as may be imposed by Ace
Hardware Corporation from time to time with regard to particular accounts.
Only with the express written consent of an executive officer whom its
President has vested with authority to grant such consents, can these
purchases include items carried under "Ace" or "Ace Hardware" brand names or
under other private label names owned by, or licensed to, Ace Hardware
Corporation. No such party shall have authority or be permitted to use names
"Ace" or "Ace Hardware" or any other trade name, trademark or service mark
owned or register (sic) by, or licensed to, Ace Hardware Corporation in the
United States of America or elsewhere (including any translations of any of
said names or marks) unless the applicable written agreement specifically
grants the right to such use. All of the terms and conditions contained in the
respective written agreements imposed upon such accounts (including, but not
limited to, those dealing with territorial rights, duration, and service,
handling, or license fees or charges, as well as any terms which vary among
particular accounts) shall be established solely by the executive officer or
officers of Ace Hardware Corporation vested with such authority by its
President, provided, however, that no such party shall be granted any
exclusive area or territorial rights without the prior approval of the Board
of Directors or a committee of the Board to which the Board has delegated the
authority to approve the granting of such rights. In establishing such terms,
consideration shall be given to the relevant business circumstances,
including, but not limited to, specific legal requirements and various costs
associated with serving an account in a particular location.
SECTION 4. Each person, partnership or corporation accepted by Ace
Hardware Corporation as a member dealer or non-member account shall, by
virtue of such acceptance, be deemed to have agreed to assume liability for
and indemnify Ace Hardware Corporation and hold it harmless from and against
any and all claims which may be asserted against it and from any losses
sustained by it (including attorneys' fees and expenses incurred by it in
defending such claims or in attempting to avoid or mitigate such losses) in
connection with or resulting from billings by suppliers of merchandise
purchased by or at the request of such dealer or account from or through Ace
Hardware Corporation in cases where such merchandise is not to be supplied
from the corporation's own inventories.
ARTICLE XXVI
BY-LAWS TO CONSTITUTE BINDING CONTRACT
SECTION 1. These By-laws, as amended from time to time, shall constitute
a binding legal contract between Ace Hardware Corporation and its
stockholders, and shall be legally binding on all stockholders of Ace
Hardware Corporation and the successors, heirs, executors, administrators,
assigns and personal representatives of such stockholders.
SECTION 2. The purchase of shares of any class of stock of this
corporation and the issuance thereof to any stockholder shall constitute and
be equivalent to a consent of the part of the stockholder to whom said shares
are issued to be bound by these By-laws, as amended from time to time, and an
agreement on such stockholder's part to be bound thereby.
SECTION 3. The invalidity of any portion of these By-laws, as amended
from time to time, shall in no way affect any other portion of the By-laws
which can be given effect without such invalidated part, and the remaining
portions of the By-laws shall continue to constitute a legally binding
contract between this corporation and its stockholders.
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 14. Other Expenses of Issuance and Distribution.
The following is an estimate of expenses in connection with the issuance and
distribution of the capital stock being offered:
Printing of Registration Statement and Prospectus $10,000
Accounting Fees and Expenses 12,000
Legal Fees 2,000
Fees and Expenses under "Blue Sky" Laws of Various States 3,500
Miscellaneous Expenses 500
-------
Total $28,000
=======
Item 15. Indemnification of Directors and Officers.
Under Section 145 of the General Corporation Law of the State of Delaware,
where we are incorporated, Article XV of our By-Laws (see Appendix A to the
Prospectus which is a part of this Registration Statement and is included by
reference) provides for us to indemnify our directors, officers, employees or
agents. The main provisions of this By-law obligate us to indemnify these
persons against expenses (including attorneys' fees) that they actually and
reasonably incur in connection with their successful defense of certain
proceedings. These proceedings include any action, suit or proceeding (whether
civil, criminal, administrative or investigative) that are instituted against
them because they are (or were) one of our officers, directors, employees or
agents. This By-law also authorizes us to indemnify these people for the amount
of any judgment, fine or settlement payments they incur, along with expenses
and attorneyss fees, in connection the proceedings described above if certain
circumstances occur. These circumstances are that a majority of disinterested
directors on our Board of Directors must vote to find that the person being
indemnified acted in good faith and in a manner he reasonably believed to be in
our best interest.
Richard Kaup, the late Virgil Poss, and Antone Salel, were the Trustees of
the Ace Dealers' Perpetuation Fund. This fund was terminated on November 30,
1976. As of that date, all of the assets of that fund were transferred to us
and we then became responsible for all obligations and liabilities of the
Trustees of that fund. We also agreed to indemnify the Trustees named above for
any of their activities as Trustees under the terms stated below. These terms
were included in the following resolution adopted by the unanimous vote of our
Board of Directors on April 24, 1974: "... that the corporation indemnify and
hold harmless each of said Trustees with respect to any claims made against any
of them and any expenses thereby incurred by any of them in connection with any
of their activities as such Trustees".
However, we have been advised that in the opinion of the Securities and
Exchange Commission this type of indemnification is against public policy as
expressed in the federal Securities Act of 1933 and is, therefore,
unenforceable. If a claim for indemnification (other than for our payment of
expenses of a director, officer or controlling person in the successful defense
of any action, suit or proceeding) is made by a director, officer or
controlling person in connection with the securities being offered by this
Prospectus, (unless in the opinion of our legal counsel the matter has been
settled by controlling precedent), we will submit the question of whether our
indemnification would be against public policy under the Act to an appropriate
court so that the issue can be finally determined.
We also maintain Directors and Officers Liability coverage for limits which
we believe are reasonable and appropriate for our exposure. Coverage is placed
with insurers who are rated "A" by A.M. Best's rating service. The coverage is
periodically reviewed by our broker regarding the adequacy of our limits and
coverage.
Item 16. Exhibits
(a) Exhibits:
Exhibit
No. Exhibit
--- -------
1 No exhibit.
2 No exhibit.
3-A Copy of Restated Certificate of Incorporation of the
Registrant dated September 18, 1974 filed as Exhibit 3-A to
the Registrant's Form S-1 Registration Statement
(Reg-istration No. 2-55860) on March 30, 1976 and
incorporated herein by reference.
3-B By-laws of the Registrant as amended through August 19, 1997
(included as Appendix A to the Prospectus constituting a part
of this Post-Effective Amendment No. 4 to the Registrant's
Form S-2 Registration Statement).
3-C Copy of Certificate of Amendment to the restated Certificate
of Incorporation of the Registrant dated May 19, 1976 filed
as Exhibit 3-D to Amendment No. 1 to the Registrant's Form
S-1 Registration Statement (Registration No. 2-55860) on June
10, 1976 and incorporated herein by reference.
3-D Copy of Certificate of Amendment to the restated Certificate
of Incorporation of the Registrant dated May 21, 1979 filed
as Exhibit 3-F to Amendment No. 1 to the Registrant's Form
S-1 Registration Statement (Registration No. 2-63880) on May
23, 1979 and incorporated herein by reference.
3-E Copy of Certificate of Amendment to the restated Certificate
of Incorporation of the Registrant dated June 7, 1982 filed
as Exhibit 3-G to the Registrant's Form S-1 Registration
Statement (Registration No. 2-82460) on March 16, 1983 and
incorporated herein by reference.
3-F Copy of Certificate of Amendment to the restated Certificate
of Incorporation of the Registrant dated June 5, 1987 filed
as Exhibit 3-F to the Registrant's Form S-1 Registration
Statement (Registration No. 33-4299) on March 29, 1988 and
incorporated herein by reference.
3-G Copy of Certificate of Amendment to the Restated Certificate
of Incorporation of the Registrant dated June 16, 1989 filed
as Exhibit 4-G to the Post-Effective Amendment No. 1 to the
Registrant's Form S-2 Registration Statement (Registration
No. 33-27790) on March 20, 1990 and incorporated herein by
reference.
3-H Copy of Certificate of Amendment to the Restated Certificate
of Incorporation of the Registrant dated June 3, 1996, filed
as Exhibit 4-H to the Post-Effective Amendment No. 2 to the
Registrant's Form S-2 Registration Statement (Registration
No. 33-58191) on or about March 12, 1997 and incorporated
herein by reference.
4-A Specimen copy of Class B stock certificate as revised as of
November, 1984, filed as Exhibit 4-A to Post-Effective
Amendment No. 2 to the Registrant's Form S-1 Registration
Statement (Registration No. 2-82460) on March 15, 1985 and
incorporated herein by reference.
4-B Specimen copy of Patronage Refund Certificate as revised in
1988 filed as Exhibit 4-B to Post-Effective Amendment No. 2
to the Registrant's Form S-1 Registration Statement
(Registration No. 33-4299) on March 29, 1988 and incorporated
herein by reference.
Exhibit
No. Exhibit
--- -------
4-C Specimen copy of Class A stock certificate as revised in 1987
filed as Exhibit 4-C to Post-Effective Amendment No. 2 to the
Registrant's Form S-1 Registration Statement (Registration
No. 33-4299) on March 29, 1988 and incorporated herein by
reference.
4-D Specimen copy of Class C stock certificate filed as Exhibit
4-I to the Registrant's Form S-1 Registration Statement
(Registration No. 2-82460) on March 16, 1983 and incorporated
herein by reference.
4-E Copy of current standard form of Subscription for Capital
Stock Agreement to be used for dealers to subscribe for
shares of the Registrant's stock in conjunction with new
membership agreements submitted to the Registrant filed as
Exhibit 4-L to Post-Effective Amendment No. 2 to the
Registrant's Form S-2 Registration Statement (Registration
No. 33-46449) on March 23, 1994 and incorporated herein by
reference.
4-F Copy of plan for the distribution of patronage dividends with
respect to purchases of merchandise made from the Registrant
on and after January 1, 1998, adopted by the Board of
Directors of the Registrant.
5 (a) Opinion of David W. League, Vice President, General
Counsel of the Registrant, as to legality of securities being
registered.
(b) Opinion of Messrs. Gatenbey, Law & League filed as
Exhibit 7 to the Registrant's Form S-1 Registration Statement
(Registration No. 2-82460) on March 16, 1983 and incorporated
herein by reference.
8 Exhibit 5(a) addresses tax matters as required in Exhibit 8;
the opinions of David W. League, Vice President, General
Counsel and Secretary of the Registrant, as to certain tax
matters are set forth in statements attributted to him
under the sub-heading "Federal Income Tax Status of Class A
and Class C Shares" and sub-heading "Federal Income Tax
Treatment of Patronage Dividends" in the Prospectus
constituting a part of this Post-Effective Amendment No. 4 to
the Registrant's Form S-2 Registration Statement.
9 No Exhibit.
10-A Copy of Ace Hardware Corporation Retirement Benefits
Replacement Plan Restated and Adopted December 7, 1993 filed
as Exhibit 10-A to Post-Effective Amendment No. 3 to the
Registrantis Form S-2 Registration Statement (Registration
No. 33-58191) on or about March 18, 1998 and incorporated
herein by reference.
10-B Copy of First Amendment to Restated Ace Hardware Corporation
Retirement Benefits Replacement Plan adopted on August 19,
1997 filed as Exhibit 10-B to Post-Effective Amendment No. 3
to the Registrant's Form S-2 Registration Statement
(Registration No. 33-58191) on or about March 18, 1998 and
incorporated herein by reference.
10-C Copy of First Amendment to Ace Hardware Corporation Deferred
Compensation Plan adopted on August 19, 1997 filed as Exhibit
10-C to Post-Effective Amendment No. 3 to the Registrant's
Form S-2 Registration Statement (Registration No. 33-58191)
on or about March 18, 1998 and incorporated herein by
reference.
Exhibit
No. Exhibit
--- -------
10-D Copy of Restated PREP Plan (formerly known as Executive
Supplemental Benefit Plans) adopted August 19, 1997 filed as
Exhibit 10-D to Post-Effective Amendment No. 3 to the
Registrant's Form S-2 Registration Statement (Registration
No. 33-58191) on or about March 18, 1998 and incorporated
herein by reference.
10-E Copy of the Ace Hardware Corporation Restated Officer
Incentive Plan effective January 1, 1999.
10-F Copy of Second Modification of Amended and Restated Note
Purchase and Private Shelf Agreement dated as of August 23,
1996, as amended by the First Modification of Amended and
Restated Purchase and Private Shelf Agreement dated as of
April 2, 1997, with The Prudential Insurance Company of
America filed as Exhibit 10-F to Post-Effective Amendment
No. 3 to the Registrant's Form S-2 Registration Statement
(Registration No. 33-58191) on or about March 18, 1998 and
incorporated herein by reference.
10-G Copy of Participation Agreement with PNC Commercial Corp.
dated December 17, 1997 establishing a $10,000,000
discretionary leasing facility for the purchase of land and
construction of retail hardware stores filed as Exhibit 10-G
to Post-Effective Amendment No. 3 to the Registrant's Form
S-2 Registration Statement (Registration No. 33-58191) on or
about March 18, 1998 and incorporated herein by reference.
10-H Copy of Form of Executive Officer Employment Agreement
effective January 1, 1996, filed as Exhibit 10-a-17 to
Post-Effective Amendment No. 1 to the Registrant's Form S-2
Registration Statement (Registration No. 33-58191) on or
about March 11, 1996 and incorporated herein by reference.
10-I Copy of Note Purchase and Private Shelf Agreement with The
Prudential Insurance Company of America dated September 27,
1991 securing 8.74% Senior Series A Notes in the principal
sum of $20,000,000 with a maturity date of July 1, 2003 filed
as Exhibit 10-A-q to the Registrant's Form S-2 Registration
Statement (Registration No. 33-46449) on March 23, 1992 and
incorporated herein by reference.
10-J Copy of current standard form of Ace Hardware Corporation
International Franchise Agreement.
10-K Copy of current standard form of Ace Hardware Membership
Agreement filed as Exhibit 10-P to Pre-Effective Amendment
No. 2 to the Registrant's Form S-2 Registration Statement
(Registration No. 33-58191) on or about April 26, 1995 and
incorporated herein by reference.
10-L Copy of 6.89% Senior Series B notes in the aggregate
principal sum of $20,000,000 issued July 29, 1992 with a
maturity date of January 1, 2000 pursuant to Note Purchase
and Private Shelf Agreement with the Prudential Insurance
Company of America dated September 27, 1991 filed as Exhibit
10-Q to Post-Effective Amendment No. 2 to the Registrant's
Form S-2 Registration Statement (Registration No. 33-46449)
on March 23, 1994 and incorporated herein by reference.
Exhibit
No. Exhibit
--- -------
10-M Copy of 6.47% Senior Series A notes in the aggregate
principal sum of $30,000,000 issued September 22, 1993 with a
maturity date of June 22, 2008, and $20,000,000 Private Shelf
Facility, pursuant to Note Purchase and Private Shelf
Agreement with the Prudential Insurance Company of America
dated as of September 22, 1993 filed as Exhibit 10-R to
Post-Effective Amendment No. 2 to the Registrant's Form S-2
Registration Statement (Registration No. 33-46449) on
March 23, 1994 and incorporated herein by reference.
10-N Copy of Lease dated March 24, 1997 for print shop facility of
Registrant in Downers Grove, Illinois filed as Exhibit 10-N
to Post-Effective Amendment No. 3 to the Registrant's Form
S-2 Registration Statement (Registration No. 33-58191) on or
about March 18, 1998 and incorporated herein by reference.
10-O Copy of Lease dated September 30, 1992 for general offices of
the Registrant in Oak Brook, Illinois filed as Exhibit 10-a-u
to the Post-Effective Amendment No.1 to the Registrant's Form
S-2 Registration Statement (Registration No. 33-46449) on
March 22, 1993 and incorporated herein by reference.
10-P Copy of Deed of Lease with Arundel II L.L.C. dated as of
January 30, 1998 for the Registrant's redistribution center
in Hanover, Maryland.
10-Q Copy of Ace Hardware Corporation Deferred Compensation Plan
effective January 1, 1994 filed as Exhibit 10-X to
Post-Effective Amendment No. 2 to the Registrant's Form S-2
Registration Statement (Registration No. 33-46449) on
March 23, 1994 and incorporated herein by reference.
10-R Copy of Lease dated September 22, 1994 for bulk merchandise
redistribution center of Registrant in Carol Stream, Illinois
filed as Exhibit 10-Y to the Registrant's Form S-2
Registration Statement (Registration No. 33-58191) on or
about March 23, 1995 and incorporated herein by reference.
10-S Copy of Lease dated May 4, 1994 for freight consolidation
center of the Registrant in Chicago, Illinois filed as
Exhibit 10-Z to the Registrant's Form S-2 Registration
Statement (Registration No. 33-58191) on or about March 23,
1995 and incorporated herein by reference.
10-T Copy of Long-Term Incentive Compensation Deferral Option Plan
of the Registrant effective January 1, 1995 adopted by its
Board of Directors on December 6, 1994 filed as Exhibit
10-a-1 to the Registrant's Form S-2 Registration Statement
(Registration No. 33-58191) on or about March 23, 1995 and
incorporated herein by reference.
10-U Copy of Ace Hardware Corporation Directors' Deferral Option
Plan Amended and Restated as of January 1, 1997.
10-V Copy of Agreement dated January 6, 1995 between Ace Hardware
Corporation and Roger E. Peterson filed as Exhibit 10-a-9 to
the Registrant's Form S-2 Registration Statement
(Registration No. 33-58191) on or about March 23, 1995 and
incorporated herein by reference.
10-W Copy of Lease dated July 28, 1995 between A.H.C. Store
Development Corp. and Tri-R Corporation for retail hardware
store premises located in Yorkville, Illinois, filed as
Exhibit 10-a-11 to Post-Effective Amendment No. 1 to the
Registrant's Form S-2 Registration Statement (Registration
No. 33-58191) on or about March 11, 1996 and incorporated
herein by reference.
Exhibit
No. Exhibit
--- -------
10-X Copy of Lease dated October 31, 1995 between Brant Trade &
Industrial Park, Inc. and Ace Hardware Canada Limited for
warehouse space in Brantford, Ontario, Canada, filed as
Exhibit 10-a-6 to Post-Effective Amendment No. 1 to the
Registrant's Form S-2 Registration Statement (Registration
No. 33-58191) on or about March 11, 1996 and incorporated
herein by reference.
10-Y Copy of Lease dated November 27, 1995 between 674573 Ontario
Limited and Ace Hardware Canada Limited for general office
space in Markham, Ontario, Canada, filed as Exhibit 10-a-13
to Post-Effective Amendment No. 1 to the Registrant's Form
S-2 Registration Statement (Registration No. 33-58191) on or
about March 11, 1996 and incorporated herein by reference.
10-Z Copy of Executive Healthcare Plan adopted by the Board of
Directors of the Registrant on August 25, 1998.
10-a-1 Copy of First Amendment to the Ace Hardware Corporation
Long-Term Incentive Compensation Deferral Option Plan
effective December 5, 1995, filed as Exhibit 10-a-15 to
Post-Effective Amendment No. 1 to the Registrant's Form S-2
Registration Statement (Registration No. 33-58191) on or
about March 11, 1996 and incorporated herein by reference.
10-a-2 Copy of Ace Hardware Corporation Executive Benefit Security
Trust Agreement effective July 19, 1995, filed as Exhibit
10-a-18 to Post-Effective Amendment No. 1 to the Registrant's
Form S-2 Registration Statement (Registration No.33-58191) on
or about March 11, 1996 and incorporated herein by reference.
10-a-3 Copy of current standard form License Agreement for
International Retail Merchants adopted in 1996 filed as
Exhibit 10-a-12 to Post-Effective Amendment No. 2 to the
Registrant's Form S-2 Registration Statement (Registration
No. 33-58191) on or about March 12, 1997 and incorporated
herein by reference.
10-a-4 Copy of Lease Agreement dated as of September 1, 1996 for the
Registrant's project facility in Wilton, New York filed as
Exhibit 10-a-13 to Post-Effective Amendment No. 2 to the
Registrant's Form S-2 Registration Statement (Registration
No. 33-58191) on or about March 12, 1997 and incorporated
herein by reference.
10-a-5 Copy of 6.47% Series A Senior Notes in the aggregate
principal amount of $30,000,000 issued August 23, 1996 with a
maturity date of June 22, 2008, and $70,000,000 Private Shelf
Facility, pursuant to Amended and Restated Note Purchase and
Private Shelf Agreement with the Prudential Insurance Company
dated August 23, 1996 filed as Exhibit 10-a-14 to
Post-Effective Amendment No. 2 to the Registrant's Form S-2
Registration Statement (Registration No. 33-58191) on or
about March 12, 1997 and incorporated herein by reference.
10-a-6 Copy of Second Amendment to the Restated Ace Hardware
Corporation Retirement Benefits Replacement Plan adopted on
December 8, 1998 and effective January 1, 1999.
11 No exhibit.
12 No exhibit.
13 No exhibit.
15 No exhibit.
Exhibit
No. Exhibit
--- -------
16 No exhibit.
23 (a) Consent of KPMG LLP, dated March 12, 1999.
(b) Consent of Counsel, Legal Opinion Exhibit 5(a).
24 Powers of Attorney.
25 No exhibit.
26 No exhibit.
27 Financial Data Schedule.
99 No exhibit.
Item 17. Undertakings.
As the Registrant signing below, we undertake:
(a) Subject to Section 15(d) of the Securities Exchange Act of 1934, to
file with the Securities and Exchange Commission any supplementary or
periodic information, documents and reports as any rule or regulation of the
Commission that is adopted under the authority conferred in that section
requires.
(b) To file with the Securities and Exchange Commission, during any
period in which offers or sales are being made under this registration, a
post-effective amendment to this Registration Statement:
(i) to include any Prospectus required by Section 10(a) (3) of the
Securities Act of 1933;
(ii) to reflect in the Prospectus any facts or events arising after the
effective date of the Registration Statement (or its most recent
post-effective amendment) which, individually or together, represent a
fundamental change in the information set forth in the Registration
Statement;
(iii) to include any material information about the plan of distribution
that was not previously disclosed in the Registration Statement or any
material change to this information in the Registration Statement,
including, for example, any addition or deletion of a managing
underwriter.
(c) That, for the purpose of determining any liability under the
Securities Act of 1933, each post-effective amendment to this Registration
Statement shall be deemed to be a new Registration Statement relating to the
securities being offered in it, and the offering of those securities at that
time shall be deemed to be the initial bonafide offering of them;
(d) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the termination
of the offering.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-2 and has duly caused this Post-Effective
Amendment No. 4 to the registrant's Form S-2 Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the
Village of Oak Brook, State of Illinois on the day of March 15, 1999.
ACE HARDWARE CORPORATION
By HOWARD J. JUNG
-----------------------------
Howard J. Jung
Chairman of the Board and Director
Pursuant to the Securities Act of 1933, this registration statement has been
signed below by the following persons in the capacities and on the dates
indicated.
Signature Title Date
HOWARD J. JUNG Chairman of the Board March 15, 1999
- ------------------------------
Howard J. Jung and Director
DAVID F. HODNIK President and Chief March 15, 1999
- ------------------------------
David F. Hodnik Executive Officer
LORI L. BOSSMANN Vice President-Controller March 15, 1999
- ------------------------------
Lori L. Bossmann (Principal Financial and
Accounting Officer)
Jennifer C. Anderson, Eric R. Bibens Directors
II, Lawrence R. Bowman, James T.
Glenn, Daniel L. Gust, D. William
Hagan, Mark Jeronimus, John E.
Kingrey, Mario R. Nathusius, Roger E.
Peterson, and Jon R. Weiss
*By DAVID F. HODNIK
-------------------------------
David F. Hodnik
*By LORI L. BOSSMANN March 15, 1999
-------------------------------
Lori L. Bossmann
*Attorneys-in-fact
INDEX TO EXHIBITS FILED TO
THE REGISTRATION STATEMENT
ON FORM S-2 OF ACE HARDWARE CORPORATION
Exhibit
No. Exhibit
--- -------
3-B By-laws of the Registrant as amended through August 19, 1997
(included as Appendix A to the Prospectus constituting a part
of this Post-Effective Amendment No. 4 to the Registrant's
Form S-2 Registration Statement).
4-F Copy of plan for the distribution of patronage dividends with
respect to purchases of merchandise made from the Registrant
from January 1, 1998 adopted by the Board of Directors of the
Registrant.
5 (a) Opinion of David W. League, Vice President and General
Counsel of the Registrant as to legality of securities being
registered.
10-E Copy of the Ace Hardware Corporation Restated Officer
Incentive Plan effective January 1, 1999.
10-J Copy of current standard form of Ace Hardware Corporation
International Franchise Agreement.
10-P Copy of Deed of Lease with Arundel II L.L.C. dated as of
January 30, 1998 for the Registrant's redistribution center
in Hanover, Maryland.
10-U Copy of Ace Hardware Corporation Directors' Deferral Option
Plan Amended and Restated as of January 1, 1997.
10-Z Copy of Executive Healthcare Plan adopted by the Board of
Directors of the Registrant on August 25, 1998.
10-a-6 Copy of Second Amendment to the Restated Ace Hardware
Corporation Retirement Benefits Replacement Plan adopted on
December 8, 1998 and effective January 1, 1999.
23 (a) Consent of KPMG LLP, dated March 12, 1999.
(b) Consent of Counsel, Legal Opinion Exhibit 5(a).
24 Powers of Attorney.
27 Financial Data Schedule.
The various exhibits incorporated by reference are listed in Item 16 of this
Post-Effective Amendment No. 4 to the Form S-2 Registration Statement of Ace
Hardware Corporation.
March 15, 1999
To the Board of Directors
Ace Hardware Corporation
2200 Kensington Court
Oak Brook, Illinois 60521
Re: Total Shares Offered By Prospectus
904 Class A
31,289 Class C
Gentlemen:
This opinion relates to the legality of the 904 shares of Class A voting stock
(par value $1,000 per share) and 31,289 shares of Class C nonvoting stock
(par value $100 per share) of Ace Hardware Corporation (the "Company"), a
Delaware corporation, to be registered with the Securities and Exchange
Commission. Of the foregoing shares, 904 unsold shares of Class A stock and
31,289 of Class C stock were previously registered under Registration
Statement No. 33-58191. These shares, pursuant to Rule 429 of Regulation C
of the Securities Act of 1933, are being offered by the Prospectus filed as
a part of this Post-Effective Amendment No. 4 to the Form S-2 Registration
Statement of Ace Hardware Corporation with respect to which said opinion is
furnished.
As General Counsel in the Legal Department of the Company since January 1,
1989 and as a partner in the firm of Gatenbey, Law & League which acted as
general counsel to the Company and its Illinois predecessor corporation for
many years prior to that date, I have examined the Company's restated
Certificate of Incorporation (as amended to date), and its corporate
proceedings, and have made such other investigations as I have deemed
necessary or appropriate for the purpose of this opinion.
VALIDITY OF SHARES OF STOCK
Based upon the foregoing, I am of the opinion that:
(1) The Company is duly organized and validly existing as a corporation in
good standing under the laws of the State of Delaware and is also duly
qualified to do business as a foreign corporation in, and is in good standing
under the laws of, the States of Alabama, Arizona, Arkansas, California,
Colorado, Connecticut, Florida, Georgia, Idaho, Illinois, Kentucky, Maryland,
Mississippi, Missouri, Nebraska, New York, North Carolina, Ohio, Oregon,
South Carolina, Texas, Washington and Wisconsin.
(2) The total authorized capital stock of the Company consists of 10,000
shares of Class A Voting Stock (par value $1,000 per share), 6,500 shares of
Class B Nonvoting Stock (par value $1,000 per share) and 4,000,000 shares of
Class C Nonvoting Stock (par value $100 per share).
(3) All of the shares of capital stock of the Company which are to be offered
by the Prospectus filed as a part of the aforesaid Post-Effective Amendment
No. 4 to Registration Statement No. 33-58191 with respect to which this
opinion is furnished (including any shares which may have heretofore been
issued but are not presently outstanding), will, upon issuance in accordance
with the terms set forth in said Prospectus, constitute legally and validly
issued, fully paid and non-assessable shares.
This opinion also relates to the preference in excess of par value to which
shares of Class "B" stock (par value $1,000 per share) of Ace Hardware
Corporation (the "Company"), a Delaware corporation, are entitled in the
event of the involuntary liquidation of the Company. The restated Certificate
of Incorporation authorizes the Company to issue 6,500 shares of Class "B"
stock, of which 2,592 shares are presently issued and outstanding.
I have examined the restated Certificate of Incorporation, as amended, and
the By-laws of the Company, and note that the matter of distribution of the
net assets of the Company in the event of an involuntary liquidation is
provided for in Article Fourth (j) of the restated Certificate of
Incorporation. It is stated therein that, in the event of a liquidation
(voluntary or involuntary), the net assets of the Company shall be
distributed among the holders of all classes of issued and outstanding stock
of the Company. In such event, there shall first be distributed to the holders
of outstanding shares of Class B Stock and Class C Stock amounts equal to the
total amounts which the Company would have been required to pay to them to
purchase or redeem all of their outstanding shares of such stock in accordance
with the purchase or redemption prices for said shares as last determined by
the Board of Directors, but if the net assets are insufficient to pay such
amounts to the holders of said shares, each outstanding share of Class B
Stock and each outstanding share of Class C Stock shall share in the
distribution of the Company's net assets in the proportion which its purchase
or redemption price bears to such total amount. If the net assets exceed
said total amount, the excess is to be distributed in equal portions to each
holder of an outstanding share of Class A Stock, but the amount so distributed
to each holder of a share of Class A Stock cannot exceed such share's par
value. Any net assets still remaining are to be distributed among the holders
of all classes of issued and outstanding shares of stock of the Company
pursuant to the following procedure:
(a) there shall first be determined the sum of the total par value of all of
the outstanding shares of Class A Stock and the total amount which the Company
would have been required to pay to purchase or redeem all of its outstanding
shares of Class B Stock and Class C Stock in accordance with the purchase or
redemption prices thereof last determined by the Board of Directors;
(b) each outstanding share of Class A Stock shall share in said remaining
net assets in the proportion which the par value thereof bears to the sum
determined in the foregoing manner; and
(c) each outstanding share of Class B Stock and each outstanding share of
Class C Stock shall share in said remaining net assets in the proportion
which the purchase or redemption prices thereof last determined by the Board
of Directors bear to said sum.
Since Article Fourth (g) and Article Fourth (h) of the restated Certificate
of Incorporation of the Company provide (i) that the purchase or redemption
price to be paid by the Company for shares of its Class B Stock must at all
times be equal to 20 times the per share purchase or redemption price last
established by the Board of Directors with respect to purchases or redemptions
by the Company of its Class C Stock, (ii) that the purchase or redemption
price to be paid by the Company for its Class C Stock cannot be less than the
par value thereof, and (iii) that the purchase or redemption price to be paid
by the Company for its Class B Stock shall in no event be less than par value
thereof, the shares of Class B Stock could have a preference in excess of par
value in the event of involuntary liquidation.
PREFERENCE OF CLASS B STOCK IN VOLUNTARY LIQUIDATION
In my opinion the provisions of the restated Certificate of Incorporation
providing for such preference with respect to the shares of Class "B" Stock
of the Company are legally permitted and have been legally adopted in
accordance with Section 151(d) of the General Corporation Law of Delaware
which provides, "The holders of the preferred or special stock of any class
or of any series thereof shall be entitled to such rights upon the dissolution
of, or upon the distribution of any assets of, the corporation as shall be
stated in the Certificate of Incorporation or in the resolution or resolutions
providing for the issue of such stock adopted by the Board of Directors as
hereinabove provided."
It is my further opinion that the aforementioned preference of the Class "B"
stock in the event of involuntary liquidation of the Company does not require,
and does not have the effect of, placing any restrictions upon surplus by
reason of the potential preference in excess of par value attached to the
Class "B" shares. In view of the fact that Article Fourth (f) of the restated
Certificate of Incorporation expressly prohibits the Company from declaring
dividends on any of the shares of any class of stock of the Company, it is
also my opinion that no holders of any securities of the Company would have
any remedies before or after payment of any dividend which would reduce
surplus to an amount less than the amount of such excess.
TAX ISSUES
Statements made under subheadings "Federal Income Tax Status of Class A and
Class C Shares" pp. 7-8 and "Federal Income Tax Treatment of Patronage
Dividends," pp. 24-25 of the Prospectus that is part of the aforesaid
Post-Effective Amendment No. 4 to Registration No. 33-58191 also represent
my opinion concerning said matters.
CONSENT
I understand that this opinion is to be used in connection with the aforesaid
Post-effective Amendment No. 4 to Registration Statement No. 33-58191, and I
consent to the filing of this opinion with said Registration Statement and
to the reference to me in the Prospectus under the heading "Opinion of
Experts".
10-K CONSENT
I further consent to "Federal Income Tax Treatment of Patronage Dividends, "
pages 13-14 of the 10-K which is incorporated by reference into the above-
referenced S-2 Registration Statement and which also represents my opinion
concerning said matters.
Sincerely,
DAVID W. LEAGUE
David W. League
Vice President-General Counsel
Ace Hardware Corporation
ACE HARDWARE CORPORATION
RESTATED OFFICER INCENTIVE PLAN
(Effective January 1, 1999)
1. ESTABLISHMENT AND PURPOSE
The Officer Incentive Plan is hereby amended and restated effective
January 1, 1999. Ace Hardware Corporation (the Corporation) has
established this officer incentive program to provide officers and
key employees with financial motivation to act in the best interests
of the Corporation. The program consists of a Short-Term Incentive
Plan (the ST Plan) and a Value Added Long-Term Incentive Plan (the VA
Plan). More specifically, the goals of the program are to:
* Provide award opportunities which balance short- and long-term
performance orientations,
* Provide a strong retention vehicle,
* Provide significant compensation opportunities in return for
outstanding performance,
* Reward performance measured over both short- and long-term
performance periods,
* Measure the elements of value which participants can impact, and
* Provide a performance component for capital accumulation through
the long-term incentive compensation deferral option plan.
2. EFFECTIVE DATES
The ST Plan is effective as of fiscal year 1999. The VA Plan is
effective for the three-year period Fiscal Year 1997 through Fiscal
Year 1999. It will continue in effect for each subsequent rolling
three-year period until and unless terminated by the Board of Directors
(the Board).
3. ELIGIBILITY AND PARTICIPATION
Participants in the Program shall include those officers and key
employees of the Corporation who meet the following eligibility
criteria:
* Have an impact on both short- and long-term results,
* Are in positions with long-result cycle timeframes, and
* Manage distinct functions or business units.
Based on these characteristics, the Program will apply to all officers
and key employees, as designated on Exhibit A. The President, may at
any time recommend to the Board the addition or deletion of Plan
Participants. The Board will have final authority to approve or
disapprove such recommendations. Existing Participants' award
opportunities will not be positively or negatively affected by the
addition or deletion of Participants.
EXHIBIT B
4. DEFINITIONS OF KEY TERMS
The key terms of the Plan are defined in this section:
a. "Participant" means any officer or key employee designated to
participate in the Program.
b. "Performance Period" means one fiscal year for the ST Plan and
a period of three consecutive fiscal years for the VA Plan.
c. "Base Salary" as relates to the ST Plan is the base salary of
Participant's compensation, before any deferrals and excluding any
amounts paid under the VA Plan. Base Salary as relates to the VA
Plan is a cumulative base salary of Participant's compensation for a
three-year Performance Period, before any deferrals and excluding any
amounts paid pursuant to the ST Plan.
d. "Total Actual Gross Patronage Dividend" is a dividend dollar amount
derived from actual Retail Support Center (RSC) sales combined with
actual Lumber and Building Material (LBM) sales including Ace Canada
RSC sales and LBM sales. It specifically includes the following
components:
- Total Patronage Dividend,
- International or Other Non-Patronage Income or Loss,
- Paint International Non-Patronage Income or Loss,
- Stop Handling Charge Subsidy,
- Stop Freight Subsidy,
- LTL Plus HC Subsidy,
- All Non-Patronage Business Income or Loss,
- Other Significant Nonrecurring Items.
e. "Total Gross Patronage Dividend Threshold" is the minimum acceptable
dividend dollar amount derived from actual RSC sales and actual LBM
sales (i.e., actual dividends below this level do not warrant a VA
Plan payout).
f. "Permanent Sharing Ratio" is a constant percent to be applied to
the difference between the Total Actual Gross Patronage Dividend and
the Total Gross Patronage Dividend Threshold for purposes of
determining the annual contribution/deduction to the VA Plan dollar
pool.
g. "Participant Sharing Ratio" is a unique percent assigned to each
Participant which indicates how the total VA Plan dollar pool will
be distributed. Each Participant's ratio will be determined by
his/her Base Salary divided by the sum of all Base Salaries. All
individual Participant Sharing Ratios will total 100 percent for
any given VA Plan Performance Period.
2
h. "Participant Account" is a record of the cumulative annual
adjustments of awards under the VA Plan allocated to a Participant.
i. "Retirement", for the purposes of this Pro ram only, shall be
defined as the first day of the month following the conclusion of
a Participant's active employment on or after the Participant
attains either (1) age 55 with 10 years of service, (2) age 60 with
5 years of service or (3) age 65.
j. "Disability" shall be defined as when a Participant becomes totally
disabled as described in the Corporation's Long-term Disability
Plan.
5. PROGRAM ADMINISTRATION
Compensation and Human Resources Committee: The Board Compensation and
Human Resources Committee (the Committee) shall be responsible for
overall Plan administration. The Committee is authorized to
interpret the Plan, to prescribe, amend, and rescind rules and
regulations relating to the Plan, to provide for conditions and
assurances deemed necessary or advisable to protect the interests of
the Corporation, and to make all other determinations necessary or
advisable for the administration of the Plan, but only to the extent
not contrary to the express provisions of the Plan.
The Committee may request the assistance of the Board in making any
determination under the Plan or in carrying out its duties hereunder.
The Committee may also delegate selected responsibilities to
Corporation officers to facilitate day-to-day Plan administration.
Determinations, interpretations, or other actions made or taken by the
Committee pursuant to the provisions of the Plan shall be final,
binding and conclusive for all purposes and upon all persons
whomsoever.
Amendment, Modification, and Termination of the Plan: The Board, or if
designated the Committee, may at any time terminate, and from time to
time may amend or modify the Plan to meet the best interests of the
Corporation (e.g., to modify the incentive pool calculation formula
inlight of a major acquisition or merger). Amendments to the Plan will
only be made inlight of extraordinary events, under which a failure to
amend would result in a performance award not consistent with the
stated purpose of the Plan.
6. ST PLAN DESIGN
Performance Measure: The President and/or the Reporting Officer will,
on a periodic basis, develop individual and team business objectives
for eligible participants. Once approved, these objectives will
become the basis for assessing performance and assigning awards under
the ST Plan. The President, at his discretion, may also consider
other factors in assessing overall performance.
Performance Period: The ST Plan is designed to operate with one-year
Performance Periods.
3
Award Opportunities: The maximum award opportunity for any given
Participant will be as set forth on Exhibit A. Exhibit B sets forth
the multiplier matrix for the team portion of the short term goal.
7. VA PLAN DESIGN
Performance Measure: Participants will share in a proportion of the
value added to the Corporation over time. Each fiscal year an
adjustment (contribution or deduction) will be made to an incentive
fund for the VA Plan Participants based on the value added to the
Corporation during the year.
The value added is based on Actual Gross Patronage Dividend realized
during the fiscal year over a Gross Patronage Dividend Threshold for
the same fiscal year. Corporation performance (in terms of Gross
Patronage Dividend) above the threshold level will result in an
increase in the incentive fund based on the Permanent Sharing Ratio.
Company performance below the threshold will result in a deduction
from the incentive fund based on the Permanent Sharing Ratio.
Following is a presentation of ratios in effect as of January 1, 1999
pertaining to the VA Plan. These ratios may be adjusted from time to
time by the Board (as set forth on Exhibit A):
* Gross Patronage Dividend Threshold for actual RSC sales is 5.4
percent
* Gross Patronage Dividend Threshold for actual LBM sales is 0.45
percent
* Permanent Sharing Ratio is 4.96 percent.
A financial model which supports the VA Plan is presented in Exhibit C.
Performance Period: The VA Plan is designed to operate with three-year
Performance Periods, with a new Performance Period beginning each year.
Award Opportunities: The Corporation's Compensation Strategy calls for
a greater emphasis on rewarding long-term performance. With this in
mind, the VA Plan calls for targeted award opportunities as set forth
on Exhibit A. These targets are reflected in the present Permanent
Sharing Ratio and will be considered in establishing Permanent Sharing
Ratios for future Performance Periods.
8. ADJUSTMENTS TO THE PARTICIPANTS' VA PLAN ACCOUNTS
Collectively: Adjustments to the value-added account of Participants
will be made annually. The total performance adjustment for all
Participants as a group will be calculated as follows:
* If the Total Actual Gross Patronage Dividend exceeds the Total Gross
Patronage Dividend Threshold, the total amount to be added is equal
to the excess multiplied by the Permanent Sharing Ratio.
4
* If the Total Actual Gross Patronage Dividend is less than the Total
Gross Patronage Dividend Threshold, the total amount to be subtracted
is equal to the shortfall multiplied by the Permanent Sharing Ratio.
The subtraction can either be applied to Participants' current
Performance Period accounts or to their deferred nonvested award
account (see Section 9).
Individually: A Participant Sharing Ratio will be assigned to each VA
Plan Participant based on his/her Base Salary as a percentage of the
total Base Salaries for all Participants. The total funded award pool
will be allocated to individual Participants based on their respective
ratios. Individual accounts will be maintained on a yearly basis, and
Participants will receive periodic statements detailing account value
and the effect of recent financial results.
9. VA PLAN VESTING AND DISTRIBUTION
Tier A Participants immediately vest in two-thirds of the calculated
award at the end of each Performance Period. Of the vested amount,
half will be paid in cash or deferred at employee's option within
the first quarter of the subsequent Fiscal Year. The other half, at
employee's option, may be invested in the Pacific Mutual or
Metropolitan supplemental life insurance plans (if Participant is
participating in such plans) or deferred (See Section 10).
With regard to the remaining one-third award, it may be immediately
deferred, but it becomes vested one year following the end of the
Performance Period. For example, the non-vested award portion
applicable for the 1997-1999 VA Plan will become vested as of the end
of Fiscal Year 2000.
Tier B Participants are immediately vested in their entire award which
will be paid in cash within the first quarter of the subsequent Fiscal
Year.
10. ST AND VA PLAN DEFERRAL ELECTION
Prior to or during the Performance Period, a Participant may elect to
defer to a future date any or all of his/her award that otherwise
would be payable. Such decisions are subject to Deferral Plan
provisions and shall be made prior such sums becoming earned and
payable.
11. CHANGES IN EMPLOYMENT STATUS
If a Plan Participant's employment terminates during a Performance
Period because of death, retirement, or permanent disability, the
Participant (or his/her Beneficiary) will be 100 percent vested in
his/her (a) Participant's Account including any portion of an award
subject to the one year deferral period for vesting, and (b) all sums
accrued towards his/her Account for the next two year rolling periods.
In the case of a voluntary or an involuntary termination, the
Participant will forfeit (a) any portion of an award that is subject
to the required one year deferral period and not vested, and (b) all
sums accrued towards his/her Account for the next two year rolling
periods. The Participant's Account shall be immediately payable unless
otherwise deferred by the Participant (See Section 10).
5
12. CHANGES IN CONTROL
Upon the occurrence of a Change in Control of the Corporation,
Participants' awards for the Plans then in effect shall be calculated
based on a pro rata application of the performance criteria as of the
end of the date the Change of Control is effective. All awards then
made, as well as any prior awards currently non-vested or in deferral,
will become immediately vested with cash payments made within a 90 day
period unless otherwise deferred by Participant (See Section 10).
13. WITHHOLDING PAYROLL TAXES
To the extent required by the laws in effect at the time payments are
made, the Corporation shall withhold from payments made hereunder any
taxes required to be withheld for federal, state, or local
governmental purposes.
14. MODE OF PAYMENT
All payments under the Program shall be made by negotiable check or
other cash equivalent.
15. BENEFICIARY DESIGNATION
If a Participant dies before receiving all the distributions to which
he/she is entitled, the remainder will be paid to such person as may
be designated by an instrument in writing, and in a form acceptable
to the Committee, executed by the Participant and delivered to the
Committee during the Participant's lifetime, which designation the
Participant may revoke or modify from time to time by an instrument
in writing in a form acceptable to the Committee, executed by the
Participant and delivered to the Committee during the Participant's
lifetime. If no such designation is delivered to the Committee, or
if no such designated Beneficiary is then living, then the remaining
distributions shall be paid to the surviving spouse of the Participant,
or in the event there is no such surviving spouse, to the estate of the
Participant.
16. NON-ALIENATION
A Participant shall have no fight to pledge, hypothecate, anticipate,
or in any way create a lien upon any amounts payable under this
Program, and no benefit payable hereunder shall be assignable in
anticipation of payment either by voluntary or involuntary acts, or
by operation of law.
17. NO EMPLOYMENT RIGHTS
Nothing in this Program shall interfere with or limit in any way the
right of the Corporation to terminate any Participant's employment at
any time for any reason, nor confer upon any Participant any right to
continue in the employ of the Corporation or its subsidiaries.
6
18. GOVERNING LAW
This Program shall be construed in accordance with the laws of the
State of Illinois.
IN WITNESS WHEREOF, the Corporation has adopted this the amended and restated
ACE HARDWARE CORPORATION OFFICER INCENTIVE PLAN as of December 8, 1998.
ACE HARDWARE CORPORATION,
A Delaware corporation
By:
Chairman of the Board of Directors
and
By:
President and CEO
7
EXHIBIT A
PARTICIPANTS
Tier A-. David F. Hodnik (The VA Plan Only)
William A. Loftus
Paul M. Ingevaldson
Rita D. Kahle
Michael C. Bodzewski
Lori L. Bossmann
Ray A. Griffith
David W. League
David F. Myer
Fred J. Neer
Donald L. Schuman
Tier B.- William J. Bauman (The VA Plan Only)
Kenneth L. Nichols (The VA Plan Only)
Daniel C. Prochaska (The VA Plan Only)
Wayne E. Wiggleton (The VA Plan Only)
Page 1 of 2
AWARD OPPORTUNITIES
ST Plan
Tiers and Participants Award Opportunities
Individual Team
Tier I 15% 25%
Rita D. Kahle
William A. Loftus
Tier II 15% 20%
Michael C. Bodzewski
Paul M. Ingevaldson
David F. Myer
Tier III 15% 15%
Lori L. Bossmann
Ray A. Griffith
David W. League
Fred J. Neer
Donald L. Schuman
VA Plan
Participant Target Award Opportunity
David F. Hodnik 90%
William A. Loftus 30%
Paul M. Ingevaldson 30%
Rita D. Kahle 30%
Michael C. Bodzewski 30%
Lori L. Bossmann 30%
Ray A. Griffith 30%
David W. League 30%
David F. Myer 30%
Fred J. Neer 30%
Donald L. Schuman 30%
New participants beginning January 1, 1999:
William J. Bauman 10%
Kenneth L. Nichols 10%
Daniel C. Prochaska 10%
Wayne E. Wiggleton 10%
The VA Plan is a rolling 3 year plan. New participants beginning January 1,
1999 will have prorated payments in the first two years, a 33% payment at the
end of 1999 and a 66% payment at the end of 2000.
RATIOS
* Gross Patronage Dividend Threshold for actual RSC sales is 5.4
percent
* Gross Patronage Dividend Threshold for actual LBM sales is 0.45
percent
* Permanent Sharing Ratio is 4.96 percent
Page 2 of 2
EXECUTIVE SHORT-TERM INCENTIVE PLAN
MULTIPLIER MATRIX - APPLIES TO TEAM PORTION OF SHORT TERM GOAL
RETURN ON SALES**
Wholesale 2.62% 2.67% 2.72% 2.77% 2.82% 2.87% 2.92%
Sales Increase
LT 4% 50% 60% 70% 100% 140% 170% 175%
6% 40% 70% 80% 110% 130% 160% 175%
8% 30% 60% 100% 120% 130% 160% 175%
10% 25% 50% 100% 125% 130% 150% 160%
12% 25% 40% 100% 130% 140% 150% 160%
14% 25% 30% 100% 140% 150% 150% 160%
GT 15% 25% 25% 100% 150% 150% 150% 160%
* For 1999, the target goal will be at 2.72% and for the year 2000,
2.74%. At the end of the year 2000, the plan and the return on
sales goal will be re-evaluated. 1999 and 2000 BLP will be
calculated Before the Paint Chip Rack subsidy.
** For return on sales component only - prorate between each goal
based on actual results. No proration based on sales growth.
(Proration occurs only if > 2.72% and payout would be higher
with proration.) The matrix is capped at=/- a 75% payout.
*** If retail sales growth is > wholesale sales growth, add 10% to
subsequent year's payment. Retail sales growth % will be
compiled from the Retail Profile report (from retail financial
statements) run in August of each subsequent year.
MULTIPLIER MATRIX CHART THAT WILL BE USED IN 1999 AND 2000
EXHIBIT B
<TABLE>
ACE HARDWARE CORPORATION
1999-2002 Long-Term Incentive Plan Review
1999-2002 Projections
With New Staff Officer Participants
2000-02 1999-01 1998-00 1997-99
Cum Cum Cum Cum 2002 2001 2000 1999 1998 1997
Proj Proj Proj Proj Proj Proj Proj Proj Proj Actual Actual
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Total Income $ -
bottom line 364,790 322,583 286,399 255,059 135,721 121,342 107,727 93,514 85,158 76,387
Total Income as a %
of Sales 2.77% 2.73% 2.72% 2.68% 2.77% 2.77% 2.75% 2.66% 2.750% 2.697%
% Increase in Total Income 13.1% 12.6% 12.3% 9.4% 11.85% 12.64% 15.20% 9.81% 11.5% 5.5%
Total Patronage Dividend 340,530 307,347 279,246 252,842 125,077 112,891 102,562 91,894 84,790 76,158
% Increase in Patr. Div 10.8% 10.1% 10.4% 8.4% 10.8% 10.1% 11.6% 8.4% 11.3% 3.1%
+ Int'l Non-Patronage
Income (loss) 4,164 3,115 2,825 2,713 1,797 1,351 1,016 748 1,061 904
+ Ace Canada Non-Patronage
Income (loss) 4,718 2,935 93 (1,745) 2,038 1,909 771 255 (933) (1,067)
+ Paint Int'l Non-Patronage
Income (loss) 1,677 1,305 1,111 1,079 689 557 431 317 363 399
+ Other Nonpatronage ** 13,701 7,881 3,124 582 6,120 4,634 2,947 300 (123) 405
+ STOP Handling Charge
Subsidy 90,725 82,329 74,707 69,890 32,830 30,161 27,734 24,434 22,539 22,917
+ STOP / Bulletin Freight
Subsidy (w/o BB) 88,871 81,561 74,974 69,352 32,144 29,543 27,184 24,834 22,956 21,562
+ LTL Plus HC Subsidy 7,028 6,462 5,952 5,453 2,543 2,336 2,149 1,977 1,826 1,650
+ Chip Rack Subsidy 2,112
= Total Gross Patronage
Dividend
(Shareholder Return) 551,414 492,935 442,032 400,166 203,238 183,382 164,794 146,871 132,479 122,928
Patronage Income on a
Book basis (pretax) 551,414 492,935 442,032 400,166 203,238 183,382 164,794 146,871 132,479 122,928
% Increase in Gross
Patronage Dividend 11.9% 11.5% 10.5% 8.6% 10.8% 11.3% 12.2% 10.9% 7.8% 5.7%
Gross Div as a % of Total Sales
Total Sales (include
Ace Canada) 13,179,443 11,805,645 10,532,132 9,525,953 4,892,682 4,375,116 3,911,645 3,518,884 3,101,603 2,905,466
Total Sales
(exclude Ace Canada) 12,855,199 11,516,141 10,278,733 9,295,932 4,772,148 4,267,496 3,815,555 3,433,090 3,030,088 2,832,754
% Increase in Total Sales 11.6% 12.1% 10.6% 14.8% 11.8% 11.8% 11.2% 13.5% 7.0% 4.9%
RSC Sales
(incl. Ace Canada) 7,725,113 7,094,885 6,488,897 5,964,986 2,083,088 2,567,919 2,354,106 2,172,860 1,961,931 1,830,195
LBM Sales
(incl. Ace Canada) 2,519,748 2,165,644 1,836,721 1,613,573 973,919 832,923 712,906 619,815 504,000 489,758
Patronage Minimum (Threshold)
- @ 5.40% of RSC Sales 424,881 390,219 356,889 328,074 151,367 138,668 127,122 117,334 105,944 98,831
- @ .45% of LBM Sales 11,339 9,745 8,265 7,261 4,383 3,748 3,208 2,789 2,268 2,204
Total Gross Div. Minimum 436,220 399,964 365,155 335,335 155,749 142,416 130,330 120,124 108,212 101,034
Value Added 115,194 92,971 76,877 64,831 47,489 40,966 34,464 26,747 24,267 21,894
Total Incentive -
4.96% of value added** 6,097 5,068 4,199 3,695 2,355.4 2,031.9 1,709.4 1,326.7 1,162.8 1,205.6
Incentive Earned as a
% of Base Comp 39.42% 35.09% 31.95% 30.05% 42.78% 39.47% 35.53% 29.57% 29.20% 31.66%
EXHIBIT C
</TABLE>
Exhibit 10-J
ACE HARDWARE CORPORATION INTERNATIONAL FRANCHISE AGREEMENT
This Agreement is made and entered into by and between ACE HARDWARE
CORPORATION, a Delaware corporation, having its general offices at
2200 Kensington Court, Oak Brook, Illinois 60521, U.S.A. (hereinafter
referred to as "Company"), and:
___________________________________________________________________________
[Corporate or Partnership Name]
an independent merchant having its general offices at:
___________________________________________________________________________
[Corporate or Partnership Address]
(hereinafter referred to as "Franchisee") which operates a retail business
outside the United States of America, its territories or possessions, at
the location(s) set forth in the attached Exhibit A;
WITNESSETH:
In consideration of the respective undertakings and covenants herein
contained, Company and Franchisee agree as follows:
1. In consideration of the franchise granted herein, Franchisee shall
pay to Company a non-refundable license fee in United States Dollars
of $25,000.00 upon execution of this Agreement for the first
franchised store opened by Franchisee and $15,000 upon the opening of
each additional franchised store opened by Franchisee. Company
agrees to: (i) waive its store planning fees for Franchisee's first
store; (ii) waive Ace Retail Management Institute fees for the two
(2) of Franchisee's employees; (iii) provide the assistance of a
Company representative to write the opening stock order for
Franchisee's first store (iv) provide one (1) set of plan-o-gram
manuals; and (v) assist in the preparation of a paint maket study and
conduct ACE paint marketing training.
2. As of the date of acceptance by Company hereof, Company grants to
Franchisee, upon and subject to the terms and conditions set forth
herein, the right to purchase from Company for resale at retail only
from Franchisee retail location(s) set forth on Exhibit A, such
merchandise as Company regularly offers for sale, including merchandise
under private labels containing the name "ACE" or "ACE Hardware". The
minimum volume of merchandise that must be purchased by Franchisee from
Company hereunder shall be, exclusive of all handling charges, U.S.
$200,000 during the first year of this Agreement, $350,000 during the
second year of this Agreement, and $500,000 during the third year of
this Agreement and each year thereafter, based upon the anniversary date
of this Agreement.
3. Franchisee shall pay to Company a Royalty Fee (" Royalty Fee") in an
amount equal to one and one-half percent (1.5%) of the Gross Retail
Revenues generated from the sale of home improvement products, tools,
hardware, paint and related merchandise and products, from whatever
source, provided to customers of the ACE Stores operated by
Franchisee in the Territory ("Gross Retail Revenues"). For the
purposes of this paragraph, the term "Gross Retail Revenues" shall
exclude all sales and value added taxes actually collected by
Franchisee from customers and paid to any government authority in
the Territory, which shall be the sole responsibility of Franchisee,
and any customer refund and credits. All Royalty Fees shall be due
and payable to Company, in United States Dollars, thirty (30) days
after the end of each calendar quarter for the calendar quarter just
ended. In the event that payment of the above fees in United States
Dollars is not possible by application of law, Franchisee shall be
entitled to make payment in its local currency at the currency
exchange rate reported in the Wall Street Journal, on the date the
payment is transmitted, provided, however, that if the payment is
transmitted after the date on which payment is due, the currency
exchange rate used shall be the rate as of the day payment is
transmitted or the date payment was due, whichever rate produces the
larger amount in United States Dollars.
4. Franchisee agrees to pay all amounts shown as currently due on
Company's billing statements for purchases of merchandise, supplies
and services made by Franchisee with such promptness as shall enable
Company to receive payment no later than the 10th day following the
date of the statement (it being understood that all invoices for
merchandise purchased on extended payment terms become currently due
when other items billed are not paid when due), and pay a service
charge per bi-weekly billing statement on any past due balance in
such amount as Company may, from time to time, impose on its dealers
generally. All amounts becoming payable by Franchisee pursuant to
Company's billing statements shall be payable in United States
currency. Licensee also agrees to reimburse Company for any and all
reasonable out-of-pocket expenses including, travel (at the business
class rate), lodging and tax, meals, and laundry costs incurred by
Company's employees in the performance of Company's obligations
hereunder.
5. Franchisee shall provide Company with a standby irrevocable letter of
credit, issued or confirmed by a United States bank approved by
Company, or with such other instruments or collateral as Company
shall deem to be appropriate in order to secure the prompt payment of
the indebtedness to it incurred by Franchisee from time to time.
6. All orders for merchandise, supplies and services placed by
Franchisee shall be subject to acceptance or nonacceptance by Company
at its corporate headquarters, now located in Oak Brook, Illinois,
U.S.A. Company shall cause all items ordered by Franchisee to be
shipped to International Retail Merchant's designated receiving
terminal in the United States for shipment by Franchisee only to
Franchisee location listed hereinabove. Title to all such
merchandise and supplies shipped to Franchisee shall pass to
Franchisee upon delivery to such receiving terminal. Franchisee
shall be responsible for and agrees to pay to Company all costs and
charges related to the delivery of such items to said terminal.
7. Franchisee shall be solely responsible for and shall pay when due all
import or export permit fees, customs duties and taxes of any nature
imposed upon the sales made by Company to Franchisee by the United
States Government or the government of the Country in which
International Retail Merchant's place of business is located.
Franchisee shall fully indemnify Company for the amount of any such
fees, duties and taxes, together with any interest or penalties
thereon, which Company may be required to pay as a result of
International Retail Merchant's failure to do so.
8. At its sole discretion and notwithstanding the provisions of
Paragraph 2 above, Company may limit, or restrict the quantities or
types of merchandise sold to Franchisee hereunder.
9. International Retail Merchant's rights hereunder shall be non-
exclusive, and Company reserves the right to sell in International
Retail Merchant's Country and elsewhere such products as Company may,
in its sole discretion, elect to sell, either directly or through any
other distributors or dealers selected or appointed at any time by
Company. Franchisee shall not be entitled to any compensation from
Company by reason of, or with respect to sales made directly by
Company or through any other distributor or dealer of Company.
10. Nothing herein shall be deemed in any way to limit the right of
Franchisee to determine the prices or terms at which products
purchased through Company shall be resold by Franchisee. It is
expressly understood that Franchisee may resell such products at any
prices determined by Franchisee, whether greater or lesser than any
prices listed or suggested by Company.
11. Franchisee hereby agrees to comply with any and all laws, regulations
and governmental orders of the United States of America, the several
States, or the Country in which International Retail Merchant's
business is located, which may be applicable to the sale and
distribution of the products purchased by Franchisee from Company, or
to the conduct of International Retail Merchant's business
operations, as the case may be. Franchisee agrees to order only such
merchandise as may lawfully be resold without alterations in labeling
or otherwise in the Country in which International Retail Merchant's
business is located, and agrees to indemnify Company and hold it
harmless from and against any and all claims, suits, proceedings,
demands, actions, judgments, orders, fines or penalties arising in
connection with the actual or alleged failure of such merchandise to
comply with any laws, regulations or governmental requirements
applicable to the sale or resale thereof.
12. Company shall supply Franchisee with such quantities of sales aids as
Company, in its sole discretion, deems necessary or desirable. All
such sales aids shall be in the English language. All copyrights
which may be issued or applied for with respect to such sales aids,
or any translations thereof, shall be issued or applied for in the
name of Company, and shall be the sole property of Company.
13. Franchisee shall not have authority to represent Company in
International Retail Merchant's Country or elsewhere as an agent, nor
to bind Company to any contract, representation, understanding, act
or deed concerning Company or any products sold by it. Neither the
making of this Agreement, nor the performance of any part of the
provisions hereof shall be construed to constitute Franchisee as an
agent or representative of Company for any purpose, nor shall this
Agreement be deemed to establish a joint venture or partnership
between the parties. All sales of merchandise by Franchisee shall be
for its own account, it being understood that Franchisee is an
independent business reselling products which are purchased from
Company.
14. Franchisee agrees to return no merchandise to Company without the
written consent of Company first being obtained.
15. (a) Company hereby grants to Franchisee a non-exclusive
license to use the service marks "ACE" and "ACE HARDWARE"
(hereinafter "the Mark") in connection with the retail hardware
services offered and performed by Franchisee at the location(s)
set forth on Exhibit A only, and in connection with private
label merchandise purchased from Company for resale from the
said location(s). Such use of the Mark by Franchisee shall
commence within one (1) year of the effective date of this
Agreement by displaying a Company exterior store identification
sign in compliance with the requirements set forth in the
Company Identity Standards Manual.
(b) Company does not guarantee, warrant or offer any patent or
trademark protection to Franchisee on any of the products
purchased by Franchisee from Company, and Company shall not be
obligated or liable in any way to indemnify Franchisee for any
actual or alleged violations of patent or patent rights, or
trademark, service mark, trade name or other intellectual
property rights arising from or in connection with the sale or
use of any products, programs or services purchased from
Company by Franchisee or the exercise of any rights granted
hereunder.
(c) Franchisee agrees to use the Mark only in the form, manner, and
logotype previously approved by Company in writing and to
comply with all guidelines and instructions from time to time
issued by Company with respect thereto. All use of the Mark
shall clearly and conspicuously disclose that the Mark is owned
by, or used under license from Company.
(d) The quality of the services in connection with which the Mark
is used shall be of high quality as determined by Company, and
otherwise in accordance with such specifications as Company
may, from time to time, prescribe.
(e) In no event shall the license herein granted be construed as
authorizing Franchisee to use any marks, trade names, slogans
or logos of Company other than as specifically licensed
hereunder. Franchisee agrees that it shall not place or cause
to be placed the names "ACE" or "ACE Hardware" on any
merchandise without the Company's prior written consent.
(f) Franchisee agrees not to adapt or vary the Mark or create or
use any trademark, service marks, trade names, symbols or logos
that are confusingly similar to those owned by Company, whether
or not licensed hereunder. Franchisee also agrees to at no
time use the Mark in association or conjunction with any trade
name, trademark or service mark owned or registered by a
competitor of Company.
(g) Company expressly disclaims any and all liability to Franchisee
or to any third party and Franchisee agrees to indemnify and to
hold Company harmless from and against any claims, suits,
losses, damages or expenses with respect to any actual or
alleged invalidity of the Mark or in connection with
International Retail Merchant's use of the Mark, or the use of
the services furnished by Franchisee in connection therewith.
(h) Franchisee acknowledges Company's ownership of the Mark, and
agrees that it will not do or permit any act to be done which
may impair such ownership. Franchisee agrees that all use of
the Mark by it shall inure to the benefit of, and be on behalf
of, Company. Franchisee agrees that it will never in any
manner represent that it has an ownership interest in the Mark,
or contest the ownership of the Mark by Company, or attack the
validity of the license herein granted. Franchisee agrees to
execute, upon request, such documents as Company may deem
necessary or desirable to acknowledge Company's ownership of
the Mark, or to register, retain, enforce or defend the Mark.
(i) Franchisee agrees to notify Company of any unauthorized use of
the Mark by others, as promptly as such use may come to
International Retail Merchant's attention. Company shall have
the sole and exclusive right, but not the obligation, to
register or renew the Mark or to commence infringement,
opposition or other proceedings with respect thereto.
(j) Franchisee agrees at no time to adopt or use, or authorize,
permit or condone the use by any other person or firm, of any
name, word or mark which is similar to or likely to be confused
with, any trade name, trademark or service mark belonging to or
registered by Company, whether or not licensed hereunder, (it
being understood and agreed that all variations or adaptations
of any trademarks or service marks owned or registered by
Company shall be the exclusive property of Company and that
Company shall have the exclusive right to register the same and
to license the use thereof).
16. Franchisee agrees to keep in strict confidence all checklists,
microfiche films, videograms, bulletins, catalogs, price lists, order
forms and other documents and information furnished by Company with
respect to the merchandise, programs and services which are available
from Company, and at no time to divulge or display any of the
foregoing, other than in connection with International Retail
Merchant's transactions with Company or for the purpose of promoting
International Retail Merchant's business. Franchisee agrees to
comply with all policy statements and guidelines communicated from
time to time by Company with respect to any confidential information
belonging to Company and at no time to authorize, permit or condone
the use of any of the foregoing by any other person or firm.
17. Upon the termination hereof, Franchisee agrees to immediately return
to Company at International Retail Merchant's sole expense, all such
documents and items and any equipment related thereto which have been
provided by Company. Franchisee further agrees, upon the termination
hereof, to immediately cease and desist from all use of the Mark in
any way, to apply to the appropriate governmental authorities in the
Country to cancel the recording, if any, of this Agreement, to remove
all signage bearing the Mark, and to destroy all printed or visual
materials of any sort bearing the Mark.
18. Franchisee agrees to refrain from making any representation that a
product purchased from Company can be used for a purpose or in a
manner not intended by its manufacturer, and Franchisee assumes full
responsibility for, and hereby indemnifies Company and holds it
harmless from and against any and all claims asserted against Company
(a) which are based upon or arise out of any such representation or
(b) which are based upon or arise out of any act performed by
Franchisee to assist International Retail Merchant's customer in
using a product purchased from Company, or to alter, install, repair
or service any product purchased by Franchisee from Company.
19. Franchisee further agrees to indemnify Company and hold it harmless
from and against any and all claims for (a) charges asserted against
Company by another party for services provided by such party to
Franchisee or for merchandise shipped by another party at
International Retail Merchant's request and (b) damages demanded from
Company in connection with any occurrence concerning which it is
alleged that Franchisee functioned as an agent of the Company.
20. Franchisee further agrees to indemnify Company and hold it harmless
for the amount of all attorneys' fees and expenses reasonably
incurred by it in:
(a) enforcing compliance by Franchisee with the provisions of this
Agreement or enforcing collection of any past due balances
owing by Franchisee on Company's billing statements,
(b) defending any claims asserted against Company which are based
upon or arise out of any occurrence of the types described in
Paragraphs 13, 18, 19, 20 and 21 hereof or in attempting to
avoid or mitigate any losses to Company in connection
therewith, and
(c) in protecting any security interest of Company granted in any
property of Franchisee in the event that Franchisee becomes a
debtor in bankruptcy or insolvency proceedings.
21. Franchisee agrees to notify Company in writing:
(a) prior to or concurrently with the effective date thereof, as to
any change in the legal form of ownership of Franchisee (such
as, for example, a change from individual or partnership form
to corporate form, or vice versa), it being understood that no
such change will operate to release from liability to Company
any party previously responsible for International Retail
Merchant's obligations hereunder without the written consent of
Company,
(b) as promptly as feasible, as to the death of any partner having
an interest in any partnership by which Franchisee is owned or
the death of any stockholder owning 50% or more of the voting
stock of Franchisee if Franchisee is incorporated, or
(c) not less then 30 days prior to the closing of the transaction,
as to the name and address of each proposed buyer or transferee
in any proposed sale, assignment or transfer of 50% or more of
the ownership interest(s) of Franchisee or of the business
operated at the location of International Retail Merchant's
business indicated hereinabove or of all of the capital stock
(both voting and non-voting) owned by the holder(s) in a
corporation owning the business operated at such location if
50% or more of the outstanding voting stock of such corporation
is owned by such holder(s).
22. Franchisee agrees to furnish Company with annual financial statement
of its year end and such current financial statements and related
information, including purchase and sales figures, concerning
International Retail Merchant's business on a quarterly basis or as
shall reasonably be requested from time to time by Company in order
to confirm Franchisee's compliance with the terms of this Agreement.
23. If requested at any time by Company, Franchisee shall maintain at
International Retail Merchant's sole expense with an insurance
carrier or carriers approved by Company a policy or policies of
liability insurance with a coverage limit of not less than
U.S.$5,000,000.00 per occurrence with respect to any claims for
damages to property, personal injuries or wrongful death which are
based upon or arise out of any occurrence concerning which it is
alleged that Franchisee functioned as an agent of Company, or that
Franchisee, Company, or either of them is otherwise liable therefor,
except for claims based on or arising out of the sole negligence of
Company. Company shall be named as an additional insured party in
each such policy and Company shall be furnished with a certificate of
insurance evidencing such coverages as are required herein.
24. Franchisee shall, at International Retail Merchant's sole expense,
take such steps as may be required in International Retail Merchant's
Country to satisfy any laws or requirements with respect to
declaring, notarizing, filing, recording, or otherwise rendering this
Agreement valid.
25. This Agreement shall be for an initial term of three (3) year,
commencing with the date of acceptance hereof by Company, and shall
thereafter be automatically renewed for successive one (1) year
periods unless written notice of termination is given by either party
no later than thirty (30) days prior to the expiration of the then
current term; provided, however, that if a longer period of advance
notice is required by any applicable statute, rule, or regulation,
then such notice shall comply with such requirement. Notwithstanding
the foregoing, Company reserves the right to terminate this Agreement
upon three (3) days' advance written notice to Franchisee in the
event that any payment owing to Company for merchandise or services
supplied to Franchisee is not received within fifteen (l5) days after
the date on which such payment is due. Further, notwithstanding the
foregoing, the closing down of the business operated at International
Retail Merchant's location set forth hereinabove shall automatically
cause this Agreement to be terminated unless such business is moved
to another location to which Company consents. This Agreement shall
also immediately terminate upon the giving of written notice by
Company to Franchisee at any time after Franchisee becomes bankrupt,
insolvent or makes an assignment for the benefit of creditors. This
Agreement shall also immediately terminate upon written notice of
termination by Company in the event that Franchisee is in breach of
any provision hereof and fails to cure such breach following written
notice of breach by Company and a reasonable period, which need not
exceed thirty (30) days from the date of mailing of such notice, to
cure such breach.
26. Notwithstanding anything herein to the contrary, if Franchisee is an
individual sole proprietor, this Agreement shall automatically
terminate upon the death of such individual. If Franchisee is a
partnership, this Agreement shall automatically terminate upon the
death of a member of such partnership. However, with Company's
approval (which approval shall not be unreasonably withheld), such
business may continue to be operated under this Agreement by the
estate of such deceased individual sole proprietor or by the
person(s) to whom ownership of said business is to be distributed by
such deceased individual's estate or by the person(s) or partnership
succeeding to the interest of such deceased member of a partnership
owning the business.
27. If Franchisee is a corporation, this Agreement shall automatically
terminate upon the consummation of any sale or transfer of all of the
shares of capital stock (both voting and non-voting) of such
corporation held by the holder or holders of 50% or more of its
outstanding voting stock.
28. Any provision of this Agreement, with regard to which the right of
Company to change the terms thereof has been reserved, shall be
deemed to have been modified as of the effective date set forth in an
advance written notice of such change given by Company to Franchisee.
29. If any amendment hereto is proposed by Company during the term
hereof, then this Agreement shall be deemed to have been modified
effective as of the date specified in a sixty (60) day advance
written notice thereof given by Company to Franchisee in order to
place the Agreement in conformity with such amendment. International
Retail Merchant's act of continuing to do business with Company after
the effective date of such amendment shall be deemed to constitute
International Retail Merchant's consent to be bound thereby. If
Franchisee does not consent to be bound by such amendment, then
Franchisee may terminate this Agreement by written notice thereof to
Company, which notice must be received by Company on or prior to the
effective date of the proposed amendment.
30. The signing of this Agreement by Franchisee constitutes an
application only, and this Agreement shall not be effective unless
and until it has been duly accepted and countersigned by Company at
its principal office in Illinois. All orders for merchandise,
supplies and services placed by Franchisee pursuant to this Agreement
shall be transmitted to Company at said office, and Franchisee shall
be deemed to have consented and agreed that:
(a) all provisions of this Agreement shall be interpreted and
construed in accordance with the substantive laws of the State
of Illinois, U.S.A.; and
(b) any suit brought by Company against Franchisee to enforce any
provision of this Agreement or seeking any relief in connection
with or arising out of the relationship between Company and
Franchisee may be instituted in an appropriate state or federal
court in the State of Illinois and Franchisee hereby expressly
submits to the jurisdiction of said court for purposes of the
enforcement of this Agreement and all matters related to this
Agreement.
31. Neither this Agreement nor any interest of Franchisee herein shall be
assignable or subject to transfer or encumbrance by Franchisee at any
time without Company's prior written consent.
32. Except as otherwise specifically provided, all notices required or
permitted to be given hereunder by one party to the other party shall
be effective if personally delivered or airmailed or sent by telex or
telefax to the addresses set forth hereinabove or to such other
address as either party designates to the other in writing for the
receipt of notices hereunder, with receipt deemed within fourteen
(14) days after airmailing or within two (2) days after sending by
telex or telefax.
33. The English version of this Agreement shall govern in the event of
any variations between the English version and any translation
hereof, and shall be used exclusively in any arbitration, legal
proceeding or suit hereunder.
34. The failure of either party to enforce its rights under any provision
hereof shall not be deemed a waiver of such rights for purposes of
future enforcement. No modification of this Agreement or any waiver
of rights hereunder shall be of any force and effect unless in
writing and signed by the party against whom enforcement of such
waiver or modification is sought.
35. The terms and conditions set forth in any purchase order or other
document shall be effective only to the extent that the same shall
not be inconsistent with the terms and conditions hereof.
36. Any provision or provisions hereof, which contravene the law of any
state or country in which this Agreement is effective, shall, in such
state or country, to the extent of such contravention of law, be
deemed separable, and shall not impair the validity of any other
term, condition, or provision hereof.
IN WITNESS WHEREOF, this Agreement has been executed on this _________ day
of _________________________, 19_____, by the person(s) signing it for
Franchisee, whose authority to sign shall be deemed to have been duly
authorized by Franchisee.
Franchisee:
_______________________________________
[Corporate or Partnership Name]
By:____________________________________
Printed Name:__________________________
Title:_________________________________
(If Franchisee is a corporation, the
corporate name should be written hereon
followed by the signature and title of
an appropriate officer. If Franchisee
is a partnership, the partnership name
should be written hereon followed by
the signatures of all partners.)
ACCEPTED for Ace Hardware
Corporation at Oak Brook,
Illinois this _____ day
of ________________, 19____.
By:________________________
________________________
(Title of Officer)
ACE HARDWARE CORPORATION FRANCHISEE AGREEMENT
EXHIBIT A
The following is(are) the retail business location(s) applicable to the
Franchisee Agreement:
DATE OF
NAME OF BUSINESS ADDRESS (LOCATION) AFFILIATION
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
Franchisee:
_________________________________
[Corporate or Partnership Name]
By:______________________________
Printed
Name:____________________________
Title:___________________________
(If Franchisee is a corporation,
the corporate name should be
written hereon followed by the
signature and title of an
appropriate officer. If
Franchisee is a partnership, the
partnership name should be
written hereon followed by the
signatures of all partners.)
ACCEPTED for Ace Hardware Corporation
at Oak Brook, Illinois this ____ day
of __________________, 19____.
By:___________________________________
___________________________________
(Title of Officer)
Exhibit 10-P
DEED OF LEASE
Arundel II L.L.C., Landlord
Ace Hardware Corporation, Tenant
Dated: January _30____, 1998
DEED OF LEASE
THIS DEED OF LEASE ("Lease"), dated this ___30th______ day of
January, 1998 by and between Arundel II L.L.C., a Delaware limited
liability company, ("Landlord") and Ace Hardware Corporation, a
_Delaware_______ corporation ("Tenant").
WITNESSETH:
That Landlord, in consideration of the rents and mutual covenants
hereinafter set forth, does hereby lease, demise and let unto Tenant, and
Tenant does hereby hire and take from Landlord the "Premises" which
consists of approximately 57,500 square feet of "net rentable area" (as
defined in Section 16.31 below) of the building ("Building") located on
that certain property known as Lot 14R, Arundel Crossing Business Park in
Anne Arundel County, Maryland. The Premises are more particularly shown on
the floor plan attached hereto as Exhibit D, and the Property is more
particularly outlined in red on the Site Plan attached hereto as Exhibit A.
The Building and the Property are sometimes hereafter referred to as the
"Project".
Tenant hereby accepts this Lease and the Premises upon the covenants
and conditions set forth herein and subject to any encumbrances, covenants,
conditions, restrictions and other matters of record as of the date hereof
including, without limitation, the Declaration of Covenants, Conditions,
Restrictions and of Certain Reciprocal Rights and Easements
("Declaration"). This Lease and the Premises are further subject to all
applicable zoning, municipal, county, state and federal laws, ordinances
and regulations governing and regulating the use of the Premises.
TO HAVE AND TO HOLD THE SAME, for a "term" commencing on the earlier
to occur of (i) Final Completion of the Premises (as defined in the Work
Agreement), or (ii) use and occupancy by Tenant of any portion of the
Premises, and continuing for a period of five (5) years and three (3)
months after the "Commencement Date", unless sooner terminated in the
manner provided hereinafter. The date on which the term of the Lease
begins is sometimes hereinafter referred to as the "Commencement Date".
The Commencement Date is anticipated to be on or about April 1, 1998.
Following the Commencement Date, Landlord shall deliver to Tenant a
Commencement Notice which shall contain the exact Commencement Date, the
number of square feet of net rentable area contained in the Premises, and
other reasonably pertinent data. Upon execution of the Commencement Notice
by Landlord and Tenant, the Commencement Notice shall be conclusive and
binding on Tenant as to all matters set forth therein.
ARTICLE I
BASE RENT
Section 1.1 Base Rent. In consideration of the leasing aforesaid,
Tenant agrees to pay to Landlord, at 6707 Democracy Boulevard, Suite 510,
Bethesda, Maryland, 20817 or at such other place as Landlord from time to
time may designate in writing, annual rental ("Base Rent") in an amount
equal to the product of $3.80, and the number of square feet of net
rentable area contained in the Premises. Base Rent shall begin accruing on
the date which is ninety (90) days after the Commencement Date ("Rent
Commencement Date") and shall be payable in equal monthly installments in
advance, on the first day of each and every month thereafter for the next
succeeding months during the balance of the term. If the Rent Commencement
Date occurs on a date other than the first day of a calendar month, or if
the term ends on a date other than the last day of a calendar month,
monthly rent shall be prorated on a daily basis. The Rent Commencement
Date is anticipated to be on or about July 1, 1998.
Section 1.2 Escalations. On the first (1st) anniversary of the Rent
Commencement Date of the term of this Lease, and on each anniversary date
thereafter during the term (each of such dates being hereinafter referred
to as an "Adjustment Date"), the monthly Base Rent payable pursuant to
Section 1.1 above shall be increased by an amount equal to the product of
(i) the monthly Base Rent in effect during the month immediately prior to
the Adjustment Date then at hand (disregarding any rental abatement then in
effect), and (ii) one and one-half percent (1 1/2%). The monthly Base
Rent, as adjusted, shall be due and payable as of such Adjustment Date and
on the first (1st) day of each month thereafter until the next Adjustment
Date or the end of the term of this Lease, whichever is applicable.
ARTICLE 2
ADDITIONAL RENT
Section 2.1 Additional Rent. In addition to the Base Rent payable by
Tenant under the provisions of Article 1 hereof, beginning on the
Commencement Date Tenant shall pay to Landlord "Additional Rent" as
hereinafter provided for in this Article 2. All sums under this Article
and all other sums and charges required to be paid by Tenant under the
Lease (except Base Rent), however denoted, shall be deemed to be
"Additional Rent." If any such amounts or charges are not paid at the time
provided in the Lease, they shall nevertheless be collectible as Additional
Rent with the next installment of Base Rent falling due.
Section 2.2 Definitions. The parties hereto agree upon the following
Definitions:
(a) "Lease Year" shall mean each twelve (12) month period
commencing with and including the month during which the term of this Lease
commences, and ending with the month during which the term of this Lease
(including any extensions or renewals) terminates.
(b) "Real Estate Taxes" shall mean and include all personal
property taxes of Landlord relating to Landlord's personal property used in
connection with the operation and maintenance of the Project (however, if
the equipment is shared between the Project and other projects, only the
proportionate share of taxes applicable to the Project shall be included),
real estate taxes accruing against the Project, water rates and charges,
sewer rates and charges, charges and fees for public utilities, street
lighting, excise levies, licenses, permits, inspection fees, installments
of special assessments, including interest thereon, relating to the
Project, and all other governmental charges, general and special, ordinary
and extraordinary, foreseen as well as unforeseen, of any kind and nature
whatsoever, or other tax, however described, which is levied or assessed in
substitution for any of the foregoing by the United States of America or
the state in which the Project are located or any political subdivision
thereof, against Landlord or all or any part of the Project as a result of
Landlord's ownership thereof, and payable during the respective Lease Year.
It shall not include any net income tax, estate tax, or inheritance tax.
Tenant shall be solely responsible for its Pro Rata Share (as hereinafter
defined) of all Real Estate Taxes.
(c) "Operating Expenses" shall mean and include all expenses
incurred by Landlord with respect to the maintenance and operation of the
Project as determined by Landlord's accountant in accordance with generally
accepted accounting principles consistently followed, including, but not
limited to, liability and casualty insurance premiums, maintenance and
repair costs, steam, electricity, water, sewer, gas and other utility
charges, fuel, lighting, window washing, parking lot maintenance, trash and
rubbish removal, snow and ice removal, security, landscaping, maintenance
of rights-of-way contiguous to the Property, wages payable to employees of
Landlord whose duties are connected with the operation and maintenance of
the Project (but only for the portion of their time allocable to work
related to the Project), amounts paid to contractors or subcontractors for
work or services performed in connection with the operation and maintenance
of the Project, repairs, replacements or other expenses for maintaining and
operating the Project, reasonable attorneys' fees and costs in connection
with appeal or contest of Real Estate Taxes or other taxes or levies, and
such other expenses as may be ordinarily incurred in the operation and
maintenance of a light industrial/office building in the
Baltimore/Washington industrial corridor and not specifically set forth
herein, including a reasonable administrative fee equal to ten percent
(10%) of the sum of Real Estate Taxes and Operating Expenses. The term
"Operating Expenses" shall also include capital improvements and
replacements to the Project, provided the cost thereof shall be amortized
on a straight-line basis over the useful life of the improvement or
replacement, as determined in accordance with generally accepted accounting
principles. Tenant shall be solely responsible for its Pro Rata Share of
all Operating Expenses.
The term "Operating Expenses" shall not include repairs, restoration
or other work occasioned by fire, windstorm or other insured casualty, or
occasioned by condemnation; leasing commissions; interest or principal
payments on any mortgage or other indebtedness of Landlord; payment under
any ground lease; compensation paid to any employee of Landlord above the
grade of building superintendent; any depreciation allowance or expense;
capital expenditures required by Landlord's failure to comply with Legal
Requirements (as hereinafter defined); overtime expenses to Landlord due to
Landlord's defaults hereunder; any cost representing an amount paid for
first class services and/or materials to a related person, firm, or entity
to the extent such amount exceeds the amount that would be paid for such
first class services and/or materials at the then existing market rates to
an unrelated person, firm or entity; costs directly resulting from the
gross negligence or misconduct of Landlord, its employees, agents or
contractors; costs and expenses incurred by Landlord in forming, operating
or maintaining the ownership entity for the Project including legal fees
incurred in connection therewith; or costs or expenses incurred by Landlord
in financing, refinancing, pledging, selling, granting or otherwise
transferring or encumbering ownership rights in the Project.
Notwithstanding the foregoing provisions of this Section 2.2, prior
to or on the Commencement Date, Tenant shall secure all utilities for the
Premises in Tenant's name and for Tenant's account. During the term of
this Lease, Tenant will pay, when due, all charges of every nature, kind or
description for such utilities furnished to the Premises or chargeable
against the Premises, including all charges for water, sewage, heat, gas,
light, garbage, electricity, telephone, steam, power, or other public or
private utility services. Prior to the Commencement Date, Tenant shall
reimburse Landlord for all utilities or services at the Premises used
directly and exclusively by Tenant or its agents, employees or contractors.
In the event that any charge or fee is required after the
Commencement Date by the state in which the Premises are located, or by any
agency, subdivision, or instrumentality thereof, or by any utility company
furnishing services or utilities to the Premises, as a condition precedent
to furnishing or continuing to furnish utilities or services to the
Premises, such charge or fee shall be deemed to be a utility charge payable
by Tenant. The provisions of this Section 2.2 shall include, but not be
limited to, any charges or fees for present or future water or sewer
capacity to serve the Premises, any charges for the underground
installation of gas or other utilities or services, and other charges
relating to the extension of or change in the facilities necessary to
provide the Premises with adequate utility services. In the event that
Landlord has paid any such charge or fee after the date hereof, Tenant
shall reimburse Landlord for such utility charge.
The term "Tenant's Pro Rata Share" shall mean a fraction, the
numerator of which is the net rentable area of the Premises, and the
denominator of which is the net rentable area of the Building. Landlord
anticipates Tenant's Pro Rata Share will be 16.75% (57,500/343,200).
Section 2.3 Intentionally Deleted.
Section 2.4 Intentionally Deleted.
Section 2.5 Estimated Operating Expenses for Subsequent Year. As to
each Lease Year, Landlord shall estimate for each such Lease Year the total
amount of Tenant's Pro Rata Share of Operating Expenses. Said estimate
shall be in writing and shall be delivered or mailed to Tenant at the
Premises following the start of the Lease Year.
Section 2.6 Payment of Additional Rent. Tenant shall pay, as
Additional Rent, Tenant's Pro Rata Share of Operating Expenses for each
Lease Year, so estimated, in equal monthly installments, in advance, on the
first day of each month during each applicable Lease Year. If for any
reason Landlord has not provided Tenant with Landlord's estimate of
Operating Expenses prior to the commencement of any Lease Year, then,
Tenant shall continue paying the amount due for the immediately preceding
year until it receives Landlord's estimate of same. Within thirty (30)
days of receipt of the Operating Expense estimate, Tenant shall pay to
Landlord all amounts due for the then current Lease Year, and during the
remainder of such Lease Year, Tenant shall pay to Landlord an amount equal
to one-twelfth (1/12th) of the Operating Expenses as noted on Landlord's
estimate.
Section 2.7 Re-estimates of Operating Expenses. From time to time
during any applicable Lease Year, Landlord may re-estimate the amount of
Tenant's Pro Rata Share of Operating Expenses, and in such event Landlord
shall notify Tenant, in writing, of such re-estimate in the manner above
set forth and fix monthly installments for the then remaining balance of
such Lease Year in an amount sufficient to pay the re-estimated amount over
the balance of such Lease Year after giving credit for payments made by
Tenant on the previous estimate.
Section 2.8 Adjustment of Actual Operating Expenses. Upon completion
of each Lease Year, Landlord shall cause its accountants to determine the
actual amount of Operating Expenses for such Lease Year and deliver a
written certification of the amounts thereof to Tenant. If Tenant has paid
less than its Pro Rata Share of the actual Operating Expenses for any Lease
Year, Tenant shall pay such deficiency within thirty (30) days after
receipt of such statement. If Tenant has paid more than its Pro Rata Share
of the actual Operating Expenses for any Lease Year, Landlord shall credit
such excess against the most current monthly installment or installments
due Landlord for its estimate of Operating Expenses for the next following
Lease Year. A pro rata adjustment shall be made for a fractional Lease
Year occurring during the term of this Lease or any renewal or extension
thereof based upon the number of days of the term of this Lease during said
Lease Year as compared to three hundred sixty-five (365) days and all
additional sums payable by Tenant or credits due Tenant as a result of the
provisions of this Article 2 shall be adjusted accordingly.
Section 2.9 Intentionally Deleted.
Section 2.10 Taxes and Other Additional Rent. Beginning on the
Commencement Date and continuing throughout the Term of the Lease, Tenant
shall be responsible for its Pro Rata Share of all Real Estate Taxes.
Tenant shall pay all amounts due within thirty (30) days of receipt of
written request and an invoice therefor, including a copy of the tax bill.
If by law any special assessment is payable (without default) in
installments (whether or not interest shall accrue on the unpaid balance of
such special assessment), and if Landlord elects to pay same in
installments, Tenant shall pay all amounts due in connection therewith,
together with any interest accrued, in installments within thirty (30) days
of receipt of Landlord's written request and invoice therefor. Landlord
shall be responsible for all installments of special assessments (including
interest accrued on the unpaid balance) which are payable prior to the
Commencement Date and after the termination date of the term of this Lease.
Further, Tenant shall pay, also as Additional Rent, all other sums
and charges required to be paid by Tenant under this Lease, and any tax or
excise on rents, gross receipts tax, or other tax, however described, which
is levied or assessed by the United States of America or the state in which
the Premises are located or any political subdivision thereof, against
Landlord in respect to the Base Rent, Additional Rent, or other charges
reserved under this Lease or as a result of Landlord's receipt of such
rents or other charges accruing under this Lease but only to the extent
such levy, tax, assessment or charge on rent shall be expressly in lieu of
or in substitution for any existing Real Estate Taxes; provided, however,
Tenant shall have no obligation to pay net income taxes of Landlord.
Section 2.11 Contesting Real Estate Taxes. Landlord shall,
upon written request of Tenant, contest by appropriate proceedings any Real
Estate Taxes. The cost of such contest shall be borne by Tenant unless
other occupants of the Building so direct Landlord to contest the Real
Estate Taxes, in which event the cost shall be split between Tenant and
such occupants on a pro-rata basis based on their respective net rentable
areas. Tenant may defer or postpone payment of its Pro Rata Share of Real
Estate Taxes until conclusion of the contest so long as (a) neither the
Project nor any portion thereof would, by reason of such postponement or
deferment, be in danger of being forfeited or lost, and (b) Tenant shall
have deposited with Landlord cash or a letter of credit payable to Landlord
issued by a national bank or federal savings and loan association in the
amount of Tenant's Pro Rata Share of the Real Estate Taxes so contested and
unpaid. If, during the continuance of such proceedings, Landlord shall,
from time to time, reasonably deem the amount deposited, as aforesaid,
insufficient, Tenant shall, upon demand of Landlord, make additional
deposits of such additional sums of money or such additional certificates
of deposit as Landlord may reasonably request. Upon failure of Tenant to
make such additional deposits within thirty (30) days, the amount
theretofore deposited may be applied by Landlord to the payment of Tenant's
Pro Rata Share of Real Estate Taxes, and the interest, fines and penalties
in connection therewith, and any reasonable costs, fees (including
reasonable attorney's fees) and other liability (including costs incurred
by Landlord, but excluding consequential or punitive damages) accruing in
any such proceedings. Upon the termination of any such proceedings, Tenant
shall pay Tenant's Pro Rata Share of Real Estate Taxes or part thereof, if
any, as finally determined in such proceedings, the payment of which may
have been deferred during the prosecution of such proceedings, together
with any reasonable costs, fees (including reasonable attorney's fees),
interest, penalties, fines and other liability in connection therewith, and
upon such payment Landlord shall return all amounts deposited with it with
respect to the contest of such Real Estate Taxes, as aforesaid, or, at the
written direction of Tenant, Landlord shall make such payment out of the
funds on deposit with Landlord and the balance, if any, shall be returned
to Tenant.
Tenant shall be entitled to the refund of any Real Estate Taxes,
penalties, fines and interest thereon received by Landlord which has been
paid by Tenant or which has been paid by Landlord but for which Landlord
has been previously reimbursed in full by Tenant. Landlord shall not be
required to join in any proceedings referred to in this Section 2.11 unless
the provisions of any law, rule or regulation at the time in effect shall
require that such proceedings be brought by or in the name of Landlord, in
which event Landlord shall join in such proceedings or permit the same to
be brought in Landlord's name upon compliance with such conditions as
Landlord may reasonably require. Landlord shall not ultimately be subject
to any liability for the payment of any fees, including attorney's fees,
costs and expenses in connection with such proceedings. Tenant agrees to
pay all such fees (including reasonable attorney's fees), costs and
expenses or, on demand, to make reimbursement to Landlord for such payment.
During the time when any such amount is on deposit with Landlord, and prior
to the time when the same is returned to Tenant or applied against the
payment, removal or discharge of Tenant's Pro Rata Share of Real Estate
Taxes, as above provided, Tenant shall be entitled to receive all interest
paid thereon, if any. Landlord agrees to cooperate with Tenant's efforts
in connection with this Section 2.11, at no cost or expense to Landlord.
Section 2.12 Landlord's Right to Contest Real Estate Taxes. In
addition to the right of Tenant under Section 2.11 to request that Landlord
contest the amount or validity of Real Estate Taxes, Landlord shall also
have the right to initiate a contest of same. Landlord shall not be
obligated to contest Real Estate Taxes, and any such contest shall be by
appropriate proceedings conducted in the name of Landlord.
Section 2.13 Evidence of Payment. Landlord covenants to furnish
Tenant written evidence of the payment of any Real Estate Taxes (i.e. paid
tax bills) for which Tenant has already paid Landlord its Pro Rata Share
upon receipt of Tenant's written request therefor.
Section 2.14 Escrow for Taxes and Assessments. At Landlord's
written demand after any Event of Default, Tenant shall pay to Landlord
Tenant's Pro Rata Share of Real Estate Taxes in estimated monthly payments
in advance. If the total monthly payments made by Tenant pursuant to this
Section 2.14 shall exceed the amount of payments due from Tenant, such
excess shall be credited on subsequent monthly payments of the same nature
or, at Tenant's option, promptly refunded, but if the total of such monthly
payments so made under this paragraph shall be insufficient to pay Tenant's
Pro Rata Share of Real Estate Taxes when due, then Tenant shall pay to
Landlord such amount as may be necessary to make up the deficiency.
ARTICLE 3
BASE AND ADDITIONAL RENT
Section 3.1 Interest and Late Fee on Past Due Obligations. Any
installment of Base Rent, Additional Rent, or other charges to be paid by
Tenant accruing under the provisions of this Lease which shall not be paid
within ten (10) days of its due date shall bear interest at the "Default
Rate" from the date when the same is due until the same shall be paid. The
Default Rate shall be equal to three (3) percentage points over the prime
rate of interest published in the Wall Street Journal, but if such rate
exceeds the maximum interest rate permitted by law, such rate shall be
reduced to the highest rate allowed by law under the circumstances. In
addition, any installment of Base Rent or Additional Rent or any other
charges payable by Tenant under the provisions hereof which shall not be
paid when due and which remains unpaid five (5) days after its due date
shall be subject to a late payment fee of five percent (5%) of the unpaid
amount.
Section 3.2 Rent Independent. Tenant's covenants to pay the Base
Rent and the Additional Rent are independent of any other covenant,
condition, provision or agreement herein contained, and nothing herein
contained shall be deemed to suspend or delay the payment of any amount of
money or charge at the time the same becomes due and payable hereunder, or
limit any other remedy of Landlord. Base Rent and Additional Rent are
sometimes collectively referred to as "Rent." Rent shall be payable
without recoupment, deduction, offset, prior notice or demand, in lawful
money of the United States.
Section 3.3 Security Deposit. Intentionally Deleted.
ARTICLE 4
POSSESSION OF PREMISES;
ENVIRONMENTAL LAWS
Section 4.1 Earlier Entry. Subject to Legal Requirements, Tenant
shall have access to the Premises prior to the Commencement Date to install
racking, furniture, fixtures, equipment, files and business records at such
time as may be mutually agreed upon by the Landlord, the Contractor (as
hereinafter defined) and the Tenant. Landlord anticipates that such early
entry will be available to Tenant on or about March 1, 1998.
Notwithstanding the foregoing, (i) such access shall not interfere in any
manner with the work being undertaken by the Landlord or the Contractor in
the Premises or the Building and shall not give rise to any labor disputes;
(ii) early entry shall be at Tenant's sole risk and Tenant shall indemnify
and hold harmless Landlord from and against all losses, damages, costs,
liabilities and claims arising out of or in connection with early access
being provided to Tenant, its employees and agents, and Tenant shall
maintain the liability insurance coverage required by the Lease, and such
insurance shall be "primary" during Tenant's early access; (iii) such
moving of furniture, fixtures and equipment into the Premises shall not
impede, hinder or delay in any manner obtaining a certificate of occupancy
(or like permit) for the Premises; and (iv) the terms of the Lease shall
apply to the extent applicable to such early entry (expressly excluding the
payment of Rent), but specifically including Tenant's obligation to comply
with all Legal Requirements during periods of early entry. In the event
that the Landlord should determine that Tenant's early access interferes
with the work being undertaken by the Landlord or the Contractor or
impedes, hinders or delays in any manner obtaining a certificate of
occupancy (or like permit), Tenant shall cease such activity immediately.
As used in this Lease and the Work Agreement, the term "Legal
Requirements" shall mean any laws, ordinances, codes (including building
codes, and electrical, plumbing, mechanical and other similar codes),
regulations, requirements and orders of the United States of America, the
County of Anne Arundel, State of Maryland and/or any other governmental
authority with jurisdiction over the Premises or the construction of the
Tenant Improvements.
Section 4.2 Intentionally Deleted.
Section 4.3 Permitted Use. The Premises shall be occupied and used
by Tenant for a dry goods warehouse/distribution/storage/office facility.
Tenant shall not use or permit the Premises to be used for any other
purpose without the prior written consent of Landlord.
Section 4.4 Tenant's Compliance With Environmental Laws. Tenant shall
at all times and in all respects comply with all federal, state and local
laws, ordinances and regulations ("Hazardous Materials Laws") relating to
the industrial hygiene, environmental protection or the use, analysis,
generation, manufacture, storage, presence, disposal or transportation of
any oil, petroleum products, flammable explosives, asbestos, urea
formaldehyde, polychlorinated biphenyls, radioactive materials or waste, or
other hazardous, toxic, contaminated or polluting materials, substances or
wastes, including without limitation any "hazardous substances," "hazardous
wastes," "hazardous materials" or "toxic substances" under any such laws,
ordinances or regulations (collectively, "Hazardous Materials").
Tenant shall at its own expense procure, maintain in effect and
comply with all conditions of any and all permits, licenses and other
governmental and regulatory approvals required for Tenant's use of the
Premises including, without limitation, discharge of (appropriately
treated) materials or waste into or through any sanitary sewer system
serving the Premises. Tenant shall cause any and all Hazardous Materials to
be removed from the Premises and transported solely by duly licensed
haulers to duly licensed facilities for final disposal of such Hazardous
Materials and wastes. Tenant shall in all respects, handle, treat, deal
with and manage any and all Hazardous Materials in, on, under or about the
Premises in complete conformity with all applicable Hazardous Materials
Laws and prudent industry practices regarding the management of such
Hazardous Materials. All reporting obligations to the extent imposed upon
Tenant by Hazardous Materials Laws are solely the responsibility of Tenant.
Upon expiration or earlier termination of this Lease, Tenant shall cause
all Hazardous Materials (except to the extent such Hazardous Materials are
generated, stored, released or disposed of during the term of this Lease by
Landlord) to be removed from the Premises and transported for use, storage
or disposal in accordance and in compliance with all applicable Hazardous
Materials Laws. Tenant shall not take any remedial action in response to
the presence of any Hazardous Materials in, on, about or under the
Premises, nor enter into any settlement agreement, consent, decree or other
compromise in respect to any claims relating to any way connected with the
foregoing without first notifying Landlord of Tenant's intention to do so
and affording Landlord ample opportunity to appear, intervene or otherwise
appropriately assert and protect Landlord's interest with respect thereto.
In addition, at Landlord's written request, at the expiration of the term
of this Lease or within sixty (60) days following the date of such request,
whichever is later, Tenant shall remove all tanks or fixtures which were
placed on the Premises during the term of this Lease and which contain, or
are contaminated with, Hazardous Materials.
Tenant shall immediately notify Landlord in writing of (a) any
enforcement, clean-up, removal or other governmental or regulatory action
instituted, completed or threatened pursuant to any Hazardous Materials
Laws; (b) any claim made or threatened by any person against Landlord, or
the Premises, relating to damage, contribution, cost recovery,
compensation, loss or injury resulting from or claimed to result from any
Hazardous Materials; and (c) any reports made to any environmental agency
arising out of or in connection with any Hazardous Materials in, on or
about the Premises, or with respect to any Hazardous Materials removed from
the Premises including, any complaints, notices, warnings, reports or
asserted violations in connection therewith. Tenant shall also provide to
Landlord, as promptly as possible, and in any event within five (5)
business days after Tenant first receives or sends the same, copies of all
claims, reports, complaints, notices, warnings or asserted violations
relating in any way to the Hazardous Materials in or on the Premises. Upon
written request of Landlord (to enable Landlord to defend itself from any
claim or charge related to any Hazardous Materials Law), Tenant shall
promptly deliver to Landlord notices of hazardous waste manifests
reflecting the legal and proper disposal of all such Hazardous Materials
removed or to be removed from the Premises. All such manifests shall list
the Tenant or its agent as a responsible party and in no way shall
attribute responsibility for any such Hazardous Materials to Landlord.
ARTICLE 5
SERVICES AND MAINTENANCE
Section 5.1 Services Provided by Landlord at Tenant's Expense.
Subject to the provisions of Article 2 hereof, Landlord shall provide the
following services on all days excepting Saturdays, Sundays, federal
holidays, and as otherwise stated in this Section 5.1: Maintenance in good
order, condition and repair and appropriate illumination of the parking
facilities and all driveways leading thereto and keeping the same free from
any unreasonable accumulation of snow and ice. Landlord shall keep and
maintain the landscaped area and parking facilities in a neat, safe and
orderly condition, and shall maintain and repair the sewer and storm system
serving the Project. All costs incurred in connection with this Section
5.1 shall be subject to reimbursement by Tenant pursuant to Article 2 or
Section 5.5, as applicable.
Section 5.2 Janitorial Service. Both Landlord and Tenant acknowledge
that Tenant shall provide janitorial and CHAR services for the Premises at
its sole cost and expense.
Section 5.3 Other Provisions Relating to Services. No interruption
in, or temporary stoppage of, any of the aforesaid services caused by
repairs, renewals, improvements, alterations, strikes, lockouts, labor
controversy, accidents, inability to obtain fuel or supplies, or other
Unavoidable Delays shall be deemed an eviction or disturbance of Tenant's
use and possession, or render Landlord liable for damages, by abatement of
rent or otherwise or relieve Tenant from any obligation herein set forth.
In no event shall Landlord be required to provide any service in excess of
that permitted by involuntary guidelines or laws, ordinances or regulations
of governmental authority.
Section 5.4 Effects on Utilities. Tenant shall not connect with
electric current or water pipes, except through existing electrical or
water outlets already in the Premises.
Section 5.5 Park Dues. Tenant acknowledges that the Property is
part of a larger development and that certain dues or assessments will be
levied in connection with the maintenance, repair and replacement of the
off-site storm water retention facility which serves the Project, and all
related storm water piping. Tenant's share of such dues or assessments
will be based on a fraction, the numerator of which will be the net
rentable area of the Premises and the denominator of which will be the net
rentable area of developed buildings serviced by the facility. The dues
and assessments will be more particularly set forth in the Declaration.
Section 5.6 Maintenance Provided by Landlord at Landlord's
Expense. Landlord shall, at its expense, keep and maintain in good order
and repair the exterior structure and structural systems and roof of the
Building. Notwithstanding anything to the contrary contained in this Lease,
in the event any repair, replacement, or other maintenance is required as a
result of the negligent actions or omissions of Tenant, Tenant shall be
solely responsible for all costs and expenses arising in connection
therewith.
ARTICLE 6
INSURANCE
Section 6.1 Landlord's Casualty Insurance Obligations. Landlord
shall keep the Building insured in an amount equivalent to the full
replacement value thereof (excluding foundation, grading and excavation
costs) against:
(a) loss or damage by fire; and
(b) such other risk or risks of a similar or dissimilar nature as
are now or may be customarily covered with respect to buildings and
improvements similar in construction, general location, use, occupancy and
design to the Building, including, but without limiting the generality of
the foregoing, windstorms, hail, explosion, vandalism, malicious mischief,
civil commotion, and such other coverage as may be deemed necessary by
Landlord, provided such additional coverage is obtainable and provided such
additional coverage is such as is customarily carried with respect to
buildings and improvements similar in construction, general location, use,
occupancy and design to the Building.
These insurance provisions shall in no way limit or modify any of the
obligations of Tenant under any provision of this Lease. Landlord agrees
that such policy or policies of insurance shall include a waiver of
subrogation clause in favor of Tenant. Notwithstanding the foregoing,
Tenant shall be obligated to pay the rental called for hereunder in the
event of damage to or destruction of the Premises if such damage or
destruction is occasioned by the negligence or fault of Tenant, its agents
or employees, such fault to be established by arbitration or a judicial
proceeding. Insurance premiums paid for insurance coverage required under
this Article 6 by Landlord (including Section 6.3) shall be a portion of
the "Operating Expenses" described in Article 2 hereof.
Section 6.2 Tenant's Casualty Insurance Obligations. Tenant shall
keep all of its machinery, equipment, furniture, fixtures and personal
property which may be located in, upon, or about the Premises insured for
the benefit of Tenant in an amount equivalent to the full insurable value
thereof against:
(a) loss or damage by fire; and
(b) such other risk or risks of a similar or dissimilar nature as
are now, or may in the future be, customarily covered with respect to a
tenant's machinery, equipment, furniture, fixtures, personal property and
business located in a building similar in construction, general location,
use, occupancy and design to the Building, including, but without limiting
the generality of the foregoing, windstorms, hail, explosions, vandalism,
theft, malicious mischief, civil commotion, and such other coverage as
Tenant may deem appropriate or necessary.
Tenant agrees that such policy or policies of insurance shall permit
release of liability as provided herein and/or waiver of subrogation clause
as to Landlord and Tenant waives, releases and discharges Landlord, its
agents, employees, and contractors from all claims or demands whatsoever
which Tenant may have or acquire arising out of damage to or destruction of
the machinery, equipment, furniture, fixtures, personal property, and loss
of use thereof occasioned by fire or other casualty, whether such claim or
demand may arise because of the negligence or fault of Landlord, its
agents, employees, contractors or otherwise, and Tenant agrees to look to
the insurance coverage only in the event of such loss.
Section 6.3 Landlord's Liability and Other Insurance Obligations.
Landlord shall maintain, for its benefit and the benefit of its managing
agent and Tenant, commercial general liability insurance against claims for
personal injury, death or property damage occurring upon, in or about the
Project, such insurance to afford protection to Landlord, its managing
agent and Tenant of a combined single limit of Two Million and No/100
Dollars ($2,000,000.00) in respect to the injury, death or property damage
arising out of any accident or occurrence. In addition, Landlord shall
carry employer's liability insurance with a minimum limit of $1,000,000 for
bodily injury; excess liability insurance over the commercial general and
employer's liability insurance required above with combined, minimum
coverage of $5,000,000; worker's compensation insurance in statutory
limits; rental interruption insurance, and such other insurance coverage or
increased amounts of referenced coverages or deductibles as is customarily
carried in respect of comparable buildings in the Baltimore/Washington
industrial corridor. Landlord agrees to include in its commercial general
liability insurance policy the contractual liability coverage insuring
Landlord's indemnification obligations provided for herein. Any such
coverage shall be deemed secondary to any liability coverage secured by
Tenant. Such insurance shall also afford coverage for all claims based
upon acts, omissions, injury or damage, which claims occurred or arose (or
the onset of which occurred or arose) in whole or in part during the policy
period.
At Tenant's request, Landlord shall furnish Tenant with a certificate
of insurance certifying that the insurance coverage required of Landlord
pursuant to this Article 6 is in effect. Any insurance required by the
terms of this Lease to be carried by Landlord may be under a blanket
policy (or policies) covering the other properties of the Landlord and/or
its related or affiliated entities so long as the insurance requirements
set forth herein are satisfied. If such insurance is maintained under a
blanket policy, Landlord shall procure and deliver to Tenant a statement
from the insurer or general agent of the insurer setting forth the coverage
maintained and the amounts thereof allocated to the risks intended to be
insured hereunder.
Section 6.4 Tenant's Liability Insurance Obligations. Tenant shall,
at Tenant's sole cost and expense but for the mutual benefit of Landlord,
its managing agent and Tenant, maintain commercial general liability
insurance against claims for personal injury, death or property damage
occurring upon, in or about the Premises, such insurance to afford
protection to Landlord, its managing agent and Tenant of a combined single
limit of Two Million and No/100 Dollars ($2,000,000.00) in respect to the
injury, death or property damage arising out of any accident or occurrence
in the Premises. In addition, Tenant shall carry employer's liability
insurance with a minimum limit of $500,000 for bodily injury; worker's
compensation insurance in statutory limits; and excess liability insurance
over the commercial general and employer's liability insurance required
above with combined, minimum coverage of $5,000,000. Such policies of
insurance shall be written in companies reasonably satisfactory to
Landlord. Landlord agrees that an insurance company with a rating of not
less than "A-" and a financial size of not less than Class VIII in the most
current available "Best's Insurance Reports" is acceptable to Landlord.
All such policies shall also name Landlord and its managing agent as
additional insureds thereunder (on a primary basis), and such policies, or
a memorandum or certificate of such insurance, shall be delivered to
Landlord with evidence reasonably satisfactory to Landlord that the premium
thereon has been paid. At such time as insurance limits required of
tenants in light industrial buildings in the area in which the Premises are
located are generally increased to greater amounts, Landlord shall have the
right to require such greater limits as may then be customary. Tenant
agrees to include in such policy the contractual liability coverage
insuring Tenant's indemnification obligations provided for herein. Any
such coverage shall be deemed primary to any liability coverage secured by
Landlord. Such insurance shall also afford coverage for all claims based
upon acts, omissions, injury or damage, which claims occurred or arose (or
the onset of which occurred or arose) in whole or in part during the policy
period.
Section 6.5 Indemnification. Tenant agrees to indemnify, protect,
defend and hold Landlord and Landlord's shareholders, employees, lender and
managing agent harmless from and against any and all claims, costs,
liabilities, actions, and damages arising from any breach or default on the
part of Tenant in the performance of any covenant or agreement on the part
of Tenant to be performed, pursuant to the terms of this Lease, or arising
from any act or negligence on the part of Tenant or its agents,
contractors, servants, employees or licensees, or arising from any
accident, injury or damage to the extent caused by Tenant, its agents, and
employees to any person, firm or corporation occurring during the term of
this Lease or any renewal thereof, in or about the Project, and from and
against all reasonable costs, reasonable counsel fees, expenses and
liabilities incurred in or about any such claim or action or proceeding
brought thereon; and in case any action or proceeding be brought against
Landlord or its managing agent by reason of any such claim, Tenant, upon
notice from Landlord, covenants to resist or defend such action or
proceeding by counsel reasonably satisfactory to Landlord. Tenant's
indemnification shall not apply to losses, claims, costs and the like
arising as a result of the negligence or willful misconduct of Landlord or
its agents.
Section 6.6 Tenant's Waiver. Tenant agrees, to the extent not
expressly prohibited by law, that Landlord, its agents, employees and
servants shall not be liable, and Tenant waives all claims for damage to
property, injury to person and damage to business sustained during the term
of this Lease by Tenant occurring in or about the Project, arising at any
time and from any cause other than by reason of the negligent or willful
misconduct, or negligent omission of Landlord, its employees, agents,
contractors or representatives. This paragraph shall apply especially but
not exclusively, to damage caused by aforesaid or by the flooding of
basements or other subsurface areas, or by refrigerators, sprinkling
devices, air conditioning apparatus, water, snow, frost, steam, excessive
heat or cold, falling plaster, broken glass, sewage, gas, odors or noise,
or the bursting or leaking of pipes or plumbing fixtures.
Section 6.7 Landlord's Deductible. Provisions herein to the contrary
notwithstanding, in the event any damage to the Project results directly
and exclusively from any act or omission of Tenant, its agents, employees
or invitees, and all or any portion of Landlord's loss is "deductible,"
Tenant shall pay to Landlord the amount of such deductible loss up to One
Hundred Thousand Dollars ($100,000).
Section 6.8 Tenant's Property. All property on the Premises
belonging to Tenant, its agents, employees, invitees or otherwise located
at the Premises, shall be at the risk of Tenant only, and Landlord shall
not be liable for damage thereto or theft, misappropriation or loss thereof
and Tenant agrees to defend and hold Landlord, its agents, employees and
servants harmless and indemnify them against claims and liability for
injuries to such property.
Section 6.9 Increase in Insurance. Tenant shall not do or permit
anything to be done in or about the Premises nor bring or keep anything
therein which will in any way increase the existing rate of or affect in
any other way any fire or other insurance upon the Project or any of its
contents, or cause a cancellation of any insurance policy covering the
Project or any of its contents. Notwithstanding anything to the contrary
contained herein, Tenant shall promptly, upon demand, reimburse Landlord
for the full amount of any additional premium charged for such policy by
reason of Tenant's failure to comply with the provisions of the paragraph,
it being understood that such demand for reimbursement shall not be
Landlord's exclusive remedy. Tenant shall promptly, upon demand, reimburse
Landlord for any additional premium charged for any such policy by reason
of Tenant's failure to comply with the provisions of this Article.
Section 6.10 Tenant's Failure to Insure. In the event Tenant
fails to provide Landlord with evidence of insurance required under this
Article 6 within thirty (30) days of Landlord's written request therefor,
but in any event at least ten (10) days prior to the expiration of the
existing policy, Landlord may, but shall not be obligated to, without
further demand upon Tenant, and without waiving or releasing Tenant from
any obligation contained in this Lease, effect such insurance and Tenant
agrees to repay, upon demand, all such sums incurred by Landlord in
effecting such insurance. All such sums shall become a part of the
Additional Rent payable hereunder, but no such payment by Landlord shall
relieve Tenant from any default under this Lease.
ARTICLE 7
CERTAIN RIGHTS RESERVED BY LANDLORD
Section 7.1 Rights Reserved by Landlord. Landlord reserves the
following rights exercisable without notice and without liability to Tenant
and without effecting an eviction, constructive or actual, or disturbance
of Tenant's use or possession, or giving rise to any claim for set off or
abatement of rent:
(a) Retain Keys. To retain at all times and to use in appropriate
instances keys to all doors within and into the Premises. No locks shall
be changed without the prior written notice to Landlord.
(b) Make Repairs. Upon 24 hours notice to Tenant (except in the
event of an emergency) to make repairs, alterations, additions, or
improvements, whether structural or otherwise, in and about the Project, or
any part thereof, and for such purposes to enter upon the Premises, and
during the continuation of any of said work, to temporarily close doors,
entryways, public spaces, and corridors in the Project and to interrupt or
temporarily suspend services and facilities, so long as Landlord at all
times endeavors in good faith to limit any interference with the conduct of
Tenant's business or its occupancy and use of the Premises.
(c) Regulate Heavy Equipment. Intentionally Deleted.
Section 7.2 Emergency Entry. Landlord and its agents may enter the
Premises at any time in case of emergency and shall have the right to use
any and all means which Landlord may reasonably deem proper to open such
doors during an emergency in order to obtain entry to the Premises. Any
entry to the Premises obtained by Landlord in the event of an emergency
shall not, under any circumstances, be construed or deemed to be a forcible
or unlawful entry into, or detainer of, the Premises, or to be an eviction
of Tenant from the Premises or any portion thereof.
Section 7.3 Exhibition of Premises. Tenant shall permit Landlord and
its agents, upon not less than twenty four (24) hours' notice, to enter and
pass through the Premises or any part thereof at reasonable times during
normal business hours to: (a) post notices of non-responsibility; (b)
exhibit the Premises to holders of encumbrances on the interest of Landlord
under the Lease and to prospective purchasers or mortgagees of the Project;
and (c) during the period of six (6) months prior to the expiration of the
Lease term, exhibit the Premises to prospective tenants thereof. In
addition, Landlord may post commercially reasonable signage indicating that
the Premises will be available for occupancy. If during the last month of
the Lease Term, Tenant shall have removed substantially all of Tenant's
property and personnel from the Premises, Landlord may enter the Premises
and repair, alter, and redecorate the same, without abatement of Rent and
without liability to Tenant, and such acts shall have no effect on this
Lease.
Section 7.4 Right of Landlord to Perform. All covenants and
agreements to be performed by Tenant under any of the terms of this Lease
shall be performed by Tenant at Tenant's sole cost and expense and without
any abatement of Rent. If Tenant shall fail to pay any sum of money (other
than Rent due Landlord) required to be paid by it hereunder or shall fail
to perform any other act on its part to be performed hereunder, including,
but not limited to, the failure to commence and complete repairs promptly
and adequately, and the failure to remove any liens or otherwise to perform
any act or fulfill any obligation required of Tenant under this Lease,
Landlord may, but shall not be obligated to, and without waiving or
releasing Tenant from any obligations of Tenant, make any such payment or
perform any such act on Tenant's part to be made or performed as in this
Lease provided. Notwithstanding the foregoing, Landlord shall not be
required to give Tenant written notice prior to performing on Tenant's
behalf in the event of an emergency. All sums so paid by Landlord and all
necessary incidental costs, together with an administrative overhead charge
equal to ten percent (10%) of the actual costs incurred, shall be payable
to Landlord by Tenant as Rent on demand and Tenant covenants to pay all
such sums. Landlord shall have (in addition to any other right or remedy
of Landlord) the same rights and remedies in the event of Tenant's
nonpayment of such sums, as in the case of default by Tenant in the payment
of Rent to Landlord.
ARTICLE 8
ALTERATIONS AND IMPROVEMENTS
Section 8.1 Tenant's Changes and Alterations. Tenant shall have the
right at any time, and from time to time during the term of this Lease, to
make such changes and alterations, structural or otherwise, to the
Premises, improvements and fixtures hereafter erected on the Premises as
Tenant shall deem necessary or desirable in connection with the
requirements of its business, subject in all cases to Landlord's prior
written consent, such consent not to be unreasonably withheld. The changes
and alterations (other than changes or alterations of Tenant's movable
trade fixtures and equipment) shall be made in all cases subject to the
following conditions, which Tenant covenants to observe and perform:
(a) Permits. No change or alteration shall be undertaken until
Tenant shall have procured and paid for, so far as the same may
be required by the applicable governmental authorities from
time to time, all municipal, state and federal permits and
authorizations of the various governmental bodies and
departments having jurisdiction thereof, and Landlord agrees to
join in the application for such permits or authorizations
whenever such action is necessary, all at Tenant's sole cost
and expense.
(b) Compliance with Plans and Specifications. Before commencement
of any change, alteration, restoration or construction (here-
inafter sometimes referred to as "Work") Tenant shall (i)
furnish Landlord with detailed plans and specifications of the
proposed change or alteration; (ii) obtain Landlord's prior
written consent; (iii) provide Landlord with the name of the
licensed architect or licensed professional engineer selected
and paid for by Tenant, who shall supervise any such work
(hereinafter referred to as "Alterations Architect or
Engineer"); and (iv) obtain Landlord's prior written approval
of detailed plans and specifications prepared and approved in
writing by said Alterations Architect or Engineer, and of each
amendment and change thereto.
(c) Value Maintained. Any change or alteration shall, when
completed, be of such character as not to reduce the value of
the Premises or the Building to which such change or alteration
is made below its value immediately before such change or
alteration, nor shall such change or alteration reduce the area
or cubic content of the Building, nor change the Building as to
use without Landlord's express written consent. Tenant further
agrees that in no event shall any change or alteration void or
impair any of Landlord's warranties on the Building and, to the
extent same are voided or impaired, Landlord's corresponding
warranties to Tenant as contained in this Lease shall be
likewise voided. Landlord's consent to any Work shall not be
construed as a determination that such Work will not void or
impair any applicable warranties.
(d) Compliance with Laws. All Work done in connection with any
change or alteration shall be done promptly and in a good and
workmanlike manner and in compliance with all building and
zoning laws of the place in which the Premises are situated,
and with all laws, ordinances, orders, rules, regulations and
requirements of all federal, state and municipal governments
and appropriate departments, commissions, boards and officers
thereof, and in accordance with the orders, rules and
regulations of the Board of Fire Underwriters where the
Premises are located, or any other body exercising similar
functions. The cost of any such change or alteration shall be
paid so that the Premises and all portions thereof shall at all
times be free of liens for labor and materials supplied to the
Premises, or any portion thereof. The Work of any change or
alteration shall be prosecuted with reasonable dispatch, delays
due to strikes, lockouts, acts of God, inability to obtain
labor or materials, governmental restrictions or similar causes
beyond the control of Tenant excepted. Tenant shall obtain and
maintain, or cause to be obtained and maintained, at no expense
to Landlord, during the performance of the Work, workers'
compensation insurance in normal and customary amounts,
covering all persons employed in connection with the Work and
with respect to which death or injury claims could be asserted
against Landlord or Tenant or against the Premises or any
interest therein. Tenant shall also cause any contractor
performing work on Tenant's behalf to carry and maintain, at no
expense to Landlord, a comprehensive general liability
insurance policy with a deductible of no greater than $10,000,
which shall include contractor's liability coverage,
contractual liability coverage, completed operations coverage,
a broad form property damage endorsement and contractor's
protective liability coverage to afford protection with limits,
for each occurrence, of not less than Three Million Dollars
($3,000,000) combined single limit, written on an occurrence
basis. In addition, the fire insurance with "extended
coverage" endorsement required by Section 6.1 hereof shall be
supplemented with "builder's risk" insurance on a completed
value form or other comparable coverage on the Work. All such
insurance shall be in a company or companies authorized to do
business in the state in which the Premises are located and
reasonably satisfactory to Landlord, and all such policies of
insurance or, at Tenant's option, certificates of insurance
shall be delivered to Landlord endorsed "Premium Paid" by the
company or agency issuing the same, or with other evidence of
payment of the premium satisfactory to Landlord.
(e) Property of Landlord. Unless otherwise designated by Tenant at
the time Landlord's consent is obtained, all improvements and
alterations (other than Tenant's movable trade fixtures and
equipment) made or installed by Tenant shall immediately, upon
completion or installation thereof, become the property of
Landlord without payment therefor by Landlord, and shall be
surrendered to Landlord on the expiration of the term of this
Lease.
(f) Location of Improvements. No change, alteration, restoration
or new construction shall connect the Premises with any other
property, building or other improvement, nor shall the same
obstruct or interfere with any existing easement.
(g) Removal of Improvements. As a condition to granting approval
for any changes or alterations Landlord, by written notice to
Tenant, given at or prior to the time of granting such
approval, may require Tenant to remove any improvements,
additions or installations installed by Tenant in the Premises
at Tenant's sole cost and expense, and repair and restore any
damage caused by the installation and removal of such
improvements, additions, or installations; provided, however,
the only improvements, additions or installations which Tenant
shall remove shall be those specified in such notice.
(h) Written Notification Required. Tenant shall notify Landlord in
writing ten (10) days prior to commencing any alterations,
additions or improvements to the Premises which have been
approved by Landlord so that Landlord shall have the right to
record and post notices of non-responsibility on the Premises.
Section 8.2 Nonstructural Alterations Without Landlord's Consent.
Notwithstanding the foregoing, Tenant shall have the right from time to
time and at any time, without Landlord's consent, to perform the following
work within the Premises: (i) install, remove and relocate nonstructural
office partitioning provided such work does not materially and adversely
affect the base building structure or HVAC systems, (ii) paint and install
wall coverings, (iii) install and remove office furniture, (iv) relocate
electrical outlets, (v) install and remove workstations, (vi) install and
remove Tenant's equipment and perform cable pulls in connection therewith,
and (vii) install and remove carpeting and other floor coverings.
Section 8.3 Freedom from Liens. Tenant shall not suffer or permit
any mechanic's lien or other lien to be filed against the Project, or any
portion thereof, by reason of work, labor, skill, services, equipment or
materials supplied or claimed to have been supplied to the Premises at the
request of Tenant, or anyone holding the Premises, or any portion thereof,
through or under Tenant. If any such mechanic's lien or other lien shall
at any time be filed against the Project, or any portion thereof, Tenant
shall cause the same to be discharged of record or satisfied by bonding
within 20 days of the date of filing the same. Tenant shall not be
entitled to any additional grace or cure period. If Tenant shall fail to
discharge or bond off such mechanic's lien or liens or other lien within
such period, then an Event of Default shall have occurred and, in addition
to any other right or remedy, Landlord may, but shall not be obligated to,
discharge the same by paying to the claimant the amount claimed to be due
or by procuring the discharge of such lien by deposit in the court having
jurisdiction of such lien, the foreclosure thereof or other proceedings
with respect thereto, of a cash sum sufficient to secure the discharge of
the same, or by the deposit of a bond or other security with such court
sufficient in form, content and amount to procure the discharge of such
lien, or in such other manner having reasonable cost as is now or may in
the future be provided by present or future law for the discharge of such
lien as a lien against the Premises or the Project. Such amount paid by
Landlord, or the value of such deposit so made by Landlord, together with
all reasonable costs, fees and expenses in connection therewith (including
reasonable attorney's fees of Landlord), together with interest thereon at
the Default Rate, shall be repaid by Tenant to Landlord within thirty (30)
days following demand by Landlord and if unpaid may be treated as
Additional Rent. Tenant shall indemnify and defend Landlord against and
save Landlord and the Premises, and any portion thereof, harmless from all
losses, costs, damages, expenses, liabilities, suits, penalties, claims,
demands and obligations, including, without limitation, reasonable
attorney's fees resulting from the assertion, filing, foreclosure or other
legal proceedings with respect to any such mechanic's lien or other lien.
Tenant shall specifically notify all materialmen, contractors,
artisans, mechanics, laborers and any other person now or hereafter
furnishing any labor, services, materials, supplies or equipment to Tenant
with respect to the Premises, or any portion thereof, that they must look
exclusively to Tenant to obtain payment for the same, and that Landlord
shall not be liable for any labor, services, materials, supplies, skill,
machinery, fixtures or equipment furnished or to be furnished to Tenant
upon credit, and that no mechanic's lien or other lien for any such labor,
services, materials, supplies, machinery, fixtures or equipment shall
attach to or affect the estate or interest of Landlord in and to the
Project, or any portion thereof.
Section 8.4 Landlord's Indemnification. The provisions of Section
8.3 above shall not apply to any mechanic's lien or other lien for labor,
services, materials, supplies, machinery, fixtures or equipment furnished
to the Premises in the performance of Landlord's construction obligations
as set forth in the Work Agreement, and Landlord does hereby agree to
indemnify and defend Tenant against and save Tenant and the Premises, and
any portion thereof, harmless from all losses, costs, damages, expenses,
liabilities, suits, penalties, claims, demands and obligations, including,
without limitation, reasonable attorney's fees resulting from the
assertion, filing, foreclosure or other legal proceedings with respect to
any such mechanic's lien or other lien.
Section 8.5 Removal of Liens. Except as otherwise provided for in
this Article 8, Tenant shall not create, permit or suffer, and shall
promptly discharge and satisfy of record, any other lien, encumbrance,
charge, security interest, or other right or interest which shall be or
become a lien, encumbrance, charge or security interest upon the Project,
or any portion thereof, or the income therefrom, or on the interest of
Landlord or Tenant in the Premises, or any portion thereof, save and except
for those liens, encumbrances, charges, security interests, or other rights
or interests consented to, in writing, by Landlord, or those mortgages,
assignments of rents, assignments of leases and other mortgage
documentation placed thereon by Landlord in financing or refinancing the
Project.
ARTICLE 9
REPAIRS
Section 9.1 Tenant's Repair Obligations. Subject to Article 6 hereof,
and except to the extent the responsibility of Landlord hereunder, Tenant
shall, during the term of this Lease, at Tenant's expense, keep the non-
structural elements of the Premises and all changes and alterations made by
Tenant to the Premises (whether non-structural or structural) in as good
order, condition and repair as they were at the time Tenant took possession
of the same, reasonable wear and tear and damage from fire and other
casualties excepted. Tenant shall keep the Premises in a neat and sanitary
condition and shall not commit any nuisance or waste on the Premises or in,
on, or throw foreign substances in the plumbing facilities. All uninsured
damage or injury to the Project caused by Tenant moving furniture,
fixtures, equipment, or other devices in or out of the Premises or by
installation or removal of furniture, fixtures, equipment, devices or other
property of Tenant, its agents, contractors, servants or employees, due to
carelessness, omission, neglect, improper conduct, or other cause of
Tenant, its servants, employees, agents, visitors, or licensees, shall be
repaired, restored and replaced promptly by Tenant at its sole cost and
expense to the reasonable satisfaction of Landlord. All repairs,
restorations and replacements shall be in quality and class equal to the
original work and shall comply with all requirements of the Lease.
Section 9.2 Landlord's Inspection. Landlord or its employees, or
agents, shall have the right, upon 24 hours notice to Tenant (except in the
event of an emergency) to enter the Premises at any reasonable time or
times for the purpose of inspection or performing work required by Landlord
under the terms of this Lease, but nothing contained herein shall be
construed as imposing any obligation on Landlord to make any repairs,
alterations or improvements which are the obligation of Tenant.
Section 9.3 Joint Inspection Upon Vacation. Tenant shall give
written notice to Landlord at least thirty (30) days prior to vacating the
Premises for the express purpose of arranging a meeting with Landlord for a
joint inspection of the Premises. In the event of Tenant's failure to give
such notice and arrange such joint inspection, Landlord's inspection at or
after Tenant's vacation of the Premises shall be conclusively deemed
correct for purposes of determining Tenant's responsibility for repairs and
restoration hereunder.
ARTICLE 10
ASSIGNMENT AND SUBLETTING
Section 10.1 Restriction on Transfer. Tenant shall not sublet
the Premises, or any portion thereof, nor assign, mortgage, pledge,
transfer or otherwise encumber or dispose of this Lease, or any interest
therein, or in any manner assign, mortgage, pledge, transfer or otherwise
encumber or dispose of its interest or estate in the Premises, or any
portion thereof, without obtaining Landlord's prior written consent in each
and every instance, such consent not to be unreasonably withheld. Tenant
agrees to pay on behalf of Landlord any and all reasonable, actual out-of-
pocket costs of Landlord, including reasonable attorney's fees paid or
payable in connection with the review of any such assignment or subletting.
For purposes of this Lease, any transfer of less than fifty percent
(50%) in the aggregate of stock, membership interest or partnership
interest in Tenant shall not constitute an assignment.
Section 10.2 Restriction From Further Assignment. Any further
assignment or subleasing shall be governed by the terms of this Article 10.
No assignment or subleasing shall relieve Tenant from any of Tenant's
obligations set forth in this Lease.
Section 10.3 Landlord's Termination Rights. Notwithstanding
anything contained in this Lease to the contrary, should Tenant desire to
assign this Lease, or its interest or estate in the Premises, or sublet the
Premises, or any portion thereof, it shall give written notice of its
intention to do so to Landlord sixty (60) days or more before the effective
date of such proposed assignment or subletting and Landlord may, at any
time within thirty (30) days after the receipt of such notice from Tenant,
cancel this Lease by giving Tenant written notice of its intention to do
so, in which event such cancellation shall become effective upon the date
specified by Landlord, but not less than thirty (30) days nor more than
sixty (60) days after its receipt by Tenant, with the same force and effect
as if said cancellation date were the date originally set forth as the
expiration date of the Term of this Lease, or any extension or renewal
thereof. Landlord may enter into a direct lease with the proposed
sublessee of assignee or with any other persons as Landlord may desire
without obligation or liability to Tenant, its assignees, sublessees or
their respective successors, assigns, agents or brokers.
Section 10.4 Tenant's Failure to Comply. Tenant's failure to
comply with the foregoing provisions and conditions of this Article 10
shall, at Landlord's option, render any purported assignment or subletting
null and void and of no force and effect.
Section 10.5 Sharing of Excess Rent. If Landlord consents to
Tenant assigning its interest under this Lease or subletting all or any
portion of the Premises, Tenant shall pay to Landlord (in addition to Rent
and all other amounts payable by Tenant under this Lease) fifty percent
(50%) of all rents and other considerations payable by such assignee or
subtenant (net of brokerage commissions, improvement costs, legal fees and
other reasonable costs and expenses incurred in connection with the
assignment or subletting) in excess of the Rent otherwise payable by Tenant
from time to time under this Lease. For the purposes of this computation,
the additional amount payable by Tenant shall be determined by either (i)
application of the rental rate per square foot for the Building or any
portion thereof sublet, or (ii) the fair market rental rate for rooftop
space or other space at the Premises sublet, as applicable. Said
additional amount shall be paid to Landlord immediately upon receipt by
Tenant of such Rent or other considerations from the assignee or subtenant.
ARTICLE 11
DAMAGE BY FIRE OR OTHER CASUALTY
Section 11.1 Tenantable Within 120 Days. If fire or other
casualty shall render the whole or any material portion of the Premises
untenantable, and Landlord determines that the Premises can reasonably be
expected to be made tenantable within one hundred twenty (120) days from
the date of such event, then Landlord shall repair and restore the Premises
to as near their condition prior to the fire or other casualty as is
reasonably possible within such one hundred twenty (120) day period
(subject to delays for causes beyond Landlord's reasonable control) and
notify Tenant that it will be doing so, such notice to be mailed within
thirty (30) days from the date of such damage or destruction, and this
Lease shall remain in full force and effect, but the Rent for the period
during which the Premises are untenantable shall be abated pro rata (based
upon the portion of the Premises which is untenantable). If Landlord is
required to repair the Premises as aforesaid, said work shall be undertaken
and prosecuted with all due diligence and speed.
Section 11.2 Not Tenantable Within 120 Days. If fire or other
casualty shall render the whole or any material part of the Premises
untenantable and Landlord determines that the Premises cannot reasonably be
expected to be made tenantable within one hundred twenty (120) days from
the date of such event, then either party, by notice in writing to the
other mailed within thirty (30) days from the date of such damage or
destruction, may terminate this Lease effective upon a date within thirty
(30) days from the date of such notice.
Section 11.3 Building Substantially Damaged. In the event that
more than fifty percent (50%) of the value of the Building is damaged or
destroyed by fire or other casualty, and irrespective of whether damage or
destruction can be made tenantable within one hundred twenty (120) days
thereafter, then at Landlord's option, by written notice to Tenant, mailed
within forty-five (45) days from the date of such damage or destruction,
Landlord may terminate this Lease effective upon a date within ninety (90)
days from the date of such notice to Tenant.
Section 11.4 Uninsured Casualty. If fire or other casualty
shall render any portion of the Premises or any material portion of the
Building untenantable and the insurance proceeds are not sufficient to make
such repair, then Landlord may, by notice to Tenant, mailed within thirty
(30) days from the date of such damages or destruction, terminate this
Lease effective upon a date within thirty (30) days from the date of such
notice.
Section 11.5 Deductible Payments. If the Premises or the
Building is damaged, and such damage is of the type insured against under
the fire and special form property damage insurance maintained by Landlord
hereunder, the cost of repairing said damage up to the amount of the
deductible under said insurance policy shall be included as a part of the
Operating Expenses. If the damage is not covered by such insurance
policies and Landlord elects to repair the damage, then Tenant shall pay
Landlord a pro rata share of the "deductible amount" (if any, which
deductible shall not exceed $100,000) under Landlord's insurance policies
based on Tenant's percentage interest of the Building and, if the damage
was due to an act or omission of Tenant, the difference between the actual
cost of repair and any insurance proceeds received by Landlord.
Section 11.6 Landlord's Repair Obligations. If fire or other
casualty shall render the whole or any material part of the Premises
untenantable and the Premises cannot reasonably be expected to be made
tenantable within one hundred twenty (120) days from the date of such event
and neither party hereto terminates this Lease pursuant to its rights
herein, or in the event that more than fifty percent (50%) of the value of
the Building is damaged or destroyed by fire or other casualty and Landlord
does not terminate this Lease pursuant to its option granted herein, or in
the event that fifty percent (50%) or less of the value of the Building is
damaged or destroyed by fire or other casualty and neither the whole nor
any material portion of the Premises is rendered untenantable, then
Landlord shall repair and restore the Premises to as near its condition
prior to the fire or other casualty as is reasonably possible with all due
diligence and speed (subject to delays for causes beyond Landlord's
reasonable control) and the Rent for the period during which the Premises
are untenantable shall be abated pro rata (based upon the portion of the
Premises which is untenantable). In no event shall Landlord be obligated
to repair or restore any special equipment or improvements installed by
Tenant at Tenant's expense.
Section 11.7 Rent Apportionment. In the event of a termination
of this Lease pursuant to this Article 11, Rent shall be apportioned on a
per diem basis and paid to the date of the fire or other casualty.
ARTICLE 12
EMINENT DOMAIN
Section 12.1 Tenant's Termination. If the whole of or any
substantial part of the Premises is taken by any public authority under the
power of eminent domain, or taken in any manner for any public or quasi-
public use, so as to render (in Tenant's reasonable judgment) the remaining
portion of the Premises unsuitable for the purposes intended hereunder,
then the term of this Lease shall cease as of the day possession shall be
taken by such public authority and Landlord shall make a pro rata refund of
any prepaid rent. All damages awarded for such taking under the power of
eminent domain or any like proceedings shall belong to and be the property
of Landlord, Tenant hereby assigning to Landlord its interest, if any, in
said award. In the event that fifty percent (50%) or more of the building
area or fifty percent (50%) or more of the value of the Building is taken
by public authority under the power of eminent domain, then, at Landlord's
option, by written notice to Tenant, mailed within sixty (60) days from the
date possession shall be taken by such public authority, Landlord may
terminate this Lease effective upon a date within ninety (90) days from the
date of such notice to Tenant. Further, if all or any material part of the
Premises is taken by public authority under the power of eminent domain, or
taken in any manner for any public or quasi-public use, so as to render the
remaining portion of the Premises unsuitable in Tenant's reasonable
opinion, for the purposes intended hereunder, upon delivery of possession
to the condemning authority pursuant to the proceedings, Tenant may, at its
option, terminate this Lease as to the remainder of the Premises by written
notice to Landlord, such notice to be given to Landlord within thirty (30)
days after Tenant receives notice of the taking. Tenant shall not have the
right to terminate this Lease pursuant to the preceding sentence unless (a)
the business of Tenant conducted in the portion of the Premises taken
cannot in Tenant's reasonable judgment be carried on with substantially the
same utility and efficiency in the remainder of the Premises (or any
substitute space securable by Tenant pursuant to clause [b] hereof); and
(b) Tenant cannot secure substantially similar (in Tenant's reasonable
judgment) alternate space upon the same terms and conditions as set forth
in this Lease from Landlord in the Building. Any notice of termination
shall specify the date not more than sixty (60) days after the giving of
such notice as the date for such termination.
Section 12.2 Tenant's Participation. Provisions in this Article
12 to the contrary notwithstanding, Tenant shall have the right to prove in
any condemnation proceedings and to receive any separate award which may be
made for damages to or condemnation of Tenant's movable trade fixtures and
equipment and for moving expenses; provided, however, Tenant shall in no
event have any right to receive any award for its interest in this Lease or
for loss of leasehold. Provisions in this Article 12 to the contrary
notwithstanding, in the event of a partial condemnation of the Building or
the Premises and this Lease is not terminated, Landlord shall, at its sole
cost and expense, restore the Premises and Building to a complete
architectural unit and the Base Rent provided for herein during the period
from and after the date of delivery of possession pursuant to such
proceedings to the termination of this Lease shall be reduced to a sum
equal to the product of the Base Rent provided for herein multiplied by a
fraction, the numerator of which is the fair market rent of the Premises
after such taking and after same has been restored to a complete
architectural unit, and the denominator of which is the fair market rent of
the Premises prior to such taking.
ARTICLE 13
SURRENDER OF PREMISES
Section 13.1 Surrender of Possession. On the last day of the
term of this Lease, or on the sooner termination thereof, Tenant shall (i)
peaceably surrender the Premises in good condition and repair consistent
with Tenant's duty to make repairs as herein provided, reasonable wear and
tear and casualty loss excluded; and (ii) at Tenant's sole cost and
expense, remove all of its property and trade fixtures and equipment from
the Premises which Tenant is required to remove pursuant to the terms of
this Lease. All property not removed shall be deemed abandoned. Tenant
hereby appoints Landlord its agent to remove all abandoned property of
Tenant from the Premises upon termination of this Lease and to cause its
transportation and storage for Tenant's benefit, all at the sole cost and
risk of Tenant and Landlord shall not be liable for damage, theft,
misappropriation or loss thereof and Landlord shall not be liable in any
manner in respect thereto.
Tenant shall reimburse Landlord upon demand for any reasonable
expenses incurred by Landlord with respect to removal, transportation, or
storage of abandoned property and with respect to restoring said Premises
to good order, condition and repair. Tenant shall promptly surrender all
keys for the Premises to Landlord at the place then fixed for the payment
of rent and shall inform Landlord of combinations on any vaults, locks and
safes left on the Premises.
Section 13.2 Tenant Retaining Possession. In the event Tenant
remains in possession of the Premises after expiration of this Lease, and
without the execution of a new lease, but with Landlord's written consent,
it shall be deemed to be occupying the Premises as a tenant from month to
month, subject to all the provisions, conditions and obligations of this
Lease insofar as the same can be applicable to a month-to-month tenancy,
except that the Base Rent shall be the greater of (i) the then current Base
Rent, or (ii) the then current fair market rate for the Premises as
reasonably determined by Landlord. In the event Tenant remains in
possession of the Premises after expiration of this Lease and without the
execution of a new lease and without Landlord's written consent, Tenant
shall be deemed to be occupying the Premises without claim of right and
Tenant shall pay, as a charge for each day of occupancy, an amount equal to
150% of the Base Rent and Additional Rent (on a daily basis) then due under
this Lease.
ARTICLE 14
DEFAULT OF TENANT
Section 14.1 Events of Default. The occurrence of any one or
more of the following events (in this Article sometimes called "Event of
Default") shall constitute a default and breach of this Lease by Tenant:
(a) If Tenant fails to pay any Base Rent or Additional Rent payable
under this Lease or fails to pay any obligation required to be paid by
Tenant when and as the same shall become due and payable, and such default
continues for a period of ten (10) days after the due date.
(b) If Tenant fails to perform any of Tenant's nonmonetary
obligations under this Lease for a period of thirty (30) days after written
notice from Landlord; provided that if more time is required to complete
such performance, Tenant shall not be in default if Tenant commences such
performance within the thirty (30) day period and thereafter diligently
pursues its completion. However, Landlord shall not be required to give
such notice if Tenant's failure to perform constitutes a non-curable breach
of this Lease. The notice required by this subsection is intended to
satisfy any and all notice requirements imposed by law on Landlord and is
not in addition to any such requirement.
(c) If Tenant, by operation of law or otherwise, violates the
provisions of this Lease relating to assignment, sublease, mortgage or
other transfer of Tenant's interest in this Lease or in the Premises.
(d) If Landlord discovers that any financial statement, warranty,
representation or other information given to Landlord by Tenant, any
assignee of Tenant, any subtenant of Tenant, any successor in interest of
Tenant or any guarantor of Tenant's obligation hereunder, and any of them,
in connection with this Lease, was materially false or misleading when made
or furnished.
(e) Tenant, by operation of law or otherwise, violates the
provisions of this Lease relating to compliance with environmental laws.
(f) If (i) Tenant makes a general assignment or general arrangement
for the benefit of creditors; (ii) a petition for adjudication of
bankruptcy or for reorganization or rearrangement is filed by or against
Tenant and is not dismissed within thirty (30) days; (iii) if a trustee or
receiver is appointed to take possession of substantially all of Tenant's
assets located at the Premises or of Tenant's interest in the Lease and
possession is not restored to Tenant within thirty (30) days; or (iv) if
substantially all of Tenant's assets located at the Premises or of Tenant's
interest in this Lease is subjected to attachment, execution or other
judicial seizure which is not discharged within thirty (30) days. If a
court of competent jurisdiction determines that any of the acts described
in this subsection does not constitute an Event of Default and a trustee is
appointed to take possession (or if Tenant remains a debtor in possession)
and such trustee or Tenant transfers Tenant's interest hereunder, then
Landlord shall receive, as Additional Rent, the difference between the Rent
(or any other consideration) paid in connection with such assignment or
sublease and the Rent payable by Tenant hereunder. As used in this
subsection, the term "Tenant" shall also mean any guarantor of Tenant's
obligations under this Lease. If any such Event of Default shall occur,
Landlord, at any time during the continuance of any such Event of Default,
may give written notice to Tenant stating that this Lease shall expire and
terminate on the date specified in such notice, and upon the date specified
in such notice this Lease, and all rights of Tenant under this Lease,
including all rights of renewal whether exercised or not, shall expire and
terminate, or in the alternative or in addition to the foregoing remedy,
Landlord may assert and have the benefit of any other remedy allowed
herein, at law, or in equity.
Section 14.2 Landlord's Remedies. Upon the occurrence of an
Event of Default by Tenant, and at any time thereafter, with or without
notice or demand and without limiting Landlord in the exercise of any right
or remedy which Landlord may have, Landlord shall be entitled to the rights
and remedies set forth below.
(a) Termination of Possession. Terminate Tenant's right to
possession of the Premises by any lawful means, in which case the Lease
shall terminate and Tenant shall immediately surrender possession of the
Premises to Landlord. In such event, Landlord shall have the immediate
right to reenter and remove all persons and property, and such property may
be removed and stored in a public warehouse or elsewhere at the cost of,
and for the account of Tenant, all without service of notice or resort to
legal process and without being deemed guilty of trespass, or becoming
liable for any loss or damage which may be occasioned thereby. In the
event that Landlord shall elect to so terminate this Lease, then Landlord
shall be entitled to recover from Tenant all damages incurred by Landlord
by reason of Tenant's default, including:
(i) The equivalent of the amount of the Base Rent and
Additional Rent which would be payable under this Lease by Tenant if this
Lease were still in effect, less
(ii) The net proceeds of any reletting affected pursuant to
the provisions of Section 14.2 hereof after deducting all of Landlord's
reasonable expenses in connection with such reletting, including, without
limitation, all repossession costs, brokerage commissions, legal expenses,
reasonable attorneys' fees, alteration costs, and expenses of preparation
of the Premises, or any portion thereof, for such reletting.
Tenant shall pay such current damages in the amount determined
in accordance with the terms of this Section 14.2 as set forth in a written
statement thereof from Landlord to Tenant (hereinafter called the
"Deficiency"), to Landlord in monthly installments on the days on which the
Rent would have been payable under this Lease if this Lease were still in
effect, and Landlord shall be entitled to recover from Tenant each monthly
installment of the Deficiency as the same shall arise.
(b) Damages. At any time after an Event of Default and termination
of this Lease, whether or not Landlord shall have collected any monthly
Deficiency as set forth in Section 14.2, Landlord shall be entitled to
recover from Tenant, and Tenant shall pay to Landlord, on demand, as and
for final damages for Tenant's default, an amount equal to the difference
between the then present worth of the aggregate of the Base Rent and
Additional Rent and any other charges to be paid by Tenant hereunder for
the unexpired portion of the term of this Lease (assuming this Lease had
not been so terminated), and the then present worth of the then aggregate
fair and reasonable fair market rent of the Premises for the same period.
In the computation of present worth, a discount rate equal to the discount
rate of the Federal Reserve Bank of New York plus one percent (1%) shall be
employed. If the Premises, or any portion thereof, shall be relet by
Landlord for the unexpired term of this Lease, or any part thereof, before
presentation of proof of such damages to any court, commission or tribunal,
the amount of Rent reserved upon such reletting shall, prima facie, be the
fair and reasonable fair market rent for the part or the whole of the
Premises so relet during the term of the reletting. Nothing herein
contained or contained in Section 14.2 shall limit or prejudice the right
of Landlord to prove and obtain, as damages by reason of such expiration or
termination, an amount equal to the maximum allowed by any statute or rule
of law in effect at the time when, and governing the proceedings in which,
such damages are to be proved, whether or not such amount be greater, equal
to or less than the amount of the difference referred to above.
(c) Reentry and Removal. Upon the occurrence of an Event of
Default by Tenant, Landlord shall also have the right, with or without
terminating this Lease, to reenter the Premises to remove all persons and
property from the Premises. Such property may be removed and stored in a
public warehouse or elsewhere at the cost of and for the account of Tenant.
If Landlord shall elect to reenter the Premises, Landlord shall not be
liable for damages by reason of such reentry.
(d) No Termination; Recovery of Rent. If Landlord does not elect
to terminate this Lease as provided in this Section 14.2, then Landlord
may, from time to time, recover all Rent as it becomes due under this
Lease. At any time thereafter, Landlord may elect to terminate this Lease
and to recover damages to which Landlord is entitled.
(e) Reletting the Premises. In the event that Landlord should
elect to terminate this Lease and to relet the Premises, it may execute any
new lease in its own name. Tenant hereunder shall have no right or
authority whatsoever to collect any Rent from such Tenant. The proceeds of
any such reletting shall be applied as follows:
(i) First, to the payment of any indebtedness other than Rent
due hereunder from Tenant to Landlord, including but not limited to storage
charges or brokerage commissions owing from Tenant to Landlord as the
result of such reletting;
(ii) Second, to the payment of the costs and expenses of
reletting the Premises, including alterations and repairs which Landlord,
in its sole discretion, deems reasonably necessary and advisable and
reasonable attorneys' fees incurred by Landlord in connection with the
retaking of the said Premises and such reletting;
(iii) Third, to the payment of Rent and other charges due and
unpaid hereunder; and
(iv) Fourth, to the payment of future Rent and other damages
payable by Tenant under this Lease.
The parties hereto shall, and they hereby do, waive trial by jury in
any action, proceeding, or counterclaim brought by either of the parties
hereto against the other on any matters whatsoever arising out of, or in
any way connected with, this Lease, the relationship of Landlord and
Tenant, Tenant's use or occupancy of the Premises and/or the Project,
and/or claim or injury or damage.
Section 14.3 Written Notice of Termination Required. Landlord
shall not be deemed to have terminated this Lease and the Tenant's right to
possession of the leasehold or the liability of Tenant to pay Rent
thereafter to accrue or its liability for damages under any of the
provisions hereof, unless Landlord shall have notified Tenant in writing
that it has so elected to terminate this Lease. Tenant covenants that the
service by Landlord of any notice pursuant to the applicable unlawful
detainer statutes of the state in which the Building is located and the
Tenant's surrender of possession pursuant to such notice shall not (unless
Landlord elects to the contrary at the time of, or at any time subsequent
to the service of, such notice, and such election be evidenced by a written
notice to Tenant) be deemed to be a termination of this Lease or of
Tenant's right to possession thereof.
Section 14.4 Remedies Cumulative; No Waiver. All rights,
options and remedies of Landlord contained in this Lease shall be construed
and held to be cumulative, and no one of them shall be exclusive of the
other, and Landlord shall have the right to pursue any one or all of such
remedies or any other remedy or relief which may be provided at law or in
equity whether or not stated in this Lease, including, without limitation,
the right of self help. No waiver by Landlord of a breach of any of the
terms, covenants or conditions of this Lease by Tenant shall be construed
or held to be a waiver of any succeeding or preceding breach of the same or
any other term, covenant or condition therein contained. No waiver of any
default of Tenant hereunder shall be implied from any omission by Landlord
to take any action on account of such default if such default persists or
is repeated, and no express waiver shall affect default other than as
specified in said waiver. The consent or approval by Landlord to or of any
act by Tenant requiring Landlord's consent or approval shall not be deemed
to waive or render unnecessary Landlord's consent to or approval of any
subsequent similar acts by Tenant.
Section 14.5 Legal Costs. Tenant shall reimburse Landlord, upon
demand, for any costs or expenses incurred by Landlord in connection with
any breach or default of Tenant under this Lease, whether or not suit is
commenced or judgment entered. Such costs shall include reasonable legal
fees and costs incurred for the negotiation of a settlement, enforcement of
rights or otherwise. Furthermore, if any action for breach of or to
enforce the provisions of this Lease is commenced, the court in such action
shall award to the party in whose favor a judgment is entered a reasonable
sum as attorneys' fees and costs. Such attorneys' fees and costs shall be
paid by the losing party in such action. Tenant shall also indemnify
Landlord against and hold Landlord harmless from all costs, expenses,
demands and liability incurred by Landlord if Landlord becomes or is made a
party to any claim or action (a) instituted by Tenant, or by any third
party against Tenant; (b) for foreclosure of any lien for labor or material
furnished to or for Tenant or such other person; (c) otherwise arising out
of or resulting from any act or transaction of Tenant or such other person;
or (d) necessary to protect Landlord's interest under this Lease in a
bankruptcy proceeding, or other proceeding under Title 11 of the United
States Code, as amended. Tenant shall defend Landlord against any such
claim or action at Tenant's expense with counsel reasonably acceptable to
Landlord or, at Landlord's election, Tenant shall reimburse Landlord for
any legal fees or costs incurred by Landlord in any such claim or action.
In addition, Tenant shall pay Landlord's reasonable attorneys' fees
incurred in connection with Tenant's request for Landlord's consent in
connection with any act which Tenant proposed to do and which requires
Landlord's consent.
Section 14.6 Waiver of Damages for Reentry. Tenant hereby
waives all claims by Landlord's reentering and taking possession of the
Premises or removing and storing the property of Tenant as permitted under
this Lease and will save Landlord harmless from all losses, costs or
damages occasioned Landlord thereby. No such reentry shall be considered
or construed to be a forcible entry by Landlord.
ARTICLE 15
SUBORDINATION/ESTOPPEL
Section 15.1 Lease Subordinate. This Lease shall be subject and
subordinate to any mortgage, deed of trust or ground lease now encumbering
the Premises, the Property, or any portion thereof by Landlord, its
successors or assigns. The foregoing subordination shall be effective
without the necessity of the execution and delivery of any further
instruments on the part of Tenant to effectuate such subordination.
Provided Tenant receives a non-disturbance agreement substantially in the
form attached hereto as Exhibit C, this Lease shall be further subject and
subordinate to any future mortgages, deeds of trust or ground leases and
any amendments, replacements, renewals and extensions thereof. Tenant
agrees at any time hereafter, within fifteen (15) days following demand, to
execute and deliver any instruments, releases, or other documents that may
be reasonably required for the purpose of subjecting and subordinating this
Lease, as above provided, to the lien of any such mortgage, deed of trust
or ground lease.
Section 15.2 Attornment. Subject to the terms of this Article
15, in the event the holder of any mortgage, deed of trust or ground lease
shall at any time elect to have this Lease constitute a prior and superior
lien to its mortgage, deed of trust or ground lease, then, and in such
event, upon any such holder or landlord notifying Tenant to that effect in
writing, this Lease shall be deemed prior and superior in lien to such
mortgage, deed of trust, ground lease, whether this Lease is dated prior or
subsequent to the date of such mortgage, deed of trust or ground lease and
Tenant shall execute such attornment agreement as may be reasonably
requested by said holder or landlord.
Section 15.3 Tenant's Notice of Default. Tenant agrees,
provided the mortgagee, ground landlord or trust deed holder under any
mortgage, ground lease, deed of trust or other security instrument
("Mortgagee") shall have notified Tenant in writing (by the way of a notice
of assignment of lease or otherwise) of its address, Tenant shall give such
Mortgagee, simultaneously with delivery of notice to Landlord, by
registered or certified mail, a copy of any such notice of default served
upon Landlord. Tenant further agrees that said Mortgagee shall have the
right to cure any alleged default during the same period that Landlord has
to cure such default.
Section 15.4 Estoppel Certificates. Tenant shall, without
charge at any time and from time to time, within fifteen (15) days after
written request by Landlord, certify, to the extent true, by written
instrument, duly executed, acknowledged and delivered to any mortgagee,
assignee of a mortgagee, proposed mortgagee, or to any purchaser or
proposed purchaser, or to any other person transacting business with
Landlord and relating to the Premises:
(a) That this Lease (and all guaranties, if any) is unmodified and
in full force and effect (or, if there have been modifications,
that the same is in full force and effect, as modified, and
stating the modifications);
(b) The dates to which the Base Rent or Additional Rent have been
paid in advance;
(c) Whether or not there are then existing any breaches or defaults
by such party or the other party known by such party under any
of the covenants, conditions, provisions, terms or agreements
of this Lease, and specifying such breach or default, if any,
or any setoffs or defenses against the enforcement of any
covenant, condition, provision, term or agreement of this Lease
(or of any guaranties) upon the part of Landlord or Tenant (or
any guarantor), as the case may be, to be performed or complied
with (and, if so, specifying the same and the steps being taken
to remedy the same); and
(d) Such other statements or certificates as Landlord or any
mortgagee may reasonably request.
It is the intention of the parties hereto that any statement de-
livered pursuant to this Section may be relied upon by any of such parties
transacting business with Landlord and relating to the Premises. If Tenant
does not deliver such statement to the requesting party within such fifteen
(15) day period, Landlord and any applicable party transacting business
relative to the Premises with Landlord, may conclusively presume and rely
upon the following facts: (i) that the terms and provisions of this Lease
have not been changed except as otherwise represented by Landlord; (ii)
that this Lease has not been canceled or terminated and is in full force
and effect, except as otherwise represented by Landlord; that the current
amount of the Base Rent is as represented by Landlord; that there have been
no subleases or assignments of the Lease; (iii) that not more than one
month's Base Rent or other charges have been paid in advance; and (iv) that
Landlord is not in default under the Lease. In such event, Tenant shall be
estopped from denying the truth of such facts.
ARTICLE 16
MISCELLANEOUS
Section 16.1 Time is of the Essence. Time is of the essence
with respect to the performance of every provision of this Lease in which
time of performance is a factor.
Section 16.2 Memorandum of Lease. Upon not less than ten (10)
days prior written request by either party, the parties hereto agree to
execute and deliver to each other a Memorandum Lease, in recordable form,
setting forth the following:
(a) The date of this Lease;
(b) The parties to this Lease;
(c) The term of this Lease;
(d) A description of the Premises; and
(e) Such other matters reasonably requested by Landlord or Tenant
to be stated therein.
The cost of recording (including all taxes) the memorandum shall be
at the expense of the requesting party.
Section 16.3 Joint and Several Liability. All parties signing
this Lease as Tenant shall be jointly and severally liable for all
obligations of Tenant.
Section 16.4 Broker. Landlord and Tenant represent to each
other that they have not dealt with any brokers in connection with this
Lease other than CB Commercial Real Estate Services, Inc., whose commission
shall be paid by Landlord pursuant to a separate agreement. Landlord and
Tenant shall indemnify and hold each other harmless against any claims for
brokerage or other commissions arising by reason of a breach of the
aforesaid representation and warranty.
Section 16.5 Notices. All notices, demands and requests shall
be in writing, and shall be effectively served by forwarding such notice,
demand or request by certified or registered mail, postage prepaid, or by
commercial overnight courier service, or by hand delivery with signed
receipts, addressed as follows:
(a) If addressed to Tenant:
Ace Hardware Corporation
2200 Kensington Court
Oak Brook, Ill. 60523-2100
Attn: Mr. George H. Harris, Corporate
Property and Planning Manager
with a copy to:
Ace Hardware Corporation
2200 Kensington Court
Oak Brook, Ill. 60523-2100
Attn: John J. VanZeyl, Esq.
(b) If addressed to Landlord:
Arundel II L.L.C.
c/o Opus East, L.L.C.
6707 Democracy Boulevard
Suite 510
Bethesda, Maryland 20817
with copies to:
Opus U.S. Corporation
700 Opus Center
9900 Bren Road
Minnetonka, Minnesota 55343
Attn: Dan F. Nicol, Esq.
and
Hazel & Thomas, P.C.
3110 Fairview Park Drive
Suite 1400
Falls Church, Virginia 22042
Attn: Donna P. Shafer, Esq.
or at such other address as Landlord and Tenant may hereafter designate by
written notice to the other party. The effective date of all notices shall
be (i) three (3) days after the date of mailing if sent by United States
Postal Service, (ii) the date of delivery if sent by a nationally
recognized overnight courier service, or (iii) the date of receipt if sent
by hand delivery with signed receipts.
Section 16.6 Landlord's Agent. All rights and remedies of
Landlord under this Lease or that may be provided by law may be executed by
Landlord in its own name individually, or in the name of its agent, and all
legal proceedings for the enforcement of any such rights or remedies,
including those set forth in Article 14, may be commenced and prosecuted to
final judgment and execution by Landlord in its own name or in the name of
its agent.
Section 16.7 Quiet Possession. Landlord covenants and agrees
that Tenant, upon paying the Base Rent, Additional Rent and other charges
herein provided for and observing and keeping the covenants, agreements and
conditions of this Lease on its part to be kept and performed, shall
lawfully and quietly hold, occupy and enjoy the Premises during the term of
this Lease without hindrance or molestation by Landlord or by any person
claiming under or through Landlord.
Section 16.8 Successors and Assigns. The covenants and
agreements herein contained shall bind and inure to the benefit of the
Landlord, its successors and assigns, and Tenant and its permitted
successors and assigns.
Section 16.9 Severability. If any term or provision of this
Lease shall to any extent be held invalid or unenforceable, the remaining
terms and provisions of this Lease shall not be affected thereby, but each
term and provision of this Lease shall be valid and enforced to the fullest
extent permitted by law. This Lease shall be construed and enforced in
accordance with the laws of the state in which the Premises are located.
Section 16.10 No Abandonment or Waste. Tenant covenants not to
do or suffer any waste or damage or disfigurement or injury to the Premises
or the Project.
Section 16.11 Transfers by Landlord. The term "Landlord" as used
in this Lease so far as covenants or obligations on the part of Landlord
are concerned shall be limited to mean and include only the owner or owners
of the Premises at the time in question, and in the event of any transfer
or transfers or conveyances the then grantor shall be automatically freed
and released from all liability accruing from and after the date of such
transfer or conveyance as respects the performance of any covenant or
obligation on the part of Landlord contained in this Lease to be performed.
It is intended hereby that the covenants and obligations contained in this
Lease on the part of Landlord shall be binding on the Landlord, its
successors and assigns, only during and in respect to their respective
successive periods of ownership.
In the event of a sale or conveyance by Landlord of the Premises or
any part thereof, the same shall operate to release Landlord from any
future liability upon any of the covenants or conditions herein contained
and in such event Tenant agrees to look solely to the responsibility of the
successor in interest of Landlord in and to this Lease. This Lease shall
not be affected by any such sale or conveyance, and Tenant agrees to attorn
to the purchaser or grantee, which shall be personally obligated on this
Lease only so long as it is the owner of Landlord's interest in and to this
Lease.
Section 16.12 Headings. The marginal or topical headings of the
several articles and sections are for convenience only and do not define,
limit or construe the contents of said articles and sections.
Section 16.13 Written Agreement. All preliminary negotiations
are merged into and incorporated in this Lease, except for written
collateral agreements executed contemporaneously herewith.
Section 16.14 Modifications or Amendments. This Lease can only
be modified or amended by an agreement in writing signed by the parties
hereto. No receipt of money by Landlord from Tenant or any other person
after termination of this Lease or after the service of any notice or after
the commencement of any suit, or after final judgment for possession of the
Premises shall reinstate, continue or extend the term of this Lease or
affect any such notice, demand or suit, or imply consent for any action for
which Landlord's consent is required, unless specifically agreed to in
writing by Landlord. Any amounts received by Landlord may be allocated to
any specific amounts due from Tenant to Landlord as Landlord determines.
Section 16.15 Landlord Control. Landlord shall have the right to
temporarily close any portion of the building area or land area to the
extent as may, in Landlord's reasonable opinion, be necessary to prevent a
dedication thereof or the accrual of any rights to any person or the public
therein.
Section 16.16 Utility Easement. Tenant shall permit Landlord (or
its designees) to erect, use, maintain, replace and repair pipes, cables,
conduits, plumbing, vents, and telephone, electric and other wires or other
items, in, to and through the Premises, as and to the extent that Landlord
may now or hereafter deem necessary or appropriate for the proper operation
and maintenance of the Project.
Section 16.17 Not Binding Until Properly Executed. Employees or
agents of Landlord have no authority to make or agree to make a lease or
other agreement or undertaking in connection herewith. The submission of
this document for examination does not constitute an offer to lease, or a
reservation of, or option for, the Premises. This document becomes
effective and binding only upon the execution and delivery hereof by the
proper officers of Landlord and Tenant. Tenant confirms that Landlord and
its agents have made no representations or promises with respect to the
Premises or the making of or entry into this Lease except as in this Lease
expressly set forth, and agrees that no claim or liability shall be
asserted by Tenant against Landlord for, and Landlord shall not be liable
by reason of, breach of any representations or promises not expressly
stated in this Lease. This Lease, except for the Building Rules and
Regulations, in respect to which Section 16.18 of this Article shall
prevail, can be modified or altered only by agreement in writing between
Landlord and Tenant, and no act or omission of any employee or agent of
Landlord shall alter, change or modify any of the provisions hereof.
Section 16.18 Building Rules and Regulations. Tenant shall
perform, observe and comply with any commercially reasonable rules and
regulations which may be adopted by Landlord from time to time, with
respect to the safety, care and cleanliness of the Premises, and the
preservation of good order thereon, and, upon written notice thereof to
Tenant, Tenant shall perform, observe, and comply with any changes,
amendments or additions thereto as from time to time shall be established
and deemed advisable by Landlord. Notwithstanding the foregoing, in no
event shall any amendments or revisions to the rules and regulations change
or alter Tenant's obligations or rights under this Lease, and in the event
of a discrepancy between the rules and regulations and the Lease, the
Lease shall govern.
Section 16.19 Compliance with Laws and Recorded Covenants.
Tenant shall not use the Premises or permit anything to be done in or about
the Premises which will, in any way, conflict with any law, statute,
ordinance or governmental rule or regulation now in force or which may
hereafter be enacted or promulgated. Tenant shall, at its sole cost and
expense, promptly comply with all laws, statutes, ordinances and
governmental rules and regulations now in force or which may hereafter be
in force, and with the requirements of any fire insurance underwriters or
other similar body now or hereafter constituted relating to or affecting
the condition, use or occupancy of the Premises. Tenant shall use the
Premises and comply with any covenants, conditions, and restrictions
affecting the Premises.
Tenant shall have the responsibility to comply with the requirements
of the ADA in the Premises only after the Commencement Date. As used in
this Lease, "ADA" shall mean the Americans with Disabilities Act of 1991,
42 U.S.C. & 12.101 et seq. and all regulations applicable thereto
promulgated as of the date hereof (collectively, "ADA").
Section 16.20 Obligations Survive Termination. All obligations
of Tenant hereunder not fully performed as of the expiration or earlier
termination of the term of this Lease shall survive the expiration or
earlier termination of the term hereof, including, without limitation, all
obligations with respect to Operating Expenses and Real Estate Taxes and
all obligations concerning the condition of the Premises.
Section 16.21 Tenant's Waiver. Intentionally Deleted.
Section 16.22 Authorization. Landlord and Tenant shall furnish
to each other, within ten (10) business days of written request from the
other party, a corporate resolution, proof of due authorization of
partners, or other appropriate and reasonable documentation evidencing the
due authorization to enter into this Lease. [OPEN]
Section 16.23 No Partnership or Joint Venture. This Lease shall
not be deemed or construed to create or establish any relationship or
partnership or joint venture or similar relationship or arrangement between
Landlord and Tenant hereunder.
Section 16.24 Landlord's Right to Substitute Premises.
Intentionally Deleted.
Section 16.25 Tenant's Obligation to Pay Miscellaneous Taxes.
Tenant shall pay, prior to delinquency, all taxes assessed or levied upon
its occupancy of the Premises, or upon the trade fixtures, furnishings,
equipment and all other personal property of Tenant located in the
Premises, and when possible, Tenant shall cause such trade fixtures,
furnishings, equipment and other personal property to be assessed and
billed separately from the property of Landlord. In the event any or all
of Tenant's trade fixtures, furnishings, equipment or other personal
property, or Tenant's occupancy of the Premises, shall be assessed and
taxed with the property of Landlord, Tenant shall pay to Landlord its share
of such taxes within thirty (30) days after delivery to Tenant by Landlord
of a statement in writing setting forth the amount of such taxes applicable
to Tenant's personal property.
Section 16.26 Signs. Tenant shall not erect any signs on the
exterior of the Building or on the Project without Landlord's prior written
consent, such consent not to be unreasonably withheld.
Section 16.27 Exhibits. The following are made a part hereof,
with the same force and effect as if specifically set forth herein:
(a) Exhibit A - Site Plan
(b) Exhibit B - Work Agreement
(c) Exhibit C - Non Disturbance Agreement
(d) Exhibit D - Floor Plan
(e) Exhibit E - Site Plan Showing Arundel I, III, IV and V
Section 16.28 Landlord's Limited Liability. Anything contained
in this Lease to the contrary notwithstanding, Tenant agrees that Tenant
shall look solely to the estate and property of Landlord in the Project,
subject, however, to the prior rights of any mortgagee or Landlord of the
Project. No other assets of Landlord or any partners, shareholders, or
other principals of Landlord shall be subject to levy, execution or other
judicial process for the satisfaction of Tenant's claim.
Section 16.29 Intentionally Deleted.
Section 16.30 Parking. Landlord hereby grants to Tenant a
license to use in common with other tenants of the Building and with the
public, up to fifty seven (57) passenger car parking spaces in the portions
of the Project designated for such common parking by Landlord from time to
time, and Landlord grants Tenant a license to use the fifteen (15) trailer
parking spaces located in the area designated on Exhibit A. Tenant shall
not be required to pay any parking fees in connection with the foregoing
privileges. The 15 tractor trailer parking spaces shall be in addition to
the 21 tractor trailer parking spaces in front of Tenant's dock doors.
Section 16.31 Measurement of Premises. As used in this Lease,
the term "net rentable area" shall mean the number of square feet as
certified by Landlord's Architect, and as measured to the outside face of
the exterior Building walls and the center line of common/demising walls.
Section 16.32 Renewal Options. Tenant shall have the right to
renew and extend the term of this Lease for the Renewal Terms (herein so
called) upon and subject to the following terms and conditions:
Tenant may extend this Lease for two (2) Renewal Terms of five (5)
years each by Tenant's giving Landlord a Renewal Notice no less than nine
(9) months prior to the expiration of the initial term or the immediately
preceding Renewal Term, as applicable. Such Renewal Term(s) shall commence
immediately upon the expiration of the initial term or subsequent Renewal
Term, and upon exercise of each renewal option the expiration date of the
term shall automatically become the last day of the applicable Renewal
Term(s). If Tenant does not renew the Lease in a timely manner for the
Renewal Term(s), then Tenant's rights with respect to all successive
Renewal Term(s) shall expire and be of no further force and effect.
The exercise by Tenant of the renewal option(s) set forth herein must
be made, if at all, by delivery of the Renewal Notice to Landlord on or
before the dates set forth above. Once Tenant shall exercise such renewal
option(s), Tenant may not thereafter revoke such exercise. At Landlord's
election, Tenant's renewal options shall terminate and be of no further
force or effect if (i) an Event of Default exists under the Lease at the
time Tenant attempts to exercise its renewal option, (ii) Tenant defaults
under any provision of the Lease after exercising its renewal option and
such default continues beyond any applicable cure period provided in the
Lease, (iii) at any time during the Term of the Lease, as extended, Tenant
assigns the Lease to a third party, or (iv) at the time Tenant attempts to
exercise its renewal option, Tenant has subleased or has demonstrated an
intention to sublease thirty percent (30%) or more of the Premises to an
unrelated third party.
Tenant shall take the Premises "as is" for the Renewal Term(s) and
Landlord shall have no obligation to make any improvements or alterations
to same; provided, however, Landlord shall comply with its repair and
maintenance obligations as set forth in this Lease.
Annual Base Rent for each year during the Renewal Terms shall be at
the per square foot rate equal to the greater of (i) the then current per
square foot rate applicable to the Premises, or (ii) the "fair market
rate". The "fair market rate" shall be agreed upon by Landlord and Tenant
within fifteen (15) days of the date on which Tenant exercises its renewal
option. In the event the parties are unable to timely agree on the "fair
market rate", the dispute shall be resolved in accordance with the
alternative dispute resolution method provided in Section 16.33 hereof.
Each "Official" shall be a commercial real estate broker with at least ten
(10) year experience in the Baltimore/Washington industrial corridor.
Tenant shall not be entitled to any rental abatement concessions,
additional renewal options or other similar concessions during any Renewal
Term.
Except as set forth herein, the leasing of the Premises for the
Renewal Term(s) shall be upon the same terms and conditions as are
applicable for the initial term and any subsequent Renewal Term(s), and
shall be upon and subject to all of the provisions of this Lease,
including, without limitation, the obligation of Tenant to pay any costs or
amounts payable by Tenant to Landlord under the Lease.
Tenant's rights under this Section 16.32 shall be personal to Tenant
and shall not inure to the benefit of any assignee or occupant of the
Premises other than an assignee which is a successor corporation into which
or with which Tenant is merged or consolidated or which acquires
substantially all of Tenant's assets and property, or to any subsidiary,
affiliate or parent company of Tenant, or any subsidiary of the parent
company of Tenant.
Section 16.33 Alternative Dispute Resolution. In the event that a
dispute arises between Landlord and Tenant under the Lease, and the Lease
specifically provides that the dispute resolution procedure outlined in
this Section 16.33 (herein referred to as the "Dispute Resolution
Procedure") shall be utilized, the parties shall proceed as follows:
(a) The party electing to proceed under the procedures
outlined herein (the "Electing Party") shall give written notice of such
election to the other party (the "Other Party"), and shall designate in
writing the Electing Party's selection of an individual with the
qualifications outlined in the section of the Lease giving rise to this
remedy (the "Official") who shall act on the Electing Party's behalf in
determining the disputed fact.
(b) Within ten (10) days after the Other Party's receipt of
the Electing Party's selection of an Official, the Other Party, by written
notice to the Electing Party, shall designate an Official who shall act on
the Other Party's behalf in determining the disputed fact.
(c) Within ten (10) days of the selection of the Other Party's
Official, the two (2) Officials shall render a joint written determination
of the disputed fact. If the two (2) Officials are unable to agree upon a
joint written determination within such ten (10) day period, each Official
shall render his or her own written determination and the two Officials
shall elect a third Official within such ten (10) day period. In the event
the two Officials are unable to select a third Official within such ten
(10) day period, then either party may apply to a court of original
jurisdiction in Anne Arundel County, Maryland for appointment by such court
of such third Official.
(d) Within ten (10) days after the appointment of the third
Official, the third Official shall select one of the determinations of the
two (2) Officials originally selected, without modification or
qualification.
(e) If either Landlord or Tenant fails or refuses to select an
Official, the Official selected shall alone determine the disputed fact.
Landlord and Tenant agree that they shall be bound by the determination of
disputed fact pursuant to this subsection. Landlord shall bear the fees
and expenses of its Official, Tenant shall bear the fees and expenses of
its Official, and Landlord and Tenant shall share equally the fees and
expenses of the third Official, if any.
Section 16.34 Intentionally Deleted.
Section 16.35 Right of Notice. Each time during the Lease term
that Landlord receives written notice that space is available in the
buildings constructed in Arundel I, III, IV and V (as shown on the site
plan attached hereto as Exhibit E) Landlord shall given Tenant written
notice of such availability. The Right of Notice provided for in this
Section shall be personal to Tenant and shall not be applicable to any
assignee, subtenant or successor of Tenant.
IN WITNESS WHEREOF the parties have executed this Lease as of
the day and year first above written.
Landlord:
Arundel II L.L.C.
By_/S/Joseph J. Rauenhorsp______[SEAL]
Its______President__________________
Tenant:
Ace Hardware Corporation
By /S/David F. Myer_____________[SEAL]
Its Vice President - Retail Support
Exhibit A
(This Exhibit is a graphic representation)
EXHIBIT B to the Lease
WORK AGREEMENT
A. LANDLORD UNDERTAKINGS.
1. Final Completion of Premises
(a) The Premises shall be deemed to be Finally Completed
("Final Completion", "Finally Complete" or "Finally Completed") on the
earliest date on which all of the following conditions have been met:
(1) The Tenant Improvements (as hereinafter defined)
have been completed substantially (i.e., in all except minor and immaterial
respects) in accordance with the Tenant Improvement Plans (as hereinafter
defined), other than insubstantial details of construction or mechanical
adjustment.
(2) The Premises and loading docks and parking
facilities contemplated in the Lease shall be free of construction debris
and other obstructions and available for use by Tenant.
(3) Landlord has put in good operating condition all
service facilities and Tenant Improvement systems serving the Premises,
including but not limited to heating, ventilating, air conditioning,
lighting, water supply, any security, fire alarm, prevention, protection
and detection and sewage systems in accordance with the Tenant Improvement
Plans.
The issuance of a certificate of occupancy (or like permit) for the
Premises shall be dispositive that the Premises have been Finally
Completed.
2. Tenant Improvements. Landlord shall furnish and install in the
warehouse portion of the Premises the "Tenant Improvements" shown on the
Outline Specifications attached hereto as Exhibit B-2. With respect to
approximately 2,000 square feet of usable office area to be contained in
the Premises, Landlord shall furnish and install those "Tenant
Improvements" shown on the finish specifications contained in the Outline
Specifications and the schematic space plan attached hereto as Exhibit B-3.
. All design, space planning, and architectural and engineering work for
or in connection with the Tenant Improvements, all drawings, plans,
specifications, licenses, permits or other approvals relating thereto, and
all insurance, bonds and other requirements and conditions hereunder, all
construction costs, and all other costs and expenses incurred in connection
with the Tenant Improvements (collectively, "Improvement Costs") shall be
at Landlord's sole cost and expense. Notwithstanding the foregoing, (i)
any costs or expenses incurred as a result of change orders (as hereinafter
defined) shall be at Tenant's sole cost and expense, and (ii) any
Improvement Costs relating to the office portion of the Premises in excess
of the Allowance (as hereinafter defined) shall be at Tenant's sole cost
and expense. To the extent any amounts are due from Tenant in connection
with the immediately preceding sentence (collectively, "Tenant's Costs"),
such amounts shall include overhead and profit (10%) and general conditions
(6%), and all such amounts shall be paid in the manner set forth below.
Allowance. Landlord grants to Tenant an allowance
("Allowance") of Fifty Thousand and no/100 Dollars ($50,000) to be applied
to the Improvement Costs for the office portion of the Premises. It is
mutually agreed that Tenant's liability for Improvement Costs relating to
the office portion of the Premises shall not exceed $10,000, provided there
are no Tenant requested change orders after the date of this Agreement.
Tenant shall not be entitled to any unused portion of the Allowance.
B. PLANS AND SPECIFICATIONS.
1. Plans and Specifications. The Landlord's Architect and the
mechanical, electrical, plumbing and structural engineers selected by
Landlord shall prepare the Plans and Specifications (as hereinafter
defined) in conformance with the Outline Specifications and the schematic
space plan attached hereto as Exhibits B-2 and B-3, respectively.
2. Time Schedule.
(a) Within thirty (30) days of the date of this Lease,
Landlord shall furnish to Tenant for its review and approval, all
architectural plans, working drawings and specifications (the "Plans and
Specifications") necessary and sufficient (i) for the construction of the
Tenant Improvements in accordance with the Outline Specifications and the
schematic space plan, and (ii) to enable the general contractor, Opus East
L.L.C. ("Contractor"), to obtain a building permit for the construction of
the Tenant Improvements. Tenant shall advise Landlord of Tenant's approval
or disapproval of the Plans and Specifications within five (5) business
days after Landlord submits the Plans and Specifications to Tenant.
Landlord shall revise the Plans and Specifications to meet Tenant's
objections, if any, and resubmit the Plans and Specifications to Tenant for
its review and approval within five (5) business days after Tenant notifies
Landlord of Tenant's objections, if any, together with an estimate of the
Improvement Costs resulting from Tenant's change orders. Tenant shall
advise Landlord of Tenant's approval or disapproval of the revised Plans
and Specifications within five (5) business days after Landlord submits
same. Upon approval of the Plans and Specifications, they shall be
attached hereto and incorporated herein as Exhibit B-4.
(b) The Outline Specifications, the schematic space plan and
the Plans and Specifications are referred to collectively herein as the
"Tenant Improvement Plans." Tenant's failure to timely approve or
disapprove any component of the Tenant Improvement Plans or any revisions
made after objections by Tenant shall constitute a Tenant Delay.
(c) The Tenant Improvements shall be of first-class quality,
shall consist of new materials, commensurate with the level of improvements
for a first class facility to be used for office, warehouse, distribution
and storage purposes in Anne Arundel County Maryland, and shall fully
comply with the Plans and Specifications.
(d) Tenant hereby designates _____________________, Ace
Hardware Corporation, 2200 Kensington Court, Oak Brook, Illinois, 60523-
2100, Telephone: ______________________________; Fax: ___________________
as Tenant's Representative for purposes of granting any consents or
approvals by Tenant under this Work Agreement, authorizing and executing
any and all documents, workletters or other writings and changes thereto
needed to effect this Work Agreement, and any and all changes, additions or
deletions to the work contemplated herein, and Landlord shall have the
right to rely on any documents executed by such authorized party. Landlord
hereby designates Geoff Lilja and __________________, either of whom may
act, Opus East, L.L.C., 6707 Democracy Boulevard, Suite 510, Bethesda,
Maryland 20817, Telephone: (301) 493-4444; Fax (301) 493-8410, as
Landlord's Representative for all purposes under this Work Agreement. All
communications between Landlord and Tenant relating to the design and
construction of the Premises shall be forwarded to or made by such party's
Representative.
3. Changes to Tenant Improvement Plans. In the event that
Tenant requests any changes ("change orders") to the Tenant Improvements
contained in the Outline Specifications or the Tenant Improvement Plans
after the parties have approved same as set forth in Paragraph B.2 hereof,
all costs and expenses incurred in connection therewith shall constitute
"Improvement Costs", and all ensuing delays shall constitute Tenant Delays
pursuant to Paragraph D 2 below.
C. COST OF TENANT IMPROVEMENTS.
1. Tenant's Costs. Tenant shall make payment of fifty percent
(50%) of all Tenant's Costs at the time of final approval of the Plans and
Specifications. Landlord shall submit monthly statements of Improvement
Costs to Tenant showing application of Tenant's prepayment as set forth
above. At such time as the prepayment has been applied in its entirety,
Tenant shall, within ten (10) days of receipt of Landlord's monthly
statement, pay to Landlord all amounts due from Tenant in accordance with
the statement.
D. CONSTRUCTION.
1. Construction Supervision. All Tenant Improvements shall be
performed by Landlord or Landlord's Contractor.
2. Delays.
(a) If Landlord shall be delayed in Finally Completing the
Premises, or in delivering the Premises to Tenant as a result of any act,
neglect, failure or omission of Tenant, its employees or agents (including,
without limitation, any contractor, subcontractor or materialman employed
by, or on behalf of, Tenant performing work in or at the Premises),
including any of the following, such delay shall be deemed a Tenant Delay:
(1) Tenant's delay in timely approving any drawings, plans or
specifications; (2) Tenant's failure to provide, or delay in providing,
Landlord with any other information available to Tenant requested by
Landlord for the purpose of completing the Tenant Improvement Plans or the
ordering of materials for the Tenant Improvements; (3) any change by Tenant
(to the extent such change is permitted by this Work Agreement) in the
Tenant Improvement Plans or in any other plan, specification or finish
information furnished by Tenant, after the parties have approved the same;
(4) delay in the completion of work by any person (other than Landlord or
the Contractor) performing work for Tenant; (5) work by, or for the benefit
of Tenant, if any, not being completed on schedule which under good
construction scheduling practices should be completed before some portion
of the Tenant Improvements is undertaken or which otherwise interferes with
Landlord undertaking the Tenant Improvements; (6) change orders; (7) Long
Lead Items (hereinafter defined); or (8) any other matter described as a
Tenant Delay in the Lease or this Work Agreement. In any such event,
Tenant's obligation to pay Rent shall be accelerated one day for each day
of Tenant Delay.
In addition, Tenant shall pay to Landlord, and shall indemnify
and hold Landlord harmless from and against, all additional costs,
expenses, damages and claims incurred by Landlord resulting from any Tenant
Delay. Any costs payable by Tenant to Landlord under this Work Agreement
shall constitute Additional Rent. If Tenant defaults in the payment of
such Additional Rent, Landlord shall be entitled to all the remedies
available for non-payment of Rent under the Lease.
In no event shall Landlord's remedies or entitlements for the
occurrence of a Tenant Delay be abated, deferred, diminished or rendered
inoperative because of a prior, concurrent or subsequent delay resulting
from any action or inaction of Landlord.
(b) In the event that any particular item or items of Tenant
Improvements is not readily available in reasonable quantities in, or for
delivery to, the Baltimore/Washington industrial corridor or requires a
long term lead time to procure, obtain or install, such item shall
constitute a "Long Lead Item".
(c) At Landlord's sole election, Tenant's failure to timely
respond to a submission of plans or specifications shall be deemed an
approval of Landlord's submission.
(d) Landlord shall not be responsible for a delay in the
completion of the Tenant Improvements, or for performing any other Lease
obligations to the extent the delay is the result of an Unavoidable Delay.
The term "Unavoidable Delays" means delays caused by strikes, Acts of God,
lockouts, labor difficulties, riots, explosions, sabotage; accidents,
shortages or inability to obtain labor or materials, legal requirements,
governmental restrictions, enemy action, civil commotion, fire or other
casualty or similar causes beyond the reasonable control of Landlord.
LIST OF EXHIBITS to Exhibit B of the Lease
Exhibit B-1 Intentionally Deleted
Exhibit B-2 Outline Specifications
Exhibit B-3 Schematic Space Plan
Exhibit B-4 Plans and Specifications for Tenant Improvements
EXHIBIT C to the Lease
SUBORDINATION, NON-DISTURBANCE
AND ATTORNMENT AGREEMENT
This Agreement is made as of this _____ day of ___________, 1998, by
and among NationsBank, N.A., a national banking association, with a
principal place of business at _________________________________________
("Lender"); Ace Hardware Corporation, a _____________________________
corporation , with a principal place of business at 2200 Kensington Court,
Oak Brook, Illinois, 60523-2100 ("Tenant"); and Arundel Crossing II,
L.L.C., a Delaware limited liability company with a principal place of
business at 6707 Democracy Boulevard, Suite 510, Bethesda, Maryland 20817,
("Landlord"); and consented to by Suzanne D. Stylc and Mary R. Henderson,
Trustees.
W I T N E S S E T H :
WHEREAS, Landlord owns the property located in Arundel Crossing
Industrial Park in Anne Arundel County, Maryland, as more fully described
in Exhibit A attached hereto and made a part hereof (the "Premises"); and
WHEREAS, Tenant has entered into a certain deed of lease dated
January ____, 1998 (the "Lease") with Landlord covering the Premises; and
WHEREAS, the Premises are encumbered or to be encumbered by that
certain first deed of trust (the "Deed of Trust"), which Deed of Trust has
heretofore been or will be recorded among the Land Records of Anne Arundel
County, Maryland; and
WHEREAS, Lender has made or will make a loan to Landlord as borrower,
the repayment of which is secured or will be secured by the Deed of Trust;
and
WHEREAS, Tenant has agreed that the Lease is now and shall remain
subject and subordinate to the operation and effect of the Deed of Trust
provided that, subject to the provisions of this Agreement, Tenant is
assured that the Lease and the Tenant's rights thereunder will not be
terminated or otherwise disturbed by any foreclosure of, or other action
relating to, the Deed of Trust.
NOW, THEREFORE, in consideration of the sum of One Dollar ($1.00),
the receipt of which is hereby acknowledged, and in consideration of the
mutual premises, covenants, and agreements herein contained, the parties
hereto, intending to be legally bound hereby, promise, covenant, and agree
as follows:
1. Subject to the terms of this Agreement, Tenant covenants and
agrees that the Lease is and shall be subject and subordinate to the lien,
operation and effect of the Deed of Trust and to all funds and all
indebtedness which may be secured by such Deed of Trust and to all
renewals, amendments, modifications, consolidations, replacements,
increases, and extensions thereof, provided, however, that at any time, at
the election of Lender, such Lender shall have the right to declare the
Lease superior to the lien, provisions, operation and effect of the Deed of
Trust.
2. In the event it should become necessary to foreclose the
Deed of Trust pursuant to the power of sale contained therein, or by deed
given in lieu of foreclosure, Lender, for itself and its successors and
assigns, agrees that such foreclosure will not terminate nor otherwise
disturb the Lease nor the rights of Tenant thereunder, as long as Tenant
continues to pay rent as required by the Lease, and otherwise continues to
perform its obligations on its part to be performed hereunder and under the
Lease, and further provided that (unless waived by Lender):
(a) Tenant shall not be, at the time of such
foreclosure, in default beyond any applicable notice and cure period under
any of the terms, covenants, or conditions of the Lease;
(b) Tenant shall pay rent and otherwise perform its
obligations under the Lease;
(c) intentionally deleted;
(d) Lender, its successors and assigns, and any party
acquiring title to the Premises through foreclosure or by virtue of a deed
given in lieu of foreclosure (hereinafter collectively referred to as a
"Successor in Interest"), shall not be liable for any act or omission of
any prior landlord or liable for any breach of an agreement contained in
the Lease arising prior to the date such Successor in Interest acquired
title to the property;
(e) Such Successor in Interest shall not be bound by
any rent or additional rent which Tenant might have paid for more than one
month in advance to any prior landlord;
(f) Such Successor in Interest shall not be bound by
any amendment or modification of the Lease made after the recordation of
the Deed of Trust and without the written consent of Lender or its
successors or assigns;
(g) Except to the extent that any offset rights
contained in the Lease have already accrued, such Successor in Interest
shall not be subject to any right of offset which Tenant may have against
any prior landlord; and
(h) Such Successor in Interest shall not be liable for
damages for any act or omission of any prior landlord.
3. Subject to the terms of this Agreement, Tenant agrees
with Landlord and Lender that in the event of a foreclosure sale of the
Premises, including a conveyance to Lender by deed in lieu of foreclosure,
or in the event that Landlord conveys its estate in the Premises or, in the
event that Landlord's estate in the Premises passes to any other person,
firm or corporation by operation of law or any other means, then in any of
said events, Tenant shall promptly attorn to the purchaser at the
foreclosure sale or to the grantee of the Premises from Landlord or to such
other successors to Landlord's estate under all the terms, covenants, and
conditions of the Lease and this Agreement and, at the request of Lender or
such person or entity acquiring the Premises through or under Lender, shall
execute a new lease with such person or entity on the same terms and
conditions as are set forth in the Lease, except that the term of the new
lease shall be for the then remaining balance of the term of the Lease.
4. Tenant hereby warrants and represents, covenants and
agrees to and with Lender as follows:
(a) so long as Tenant has been given written notice of
the existence of and an address for Lender, to deliver to Lender a
duplicate of each notice of default delivered to Landlord at the same time
as such notice is given to Landlord;
(b) that Tenant is now the sole owner of the leasehold
estate created by the Lease and shall not hereafter assign the Lease or
sublease the Premises except as permitted by the terms thereof, and that
notwithstanding any such assignment or any sublease, Tenant shall remain
primarily liable for the observance and performance of all of its
agreements under the Lease except as otherwise provided therein;
(c) not to seek to terminate the Lease by reason of any
default of Landlord without prior written notice thereof to Lender and the
lapse thereafter of the period given to Landlord under the Lease to cure
its default within which time Lender, at its option, may remedy any such
default, provided, however, that with respect to any default of Landlord
under the Lease which cannot be remedied within such time, if Lender
commences to cure such default within such time and thereafter diligently
proceeds with such efforts, Lender shall have such time as is reasonably
necessary to complete curing such default;
(d) to promptly certify in writing to Lender whether or
not any default on the part of Landlord then exists under the Lease or
whether there are any events which, with notice or the passage of time, or
both, would constitute a default of Landlord;
(e) to provide on fifteen (15) days written request
estoppel certificates in recordable form confirming Tenant's covenants and
agreements pursuant to this Agreement and certifying to the extent true
that: (i) the Lease is subordinate to the lien, operation and effect of
the Deed of Trust, or is superior to the Deed of Trust (if Lender has so
elected); (ii) Tenant is in full and complete possession of the Premises,
stating the date on which rent commenced to accrue and the date to which it
is paid; (iii) the Lease is in full force and effect, and has not been
amended, modified, or superseded (except as indicated); (iv) Tenant has
received no notice of any sale, transfer, pledge, or assignment of the
Lease or of the rentals by the Landlord except for the assignment to
Lender; (v) Tenant has not advanced any amounts to or on behalf of the
Landlord under the Lease which have not been reimbursed; (vi) Tenant holds
no claim against the Landlord which might be set off against accruing
rentals; (vii) Tenant understands that the Lease has been collaterally
assigned to Lender as security for Lender's loan; and (viii) containing
such other certificates as Lender shall reasonably request; and
(f) Not to alter, amend or modify any of the terms,
covenants or conditions of the Lease without the prior written consent of
Lender.
5. Tenant acknowledges that the Lease has been assigned by
Landlord to Lender and agrees with Lender that, from and after the date
Lender notifies Tenant in writing that Landlord is in default under the
Deed of Trust and that Lender has exercised its rights under the Assignment
of Rents given by Borrower to Lender, Tenant shall promptly remit all
payments due under the Lease to Lender or to any receiver appointed by or
at the instance of Lender.
6. This Agreement shall be binding upon and shall extend to
and benefit the successors and assigns of the parties hereto.
7. This Agreement may be executed in two or more
counterparts, all of which taken together shall constitute one and the same
instrument.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement
by their duly authorized officers the day and year first above written.
WITNESS/ATTEST: LENDER:
NationsBank, a national banking association
By:
Name: Name:
Title: Title:
WITNESS/ATTEST: TENANT:
Ace Hardware Corporation, a _____________
corporation
By:
Name: Name:
Title: Title:
WITNESS/ATTEST: LANDLORD:
Arundel Crossing II, L.L.C., a
Delaware limited liability company
By:
Name: Name:
Title: Title:
[SIGNATURES CONTINUED ON FOLLOWING PAGE
The trustees under the Deed of Trust hereby consent to the foregoing
Agreement.
WITNESS:
Suzanne D. Stylc, Trustee
Mary R. Henderson, Trustee
STATE OF )
COUNTY OF )
On this, the ____ day of _______________, 1997, before me,
_______________________, the undersigned Notary Public, personally appeared
_______________________, who acknowledged himself to be the
___________________ of NationsBank, N.A., a national banking association,
and that he as such _____________________, being authorized to do so,
executed the foregoing instrument for the purposes therein contained by
signing the name of the bank by himself as _____________________.
Witness my hand and official seal.
Notary Public
My commission expires:
STATE OF )
COUNTY OF )
On this, the ____ day of _______________, 199_, before me,
_______________________, the undersigned Notary Public, personally appeared
_______________________, who acknowledged himself to be the
___________________ of Ace Hardware Corporation, a _____________
corporation, and that he as such ___________________, being authorized to
do so, executed the foregoing instrument for the purposes therein contained
by signing the name of the corporation by himself as _____________________.
Witness my hand and official seal.
Notary Public
My commission expires:
STATE OF )
COUNTY OF )
On this, the ____ day of _______________, 1997, before me,
_______________________, the undersigned Notary Public, personally appeared
_______________________, who acknowledged himself to be the
___________________ of Arundel Crossing II, L.L.C., a Delaware limited
liability company, and that he as such ___________________, being
authorized to do so, executed the foregoing instrument for the purposes
therein contained by signing the name of the limited liability company by
himself as _____________________.
Witness my hand and official seal.
Notary Public
My commission expires:
STATE OF )
COUNTY OF )
On this, the ____ day of _______________, 199_, before me,
____________________, the undersigned Notary Public, personally appeared
Suzanne D. Style, who acknowledged herself to be the Trustee identified in
the foregoing instrument.
Witness my hand and official seal.
Notary Public
My commission expires:
STATE OF )
COUNTY OF )
On this, the ____ day of _______________, 199_, before me,
_______________________, the undersigned Notary Public, personally appeared
Mary R. Henderson, who acknowledged herself to be the Trustee identified in
the foregoing instrument.
Witness my hand and official seal.
Notary Public
My commission expires:
Exhibit A To Exhibit C of the Lease
(This exhibit is a graphic representation)
Exhibits D and E to the Lease
(These exhibits are graphical representations)
Exhibit 10-U
ACE HARDWARE CORPORATION
DIRECTORS' DEFERRAL OPTION PLAN
1997 AMENDMENT AND RESTATEMENT
ACE HARDWARE CORPORATION
DIRECTORS' DEFERRAL OPTION PLAN
Ace Hardware Corporation hereby amends and restates in its entirety,
effective as of January 1, 1997, the Ace Hardware Corporation
Directors' Deferral Option Plan which was originally established
effective January 1, 1995.
I. PURPOSE
The purpose of this Ace Hardware Corporation Directors' Deferral
Option Plan (the "Plan") is to provide a further means whereby Ace
Hardware Corporation (the "Company") may afford financial security to
directors of the Company who have rendered and continue to render
valuable service to the Company.
Compensation reductions made pursuant to the Plan will be credited
with interest for the benefit of each Participant. The intent of the
Plan is to credit Participants' compensation deferrals with a
specified rate of interest and to provide the Participants a means to
accumulate supplemental funds for retirement, special needs prior to
retirement or death.
II. DEFINITIONS AND CERTAIN PROVISIONS
2.1 "Agreement" means the Ace Hardware Corporation's Directors'
Deferral Option Agreement executed between a Participant and
the Company, whereby a Participant agrees to defer a portion of
his/her Compensation pursuant to the provisions of the Plan,
and the Company agrees to make benefit payments in accordance
with the provisions of the Plan.
2.2 "Beneficiary" means the person or persons who under this Plan
becomes entitled to receive a Participant's interest in the
event of the Participant's death.
2.3 "Board of Directors" means the Board of Directors of Ace
Hardware Corporation or any committee thereof acting within the
scope of its authority.
2.4 "Committee" means the committee appointed to manage and
administer the Plan.
2.5 "Company" means Ace Hardware Corporation, a Delaware
corporation and its subsidiaries and any successor in interest.
2.6 "Compensation" means the directors fees for personal services
rendered by a Participant as a director of the Company during a
calendar year.
2.7 "Deferral Year" means any calendar year, 1995 through 2000.
2.8 "Deferred Benefit Account" means the account(s) maintained on
the books of the Company for a Participant under this Plan. A
separate Deferred Benefit Account shall be maintained for each
Participant. A Participant's Deferred Benefit Account shall
not constitute or be treated as a trust fund of any kind.
2.9 "Determination Date" means the date on which the amount of a
Participant's Deferred Benefit Account is determined as
provided in Article III hereof. The last day of a Plan year or
the date of a Participant's Termination of Service shall be a
Determination Date.
2.10 "Disability" means a condition, as determined by the Company,
that totally and continuously prevents the Participant, for at
least six consecutive months, from engaging in an "occupation"
for compensation or profit. During the first twenty- four (24)
months of total disability, "occupation" means the
Participant's occupation at the time the disability began.
After that period, "occupation" means any occupation for which
the Participant is or becomes reasonably fitted by education,
training or experience. Notwithstanding the foregoing, a
Disability shall not exist for purposes of this Plan if the
Participant fails to qualify for disability benefits under the
Social Security Act, unless the Company determines, in its sole
discretion, that a Disability exists.
2.11 "Effective Date" means January 1, 1995.
2.12 "Interest Yield" means either the Normal Retirement Interest
Yield, the Early Retirement Interest Yield, or the Death
Interest Yield, as defined below:
(a) "Normal Retirement Interest Yield" means a rate
of interest equal to 120 percent of Prime.
(b) "Early Retirement Interest Yield" means a rate
of interest equal to 100 percent of Prime. This
rate of interest shall be used only for
crediting interest on amounts deferred in
Deferral Years 1995 and 1996.
(c) "Death Interest Yield" means a rate of interest
equal to 120 percent of Prime. This rate of
interest shall be fixed at the time of the
Participant's death.
2.13 "Participant" means a member of the Board of Directors of the
Company who is designated to be eligible pursuant to Section
3.1 and who has executed an Agreement with the Company.
2.14 "Payment Commencement Date" means the date benefits commence
under this Plan in accordance with Sections 4.5 and 4.8. For
amounts deferred pursuant to this Plan during Deferral Years
1995 and 1996, the Payment Commencement Date shall be within
sixty (60) days of the date elected by the Participant in
his/her Agreement, but in no event later than age 65. For
amounts deferred pursuant to this Plan during Deferral Years
1997-2000, the Payment Commencement Date shall be a date within
sixty (60) days of the Participant's Termination of Service.
2.15 "Plan" means the Ace Hardware Corporation Directors' Deferral
Option Plan as amended from time-to-time.
2.16 "Prime" means the Prime Rate as of December 31st of the
preceding year as reported in the Wall Street Journal.
2.17 "Retirement Date" means the date of a Participant's Termination
of Service other than by reason of death or Disability.
2.18 "Termination of Service" means the Participant's cessation of
his/her service with the Company for any reason whatsoever,
whether voluntarily or involuntarily, including by reason of
retirement, death, or Disability.
III. PARTICIPATION AND COMPENSATION REDUCTION
3.1 Participation. Participation in the Plan shall be limited to
directors of the Company who elect to participate in this Plan
by filing an Agreement with the Company prior to the first day
of the deferral period in which a Participant's participation
commences in the Plan. The election to participate shall be
effective upon receipt by the Committee of the Agreement that
is properly completed and executed in conformity with the Plan.
3.2 Minimum and Maximum Deferral and Length of Participation. A
Participant in the Plan may elect to defer 5% to 100% of
his/her Compensation in 5% increments. A Participant may elect
to defer a different percentage of Compensation for each
Deferral Year. A Participant shall make an annual election for
the upcoming Deferral Year by December 15th of the year
preceding the Deferral Year for which the election is being
made.
3.3 Timing of Deferral Credits. The amount of Compensation that a
Participant elects to defer in the Agreement shall cause an
equivalent reduction in his/her Compensation. Compensation
deferrals shall be credited to the Participant's Deferred
Benefit Account at such time as the Participant would have
otherwise received or been eligible to receive the Compensation
deferred pursuant to the Plan.
3.4 New Participants. A Participant who first attains such status
subsequent to January 1, 1995, shall be entitled to participate
in the Plan after satisfying the requirements of Section 3.1
and shall be bound by all terms and conditions of the Plan,
provided, however, that this Agreement must be filed no later
than thirty (30) days following his/her eligibility to
participate.
3.5 Emergency Benefit; Waiver of Deferral. In the event that the
Committee, upon written petition of the Participant or his/her
Beneficiary, determines in its sole discretion, that the
Participant or his/her Beneficiary has suffered an
unforeseeable financial emergency, the Company shall pay to the
Participant or his/her Beneficiary, as soon as possible
following such determination, an amount, not in excess of the
Participant's Deferred Benefit Account, necessary to satisfy
the emergency. For purposes of this Plan, an unforeseeable
financial emergency is an unanticipated emergency that is
caused by an event beyond the control of the Participant or
Beneficiary and that would result in severe financial hardship
to the individual if the emergency distribution were not
permitted. Cash needs arising from foreseeable events, such as
the purchase of a residence or education expenses for children
shall not be considered the result of an unforeseeable
financial emergency. The Committee may also grant a waiver of
the Participant's agreement to defer a stated amount of
Compensation upon finding that the Participant has suffered an
unforeseeable financial emergency. The waiver shall be for
such period of time as the Committee deems necessary under the
circumstances to relieve the hardship.
3.6 Determination of Account. Each Participant's Deferred Benefit
Account as of each Determination Date shall consist of the
balance of the Participant's Deferred Benefit Account as of the
immediately preceding Determination Date, plus the
Participant's elective deferred Compensation pursuant to
Section 3.2 since the immediately preceding Determination Date.
The Deferred Benefit Account of each Participant shall be
reduced by the amount of all distributions, if any, made from
such Deferred Benefit Account since the preceding Determination
Date. The appropriate Interest Yield shall be credited on the
average daily balance of the Deferred Benefit Account as of the
Determination Date and since the last preceding Determination
Date, but after the Deferred Benefit Account has been adjusted
for any additions (including interest earnings) or
distributions to be credited or deducted for each such day.
3.7 Vesting of Deferred Benefit Account. A Participant shall be
100% vested in his/her Deferred Benefit Account.
IV. BENEFITS
4.1 Inservice Distribution. At the time a Participant executes the
Agreement, he/she may elect to receive a return of up to 50%,
in 5% increments, of the annual deferral originally made
pursuant to the Plan. The return of deferral election applies
only to the Participant's deferral and not to the interest
credited to the Participant's Deferred Benefit Account. Each
return of deferral shall be paid in a lump sum on December 1st
of the year which is six (6) years after the year in which the
deferral is made. A return of deferral shall only be paid
prior to a Participant's Termination of Service. Any return of
deferral paid shall be deemed a distribution, and shall be
deducted from the Participant's Deferred Benefit Account. A
separate return of deferral election shall be made for each
Deferral Year.
4.2 Retirement Benefit. Subject to Section 4.5 below, upon a
Participant's Retirement Date, he/she shall be entitled to
receive the amount of his/her Deferred Benefit Account
determined under Section 3.6 using the Retirement Interest
Yield. The form of benefit payment shall be as provided in
Section 4.5.
4.3 Death Benefits. Upon the death of a Participant or a retired
Participant, the Beneficiary of the Participant or retired
Participant shall receive the Participant's remaining Deferred
Benefit Account. Payment of the Participant's remaining
Deferred Benefit Account shall be in accordance with Section
4.5.
4.4 Disability. In the event of a Termination of Service due to
Disability, which first manifests itself after the Effective
Date of the Plan and prior to his/her Retirement Date, a
disabled Participant may receive a benefit equal to the
remaining balance, if any, of his/her Deferred Benefit Account.
Such benefit shall be paid until the earliest of the following
events: (i) there is no longer any balance in the
Participant's Deferred Benefit Account; (ii) the Participant
ceases to be disabled and resumes employment with the Company;
(iii) the Participant dies. Payment of a Participant's
remaining Deferred Benefit Account shall be in accordance with
Section 4.5 over the number of years elected by the
Participant. Disability benefits shall be treated as
distributions from a Participant's Deferred Benefit Account.
4.5 Form of Benefit Payment.
a) Deferral Years 1995 and 1996. Upon the happening of an
event described in Section 4.2, 4.3 or 4.4, the Company
shall pay to the Participant or his/her Beneficiary, monthly
installments payable in substantially equal amounts over the
number of years elected by the Participant. For purposes of
any installment payments due under this Section 4.5, a
Participant at the time of his/her election to defer into
this Plan shall elect the number of years such payments
shall be paid. The number of years installment payments may
be paid shall not be fewer than five (5) years nor greater
than twenty (20) years. In addition, for benefit payments
related to deferrals made in Deferral Years 1995 and 1996, a
Participant at the time he/she enters into his/her Agreement
may elect to begin receiving benefits pursuant to this
Section 4.5(a) within sixty (60) days of his/her Termination
of Service or at a specific time up to and including the
Participant's attainment of age 65. For Participants who
elect to begin receiving their benefit payments immediately
upon a Termination of Service, their Deferred Benefit
Account shall be credited with interest utilizing the Normal
Retirement Interest Yield or the Death Interest Yield in the
event of a benefit payable pursuant to Section 4.3 until all
benefits due from this Plan have been paid. For
Participants who elect to defer the receipt of benefits
until a later date upon a Termination of Service, interest
on the unpaid principal balance utilizing the Normal
Retirement Interest Yield until the Termination of Service
and the Early Retirement Interest Yield from the date of the
Participant's Termination of Service until all benefits
under the Plan have been paid will be added to the
Participant's Deferred Benefit Account on each Determination
Date.
During the period a Participant is receiving installment
payments, the amount of the installment payments shall be
based on the prevailing Interest Yield applicable at the
commencement of payments, projected into the future. The
amount of the installment payments shall be recomputed every
three years and the installment payments shall be increased
or decreased to reflect any changes in the applicable
Interest Yield. Upon the death of a Participant or a
retired Participant, the remaining installment payments
payable to the Beneficiary shall be fixed. The Interest
Yield used to determine the installment payment amounts
shall be the Death Interest Yield, except in any instance
where a retired Participant had elected to defer the receipt
of benefits until a later date upon his/her Termination of
Service in accordance with this Section 4.5(a). In that
event, the Interest Yield used to determine the installment
payment amounts shall be the Early Retirement Interest
Yield.
The Company may, in its sole discretion, elect to pay, at
any time, a Participant's or Beneficiary's Deferred Benefit
Account in a lump sum payment.
b) Deferral Years 1997-2000. Upon the happening of an event
described in Section 4.2, 4.3 or 4.4, the Company shall pay
to the Participant or his/her Beneficiary, monthly
installments payable in substantially equal amounts over the
number of years elected by the Participant. For purposes of
any installment payments due under this Section 4.5, a
Participant at the time of his/her election to defer into
this Plan shall elect the number of years such payments
shall be paid. The number of years installment payments may
be paid shall not be fewer than five (5) years nor greater
than twenty (20) years. Interest on the unpaid principal
balance equal to the applicable Normal Retirement Interest
Yield in the event of a benefit payable pursuant to Section
4.2 or 4.4 or the Death Interest Yield in the event of a
benefit payable pursuant to Section 4.3 will be added to the
Deferred Benefit Account on each Determination Date.
Payment of a Participant's benefits under this Section
4.5(b) shall commence within sixty (60) days of the
Participant's Termination of Service.
During the period a Participant is receiving installment
payments, the amount of the installment payments shall be
based on the prevailing Interest Yield applicable at the
commencement of payments, projected into the future. The
amount of the installment payments shall be recomputed every
three years and the installment payments shall be increased
or decreased to reflect any changes in the applicable
Interest Yield. Upon the death of a Participant or a
retired Participant, the remaining installment payments
payable to the Beneficiary shall be fixed. The Interest
Yield used to determine the installment payment amounts
shall be the Death Interest Yield.
The Company may, in its sole discretion, elect to pay, at
any time, a Participant's or Beneficiary's Deferred Benefit
Account in a lump sum payment.
4.6 Lump Sum Settlement Option. Notwithstanding any other
provision of this Plan, any Participant, retired Participant or
Beneficiary who has a Deferred Benefit Account hereunder may
elect to receive an immediate lump sum payment of the balance
of his/her Deferred Benefit Account, reduced by a penalty equal
to six percent (6%) of the Participant's, retired Participant's
or Beneficiary's remaining Deferred Benefit Account. The six
percent (6%) penalty shall be permanently forfeited and shall
not be paid to the Participant, retired Participant, or
Beneficiary. A Participant who elects to receive a lump sum
payment pursuant to this Section 4.6 must forego further
participation in the Plan for eighteen (18) months.
4.7 Withholding; Employment Taxes. To the extent required by the
applicable law in effect at the time payments are made, the
Company shall withhold any taxes required to be withheld by any
Federal, State or local government.
4.8 Commencement of Payments. Unless otherwise provided,
commencement of payments under this Plan shall be within sixty
(60) days following receipt of notice by the Committee of an
event which entitles a Participant or a Beneficiary to payments
under this Plan, or at such earlier date as may be determined
by the Committee. All payments shall be made as of the first
day of the month.
4.9 Full Payment of Benefits. Notwithstanding any other provision
of this Plan, all benefits shall be paid no later than the
Participant's eightieth (80th) birthday.
4.10 Recipients of Payments: Designation of Beneficiary. All
payments to be made by the Company under the Plan shall be made
to the Participant during his/her lifetime, provided that if
the Participant dies prior to the completion of such payments,
then all subsequent payments under the Plan shall be made by
the Company to the Beneficiary determined in accordance with
this Section 4.10. The Participant may designate a Beneficiary
by filing a written notice of such designation with the
Committee in such form as the Company requires and may include
contingent Beneficiaries. The Participant may from time-to-
time change the designated Beneficiary without the consent of
such Beneficiary by filing a new designation in writing with
the Committee. If no designation is in effect at the time when
any benefits payable under this Plan shall become due, the
Beneficiary shall be the spouse of the Participant, or if no
spouse is then living, the representatives of the Participant's
estate.
V. CLAIMS FOR BENEFITS PROCEDURE
5.1 Claim for Benefits. Any claim for benefits under the Plan
shall be made in writing to any member of the Committee. If
such claim for benefits is wholly or partially denied by the
Committee, the Committee shall, within a reasonable period of
time, but not later than sixty (60) days after receipt of the
claim, notify the claimant of the denial of the claim. Such
notice of denial shall be in writing and shall contain:
(a) The specific reason or reasons for denial of the
claim;
(b) A reference to the relevant Plan provisions upon
which the denial is based;
(c) A description of any additional material or
information necessary for the claimant to
perfect the claim, together with an explanation
of why such material or information is
necessary; and
(d) An explanation of the Plan's claim review
procedure.
If no such notice is provided, the claim shall
be deemed granted.
5.2 Request for Review of a Denial of a Claim for Benefits. Upon
the receipt by the claimant of written notice of the denial of
a claim, the claimant may within ninety (90) days file a
written request to the Committee, requesting a review of the
denial of the claim, which review shall include a hearing if
deemed necessary by the Committee. In connection with the
claimant's appeal of the denial of his/her claim, he/she may
review relevant documents and may submit issues and comments in
writing.
5.3 Decision Upon Review of a Denial of a Claim for Benefits. The
Committee shall render a decision on the claim review promptly,
but no more than sixty (60) days after the receipt of the
claimant's request for review, unless special circumstances
(such as the need to hold a hearing) require an extension of
time, in which case the sixty (60) day period shall be extended
to 120 days. Such decision shall:
(a) Include specific reasons for the decision;
(b) Be written in a manner calculated to be
understood by the claimant; and
(c) Contain specific references to the relevant Plan
provisions upon which the decision is based.
The decision of the Committee shall be final and
binding in all respects on both the Company and the
claimant.
VI. ADMINISTRATION
6.1 Committee. The Plan shall be administered by the Committee.
Members of the Committee or agents of the Committee may be
Participants under the Plan. No member of the Committee who is
also a Participant shall be involved in the decisions of the
Committee regarding any determination of any claim for benefit
with respect to himself or herself.
6.2 General Rights, Powers, and Duties of Committee. The Committee
shall be responsible for the management, operation, and
administration of the Plan. The Committee may designate a
Committee member or an officer of the Company as Plan
Administrator. Absent such delegation, the Committee shall be
the Plan Administrator. The Plan Administrator shall perform
duties as designated by the Committee. In addition to any
powers, rights and duties set forth elsewhere in the Plan, it
shall have the following powers and duties:
(a) To adopt such rules and regulations consistent with the
provisions of the Plan as it deems necessary for the
proper and efficient administration of the Plan;
(b) To administer the Plan in accordance with its
terms and any rules and regulations it
establishes;
(c) To maintain records concerning the Plan
sufficient to prepare reports, returns and other
information required by the Plan or by law;
(d) To construe and interpret the Plan and resolve
all questions arising under the Plan;
(e) To direct the Company to pay benefits under the
Plan, and to give such other directions and
instructions as may be necessary for the proper
administration of the Plan;
(f) To employ or retain agents, attorneys,
actuaries, accountants or other persons, who may
also be Participants in the Plan or be employed
by or represent the Company, as it deems
necessary for the effective exercise of its
duties, and may delegate to such agents any
power and duties, both ministerial and
discretionary, as it may deem necessary and
appropriate; and
(g) To be responsible for the preparation, filing
and disclosure on behalf of the Plan of such
documents and reports as are required by any
applicable Federal or State law.
6.3 Information to be Furnished to Committee. The Company
shall furnish the Committee such data and information
as it may require. The records of the Company shall
be determinative of each Participant's period of
employment, termination of employment and the reason
therefore, leave of absence, reemployment, number of
completed board terms, personal data, and Compensation
deferrals. Participants and their Beneficiaries shall
furnish to the Committee such evidence, data, or
information, and execute such documents as the
Committee requests.
6.4 Responsibility. No member of the Committee of the Company
shall be liable to any person for any action taken or omitted
in connection with the administration of this Plan unless
attributable to his/her own fraud or willful misconduct. The
Company agrees to defend, indemnify and hold each Committee
member harmless from any and all damages, losses or costs
(including reasonable attorney's fees) which occur by reason
of, arise out of, or are incidental to the implementation or
administration of the Plan unless attributable to his/her own
willful fraud or willful misconduct.
6.5 Committee Review. Any action on matters within the discretion
of the Committee shall be final and conclusive as to all
Participants, retired Participants, Beneficiaries and other
persons claiming rights under the Plan. The Committee shall
exercise all of the powers, duties and responsibilities set
forth hereunder in its sole discretion.
VII. AMENDMENT AND TERMINATION
7.1 Amendment. The Plan may be amended in whole or in part by the
Company at any time. Notice of any such amendment shall be
given in writing to the Committee and to each Participant and
each Beneficiary. No amendment shall decrease the value of a
Participant's Deferred Benefit Account.
7.2 Company's Right to Terminate. The Company may terminate the
Plan and/or the Agreements pertaining to the Participant at any
time after the Effective Date of the Plan. In the event of any
such termination, the Participant or Beneficiary shall be
entitled to the amount of his/her Deferred Benefit Account
determined under Section 3.6, using the Retirement Interest
Yield as of the date of termination of the Plan and/or his/her
Agreement. Such benefit shall be paid to the Participant in
monthly installments over a period of no more than fifteen (15)
years, except that the Company, in its sole discretion, may pay
out such benefit in a lump sum or in installments over a period
shorter than fifteen (15) years.
VIII. MISCELLANEOUS
8.1 No Implied Rights; Rights on Termination of Service. Neither
the establishment of the Plan nor any amendment thereof shall
be construed as giving any Participant, retired Participant,
Beneficiary, or any other person any legal or equitable right
unless such right shall be specifically provided for in the
Plan or conferred by specific action of the Company in
accordance with the terms and provisions of the Plan. Except
as expressly provided in this Plan, the Company shall not be
required or be liable to make any payment under the Plan.
8.2 No Right to Company Assets. Neither the Participant nor any
other person shall acquire by reason of the Plan any right in
or title to any assets, funds or property of the Company
whatsoever including, without limiting the generality of the
foregoing, any specific funds, assets, or other property which
the Company, in its sole discretion, may set aside in
anticipation of a liability hereunder. Any benefits which
become payable hereunder shall be payable from the general
assets of the Company. The Participant shall have only a
contractual right to the amounts, if any, payable hereunder
unsecured by any asset of the Company. Nothing contained in
the Plan constitutes a guarantee by the Company that the assets
of the Company shall be sufficient to pay any benefit to any
person.
8.3 No Employment Rights. Nothing herein shall constitute a
contract of employment or of continuing service or in any
manner obligate the Company to continue the services of the
Participant, or obligate the Participant to continue in the
service of the Company, or as a limitation of the right of the
Company to discharge any of its directors, with or without cause.
Nothing herein shall be construed as fixing or regulating the
Compensation payable to the Participant.
8.4 Offset. If, at the time payments or installments of payments
are to be made hereunder, the Participant, retired Participant
or the Beneficiary are indebted or obligated to the Company,
then the payments remaining to be made to the Participant,
retired Participant, or the Beneficiary may, at the discretion
of the Company, be reduced by the amount of such indebtedness
or obligation, provided, however, that an election by the
Company not to reduce any such payment or payments shall not
constitute a waiver of its claim for such indebtedness or
obligation.
8.5 Non-assignability. Neither the Participant nor any other
person shall have any voluntary or involuntary right to
commute, sell, assign, pledge, anticipate, mortgage or
otherwise encumber, transfer, hypothecate or convey in advance
of actual receipt the amounts, if any, payable hereunder, or
any part thereof, which are expressly declared to be
unassignable and non-transferable. No part of the amounts
payable shall be, prior to actual payment, subject to seizure
or sequestration for the payment of any debts, judgments,
alimony or separate maintenance owed by the Participant or any
other person, or be transferable by operation of law in the
event of the Participant's or any other person's bankruptcy or
insolvency.
8.6 Gender and Number. Wherever appropriate herein, the masculine
may mean the feminine and the singular may mean the plural or
vice versa.
8.7 Notice. Any notice required or permitted to be given under the
Plan shall be sufficient if in writing and hand delivered, or
sent by registered or certified mail, and if given to the
Company, delivered to the principal office of the Company,
directed to the attention of the Committee. Such notice shall
be deemed given as of the date of delivery or, if delivery is
made by mail, as of the date shown on the postmark or the
receipt for registration or certification.
8.8 Governing Laws. The Plan shall be construed and administered
according to the laws of the State of Illinois.
In witness whereof, the Company has amended and restated this Ace Hardware
Corporation Directors' Deferral Option Plan originally effective January 1,
1995, as of January 1, 1997.
Ace Hardware Corporation
By:
---------------------
Its:
---------------------
Exhibit 10-Z
EXECUTIVE HEALTHCARE PLAN
Eligible Executives who are retiring, from Ace (and their family members),
will be provided the same health/dental care/prescription drug benefits
that active employees are provided by Ace. The assumption is that all
eligible Executives would be covered by the indemnity program however, in
those instances where they qualify they would be eligible to enroll in a
HMO.
Guidelines: benefit to be offered only to Officers who are retiring from Ace.
Must be age 55 or older and have a minimum of 10 or more years of
service at the time of retirement.
Executive must be in good standing at the time of retirement and each
Executive will require board approval to be eligible for this benefit.
The Executive will co-pay the premium for family or single coverage at
the same dollar amount as active employees are charged for the
healthcare premium. This amount would be subject to annual review at
the same time and at the same change amount implemented for active
employees.
Any Executive who upon leaving Ace to take a full-time position with
another organization, become a full-time consultant or take a temporary
position with another non-Ace organization is not eligible for the
retirement benefit. Nor is anyone eligible, at a later date, to re-
apply to Ace to become eligible for the healthcare benefit.
If the retired employee reaches age 65 or becomes eligible for
Medicare/Medicaid or if the Executive should die, coverage will
continue for the spouse through age 65 or until remarriage, employment
or failure to pay the premium. If spousal coverage is terminated,
then employee's spouse shall be offered the opportunity to elect COBRA.
Premiums, if employee elects coverage, shall be payable in advance on an
annual basis no later than January 31, of the calendar year for which
the coverage is elected.
Currently, nationwide, all non-union employees are eligible to
participate in our retirement medical subsidy plan. This provides $33
per month to offset approved healthcare insurance expenditures by the
retiree. All Executives who qualify for this healthcare program would
be eligible for the retiree medical subsidy.
Per request of Ace counsel, all changes made via substitution pages. As such,
first draft of lease re-named zace.lse and then duplicated to create second
version of ace.lse.
SECOND AMENDMENT
TO
RESTATED ACE HARDWARE CORPORATION
RETIREMENT BENEFITS REPLACEMENT PLAN
(Adopted on December 8, 1998)
This Second Amendment to the Restated Ace Hardware Corporation Retirement
Benefits Replacement Plan is hereby entered into on this 8th day of December,
1998 and is effective January 1, 1999:
WITNESSETH.-
Whereas the Company adopted a Retirement Benefits Replacement Plan on
October 1, 1985 and restated the Plan on December 7, 1993; and
Whereas the Company has amended this Plan to provide for participation by
certain officers of the corporation specifically named in the Plan as
Participants therein;
Now therefore, effective January 1, 1999, the Ace Hardware Corporation
Retirement Benefits Replacement Plan is amended to add certain named officers
and key employees of the corporation as Participants in the Plan and to restate
Article III, Plan Participation, as follows:
III
PLAN PARTICIPATION
Participation in this Plan shall be exclusively limited to any officer or key
employee who is designated as a Participant by the Board of Directors of Ace
Hardware Corporation ("Board") and whose benefits under any of the Profit
Sharing Plan, Money Purchase Plan and the Pension Plan are reduced by reason
of the Limitations. Effective as of January 1, 1999, the following
individuals shall become or continue to be Participants hereunder:
David F. Hodnik David F. Myer
William A. Loftus Fred J. Neer
Paul M. Ingevaldson Donald L. Schuman
Rita D. Kahle William J. Bauman
Michael C. Bodzewski Kenneth L. Nichols
Lori L. Bossmann Daniel C. Prochaska
Ray A. Griffith Wayne E. Wiggleton
David W. League
Effective 1/01/99
KPMG
AUDITORS' CONSENT
The Board of Directors
Ace Hardware Corporation:
We consent to the use of our report included herein and the reference to our
firm under the heading "Experts" in the prospectus.
KPMG LLP
Chicago, Illinois
March 12, 1999
ACE HARDWARE CORPORATION: POWER OF ATTORNEY
--------------------------------------------
KNOW ALL MEN BY THESE PRESENTS that each of the undersigned directors of
ACE HARDWARE CORPORATION, a Delaware corporation, hereby constitutes and
appoints DAVID F. HODNIK and LORI L. BOSSMANN, and each of them, his true and
lawful attorneys-in-fact and agents, each with full power to act without the
other, with full power of substitution, for him and in his name, place and
stead, in any and all capacities, to sign the Registration Statement on Form
S-2, and any and all amendments thereto, and to file the same with all exhibits
thereto, and other documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorneys and agents full power and
authority to do and perform each and every act and thing requisite and
necessary to be done in and about the premises, as fully to all intents and
purposes as they might or could do in person, hereby ratifying and confirming
all that said attorneys and agents, or either of them, or their substitutes,
may lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, each of the undersigned has set his or her hand and seal
as of this 15th day of March, 1999.
JENNIFER C. ANDERSON MARK JERONIMUS
- ----------------------------------- -----------------------
Jennifer C. Anderson Mark Jeronimus
ERIC R. BIBENS II HOWARD J. JUNG
- ----------------------------------- -----------------------
Eric R. Bibens II Howard J. Jung
LAWRENCE R. BOWMAN JOHN E. KINGREY
- ----------------------------------- -----------------------
Lawrence R. Bowman John E. Kingrey
JAMES T. GLENN MARIO R. NATHUSIUS
- ---------------------------------- -----------------------
James T. Glenn Mario R. Nathusius
DANIEL L. GUST ROGER E. PETERSON
- ---------------------------------- -----------------------
Daniel L. Gust Roger E. Peterson
D. WILLIAM HAGAN JON R. WEISS
- ---------------------------------- -----------------------
D. William Hagan Jon R. Weiss
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from SEC Form S-2
Post-Effective Amendment No. 4 and is qualified in its entirety by reference to
such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JAN-02-1999
<PERIOD-END> JAN-02-1999
<CASH> 53901
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<RECEIVABLES> 399845
<ALLOWANCES> 2725
<INVENTORY> 334405
<CURRENT-ASSETS> 800572
<PP&E> 403021
<DEPRECIATION> 163176
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0
0
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<SALES> 3120380
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<OTHER-EXPENSES> 0
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<INCOME-TAX> 1736
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</TABLE>
