-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Q5LL3pOHNbT83q5nM5818f1q8osoiNq53na08+XIyh8dikKigOiS3CBg4WmIyuk1 Pb0S7MMqfPI5b3uYrGzw2g== 0000950124-97-003052.txt : 19970521 0000950124-97-003052.hdr.sgml : 19970521 ACCESSION NUMBER: 0000950124-97-003052 CONFORMED SUBMISSION TYPE: S-2/A PUBLIC DOCUMENT COUNT: 7 FILED AS OF DATE: 19970520 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: COTTER & CO CENTRAL INDEX KEY: 0000025095 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-HARDWARE [5072] IRS NUMBER: 362099896 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-2/A SEC ACT: 1933 Act SEC FILE NUMBER: 333-26727 FILM NUMBER: 97612185 BUSINESS ADDRESS: STREET 1: 8600 WEST BRYN MAWR AVE CITY: CHICAGO STATE: IL ZIP: 60631 BUSINESS PHONE: 3129752700 MAIL ADDRESS: STREET 1: 2740 N CLYBOURN AVE CITY: CHICAGO STATE: IL ZIP: 60614 S-2/A 1 AMENDMENT # 1 TO FORM S-2 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 20, 1997 REGISTRATION NO. 333-26727 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ------------------ AMENDMENT NO. 1 TO FORM S-2 REGISTRATION STATEMENT Under THE SECURITIES ACT OF 1933 ------------------ COTTER & COMPANY (Exact name of Registrant as specified in its charter) Delaware 36-2099896 (State of Incorporation) (IRS Employer Identification No.)
8600 West Bryn Mawr Avenue Chicago, Illinois 60631-3505 (773) 695-5000 (Address, including zip code, and telephone number, including area code, of Registrant's principal executive offices) Kerry J. Kirby, Vice President and Chief Financial Officer Cotter & Company 8600 West Bryn Mawr Avenue Chicago, Illinois 60631-3505 (773) 695-5000 Fax: (773) 695-6563 (Name, address, including zip code, and telephone number, including area code, of agent for service) Copies to: Daniel T. Burns, Vice President and Secretary William K. Blomquist, Esq. Cotter & Company Arnstein & Lehr 8600 West Bryn Mawr Avenue Suite 1200 Chicago, Illinois 60631-3505 120 South Riverside Plaza (773) 695-5000 Chicago, Illinois 60606 Fax: (773) 695-5465 (312) 876-7128 Fax: (312) 876-0288
------------------ Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this 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. [ ] CALCULATION OF REGISTRATION FEE
- ------------------------------------------------------------------------------------------------------------------------------ PROPOSED MAXIMUM PROPOSED MAXIMUM TITLE OF EACH CLASS OF SECURITIES AMOUNT TO BE OFFERING PRICE AGGREGATE AMOUNT OF TO BE REGISTERED REGISTERED PER UNIT* OFFERING PRICE REGISTRATION FEE - ------------------------------------------------------------------------------------------------------------------------------ Variable Denomination Floating Rate Demand Notes........................ $50,000,000 100% $50,000,000 $15,152 - ---------------------------------------------------------------------------------------------------------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE. ================================================================================ * Estimated solely for the purpose of calculating the registration fee. 2 COTTER & COMPANY ------------------ CROSS REFERENCE SHEET
CAPTION IN ITEM IN FORM S-2 PROSPECTUS ---------------- ---------- 1. Forepart of the Registration Statement and Outside Front Cover Page of Prospectus........... Forepart of Registration Statement and Outside Front Cover Page of Prospectus 2. Inside Front and Outside Back Cover Pages of Prospectus....................................... Available Information; Reports to Security Holders; Documents Incorporated by Reference 3. Summary Information, Risk Factors and Ratio of Earnings to Fixed Charges........................ Summary; The Company; Certain Terms of the Notes; Risk Factors, Consolidated Ratio of Earnings to Fixed Charges of the Company 4. Use of Proceeds.................................. Use of Proceeds 5. Determination of Offering Price.................. Outside Front Cover Page of Prospectus and Plan of Distribution 6. Dilution......................................... Not Applicable 7. Selling Security Holders......................... Not Applicable 8. Plan of Distribution............................. Plan of Distribution 9. Description of Securities to be Registered....... Certain Terms of the Notes 10. Interests of Named Experts and Counsel........... Not Applicable 11. Information with Respect to the Registrant....... Summary; The Company; Dividends; Selected Financial Data; Management's Discussion and Analysis of Financial Condition and Results of Operations; Business; Distribution of Patronage Dividends; Management; Certain Terms of the Notes; Merger; Index to Consolidated Financial Statements; Unaudited Pro Forma Consolidated Financial Statements 12. Incorporation of Certain Information by Reference........................................ Documents Incorporated By Reference 13. Disclosure of Commission Position on Indemnification for Securities Act Liabilities... Not Applicable
3 PROSPECTUS (Subject To Completion) Dated May 20, 1997 COTTER & COMPANY $50,000,000 VARIABLE DENOMINATION FLOATING RATE DEMAND NOTES The TruServ Variable Denomination Floating Rate Demand Note Investment Program (the "Program") is designed to provide investors (the "Investors") with a convenient means of investing funds directly with Cotter & Company (the "Company"). The Variable Denomination Floating Rate Demand Notes (the "Notes") will provide liquidity and will typically pay interest above the average rate of taxable U.S. money market funds. This offering (the "Offer") is being made in reliance on Rule 415 under the Securities Act of 1933. The Notes are offered exclusively to Members of Cotter & Company holding Class A common stock, holders of certain Cotter & Company Variable Denomination Fixed Rate Redeemable Term Notes and to those Members of ServiStar Coast to Coast Corporation ("SCC") holding SCC Class A common stock who become Members of the Company on July 1, 1997 by virtue of the Merger described herein (collectively, the "Offerees"). The Program is designed to provide Offerees with a convenient means of investing funds directly with the Company. The Notes will be repayable on demand and will be similar in legal obligation to the Company's TruServ Variable Denomination Fixed Rate Redeemable Term Note Program ("Fixed Rate Program"). Investments in the Notes will be represented by a Program account (an "Account") established for the Investor by the agent bank (the "Agent Bank") appointed by the Company. The Notes will not be represented by a certificate or any other instrument evidencing the Company's indebtedness. The Company reserves the right to modify, withdraw, or cancel the offer made hereby at any time. AN ACCOUNT IS NOT EQUIVALENT TO A DEPOSIT OR OTHER BANK ACCOUNT AND IS NOT SUBJECT TO THE PROTECTION OF THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER INSURANCE. THE PROGRAM IS NOT SUBJECT TO THE REQUIREMENTS OF THE INVESTMENT COMPANY ACT OF 1940 (INCLUDING DIVERSIFICATION OF INVESTMENTS) OR THE EMPLOYEE RETIREMENT INCOME SECURITY ACT OF 1974. ALL INVESTMENTS IN THE NOTES ARE OBLIGATIONS OF COTTER & COMPANY AND ARE NOT OBLIGATIONS OF OR GUARANTEED BY THE AGENT BANK OR ANY OTHER COMPANY. THE WEEKLY INTEREST RATE PAID ON INVESTMENTS IN THE NOTES MAY NOT PROVIDE A BASIS FOR COMPARISON WITH OTHER INVESTMENTS WHICH USE A DIFFERENT METHOD OF CALCULATING A VARIABLE YIELD OR WHICH PAY A FIXED YIELD FOR A STATED PERIOD OF TIME. For information regarding the TruServ Variable Denomination Floating Rate Demand Note Investment Program, please call 1-800-507-9000. Please read this Prospectus carefully and retain for future reference. ------------------ THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES 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 COMPANY - ---------------------------------------------------------------------------------------------------------- Variable Denomination Floating Rate Demand Notes.................................... $50,000,000(1) See (2) Below $50,000,000(3) ==========================================================================================================
(1) The initial minimum denomination note which may be purchased is $250. (2) There will be no underwriters. The subject Notes will be sold directly by the Company at par value. (3) There is no firm commitment for the sale of the securities offered hereunder; they will be sold from time to time by the Company. However, assuming the sale of all securities offered hereunder, and before deduction of approximately $89,152 for estimated expenses in connection with this offering, the total proceeds will be as shown above. ------------------ These securities are offered through COTTER & COMPANY ------------------ THE DATE OF THIS PROSPECTUS IS MAY , 1997. Information contained herein is subject to completion or amendment. A registration statement relating to these securities has been filed with the Securities and Exchange Commission. These securities may not be sold nor may offers to buy be accepted prior to the time the registration statement becomes effective. This prospectus shall not constitute an offer to sell or the solicitation of an offer to buy nor shall there be any sale of these securities in any State in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such State. 4 AVAILABLE INFORMATION The Company is subject to the informational requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act") and in accordance therewith files reports and other information with the Securities and Exchange Commission (the "Commission"). Such reports and other information filed by the Company with the Commission can be inspected and copied at the public reference facilities maintained by the Commission at its principal office at 450 Fifth Street, N.W., Washington, D.C. 20549, as well as the Regional Offices of the Commission at Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511 and 7 World Trade Center, Suite 1300, New York, New York 10048. Copies of such materials can be obtained from the Public Reference Section of the Commission at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549. Such reports and other information may also be obtained from the Commission's web site which is maintained at http://www.sec.gov. REPORTS TO SECURITY HOLDERS Each year the Company distributes to its stockholder-Members an annual report containing consolidated financial statements reported upon by a firm of independent auditors. The Company may, from time to time, also furnish to its stockholder-Members interim reports, as determined by management. DOCUMENTS INCORPORATED BY REFERENCE The Company's Annual Report on Form 10-K for the fiscal year ended December 28, 1996, Quarterly Report on Form 10-Q for the quarter ended March 29, 1997, and Current Report on Form 8-K dated February 27, 1997, filed pursuant to Section 15(d) of the Exchange Act are incorporated herein by reference. The Company will provide without charge to each person to whom a Prospectus is delivered, upon written or oral request of such person, a copy of any and all of the documents incorporated by reference in the Registration Statement (other than exhibits to such documents unless such exhibits are specifically incorporated by reference into the documents that the Registration Statement incorporates). Requests for such copies should be directed to Kerry J. Kirby, Vice President and Chief Financial Officer, Cotter & Company, 8600 West Bryn Mawr Avenue, Chicago, IL 60631-3505, (773) 695-5000. The Company currently estimates that the Offer will terminate on or about one year from offer date. 2 5 SUMMARY This Summary is qualified in its entirety by the detailed information and the Company's consolidated financial statements and the consolidated financial statements of ServiStar Coast to Coast Corporation (including the notes thereto) appearing elsewhere in this Prospectus and in the documents incorporated herein by reference. Cotter & Company (the "Company"), is located at 8600 West Bryn Mawr Avenue, Chicago, Illinois, 60631-3505, telephone number (773) 695-5000. The Company is a Member-owned wholesaler of hardware and related merchandise. Historically, it has been the largest cooperative wholesaler of hardware and related merchandise in the United States. The Company also manufactures paint and paint applicators. For reporting purposes, the Company operates in a single industry as a Member-owned wholesaler cooperative. On April 1, 1997, the stockholders of the Company and the shareholders of ServiStar Coast to Coast Corporation ("SCC") agreed to merge the two companies (the "Merger"). SCC is a hardware wholesaler with annual revenue of $1,700,000,000 and with a strong market presence in retail lumber and building materials. The transaction is subject to customary closing conditions and is expected to be completed on July 1, 1997. Following completion of the Merger, the Company will be renamed TruServ Corporation. The Notes being offered hereby are offered exclusively to Members of the Company holding Class A common stock, holders of certain Cotter & Company Variable Denomination Fixed Rate Redeemable Term Notes and to those Members of SCC holding SCC Class A common stock who become Members of the Company on July 1, 1997 by virtue of the Merger described herein. Ownership of the Notes can be issued in one of the following four types of accounts: Single Tenancy, Joint Tenancy with Right of Survivorship, Tenancy by Custodian (under the Uniform Gifts to Minors Act) and Living Trust. Sales of Notes are made for cash. The Investor must have a valid social security or taxpayer identification number. Interest is compounded monthly and interest payments will be added to the account balance on a monthly basis. The Notes are not equivalent to a deposit or other bank account and are not subject to the protection of the Federal Deposit Insurance Corporation or any other insurance. The Program is not subject to the requirements of the Investment Company Act of 1940 (including diversification of investments) or the Employee Retirement Income Security Act of 1974. All investments in the Notes are investments in securities of the Company and are not an obligation of The Northern Trust Company (the "Agent Bank") or any other company. The Notes being offered hereby are not transferable and may not be pledged for any debt of an Investor. Additionally, the Company has the option to redeem the account balance in whole or in part at the principal amount thereof plus accrued and unpaid interest. The Notes will be subordinated in right of payment to senior notes, indebtedness to banking institutions, trade creditors and other indebtedness of the Company. The Notes are unsecured and rank equally and rateably with all other unsecured and subordinated indebtedness of the Company. The Program is not qualified under Section 401 (a) of the Internal Revenue Code. Accordingly, all interest credited to the notes or paid in any taxable year is reportable by the Investor as taxable income for Federal income tax purposes. No part of the taxable interest is excludable from taxable income. There is no existing secondary market for the Notes offered hereunder and there is no expectation that any secondary market will develop. The Company intends to use the proceeds of this offering primarily for general working capital purposes, including the purchase of merchandise for resale to Members. 3 6 THE COMPANY The Company was organized as a Delaware corporation in 1953. Upon its organization, it succeeded to the business of Cotter & Company, an Illinois corporation organized in 1948. The Company's principal executive offices are located at 8600 West Bryn Mawr Avenue, Chicago, Illinois 60631-3505, telephone number (773) 695-5000. The Company is a Member-owned wholesaler of hardware and related merchandise. Historically, it has been the largest cooperative wholesaler of hardware and related merchandise in the United States. The Company also manufactures paint and paint applicators. For reporting purposes, the Company operates in a single industry as a Member-owned wholesaler cooperative. On April 1, 1997, the stockholders of the Company and the shareholders of SCC agreed to merge the two companies. SCC is a hardware wholesaler with annual revenue of $1,700,000,000 and with a strong presence in retail lumber and retail building materials. The transaction is subject to customary closing conditions and is expected to be completed on July 1, 1997. Following completion of the Merger, the Company will be renamed TruServ Corporation and as a result both Members of the Company and SCC will be eligible for this program. The Company serves approximately 5,300 True Value(R) Hardware Stores throughout the United States. Primary concentrations of Members exist in California (approximately 8%), Illinois and New York (approximately 6% each), Pennsylvania and Texas (approximately 5% each) and Michigan, Ohio and Wisconsin (approximately 4% each). CONSOLIDATED RATIO OF EARNINGS TO FIXED CHARGES OF THE COMPANY
FOR THE FISCAL YEARS -------------------------------- 1996 1995 1994 1993 1992 ---- ---- ---- ---- ---- 2.57 2.78 2.84 2.71 2.73
FOR THE THIRTEEN WEEKS ENDED ----------------------------- MARCH 29, MARCH 30, 1997 1996 --------- --------- 1.14 1.28
The ratio of earnings to fixed charges has been computed by dividing earnings before income taxes and fixed charges by fixed charges. Fixed charges consist of interest expense and the portion of rental expense deemed to represent interest expense. 4 7 THE TRUSERV VARIABLE DENOMINATION FLOATING RATE DEMAND NOTE INVESTMENT PROGRAM INTEREST The principal amount of each Note will be equal to all investments made in the Notes by the Investor, plus accrued and reinvested interest, less any redemptions and fees. The Notes will have no stated maturity and will earn interest at floating rates, to be determined by the TruServ Investment Program Committee each week, to be effective the following week. The rate of interest on the Notes will typically be greater than the most recent seven-day average yield (non-compounded) for taxable money market funds in the United States as published in the IBC Money Fund Report*. Rates may vary by Account balance or other factors as determined by the TruServ Investment Program Committee. Interest on the Notes will accrue daily and will be compounded monthly. The rate of interest paid for any period on the Notes is not an indication or representation of future rates. Accrued interest will be credited and automatically reinvested in additional Notes monthly and will begin to accrue interest on the first day following the date of such reinvestment. If in any week the IBC Money Fund Report is not available or publication of such seven-day average yield is suspended, the seven-day average yield at such time shall be an approximately equivalent rate determined by the TruServ Investment Program Committee. ACCOUNT INFORMATION The Investor will receive regular quarterly statements showing a summary of all transactions made in the Investor's Account. Redemption checks on which payment has been made will not be returned to the Investor, but the check number and the amount of each check will be indicated on the Investor's statement. ELIGIBLE INVESTORS The Notes being offered hereby are offered exclusively to Members of the Company holding Class A common stock, holders of certain Cotter & Company Variable Denomination Fixed Rate Redeemable Term Notes and to those Members of SCC holding SCC Class A common stock who become Members of the Company on July 1, 1997 by virtue of the Merger described herein. All sales of the Notes will be made for cash. HOW TO INVEST To open an Account, complete the Application accompanying this Prospectus and enclose a check made payable to "TruServ Investment Program" for the initial investment (minimum investment -- $250). After the Account is opened, additional investments may be made at any time without charge by check or by wire transfer: BY CHECK MAILED TO AGENT BANK. Your investment will be credited and interest will begin to accrue on the first business day after the Agent Bank receives your check. Funds will be available for withdrawal the morning of the sixth business day following deposit. Investments made by check cannot be redeemed for five - --------------- *IBC Money Fund Report is a registered trademark of IBC Financial Data, Inc. and is published weekly and is currently published on Thursday in The Wall Street Journal. IBC Money Fund Report states that the yield information obtained from money market funds is screened by the publisher, but no guarantee of the accuracy of the information contained therein is made by the Company. 5 8 business days after the check is first credited to your Account or, if later, until the check clears. Checks must be payable only to "TruServ Investment Program". No third party checks will be accepted. All investments must be made in U.S. dollars drawn on a U.S. bank. Accounts may be opened only by U.S. Citizens providing valid U.S. Federal Identification numbers. You may terminate your investments at any time. BY WIRE TRANSFER. You may wire transfer your investment to the Program. Wire transfers received by 10:00 a.m. CST will be processed same day. Wire transfers received after 10:00 a.m. CST will be credited to your Account the following business day. Wire investments should be wired to: ABA 071000152 The Northern Trust Company, Chicago, Illinois TruServ Investment Program Further Advice -- (Your Account Number) HOW TO REDEEM You may redeem any part of your Account at any time as described below. Interest on redeemed investments will accrue to, but not including, the date of redemption. You may close your Account only by use of the written redemption option. REDEMPTION BY CHECK. You may make redemption checks payable to anyone in the amount of $250 or more. If the amount of the redemption check is greater than the balance in your Account or less than $250, the check will not be honored. Your redemption will be made on the day the Agent Bank receives your redemption check for payment. If your Account is held jointly with someone else, only one signature will be required on a redemption check unless otherwise specified. The check redemption feature does not create a deposit or a banking relationship with the Agent Bank, or with the Company. WRITTEN REDEMPTION. You may redeem all or any part of your Account, subject to a $250 minimum, by written request, including the signatures of all registered owners (including joint owners) of the Account. A check for the requested amount (or in an amount equal to the balance of your Account if the Account is being closed) will be mailed to the registered account address. WIRE REDEMPTION. You can redeem any part of your Account, subject to a $2,500 minimum, by wire transfer if you have authorized the wire redemption option. Wire redemption proceeds can only be wired to the U.S. bank account you have designated on your Application. To change this designation, a written request signed by all registered owners (including joint owners) of the Account, with all signatures guaranteed by a financial institution, must be submitted to the Agent Bank. Funds will be wired no later than the next business day after receipt of your wire redemption request, provided your request is received by 2:00 p.m. Eastern Time on any business day. If your designated bank is not a member of the Federal Reserve system, there may be a delay in wiring funds. Each wire transfer will incur a processing charge from the Agent Bank, and may also incur an additional charge from other institutions handling the transfer. The Agent Bank's records of the wire instructions are binding. REDEMPTION DUE TO BALANCE BELOW MINIMUM INVESTMENT. If your Account balance falls below the $250 minimum, you will receive notice that the Account is below the minimum and will be closed at the end of the 6 9 next monthly cycle. If additional investments increasing the Account balance to at least $250 are not made, the Account will then be closed at the end of the next cycle and an official bank check issued for the balance plus interest. FEES There are no account maintenance fees or charges for checks or check redemptions, no sales loads, and no charges for investing or ongoing management other then as described herein. Fees for checks returned for insufficient funds, wire redemptions, stop payment requests and other unusual services will be directly debited from your Account, as follows: Additional fees (Subject to change) Wire transfer fee - per wire transfer ($2,500 minimum).... $ 15.00 Non sufficient funds (NSF) deposit-per check.............. $ 10.00 Stop payment.............................................. $ 15.00 Overnight delivery........................................ $ 12.00
TRUSERV INVESTMENT PROGRAM COMMITTEE The TruServ Investment Program Committee consists of officers of the Company designated by the Company's Board of Directors. The Committee has the full power and authority to amend the Program as described under "Termination, Suspension, or Modification". The Committee may also interpret Program provisions, adopt Program rules and regulations and make certain determinations regarding the Program. The members of the Committee are the Company's Chief Financial Officer, Vice President-Treasurer and Assistant Treasurer. Members of the Committee receive no additional compensation for Committee services. TERMINATION, SUSPENSION OR MODIFICATION The Company expects that the Program will continue indefinitely, but the Company reserves the right at any time to suspend or terminate the Program entirely, or from time to time to modify the Program in part. The Company also reserves the right to modify, suspend or terminate any of the investment options and redemption options described above. Written notice of any material modification, suspension or termination will be provided to Investors at least fifteen days prior to the effective date. See "Certain Terms of the Notes--Modification of the Indenture." USE OF PROCEEDS The proceeds from the sale of the Notes will be made available for general working capital purposes, including the purchase of merchandise for resale to Members. ARBITRATION This Program shall be enforced and interpreted under the laws of the State of Illinois. Any controversy or claims arising out of or relating to this Offer, or any breach thereof, including, without limitation, any claim that this Offer or any portion thereof is invalid, illegal or otherwise voidable, shall be submitted to arbitration before and in accordance with the rules of the American Arbitration Association unless another extra judicial dispute resolution process has been agreed to in writing by the parties. Judgment upon the award may be 7 10 entered in any court having jurisdiction thereof. The location of the arbitration proceedings shall be at the American Arbitration Association office geographically or physically located closest to the Investor's domicile, unless otherwise agreed upon in writing by the parties. CERTAIN TERMS OF THE NOTES The Notes are issued under an Indenture (the "Indenture") dated as of May 8, 1997, as amended, between the Company and First Trust National Association, as trustee (the "Trustee"). The statements under this heading are subject to the detailed provisions of the Indenture, a copy of which is filed as an exhibit to the Registration Statement covering the offering of the Notes. Wherever particular provisions of the Indenture or terms defined therein are referred to, such provisions or definitions are incorporated by reference as a part of the statements made and the statements are qualified in their entirety by such reference. GENERAL The Notes are initially issuable in a minimum amount of $250 and thereafter in investments of at least $50 and will mature on the demand of the Investor. The Notes are unsecured and rank equally and ratably with all other unsecured debt and subordinated indebtedness of the Company. Neither the Indenture nor any other instrument to which the Company is a party limits the principal amount of the Notes or any other indebtedness of the Company that may be issued. The Notes will not be subject to any sinking fund. The Notes will be issued in uncertificated form (i.e. "Book Entry") and Investors will not receive any certificate or other instrument evidencing the Company's indebtedness. All funds invested in Notes together with interest accrued thereon, and redemptions, if any, will be recorded on a register maintained by the Agent Bank. OPTIONAL REDEMPTION BY THE COMPANY The Company may redeem, at any time at its option, all or any part of the Notes. Any partial redemption of Notes will be effected by lot or pro rata or by any other method that is deemed fair and appropriate by the Trustee, except that the Company may redeem all of the Notes held in an Account not meeting guidelines established by the TruServ Investment Program Committee. The Company will give at least 30 days prior written notice to an Investor whose Note is to be redeemed. The Note (or portion thereof) being so redeemed, plus accrued and unpaid interest thereon to, but not including, the date of redemption, will be paid by check to the registered holder of the Note. Interest on the redeemed amount shall cease to accrue on and after the effective date of redemption. MODIFICATION OF THE INDENTURE The Indenture permits the Company and the Trustee, with the consent of the holders of not less than 66 2/3% in aggregate principal amount of the Notes at the time outstanding, to add any provisions to or change in any manner or eliminate any of the provisions of the Indenture or modify in any manner the rights of the holders of the Notes, provided that no such addition or modification shall, among other things (i) change the character of the Notes from being payable upon demand, (ii) reduce the principal amount of any Note or (iii) reduce the aforesaid percentage of principal amount of such Notes, the consent of the holders of which is required for any addition or modification, without in each case the consent of the holder of each such Note so affected. 8 11 EVENTS OF DEFAULT An Event of Default with respect to the Notes is defined in the Indenture as being: default in payment of any principal or interest on any Note when due and continuance of such default for a period of 20 days, provided that an administrative error shall not be considered an Event of Default unless such error shall have continued uncorrected for a period of 60 days after written notice to the Agent Bank or the Trustee (with a copy to the Company), the Trustee to be the sole judge of whether the error has been corrected; default for 60 days after written notice to the Company in the performance of any other covenant in the respect of the Notes; or certain events in bankruptcy, insolvency or reorganization. The Indenture requires the Company to file with the Trustee annually a written statement as to the presence or absence of certain defaults under the terms thereof. The Trustee shall, within 90 days after the occurrence of a default in respect of the Notes, give to the holders thereof notice of all uncured and unwaived defaults known to it (the term "default" to mean the events specified above without grace periods); provided that, except in the case of default in the payment of principal or interest on any of the Notes, the Trustee shall be protected in withholding such notice if it in good faith determines that the withholding of such notice is in the interests of the holders of the Notes. The Indenture provides that during the continuance of an Event of Default, either the Trustee thereunder or the holders of 50% in aggregate principal amount of the outstanding Notes may declare the principal of all such Notes to be due and payable immediately, but under certain conditions such declaration may be annulled by the holders of a majority in principal amount of such Notes then outstanding. The Indenture provides that past defaults with respect to the Notes (except, unless theretofore cured, a default in payment of principal of or interest on any of the Notes) may be waived on behalf of the holders of all Notes by the holders of a majority in principal amount of such Notes then outstanding. CONCERNING THE TRUSTEE The Trustee acts as trustee under one other indenture with the Company, pursuant to which a number of series of subordinated, unsecured notes of the Company are presently outstanding. PLAN OF DISTRIBUTION The availability of the Program will be communicated through a mailing to all Offerees. An Offeree, upon request of an application package will receive the Prospectus, IRS W-9 Certification Form and application form to be returned to the address as specified on the application form. The application will include the Investor's registration form. By signing and returning the application form and IRS W-9 Certification Form, together with a check made payable to the "TruServ Investment Program" for the invested amount to the address as specified on the application form, an Investor shall consent to be bound by the terms of the Program, as described in the Prospectus, as amended from time to time by the Company. AGENT BANK AND ADMINISTRATION The Company has engaged The Northern Trust Company as the Agent Bank to service the Program. The Agent Bank will send the following to the Investor: -- Investment confirmation, -- Quarterly statements listing all balances, transactions and year-to-date interest, and -- Form 1099INT. 9 12 Additionally, the Agent Bank will provide an automated voice response system, at toll-free number 1-800-507-9000, to allow Investors to call and obtain aggregate account information. The Agent Bank will also process redemption requests, respond to inquiries and provide to Investors Account information. Additional or other inquiries from Investors to the Agent Bank will be forwarded to the Company. TAXES The Program is not qualified under Section 401(a) of the Internal Revenue Code. Accordingly, all interest credited to the Notes or paid in any taxable year is reportable by the Investor as taxable income for Federal income tax purposes. No part of the taxable interest is excludable from taxable income. The December statement to each Investor from the Agent Bank each year will state the full amount reportable as taxable income. The Agent Bank also will file tax information returns as required by law. State and local income taxes and tax reporting also may be applicable. Investors are individually responsible for complying with applicable federal, state, and local tax laws and should consult their individual tax advisors with respect to tax consequences which may be applicable to their particular situation. RISK FACTORS The business of the Company and SCC after the Merger will be subject to a number of risks, including: uncertainties associated with the integration of the business of SCC with the Company; the uncertain impact of the growth in the hardware, lumber/building materials, home center, do-it-yourself, rental and industrial/ commercial industries; the impact of increasingly intense competition and market changes; the potential impact of future litigation; the impact of various environmental issues; the volatility of merchandise and inventory prices; the failure to achieve anticipate economies of scale and operating efficiencies of the post-Merger cooperative; difficulties in integrating merchandise ordering and purchasing systems; difficulties in integrating wholesale technology and technical support; difficulties of combining logistic/distribution facilities and systems operations; regional variations in marketing opportunities; the combination of disparate pricing strategies and the potential impact of franchising and licensing laws on the Company's operations following the Merger. The Notes are unsecured obligations and will be subordinated in right of payment to senior notes, indebtedness to banking institutions, trade creditors and other indebtedness of the Company. MERGER At the Company's Annual Meeting, holders of Class A common stock approved the merger of the Company and SCC, including the issuance of the shares of common stock pursuant to the Merger Agreement, dated December 9, 1996, amendment and restatement of the Certificate of Incorporation as set forth in the Merger Agreement, ratification of revised By-Laws for TruServ Corporation ("TruServ"), and ratification of the revised form of the Retail Member Agreement as set forth in the Merger Agreement. The transaction is subject to customary closing conditions and is expected to be completed on July 1, 1997. The Amended and Restated Certificate of Incorporation will, among other things, increase the number of authorized shares of Class A common stock to 750,000 shares and the number of Class B common stock to 4,000,000 shares, eliminate cumulative voting, eliminate the requirement that all stockholders own the same number of shares 10 13 of Class A common stock and change the name of the Company to TruServ. At the same meeting, holders of Class B common stock approved the increase in the number of authorized shares of Class B common stock to 4,000,000 shares. CONVERSION OF SECURITIES Upon consummation of the transactions contemplated by the Merger Agreement, (i) SCC will be merged with and into the Company, with the Company being the surviving corporation (and thereafter known as TruServ Corporation), and (ii) each outstanding share of SCC common stock and SCC Series A stock (excluding those shares thereof canceled pursuant to Article III of the Merger Agreement) will be converted into the right to receive one fully paid and nonassessable share of TruServ Class A common stock and each two outstanding shares of SCC preferred stock will be converted into the right to receive one fully paid and non-assessable share of TruServ Class B common stock. No fractional shares of TruServ stock will be issued in connection with such exchange. Cash will be delivered in lieu of fractional or cancelable shares. Based on the number of shares of SCC stock outstanding on the SCC record date, it is expected that approximately 262,348 and 1,083,752 shares of TruServ Class A common stock and Class B common stock, respectively, will be issued in connection with the Merger. It is anticipated that an additional approximately 250,000 shares of TruServ Class A common stock will be purchased by those pre-Merger stockholders of the Company to satisfy the new Class A common stock ownership requirement applicable to such Members as contemplated by the Merger Agreement. RETAIL MEMBER AGREEMENT After the Effective Time of the Merger, all the Company's Members, and those SCC Members who voted in favor of the Merger Agreement, will be governed by the form of Retail Member Agreement attached to the Merger Agreement as Exhibit 3.8. Such Retail Member Agreement is an amendment and restatement of the existing Retail Member Agreement. All the Company's stockholders, regardless of their vote for or against the Merger or their abstention from such vote, will be deemed to be bound by the agreement, as amended. A vote to approve the Merger Agreement by an SCC Member was deemed to constitute that Member's agreement to accept and be bound by the terms of the Retail Member Agreement, in cancellation and replacement of such SCC Member's existing Retailers/Distributors Agreement(s) with SCC. The Hardware/Lumber Operations of such Member will after the Effective Time be conducted as part of the cooperative activities of TruServ and be governed by the Certificate of Incorporation, By-Laws and Retail Member Agreement of TruServ as in effect from time to time. The SCC Membership Agreement of each SCC Member voting against the Merger, or abstaining with respect thereto, together with any related license or franchise agreements, shall be assigned by SCC to TruServ without further action, subject to any terminations and replacements as may be agreed upon between each such SCC Member and TruServ. Whether or not an individual Member voted for, against or abstained from the Merger going forward all Members will belong to and be a part of TruServ, sharing in the benefits and advantages of membership in the new cooperative. 11 14 DIVIDENDS Other than the payment of patronage dividends, including the redemption of some nonqualified written notices of allocation, the Company has not paid dividends on its Class A common stock or Class B common stock. The Board of Directors does not plan to pay dividends on either class of stock. Dividends (other than patronage dividends) on the Class A common stock and Class B common stock, subject to the provisions of the Company's Certificate of Incorporation, may be declared out of gross margins of the Company, other than gross margins from operations with or for Members and other patronage source income, after deduction for expenses, reserves and provisions authorized by the Board of Directors. Dividends may be paid in cash, in property, or in shares of the common stock, subject to the provisions of the Certificate of Incorporation. See "Distribution of Patronage Dividends." SELECTED FINANCIAL DATA
FOR THE FISCAL YEARS -------------------------------------------------------------- 1996 1995 1994 1993 1992 ---------- ---------- ---------- ---------- ---------- (IN THOUSANDS EXCEPT PER SHARE DATA) Revenues.............................. $2,441,707 $2,437,002 $2,574,445 $2,420,727 $2,356,468 Gross margins......................... $ 196,636 $ 202,068 $ 223,331 $ 217,921 $ 216,608 Net margins........................... $ 52,410 $ 59,037 $ 60,318 $ 57,023 $ 60,629 Patronage dividends................... $ 53,320 $ 60,140 $ 60,421 $ 54,440 $ 60,901 Total assets.......................... $ 853,985 $ 819,576 $ 868,785 $ 803,528 $ 833,372 Long-term debt and obligations under capital leases...................... $ 80,145 $ 79,213 $ 75,756 $ 69,201 $ 72,749 Promissory (subordinated) and instalment notes payable............ $ 185,366 $ 186,335 $ 199,099 $ 217,996 $ 235,695 Class A common stock.................. $ 4,876 $ 5,294 $ 6,370 $ 6,633 $ 6,857 Class B common stock.................. $ 114,053 $ 113,062 $ 116,663 $ 110,773 $ 108,982 Book value per share of Class A common stock and Class B common stock(a)... $ 101.89 $ 102.68 $ 103.57 $ 103.85 $ 101.42
- --------------- (a) The book value per share of the Company's Class A common stock and Class B common stock is the value, determined in accordance with generally accepted accounting principles, of such shares as shown by the respective year-end consolidated balance sheets of the Company, included elsewhere herein as reported on by the Company's independent auditors, after eliminating therefrom all value for goodwill, and other intangible assets and any retained earnings specifically appropriated by the Company's Board of Directors. 12 15 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS THIRTEEN WEEKS ENDED MARCH 29, 1997 COMPARED TO THIRTEEN WEEKS ENDED MARCH 30, 1996 RESULTS OF OPERATIONS Revenues decreased by $16,913,000 or 2.9% compared to the same period last year. The decrease was due to seasonal merchandise departments mostly affected by adverse weather. These decreases were concentrated in the seasonal merchandise categories of Farm and Garden and Sporting Goods and Toys. Comparable store sales decreased 1.7%. Gross margins decreased by $2,067,000 or 4.5% and, as a percentage of revenues, declined from 7.9% to 7.7% for the same period last year. The reduction resulted from decreased sales volume and a change in sales mix. The lower margin "direct shipment sales" was the only category to show an increase in the quarter. Warehouse, general and administrative expenses decreased by $1,579,000 or 4.3% and, as a percentage of revenues, remained comparable with the same period last year. The decrease was attributed to the Company's continued efforts to reduce operating costs. Interest paid to Members decreased by $361,000 or 7.8% due to a lower principal balance and lower average interest rates. Other interest expense increased $804,000 or 36.1% due to higher short-term borrowings compared to the same period last year. Net margins were $1,071,000 compared to $2,083,000 for the same period last year. LIQUIDITY AND CAPITAL RESOURCES The Company has a seasonal need for cash. During the first quarter of the year, as seasonal inventories are purchased for resale or manufacture and shipment, cash and cash equivalents are used for operating activities. In subsequent quarterly periods, the Company anticipates that cash and cash equivalents will be provided by operating activities and financing activities, if necessary. During the first quarter of 1997, inventories increased by $42,804,000 to support anticipated future orders of seasonal merchandise. Accounts and notes receivable increased by $29,528,000 due to the seasonal payment terms extended to the Company's Members. Short-term borrowings increased by $45,507,000 and accounts payable and accrued expenses increased by $56,423,000 in support of the increased inventories and favorable seasonal terms obtained from vendors which were passed on to the Company's Members. At March 29, 1997, net working capital decreased to $195,301,000 from $201,304,000 at December 28, 1996. The current ratio decreased to 1.35 at March 29, 1997 compared to 1.43 at December 28, 1996. In March of 1996 the Company established a $125,000,000 five-year revolving credit facility with a group of banks. In addition, the Company has a $50,000,000 private shelf agreement and various short-term lines of credit available under informal agreements with lending banks, cancelable by either party under specific circumstances. Borrowings under the short-term credit facility were $116,101,000 at March 29, 1997. The Company's capital is primarily derived from Class A common stock and retained earnings, together with promissory (subordinated) notes and nonvoting Class B common stock issued in connection with the Company's annual patronage dividend. The Company believes the funds derived from these capital resources, as well as operations and the credit facilities noted above, will be sufficient to satisfy capital needs. 13 16 Total capital expenditures, including those made under capital leases, were $6,571,000 for the thirteen weeks ended March 29, 1997 compared to $6,580,000 during the comparable period in 1996. These capital expenditures relate to additional equipment and technological improvements at the regional distribution centers and at the National Headquarters. The Company is in the process of assessing and renegotiating its long-term and short-term capital needs in connection with the Merger which is expected to be consummated July 1, 1997. RESULTS OF OPERATIONS FISCAL YEAR 1996 COMPARED TO FISCAL YEAR 1995 In fiscal year 1996, the Company's revenues were $2,441,707,000, an increase of 0.2% from fiscal year 1995. Current year revenues were influenced by the 1995 phase-out of the V&S(R) Variety and General Power Equipment divisions. Comparable store revenues increased 4.4% due to improved Member participation. Fiscal year 1996 revenue increases were concentrated in the core merchandise categories of Electrical and Plumbing, up 4.0%, Painting and Cleaning, up 5.0%, Farm and Garden, up 3.8% and Lumber and Building Materials, up 2.4%. Additionally, the Company continued to pursue business opportunities such as International and trueAdvantage(TM), which both increased 14.2%. Also, the Company further expanded the Pinpoint Pricing program to further reduce the selling price of many core hardware and related products. Overall gross margins, as a percent of revenues, decreased for the fifth year in a row to 8.1% from 8.3% in fiscal year 1995. The reduction in gross margin was the result of a more competitive pricing strategy, which included the expanded Pinpoint Pricing program that resulted in a $7,100,000 price reduction to the Members. Other strategies, predominantly the trueAdvantage(TM) program, returned an additional $2,000,000 to the Members. Warehouse, general and administrative expenses increased slightly compared to the prior year, but as a percent of revenues remained comparable at 4.7% with the prior year, due to management's continued effort to control operating expense and an expense recovery associated with prior years' favorable risk loss experience. Certain estimates of warehouse, general and administrative expenses are recorded throughout the year including expenses related to incurred but not reported healthcare claims, premiums for comprehensive insurance, capitalizable inventory related costs and other expense items. During the fourth quarter of fiscal 1996, the Company recorded approximately $11 million of net reductions in warehouse, general and administrative expenses relating to the refinement of these estimates recorded in the prior three quarters, a refund of insurance premiums of approximately $7 million and cost recoveries from manufacturers of approximately $5 million related to the Fall market. Interest paid to Members decreased by $2,167,000 or 10.5% primarily due to a lower principal balance and lower average interest rates. Other interest expense increased by $877,000 or 9.4% compared to last year primarily due to higher short-term borrowings partially offset by a lower average interest rate. Net margins were $52,410,000 for the year ended December 28, 1996 compared to $59,037,000 for the year ended December 30, 1995. FISCAL YEAR 1995 COMPARED TO FISCAL YEAR 1994 In fiscal year 1995, the Company's revenues were $2,437,002,000, a decrease of 5.3% from fiscal year 1994. This decrease was attributable to the phase-out of the V&S(R) Variety division and the sale of the General 14 17 Power Equipment manufacturing division. Comparable sales categories were flat with the prior year due to the soft economy and unusual weather in the United States, combined with the declining sales in Mexico. In addition, the Company expanded the Pinpoint Pricing program which reduced the selling price of many core hardware and related products. Overall merchandise gross margins, as a percentage of revenues, decreased for the fourth year in a row. This reduction in gross margin percentage was the result of an expanded Pinpoint Pricing program and the withdrawal from the resigned businesses of V&S(R) Variety division and General Power Equipment manufacturing division. Warehouse, general and administrative expenses decreased by $18,652,000 or 14.0% compared to the prior year. As a percentage of revenue, these expenses were 4.7% in 1995 compared to 5.2% in 1994. The decrease in operating expenses was attributable to continued efforts to reduce operating costs, an expense recovery associated with prior years' favorable risk loss experience and efficiencies derived from the resigned businesses. Interest paid to Members decreased by $2,267,000 or 9.9% primarily due to a lower average principal balance and a decrease in the average interest rate. Other interest increased due to the increase in the Cotter & Company term note program. Net margins were $59,037,000 for the year ended December 30, 1995 compared to $60,318,000 for the year ended December 31, 1994. LIQUIDITY AND CAPITAL RESOURCES Cash and cash equivalents decreased from $22,473,000 at December 30, 1995, to $1,662,000 at December 28, 1996. This decrease was primarily due to cash flow used for operating activities. Cash used for operating activities was $9,609,000 for the year ended December 28, 1996, compared to cash flow provided by operating activities of $106,640,000 for the year ended December 30, 1995. The decrease in cash flow from operating activities resulted from increased inventory levels to better service the needs of Members with expanded inventory selection and improved service levels. Inventory levels increased by $32,243,000 in fiscal year 1996 compared to a $69,436,000 decrease in fiscal year 1995. Additionally, accounts and notes receivables used cash flow from operating activities of $38,581,000 due to seasonal payment terms extended to Members. Cash flows of $21,767,000 used for investing activities increased slightly from the previous fiscal year. These uses of cash flows were funded by financing activities which provided cash flow of $10,565,000 in fiscal year 1996. At December 28, 1996, net working capital decreased slightly to $201,304,000 from $202,999,000 at December 30, 1995. The current ratio decreased to 1.43 at December 28, 1996 from 1.47 at December 30, 1995. The Company has established a $125,000,000 five-year revolving credit facility with a group of banks. In addition, the Company has various short-term lines of credit available under informal agreements with lending banks, cancelable by either party under specific circumstances. The Company pays commitment fees for these lines. The borrowings under these agreements were $70,594,000 at December 28, 1996 and $2,657,000 at December 30, 1995. In addition, the Company has a private shelf agreement with available borrowings up to $50,000,000. 15 18 The Company's capital is primarily derived from Class A common stock and retained earnings, together with promissory (subordinated) notes and nonvoting Class B common stock issued in connection with the Company's annual patronage dividend. Funds derived from these capital resources are usually sufficient to satisfy long-term capital needs. Total capital expenditures, including those made under capital leases, were $23,708,000 in fiscal year 1996 compared to $28,912,000 in fiscal year 1995 and $21,427,000 in fiscal year 1994. These capital expenditures were principally related to additional equipment and technological improvements at the regional distribution centers and national headquarters. Funding of capital expenditures in fiscal year 1997 is anticipated to come from operations and external sources, if necessary. BUSINESS The Company is a Member-owned wholesaler of hardware and related merchandise. Historically, it has been the largest cooperative wholesaler of hardware and related merchandise in the United States. The Company also manufactures paint and paint applicators. For reporting purposes, the Company operates in a single industry as a Member-owned wholesaler cooperative. On April 1, 1997, the stockholders of the Company and the shareholders of SCC agreed to merge the two companies pursuant to the Merger Agreement. SCC is a $1,700,000,000 hardware wholesaler with a strong presence in retail lumber and building materials. The transaction is subject to customary closing conditions and is expected to be completed on July 1, 1997. Following completion of the Merger, the Company will be renamed TruServ Corporation. Membership entitles a Member to use certain Company trademarks and trade names, including the federally registered collective membership trademark indicating membership in "True Value(R) Hardware Stores". The "True Value(R)" collective membership mark has a present expiration date of January 2, 2003. The Company serves approximately 5,300 True Value(R) Hardware Stores throughout the United States. Primary concentrations of Members exist in California (approximately 8%), Illinois and New York (approximately 6% each), Pennsylvania and Texas (approximately 5% each) and Michigan, Ohio and Wisconsin (approximately 4% each). The Company's total sales of merchandise to its U.S. Members were divided among the following general classes of merchandise:
FOR THE FISCAL YEARS --------------------- 1996 1995 1994 ----- ----- ----- Hardware Goods..................................... 22.4% 22.3% 20.1% Electrical and Plumbing............................ 18.2% 17.7% 15.8% Painting and Cleaning.............................. 14.0% 13.3% 14.4% Farm and Garden.................................... 13.8% 13.3% 12.5% Lumber and Building Materials...................... 12.8% 12.7% 12.9% Appliances and Housewares.......................... 11.2% 11.7% 10.4% Sporting Goods and Toys............................ 7.6% 9.0% 13.9%
The Company serves its Members by functioning as a low cost distributor of goods and maximizing its volume purchasing abilities, primarily through vendor rebates and discount programs, for the benefit of its Members. These benefits are passed along to its Members in the form of lower prices and/or patronage 16 19 dividends. The Company has numerous individual agreements or commitments from its suppliers, virtually all of which are terminable by such suppliers without cause. Such provisions, either individually or in the aggregate, have not had any material adverse effect on the Company's ability to conduct its business. The goods and services purchased by the Company from these suppliers are generally available from a wide variety of sources. The Company is not dependent upon any one supplier or group of suppliers and has not experienced a problem in obtaining necessary goods. The Company holds conventions and meetings for its Members in order to keep them better informed as to industry trends and the availability of new merchandise. The Company also provides each of its Members with an illustrated price catalog showing the products available from the Company. The Company's sales to its Members are divided into three categories, as follows: (1) warehouse shipment sales (approximately 49% of total sales); (2) direct shipment sales (approximately 41% of total sales); and (3) relay sales (approximately 10% of total sales). Warehouse shipment sales are sales of products purchased, warehoused, and resold by the Company upon orders from the Members. Direct shipment sales are sales of products purchased by the Company but delivered directly to Members from manufacturers. Relay sales are sales of products purchased by the Company in response to the requests of several Members for a product which is not normally held in inventory and is not susceptible to direct shipment. Generally, the Company will give notice to all Members of its intention to purchase products for relay shipment and then purchase only so many of such products as the Members order. When the product shipment arrives at the Company, it is not warehoused; rather, the Company breaks up the shipment and "relays" the appropriate quantities to the Members who placed orders. The Company also manufactures paint and paint applicators. The principal raw materials used by the Company are chemicals including among other ingredients, resins, solvents, coalescent extenders and pigments. All raw materials are purchased from outside sources. There are no minimum/maximum purchase obligations with the vendors and they have the right to terminate their agreements at any time. Currently, there is no shortage, nor is any anticipated, of such raw materials which would materially impact operations. The raw materials purchased by the Company from these vendors are generally available from a variety of sources. The Company is not dependent upon any one supplier and has not experienced a problem in obtaining necessary raw materials. The Company annually sponsors two "markets" (one in the Spring and one in the Fall). In fiscal year 1997, these markets will be held in Atlanta and New Orleans. Members are invited to the markets and generally place substantial orders for delivery during the period prior to the next market. During such markets, new merchandise and seasonal merchandise for the coming season is displayed to attending Members. As of February 22, 1997 and February 24, 1996, the Company had a backlog of firm orders (including relay orders) of approximately $16,000,000 and $23,000,000, respectively. The Company's backlog at any given time is made up of two principal components: (i) normal resupply orders and (ii) market orders for future delivery. Resupply orders are orders from Members for merchandise to keep inventories at normal levels. Generally, such orders are filled the day following receipt, except that relay orders for future delivery (which are in the nature of resupply orders) are not intended to be filled for several months. Market orders for future delivery are Member orders for new or seasonal merchandise placed at the Company's two markets, for delivery during the several months subsequent to the markets. Thus, the Company will have a relatively high backlog at the end of each market which will diminish in subsequent months until the next market. The retail hardware industry is characterized by intense competition. Independent retail hardware businesses served by the Company continue to face intense competition from chain stores, discount stores, home centers and warehouse operations. Increased operating expenses for the retail stores, including increased costs due to longer open-store hours and higher rental costs of retail space, have cut into operating margins 17 20 and brought pressures for lower merchandise costs, to which the Company has been responsive through a retail oriented competitive pricing strategy on high turnover, price sensitive items (Pinpoint Pricing program). The trueAdvantage(TM) program was introduced in 1995 to promote higher retail standards in order to build consumer loyalty and create a positive image for all True Value(R) stores. The trueAdvantage(TM) program is a voluntary program developed to help Members meet the wants and needs of the retail customer coming into hardware stores. The program establishes twelve standards to be met for the benefit of the retail customer. Included are state-of-the-art, high-tech standards like in-store computerization and participation in the Cotter Satellite Network as well as various "low-tech" essentials. The benefits of being a trueAdvantage(TM) Member include below market-rate business improvement financing and a 5% year-end discount on increases in their warehouse purchases. Over 1,000 Members have committed to the trueAdvantage(TM) program. The Company competes with other Member-owned and non-member-owned wholesalers as a source of supply and merchandising support for independent retailers. Competitive factors considered by independent retailers in choosing a source of supply include price, service capabilities, promotional support and merchandise selection and quality. Increased operating expenses and decreased margins have resulted in several non-member-owned wholesalers withdrawing from business. The Company, through a Canadian subsidiary, owns a majority equity interest in Cotter Canada Hardware and Variety Cooperative, Inc., a Canadian wholesaler of hardware, variety and related merchandise. This cooperative serves 505 True Value(R) Hardware and V&S(R) Variety Stores, all located in Canada. The cooperative has approximately 325 employees and generated less than 5% of the Company's consolidated revenue in fiscal year 1996. The Company operates several other subsidiaries, most of which are engaged in businesses providing additional services to the Company's Members. In the aggregate, these subsidiaries are not significant to the Company's results of operations. The Company employs approximately 3,500 persons in the United States on a full-time basis. Due to the widespread geographical distribution of the Company's operations, employee relations are governed by the practices prevailing in the particular area and are generally dealt with locally. Approximately 34% of the Company's hourly-wage employees are covered by collective bargaining agreements which are generally effective for periods of three or four years. In general, the Company considers its relationship with its employees to be good. DISTRIBUTION OF PATRONAGE DIVIDENDS The Company operates on a cooperative basis with respect to business done with or for Members. All Members are entitled to receive patronage dividend distributions from the Company on the basis of gross margins of merchandise and/or services purchased by each Member. In accordance with the Company's By-Laws and Retail Member Agreement; the annual patronage dividend is paid to Members out of the gross margins from operations and other patronage source income, after deduction for expenses, reserves and provisions authorized by the Board of Directors. Patronage dividends are usually paid to Members within 60 days after the close of the Company's fiscal year; however, the Internal Revenue Code (the "Code") permits distribution of patronage dividends as late as the 15th day of the ninth month after the close of the Company's fiscal year, and the Company may elect to distribute the annual patronage dividend at a later time than usual in accordance with the provisions of the Code. 18 21 The Company's By-Laws provide for the payment of year-end patronage dividends, after payment of at least 20% of such patronage dividends in cash, in qualified written notices of allocation including (i) Class B common stock based on book value thereof, to a maximum of 2% of the Member's net purchases of merchandise from the Company for the year (except in unusual circumstances of individual hardships, in which case the Board of Directors reserves the right to make payments in cash), (ii) promissory (subordinated) notes, or (iii) other property. Such promissory (subordinated) notes are for a five year term, bear interest at a fixed rate based on a premium spread above comparable U.S. Treasury notes as approved by the Board of Directors, and are subordinated to all other debt of the Company. The Company may also issue nonqualified written notices of allocation to its Members as part of its annual patronage dividend. See "Payment of Patronage Dividends in Accordance with the Internal Revenue Code." In determining the form of the annual patronage dividend, a Member's required investment in Class B common stock of the Company had been limited by the Board of Directors to an amount in the aggregate not exceeding an amount (computed on the basis of par value thereof and to the nearest multiple of $100) equal to (i) two percent (2%) of a Member's net purchases of direct shipment sales from the Company and purchases of direct shipment sales of "Competitive Edge Program Lumber" materials computed separately at one percent (1%), (ii) four percent (4%) of a Member's net purchases of relay sales from the Company and (iii) eight percent (8%) of a Member's net warehouse purchases from the Company in the year of the highest total net purchases of the three preceding years. In 1996, the Board of Directors adopted a plan to continue to adequately capitalize the Company. The percentage method described in items (i) through (iii) has been superseded by the Board of Director's 1996 plan, which plan is set forth in the Merger Agreement. The annual application of the requirements set forth in the Merger Agreement results in the issuance of a number of shares of Class B common stock, the cumulative value of which will not exceed two percent (2%) of the Member's net purchases of merchandise from the Company. In that each Member currently has equal voting power (voting rights being limited to Class A common stock), acquisition of Class B common stock as patronage dividends generally results in the larger-volume Members having greater common stock equity in the Company but a lesser proportionate voting power per dollar of common stock owned than smaller-volume Members. See the Merger Agreement for the amounts of Class B common stock a Member is required to acquire through his or her patronage dividend. The indicated percentages are multiplied by the Member's purchase levels of the merchandise categories set forth in the Merger Agreement. The amount of such required investment is determined by majority vote of the Board of Directors, and may be increased or decreased by such vote. The basis for determining the necessity of an increase or decrease is through evaluation of the financial needs of the Company, keeping in mind the needs of the membership. The consideration and method of payment for such shares is by way of the required amount being calculated as part of the annual patronage dividend distribution amount. PAYMENT OF PATRONAGE DIVIDENDS IN ACCORDANCE WITH THE INTERNAL REVENUE CODE The Code specifically provides for the taxation of cooperatives (such as the Company) and their patrons (such as the Company's Members) so as to ensure that the business earnings of cooperatives are currently taxable either to the cooperatives or to the patrons. The shares of Class B common stock, the promissory (subordinated) notes and other written notices, which disclose to the recipient the stated amount allocated to him by the Company and the portion thereof which is a patronage dividend, distributed by the Company to its Members are "written notices of allocation" within the meaning of that phrase as used in the Code. For such written notices to be "qualified written notices of allocation" within the meaning of the Code, it is necessary that the Company pay 20% or more of the 19 22 annual patronage dividend in cash and that the Members consent to having the allocations (at their stated dollar amount) treated as being constructively received by them and includable in their gross income. Such written notices that do not meet these requirements are "nonqualified written notices of allocation" within the meaning of the Code. Cash, qualified written notices, and other property (except nonqualified written notices of allocation) are currently deducted from earnings in determining the taxable income of the Company and, accordingly such qualified written notices of allocation are includable in gross income of the patron (Member). Section 1385(a) of the Code provides, in substance, that the amount of any patronage dividend which is paid in cash, qualified written notices of allocation or other property (except nonqualified written notices of allocation) shall be included in the gross income of the patron (Member) for the taxable year in which it receives such cash or such qualified written notices of allocation. In general, with respect to nonqualified written notices of allocation, no amounts are deductible by the Company or includable in gross income of the patron (Member) until redeemed by the Company. Thus, every year each Member may receive, as part of the Member's patronage dividend, non-cash "qualified written notices of allocation", which may include Class B common stock or promissory (subordinated) notes, the stated dollar amount of which must be recognized as gross income for the taxable year in which received. The portion of the patronage dividend paid in cash (at least 20%) may be insufficient, depending on the tax bracket in each Member's case, to provide funds for the payment of income taxes for which the Member will be liable as a result of the receipt of the entire patronage dividend, including cash, Class B common stock and promissory (subordinated) notes. In response to the provisions of the Code, the Company's By-Laws provide for the treatment of the shares of Class B common stock, promissory (subordinated) notes and such other notices as the Board of Directors may determine, distributed in payment of patronage dividends as "qualified written notices of allocation." The By-Laws provide in effect: (i) for payment of patronage dividends partly in cash, partly in qualified written notices of allocation (including the Class B common stock and promissory (subordinated) notes as described above), other property or in nonqualified written notices of allocation, and (ii) that membership in the organization (i.e. the status of being a Member of the Company) shall constitute consent by the Member to take the qualified written notices of allocation or other property into account in the Member's gross income as provided in Section 1385(a) of the Code. Under the provisions of the Code, persons who become or became Members of the Company or who retained their status as Members after adoption of the By-Laws providing that membership in the organization constitutes consent, and after receiving written notification and a copy of the By-Laws are deemed to have consented to the tax treatment of the cash and the qualified written notices of allocation in which the patronage dividends are paid, in accordance with Section 1385(a) of the Code. Written notification of the adoption of the By-Laws and its significance, and a copy of the By-Laws, were sent to each then existing Member and have been, and will continue to be, delivered to each party that became, or becomes a Member thereafter. Such consent is then effective except as to patronage occurring after the distributee ceases to be a Member of the organization or after the By-Laws of the organization cease to contain the provision with respect to the above described consent. Such consent may be revoked by the Member only by terminating its membership in the Company in the manner provided in its Retail Member Agreement. Each year since 1978, the Company has paid its Members 30% of the annual patronage dividend in cash in respect to patronage (excluding nonqualified written notices of allocation) occurring in the preceding year. It is the judgment of management that the payment of 30% or more of patronage dividends in cash will not 20 23 have a material adverse effect on the operations of the Company or its ability to maintain adequate working capital for the normal requirements of its business. However, the Company is obligated to distribute only 20% of the annual patronage dividend (excluding nonqualified written notices of allocation) in cash and it may distribute this lesser percentage in future years. In order to avoid the administrative inconvenience and expense of issuing separate certificates representing shares of Class B common stock and separate promissory (subordinated) notes to each Member, the Company deposits a bulk certificate and a bulk promissory (subordinated) note with Harris Trust and Savings Bank, Chicago, Illinois for safekeeping for and on behalf of its Members and sends a written notice to each Member of these deposits and the allocation thereof to such Member. 21 24 MANAGEMENT The directors and principal executive officers of the Company are as follows:
NAME (AGE) OFFICE ---------- ------ Karen M. Agnew (55)............................... Vice President and Assistant Secretary Joe W. Blagg (47)................................. Director Daniel T. Burns (46).............................. Vice President, General Counsel and Secretary Danny R. Burton (50).............................. Vice President William M. Claypool, III (74)..................... Director Samuel D. Costa, Jr. (55)......................... Director Daniel A. Cotter (62)............................. President, Chief Executive Officer and Director Leonard C. Farr (75).............................. Director William M. Halterman (49)......................... Director Robert F. Johnson (53)............................ Vice President Jerrald T. Kabelin (59)........................... Director Kerry J. Kirby (50)............................... Vice President, Chief Financial Officer and Treasurer Robert J. Ladner (50)............................. Chairman of the Board and Director Paul Lemerise (52)................................ Vice President Robert M. Liebgott (46)........................... Vice President John F. Lottes III (56)........................... Director Kenneth M. Noble (39)............................. Director Robert Ostrov (47)................................ Senior Vice President Richard L. Schaefer (68).......................... Director John P. Semkus (50)............................... Vice President George V. Sheffer (44)............................ Director Dennis A. Swanson (58)............................ Director John M. West, Jr. (44)............................ Director
During the past five years, the principal occupation of each director of the Company, other than Daniel A. Cotter, was the operation of retail hardware stores. LEGAL MATTERS The legality of the Notes will be passed upon for the Company by Messrs. Arnstein & Lehr, Suite 1200, 120 South Riverside Plaza, Chicago, Illinois 60606. 22 25 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE(S) ------- COTTER & COMPANY Condensed Consolidated Balance Sheet at March 29, 1997 and December 28, 1996...................................... 25-26 Condensed Consolidated Statement of Operations for the thirteen weeks ended March 29, 1997 and March 30, 1996................................................... 27 Condensed Consolidated Statement of Cash Flows for the thirteen weeks ended March 29, 1997 and March 30, 1996................................................... 28 Notes to Condensed Consolidated Financial Statements...... 29-30 Report of Independent Auditors............................ 31 Consolidated Balance Sheet at December 28, 1996 and December 30, 1995...................................... 32-33 Consolidated Statement of Operations for each of the three years in the period ended December 28, 1996............ 34 Consolidated Statement of Cash Flows for each of the three years in the period ended December 28, 1996............ 35 Consolidated Statement of Capital Stock and Retained Earnings for each of the three years in the period ended December 28, 1996................................ 36 Notes to Consolidated Financial Statements................ 37-46 SERVISTAR COAST TO COAST CORPORATION Consolidated Balance Sheets at March 31, 1997 and June 30, 1996................................................... 47 Consolidated Statements of Operations for the three months and nine months ended March 31, 1997 and 1996.......... 48 Consolidated Statements of Cash Flows for the nine months ended March 31, 1997 and 1996.......................... 49 Report of Independent Accountants......................... 50 Consolidated and Combined Balance Sheets at June 30, 1996 and 1995............................................... 51-52 Consolidated and Combined Statements of Operations for each of the three years in the period ended June 30, 1996................................................... 53 Consolidated and Combined Statements of Cash Flows for each of the three years in the period ended June 30, 1996................................................... 54 Notes to Consolidated and Combined Financial Statements... 55-62
23 26 ------------------------------------- THIS PAGE INTENTIONALLY LEFT BLANK ------------------------------------- 24 27 COTTER & COMPANY ------------------ CONDENSED CONSOLIDATED BALANCE SHEET ASSETS
MARCH 29, DECEMBER 28, 1997 1996 --------- ------------ (000'S OMITTED) (UNAUDITED) Current assets: Cash and cash equivalents................................. $ 1,863 $ 1,662 Accounts and notes receivable............................. 336,733 307,205 Inventories............................................... 390,358 347,554 Prepaid expenses.......................................... 21,915 13,517 -------- -------- Total current assets......................... 750,869 669,938 Properties owned, less accumulated depreciation............. 168,792 167,331 Properties under capital leases, less accumulated amortization.............................................. 3,270 3,680 Other assets................................................ 13,578 13,036 -------- -------- -------- -------- Total assets................................. $936,509 $853,985 ======== ========
See Notes to Condensed Consolidated Financial Statements. 25 28 COTTER & COMPANY ------------------ CONDENSED CONSOLIDATED BALANCE SHEET LIABILITIES AND CAPITALIZATION
MARCH 29, DECEMBER 28, 1997 1996 --------- ------------ (000'S OMITTED) (UNAUDITED) Current liabilities: Accounts payable and accrued expenses..................... $394,863 $338,440 Short-term borrowings..................................... 116,101 70,594 Current maturities of notes, long-term debt and lease obligations............................................ 43,495 43,458 Patronage dividends payable in cash (Estimated at March 29, 1997).............................................. 1,109 16,142 -------- -------- Total current liabilities.................... 555,568 468,634 -------- -------- Long-term debt and obligations under capital leases......... 79,673 80,145 -------- -------- Capitalization: Estimated patronage dividends to be distributed principally by the issuance of Class B nonvoting common stock and if necessary, promissory (subordinated) notes.................................................. 939 -- Promissory (subordinated) and instalment notes............ 182,972 185,366 Class A common stock and partially paid subscriptions (Authorized 100,000 shares; issued and fully paid, 48,030 and 48,480 shares).............................. 4,804 4,876 Class B nonvoting common stock and paid-in capital (Authorized 2,000,000 shares; issued and fully paid, 1,107,342 and 1,043,521 shares; issuable as partial payment of patronage dividends, 84,194 shares as of December 28, 1996)..................................... 111,961 114,053 Retained earnings......................................... 1,481 1,751 -------- -------- 302,157 306,046 Foreign currency translation adjustment................... (889) (840) -------- -------- Total capitalization......................... 301,268 305,206 -------- -------- Total liabilities and capitalization......... $936,509 $853,985 ======== ========
See Notes to Condensed Consolidated Financial Statements. 26 29 COTTER & COMPANY ------------------ CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THIRTEEN WEEKS ENDED ------------------------ MARCH 29, MARCH 30, 1997 1996 --------- --------- (000'S OMITTED) (UNAUDITED) Revenues.................................................... $561,696 $578,609 Cost and expenses: Cost of revenues.......................................... 518,179 533,025 Warehouse, general and administrative..................... 35,119 36,698 Interest paid to Members.................................. 4,297 4,658 Other interest expense.................................... 3,033 2,229 Other income, net......................................... (163) (259) Income tax expense........................................ 160 175 -------- -------- 560,625 576,526 -------- -------- Net margins................................................. $ 1,071 $ 2,083 ======== ========
See Notes to Condensed Consolidated Financial Statements. 27 30 COTTER & COMPANY ------------------ CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE THIRTEEN WEEKS ENDED --------------------------- MARCH 29, MARCH 30, 1997 1996 --------- --------- (000'S OMITTED) (UNAUDITED) Operating activities: Net margins............................................... $ 1,071 $ 2,083 Adjustments to reconcile net margins to cash and cash equivalents from operating activities: Statement of operations components not affecting cash and cash equivalents.................................. 6,307 6,273 Net change in working capital components............... (28,013) (53,194) -------- -------- Net cash and cash equivalents used for operating activities....................... (20,635) (44,838) -------- -------- Investing activities: Additions to properties owned............................. (6,571) (6,580) Changes in other assets................................... (318) (426) -------- -------- Net cash and cash equivalents used for investing activities....................... (6,889) (7,006) -------- -------- Financing activities: Proceeds from short-term borrowings....................... 45,507 51,627 Proceeds from long-term borrowings........................ 1,088 -- Payment of annual patronage dividend...................... (15,435) (17,659) Payment of notes, long-term debt, lease obligations and common stock........................................... (3,435) (3,112) -------- -------- Net cash and cash equivalents provided by financing activities....................... 27,725 30,856 -------- -------- Net increase (decrease) in cash and cash equivalents........ 201 (20,988) Cash and cash equivalents at beginning of the year.......... 1,662 22,473 -------- -------- Cash and cash equivalents at end of the period.............. $ 1,863 $ 1,485 ======== ========
See Notes to Condensed Consolidated Financial Statements. 28 31 COTTER & COMPANY ------------------ NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 1--GENERAL The condensed consolidated balance sheet, statement of operations and statement of cash flows at and for the period ended March 29, 1997 and the condensed consolidated statement of operations and statement of cash flows for the period ended March 30, 1996 are unaudited and, in the opinion of the management of Cotter & Company (the "Company"), include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of financial position, results of operations and cash flows for the respective interim periods. The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. This financial information should be read in conjunction with the consolidated financial statements for the year ended December 28, 1996 included in the Company's Form S-2 Registration Statement (No. 333-26727) and in the Company's 1996 Annual Report on Form 10-K. On April 1, 1997, the stockholders of the Company and the shareholders of ServiStar Coast to Coast Corporation ("SCC") agreed by a majority vote to merge the two companies effective July 1, 1997. SCC is a hardware wholesaler with annual revenues of $1,700,000,000 and with a strong market presence in retail lumber and building materials. Following completion of the merger, the Company will be renamed TruServ Corporation. NOTE 2--ESTIMATED PATRONAGE DIVIDENDS Patronage dividends are declared and paid by the Company after the close of each fiscal year. The 1996 annual patronage dividend was distributed through a payment of 30% of the total distribution in cash, with the balance being paid through the issuance of the Company's Class B nonvoting common stock and five-year promissory (subordinated) notes. Such patronage dividends, consisting of substantially all of the Company's patronage source income, have been paid since 1949. Effective in 1997, the Board of Directors changed the patronage dividend policy to increase the Class B nonvoting common stock requirements after payment of at least 20% in cash and any further distribution in cash versus promissory notes. The estimated patronage dividend for the thirteen weeks ended March 29, 1997 is $1,341,000 compared to $2,064,000 for the corresponding period in 1996. Patronage dividends for the period December 29, 1996 to June 28, 1997 will be paid in the third quarter of 1997, in accordance with the new patronage dividend policy noted above. 29 32 COTTER & COMPANY ------------------ NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (UNAUDITED) NOTE 3--INVENTORIES Inventories consisted of:
MARCH 29, DECEMBER 28, 1997 1996 --------- ------------ (000'S OMITTED) (UNAUDITED) Manufacturing inventories: Raw materials........................................ $ 4,291 $ 2,797 Work-in-process and finished goods................... 30,333 24,558 -------- -------- 34,624 27,355 Merchandise inventories................................ 355,734 320,199 -------- -------- $390,358 $347,554 ======== ========
30 33 REPORT OF INDEPENDENT AUDITORS To the Members and the Board of Directors Cotter & Company We have audited the accompanying consolidated balance sheets of Cotter & Company as of December 28, 1996 and December 30, 1995, and the related consolidated statements of operations, cash flows and capital stock and retained earnings for each of the three years in the period ended December 28, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Cotter & Company at December 28, 1996 and December 30, 1995, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 28, 1996, in conformity with generally accepted accounting principles. ERNST & YOUNG LLP Chicago, Illinois February 10, 1997, except for Note 11 as to which the date is April 1, 1997 31 34 COTTER & COMPANY ------------------ CONSOLIDATED BALANCE SHEET ASSETS
DECEMBER 28, DECEMBER 30, 1996 1995 ------------ ------------ (000'S OMITTED) Current assets: Cash and cash equivalents................................. $ 1,662 $ 22,473 Accounts and notes receivable............................. 307,205 287,888 Inventories............................................... 347,554 315,311 Prepaid expenses.......................................... 13,517 11,180 -------- -------- Total current assets......................... 669,938 636,852 Properties owned, less accumulated depreciation............. 167,331 165,683 Properties under capital leases, less accumulated amortization.............................................. 3,680 5,393 Other assets................................................ 13,036 11,648 -------- -------- Total assets................................. $853,985 $819,576 ======== ========
See Notes to Consolidated Financial Statements. 32 35 COTTER & COMPANY ------------------ CONSOLIDATED BALANCE SHEET LIABILITIES AND CAPITALIZATION
DECEMBER 28, DECEMBER 30, 1996 1995 ------------ ------------ (000'S OMITTED) Current liabilities: Accounts payable.......................................... $287,291 $297,884 Accrued expenses.......................................... 51,149 53,363 Short-term borrowings..................................... 70,594 2,657 Current maturities of notes, long-term debt and lease obligations............................................ 43,458 61,634 Patronage dividend payable in cash........................ 16,142 18,315 -------- -------- Total current liabilities.................... 468,634 433,853 Long-term debt.............................................. 77,680 75,449 Obligations under capital leases............................ 2,465 3,764 Capitalization: Promissory (subordinated) and instalment notes............ 185,366 186,335 Class A common stock and partially paid subscriptions (Authorized 100,000 shares; issued and fully paid 48,480 and 52,710 shares)......................................... 4,876 5,294 Class B nonvoting common stock and paid-in capital (Authorized 2,000,000 shares; issued and fully paid 1,043,521 and 1,055,700 shares; issuable as partial payment of patronage dividends, 84,194 and 62,005 shares)................................................ 114,053 113,062 Retained earnings......................................... 1,751 2,661 -------- -------- 306,046 307,352 Foreign currency translation adjustment................... (840) (842) -------- -------- Total capitalization......................... 305,206 306,510 -------- -------- Total liabilities and capitalization......... $853,985 $819,576 ======== ========
See Notes to Consolidated Financial Statements. 33 36 COTTER & COMPANY ------------------ CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEARS ENDED ---------------------------------------------- DECEMBER 28, DECEMBER 30, DECEMBER 31, 1996 1995 1994 ------------ ------------ ------------ (000'S OMITTED) Revenues............................................ $2,441,707 $2,437,002 $2,574,445 ---------- ---------- ---------- Cost and expenses: Cost of revenues.................................. 2,245,071 2,234,934 2,351,114 Warehouse, general and administrative............. 115,457 114,107 132,759 Interest paid to Members.......................... 18,460 20,627 22,894 Other interest expense............................ 10,175 9,298 7,493 Gain on sale of properties owned.................. -- -- (692) Other income, net................................. (228) (1,177) (604) Income tax expense................................ 362 176 1,163 ---------- ---------- ---------- 2,389,297 2,377,965 2,514,127 ---------- ---------- ---------- Net margins......................................... $ 52,410 $ 59,037 $ 60,318 ========== ========== ==========
See Notes to Consolidated Financial Statements. 34 37 COTTER & COMPANY ------------------ CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED ------------------------------------------------- DECEMBER 28, DECEMBER 30, DECEMBER 31, 1996 1995 1994 ------------ ------------ ------------ (000'S OMITTED) Operating activities: Net margins..................................... $ 52,410 $ 59,037 $ 60,318 Adjustments to reconcile net margins to cash and cash equivalents from operating activities: Depreciation and amortization................ 20,561 20,706 21,613 Provision for losses on accounts and notes receivable................................. 3,201 3,741 4,233 Changes in operating assets and liabilities: Accounts and notes receivable.............. (38,581) (13,921) (33,112) Inventories................................ (32,243) 69,436 (49,145) Accounts payable........................... (10,593) (36,584) 79,957 Accrued expenses........................... (2,563) 7,552 6,022 Other adjustments, net..................... (1,801) (3,327) (1,223) -------- -------- -------- Net cash and cash equivalents provided by (used for) operating activities....................... (9,609) 106,640 88,663 -------- -------- -------- Investing activities: Additions to properties owned................... (23,530) (24,904) (21,427) Proceeds from sale of properties owned.......... 3,151 5,022 2,174 Changes in other assets......................... (1,388) 617 1,132 -------- -------- -------- Net cash and cash equivalents (used for) investing activities........ (21,767) (19,265) (18,121) -------- -------- -------- Financing activities: Payment of annual patronage dividend............ (18,315) (18,383) (16,614) Payment of notes, long-term debt and lease obligations.................................. (40,271) (43,106) (39,632) Proceeds from long-term borrowings.............. 1,693 3,000 -- Increase (decrease) in short-term borrowings.... 67,937 (6,672) (13,851) Purchase of common stock........................ (660) (1,740) (216) Proceeds from sale of Class A common stock...... 181 168 288 -------- -------- -------- Net cash and cash equivalents provided by (used for) financing activities....................... 10,565 (66,733) (70,025) -------- -------- -------- Net increase (decrease) in cash and cash equivalents..................................... (20,811) 20,642 517 -------- -------- -------- Cash and cash equivalents at beginning of year.... 22,473 1,831 1,314 -------- -------- -------- Cash and cash equivalents at end of year.......... $ 1,662 $ 22,473 $ 1,831 ======== ======== ========
See Notes to Consolidated Financial Statements. 35 38 COTTER & COMPANY ------------------ CONSOLIDATED STATEMENT OF CAPITAL STOCK AND RETAINED EARNINGS FOR THE THREE YEARS ENDED DECEMBER 28, 1996
COMMON STOCK, $100 PAR VALUE -------------------------------------- CLASS A CLASS B FOREIGN ------------------- ---------------- CURRENCY ISSUED AND RETAINED TRANSLATION ISSUED SUBSCRIBED TO BE ISSUED EARNINGS ADJUSTMENT ------ ---------- ------------ -------- ----------- (000'S OMITTED) Balances at January 1, 1994............. $6,588 $ 45 $110,773 $ 3,867 $(670) Net margins........................... 60,318 Foreign currency translation adjustment......................... (245) Patronage dividend.................... 10,829 (60,421) Stock issued for paid-up subscriptions...................... 275 (275) Stock subscriptions................... 265 Stock purchased and retired........... (528) (4,939) ------ ----- -------- -------- ----- Balances at December 31, 1994........... 6,335 35 116,663 3,764 (915) Net margins........................... 59,037 Foreign currency translation adjustment......................... 73 Patronage dividend.................... 6,422 (60,140) Stock issued for paid-up subscriptions...................... 168 (168) Stock subscriptions................... 156 Stock purchased and retired........... (1,232) (10,023) ------ ----- -------- -------- ----- Balances at December 30, 1995........... 5,271 23 113,062 2,661 (842) Net margins........................... 52,410 Foreign currency translation adjustment......................... 2 Patronage dividend.................... 8,645 (53,320) Stock issued for paid-up subscriptions...................... 184 (184) Stock subscriptions................... 189 Stock purchased and retired........... (607) (7,654) ------ ----- -------- -------- ----- Balances at December 28, 1996........... $4,848 $ 28 $114,053 $ 1,751 $(840) ====== ===== ======== ======== =====
- --------------- Subscribed Class A common stock amounts are net of unpaid amounts of $1,000 at December 28, 1996, December 30, 1995, and December 31, 1994 and $14,000 at January 1, 1994 (for 290, 240, 360, and 590 shares subscribed, respectively). See Notes to Consolidated Financial Statements. 36 39 COTTER & COMPANY ------------------ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. DESCRIPTION OF BUSINESS AND ACCOUNTING POLICIES Cotter & Company (the Company) is a Member-owned wholesaler of hardware and related merchandise. The Company also manufactures paint and paint applicators. The Company's goods and services are sold predominantly within the United States, primarily to retailers of hardware and related lines, each of whom has purchased ten shares of the Company's Class A common stock upon becoming a Member. The Company operates in a single industry as a Member-owned wholesaler cooperative. All Members are entitled to receive patronage dividend distributions from the Company on the basis of gross margins of merchandise and/or services purchased by each Member. In accordance with the Company's By-laws, the annual patronage dividend is paid to Members out of gross margins from operations and other patronage source income, after deduction for expenses and provisions authorized by the Board of Directors. On December 9, 1996, the Boards of Directors of the Company and ServiStar Coast to Coast Corporation agreed to merge the two companies. ServiStar Coast to Coast is a $1,700,000,000 hardware wholesaler with a strong presence in retail lumber and building materials. The transaction is subject to customary closing conditions, including approval by the stockholders of both companies, and is expected to be completed on July 1, 1997. Following completion of the merger, the Company will be renamed TruServ Corporation. The significant accounting policies of the Company are summarized below: Consolidation. The consolidated financial statements include the accounts of the Company and all wholly-owned subsidiaries. The consolidated financial statements also include the accounts of Cotter Canada Hardware and Variety Cooperative, Inc., a Canadian Member-owned wholesaler of hardware, variety and related merchandise, in which the Company has a majority equity interest. On January 13, 1995, the Company agreed to the sale of certain inventory of its V&S(R) Variety division to a national wholesaler who agreed to supply the majority of the V&S(R) Stores. Also, on January 31, 1995, the Company sold certain assets of its outdoor power equipment manufacturing division to a nationally recognized company and secured a favorable supply agreement for such equipment. These transactions did not have a material impact on the Company's results of operation or financial position. Capitalization. The Company's capital (Capitalization) is derived from Class A voting common stock and retained earnings, together with promissory (subordinated) notes and Class B nonvoting common stock issued in connection with the Company's annual patronage dividend. The By-laws provide for partially meeting the Company's capital requirements by payment of the year-end patronage dividend, of which at least twenty percent must be paid in cash, and the balance in five-year promissory (subordinated) notes and $100 par value Class B common stock. Membership may be terminated without cause by either the Company or the Member upon sixty days' written notice. In the event membership is terminated, the Company undertakes to purchase, and the Member is required to sell to the Company, all of the Member's Class A common stock and Class B common stock at book value. Payment for the Class A common stock will be in cash. Payment for the Class B common stock 37 40 COTTER & COMPANY ------------------ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) will be a note payable in five equal annual instalments bearing interest at the same rate per annum as the promissory (subordinated) notes most recently issued as part of the Company's patronage dividend. Cash equivalents. The Company classifies its temporary investments in highly liquid debt instruments, with an original maturity of three months or less, as cash equivalents. Inventories. Inventories are stated at the lower of cost, determined on the "first-in, first-out" basis, or market. Properties. Properties are recorded at cost. Depreciation and amortization are computed by using the straight-line method over the following estimated useful lives: buildings and improvements--10 to 40 years; machinery and warehouse, office and computer equipment--5 to 10 years; transportation equipment--3 to 7 years; and leasehold improvements--the life of the lease without regard to options for renewal. Revenue Recognition. The Company recognizes revenue when merchandise is shipped or services are rendered. Retirement plans. The Company sponsors two noncontributory defined benefit retirement plans covering substantially all of its employees. Company contributions to union-sponsored defined contribution plans are based on collectively bargained rates times hours worked. The Company's policy is to fund annually all tax-qualified plans to the extent deductible for income tax purposes. 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 amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Reporting year. The Company's reporting year-end is the Saturday closest to December 31. 2. INVENTORIES Inventories consisted of:
DECEMBER 28, 1996 DECEMBER 30, 1995 ----------------- ----------------- (000'S OMITTED) Manufacturing inventories: Raw materials......................... $ 2,797 $ 2,139 Work-in-process and finished goods.... 24,558 19,407 -------- -------- 27,355 21,546 Merchandise inventories................. 320,199 293,765 -------- -------- $347,554 $315,311 ======== ========
38 41 COTTER & COMPANY ------------------ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 3. PROPERTIES Properties owned or leased under capital leases consisted of:
DECEMBER 28, 1996 DECEMBER 30, 1995 --------------------- --------------------- OWNED LEASED OWNED LEASED -------- ------- -------- ------- (000'S OMITTED) Buildings and improvements.................... $179,206 $ -- $173,568 $ -- Machinery and warehouse equipment............. 61,183 -- 60,197 -- Office and computer equipment................. 74,065 -- 77,340 -- Transportation equipment...................... 16,561 11,202 21,076 11,454 -------- ------- -------- ------- 331,015 11,202 332,181 11,454 Less accumulated depreciation and amortization................................ 175,730 7,522 178,793 6,061 -------- ------- -------- ------- 155,285 3,680 153,388 5,393 Land.......................................... 12,046 -- 12,295 -- -------- ------- -------- ------- $167,331 $ 3,680 $165,683 $ 5,393 ======== ======= ======== =======
4. LONG-TERM DEBT AND BORROWING ARRANGEMENTS Long-term debt consisted of:
DECEMBER 28, 1996 DECEMBER 30, 1995 ----------------- ----------------- (000'S OMITTED) Senior note at 8.60%..................... $47,000 $49,000 Term loans: 5.97%.................................. 2,437 3,000 Variable (7.33% and 7.60%, respectively)....................... 6,200 6,200 Canadian prime at 7.50%................ -- 3,665 Redeemable (subordinated) term notes, fixed interest rates ranging from 6.85% to 7.61%............................... 26,683 16,697 Industrial Revenue Bonds (5.28%):........ 4,000 4,000 ------- ------- 86,320 82,562 Less amounts due within one year......... 8,640 7,113 ------- ------- $77,680 $75,449 ======= =======
Principal payments for the 8.60% senior note are due quarterly in incrementally increasing amounts through maturity in 2007. Principal payments for the 5.97% term loan are due quarterly beginning in 1996 through maturity in 1999. Payment for the variable term loan is due in 1999. 39 42 COTTER & COMPANY ------------------ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The redeemable (subordinated) term notes have two to four year terms and are issued in exchange for promissory (subordinated) notes that were held by promissory note holders, who do not own the Company's Class A common stock. Also, effective October 1, 1996 the term notes were opened for purchase by investors that are affiliated with the Company. On October 1, 1997, and every three-year period thereafter, the interest rate on the 5.28% industrial revenue bonds will be adjusted based on a bond index. These bonds may be redeemed at face value at the option of either the Company or the bondholders at each interest reset date through maturity in 2003. Total maturities of long-term debt for fiscal years 1997, 1998, 1999, 2000, 2001 and thereafter are $8,640,000, $16,481,000, $17,574,000, $7,625,000, $4,000,000 and $32,000,000, respectively. The Company has established a $125,000,000 five-year revolving credit facility with a group of banks. In addition, the Company has various short-term lines of credit available under informal agreements with lending banks, cancelable by either party under specific circumstances. The borrowings under these agreements were $70,594,000 at December 28, 1996 and were at a weighted average interest rate of 5.5%. At December 30, 1995, the Company's Canadian subsidiary had short-term borrowings at an interest rate of 7.5%. The Company is required to meet certain financial ratios and covenants pertaining to certain debt arrangements. 40 43 COTTER & COMPANY ------------------ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 5. CAPITAL LEASES AND OTHER LEASE COMMITMENTS The Company rents buildings and warehouse, office, computer and transportation equipment under operating and capital leases. The following is a schedule of future minimum lease payments under long-term non-cancelable leases, together with the present value of the net minimum lease payments, as of December 28, 1996:
CAPITAL OPERATING ------- --------- (000'S OMITTED) Fiscal years 1997................................................. $1,433 $10,387 1998................................................. 1,144 9,126 1999................................................. 809 7,411 2000................................................. 296 6,221 2001................................................. 184 5,509 Thereafter........................................... 108 45,651 ------ ------- Net minimum lease payments............................. 3,974 $84,305 ======= Less amounts representing interest..................... 145 ------ Present value of net minimum lease payments............ 3,829 Less amounts due within one year....................... 1,364 ------ $2,465 ======
Capital leases expire at various dates and generally provide for purchase options but not renewals. Purchase options provide for purchase prices at either fair market value or a stated value which is related to the lessor's book value at expiration of the lease term. Rent expense under operating leases was as follows:
FOR THE YEARS ENDED ------------------------------------------------ DECEMBER 28, DECEMBER 30, DECEMBER 31, 1996 1995 1994 ------------ ------------ ------------ (000'S OMITTED) Minimum rent................................ $14,476 $ 9,553 $8,487 Contingent rent............................. 495 510 611 ------- ------- ------ $14,971 $10,063 $9,098 ======= ======= ======
41 44 COTTER & COMPANY ------------------ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 6. CAPITALIZATION Promissory (subordinated) and instalment notes consisted of:
DECEMBER 28, DECEMBER 30, 1996 1995 ------------ ------------ (000'S OMITTED) Promissory (subordinated) notes - Due on December 31, 1996--6.00%........................ $ -- $ 23,588 Due on December 31, 1996--9.50%........................ -- 27,029 Due on December 31, 1997--10.00%....................... 16,037 16,660 Due on December 31, 1997--7.87%........................ 14,832 15,616 Due on December 31, 1998--7.47%........................ 14,886 16,461 Due on December 31, 1998--8.00%........................ 25,684 27,048 Due on December 31, 1999--7.86%........................ 15,349 -- Due on December 31, 1999--8.00%........................ 24,254 25,470 Due on December 31, 1999--8.20%........................ 23,431 25,327 Due on December 31, 2000--6.50%........................ 23,010 23,996 Due on December 31, 2000--7.58% (issued in 1996)....... 29,315 32,047 Due on December 31, 2001--8.06% (to be issued)......... 25,123 -- Instalment notes at interest rates of 6.50% to 8.20% with maturities through 2000........................ 6,899 5,753 -------- -------- 218,820 238,995 Less amounts due within one year......................... 33,454 52,660 -------- -------- $185,366 $186,335 ======== ========
The promissory notes are issued principally in payment of the annual patronage dividend. Promissory notes are subordinated to indebtedness to banking institutions, trade creditors and other indebtedness of the Company as specified by its Board of Directors. Notes to be issued relate to the patronage dividend which is distributed after the end of the year. Prior experience indicates that the maturities of a significant portion of the notes due within one year are extended, for a three year period, at interest rates substantially equivalent to competitive market rates of comparable instruments. The Company anticipates that this practice will continue. Total maturities of promissory and instalment notes for fiscal years 1997, 1998, 1999, 2000 and 2001 are $33,454,000, $42,690,000, $64,603,000, $52,950,000, and $25,123,000, respectively. 7. FAIR VALUE OF FINANCIAL INSTRUMENTS Due to the uncertainty of the ultimate maturities of the promissory (subordinated) notes, management believes it is impracticable to estimate their fair value. The carrying amounts of the Company's other financial instruments approximate fair value. Fair value was estimated using discounted cash flow analyses, based on the Company's incremental borrowing rate for similar borrowings. 42 45 COTTER & COMPANY ------------------ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 8. INCOME TAXES At December 28, 1996, the Company has alternative minimum tax credit carryforwards of approximately $900,000 which do not expire. The carryforwards are available to offset future federal tax liabilities. Significant components of the Company's deferred tax assets and liabilities as of December 28, 1996 resulted primarily from alternative minimum tax credit carryforwards and temporary differences between income tax and financial reporting for depreciation, inventory capitalization, bad debts, vacation pay and contributions to fund retirement plans. Significant components of the provision (benefit) for income taxes are as follows:
FOR THE YEARS ENDED ------------------------------------------------ DECEMBER 28, DECEMBER 30, DECEMBER 31, 1996 1995 1994 ------------ ------------ ------------ (000'S OMITTED) Current: Federal................................... $ -- $ (363) $ 486 State..................................... 237 379 462 Foreign................................... 275 273 278 ----- ------ ------ Total current............................. 512 289 1,226 ----- ------ ------ Deferred: Federal................................... (147) (145) (147) State..................................... (26) (26) (26) Foreign................................... 23 58 110 ----- ------ ------ Total deferred............................ (150) (113) (63) ----- ------ ------ $ 362 $ 176 $1,163 ===== ====== ======
43 46 COTTER & COMPANY ------------------ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The Company operates as a nonexempt cooperative and is allowed a deduction in determining its taxable income for amounts paid as patronage dividend based on margins from business done with or for Members. The reconciliation of income tax expense to income tax computed at the U.S. federal statutory tax rate of 35% in fiscal year 1996, 1995 and 1994 is as follows:
FOR THE YEARS ENDED -------------------------------------------- DECEMBER 28, DECEMBER 30, DECEMBER 31, 1996 1995 1994 ------------ ------------ ------------ (000'S OMITTED) Tax at U.S. statutory rate................ $ 18,470 $ 20,725 $ 21,518 Effects of: Patronage dividend...................... (18,662) (21,049) (21,147) State income taxes, net of federal tax benefit.............................. 137 229 283 Other, net.............................. 417 271 509 -------- -------- -------- $ 362 $ 176 $ 1,163 ======== ======== ========
9. CASH FLOW The Company's noncash financing and investing activities in fiscal year 1996 and 1995 include acquisition of transportation equipment by entering into capital leases and the acquisition of property for resale. These transactions aggregate $178,000 and $4,008,000 in fiscal years 1996 and 1995, respectively. In addition, the annual patronage dividend and promissory (subordinated) note renewals relating to noncash operating and financing activities are as follows:
FOR THE YEARS ENDED -------------------------------------------- DECEMBER 28, DECEMBER 30, DECEMBER 31, 1996 1995 1994 ------------ ------------ ------------ (000'S OMITTED) Patronage dividend payable in cash...................... $16,142 $18,315 $18,383 Promissory (subordinated) notes......................... 15,354 23,536 23,213 Class B nonvoting common stock.......................... 1,248 (2,592) 5,900 Instalment notes........................................ 4,605 5,972 3,058 Member indebtedness..................................... 15,971 14,909 9,867 ------- ------- ------- $53,320 $60,140 $60,421 ======= ======= ======= Note renewals........................................... $27,938 $23,974 $26,191 ======= ======= =======
Cash paid for interest during fiscal years 1996, 1995 and 1994 totaled $28,694,000, $29,624,000 and $30,583,000, respectively. Cash paid for income taxes during fiscal years 1996, 1995 and 1994 totaled $694,000, $1,012,000 and $1,709,000, respectively. 44 47 COTTER & COMPANY ------------------ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 10. RETIREMENT PLANS The components of net pension cost for the Company administered pension plans consisted of:
FOR THE YEARS ENDED -------------------------------------------------- DECEMBER 28, DECEMBER 30, DECEMBER 31, 1996 1995 1994 ------------ ------------ ------------ (000'S OMITTED) Income: Actual return (loss) on plan assets............... $13,007 $25,564 $(1,543) Amortization of excess plan assets................ 914 914 920 ------- ------- ------- 13,921 26,478 (623) ------- ------- ------- Expenses: Service cost-benefits earned during year.......... 4,851 4,152 4,765 Interest on projected benefit obligation.......... 7,623 7,242 6,736 Deferral of excess (deficiency) of actual over estimated return on plan assets................ 4,223 18,021 (8,815) ------- ------- ------- 16,697 29,415 2,686 ------- ------- ------- Net pension cost.................................... $ 2,776 $ 2,937 $ 3,309 ======= ======= =======
The discount rate and the rate of increase in future compensation levels used in determining the actuarial present value of the projected benefit obligation were respectively, 7.75% and 4.50% in fiscal year 1996, 7.25% and 4.50%, in fiscal year 1995 and 8.50% and 4.50% in fiscal year 1994. These changes in actuarial assumptions did not have a material impact on net pension cost for fiscal years 1996 and 1995 and the Company does not anticipate that these changes will have a material impact on net pension cost in future years. In fiscal years 1996, 1995 and 1994, the expected long-term rate of return on assets was 9.50%. During 1995, the Company amended its pension plan, and such amendment had no material impact on the projected benefit obligation or pension expense. During 1996, the Company settled $8,520,000 of pension obligations under it's amended plan that resulted in a reduction of $798,000 in pension expense for fiscal year 1996. Plan assets are composed primarily of corporate equity and debt securities. Benefits are based on years of service and the employee's compensation during the last ten years of employment, offset by a percentage of 45 48 COTTER & COMPANY ------------------ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Social Security retirement benefits. Trusteed net assets and actuarially computed benefit obligations for the Company administered pension plans are presented below:
DECEMBER 28, DECEMBER 30, 1996 1995 ------------ ------------ (000'S OMITTED) Assets: Total plan assets at fair value........................... $107,954 $104,396 ======== ======== Obligations: Accumulated benefit obligations: Vested................................................. $ 70,593 $ 77,435 Non-vested............................................. 13,369 10,830 Effect of projected compensation increases................ 21,015 21,730 -------- -------- Total projected benefit obligations....................... 104,977 109,995 -------- -------- Net excess assets (liabilities): Unrecognized: Unamortized excess assets at original date............. 6,170 7,673 Net actuarial gain (loss).............................. 5,702 (3,793) Prior service costs.................................... (3,424) (4,017) Recognized accrued pension cost........................... (5,471) (5,462) -------- -------- Total net excess assets (liabilities)..................... 2,977 (5,599) -------- -------- Total obligations and net excess assets (liabilities)....... $107,954 $104,396 ======== ========
The Company also participates in union-sponsored defined contribution plans. Pension costs related to these plans were $641,000, $720,000 and $757,000 for fiscal years 1996, 1995 and 1994, respectively. 11. SUBSEQUENT EVENT On April 1, 1997, the stockholders of the Company and the shareholders of ServiStar Coast to Coast Corporation voted to merge the two companies effective July 1, 1997. 46 49 SERVISTAR COAST TO COAST CORPORATION ------------------ CONSOLIDATED BALANCE SHEETS
MARCH 31, JUNE 30, 1997 1996 --------- -------- (UNAUDITED) (IN THOUSANDS) ASSETS Current assets: Cash and cash equivalents................................. $ 1,454 $ 5,172 Accounts and notes receivable............................. 196,075 192,299 Merchandise inventory..................................... 174,889 171,976 Prepaid expenses.......................................... 3,534 8,314 -------- -------- Total current assets.............................. 375,952 377,761 Properties owned, less accumulated depreciation............. 79,933 78,414 Other assets................................................ 16,214 11,607 -------- -------- Total assets...................................... $472,099 $467,782 ======== ======== LIABILITIES AND OWNERS' EQUITY Current liabilities: Accounts payable and accrued expenses..................... $220,611 $212,612 Current maturities of long-term debt...................... 5,568 5,645 Patronage dividends payable in cash....................... 3,699 9,656 -------- -------- Total current liabilities......................... 229,878 227,913 -------- -------- Long-term debt.............................................. 123,428 118,476 -------- -------- Owners' equity: Preferred stock........................................... 112,857 118,359 Common stock.............................................. 12,718 8,487 Retained deficit.......................................... (6,782) (5,453) -------- -------- Total owners' equity......................... 118,793 121,393 -------- -------- Total liabilities and owners' equity......... $472,099 $467,782 ======== ========
47 50 SERVISTAR COAST TO COAST CORPORATION ------------------ CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE FOR THE NINE MONTHS ENDED MONTHS ENDED ------------------------ -------------------------- MARCH 31, MARCH 31, MARCH 31, MARCH 31, 1997 1996 1997 1996 --------- --------- --------- --------- (IN THOUSANDS) (UNAUDITED) Revenues..................................... $405,477 $440,641 $1,294,469 $1,261,628 -------- -------- ---------- ---------- Cost and expenses: Cost of goods sold......................... 374,629 406,079 1,193,729 1,158,510 Distribution, selling and administrative... 27,721 30,380 87,915 91,630 Interest expense........................... 2,649 2,562 7,586 7,726 Other income, net.......................... (661) (1,289) (2,033) (3,493) Income tax expense......................... 99 99 297 297 -------- -------- ---------- ---------- 404,437 437,831 1,287,494 1,254,670 -------- -------- ---------- ---------- Net margins.................................. $ 1,040 $ 2,810 $ 6,975 $ 6,958 ======== ======== ========== ==========
48 51 SERVISTAR COAST TO COAST CORPORATION ------------------ CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED
MARCH 31, MARCH 31, 1997 1996 --------- --------- (IN THOUSANDS) (UNAUDITED) Cash flows from operating activities: Net margins............................................... $ 6,975 $ 6,958 Adjustments to reconcile net margins to net cash from operating activities: Depreciation........................................... 5,311 5,690 Amortization........................................... 2,155 1,855 (Gain) loss on disposition............................. (38) (128) Increase (decrease) from changes in: Receivables.......................................... (3,776) (3,431) Merchandise inventory................................ (2,913) (18,603) Prepaid expenses..................................... 4,780 (2,803) Accounts payable and accrued expenses................ 7,726 16,909 -------- -------- Net cash provided by operating activities.... 20,220 6,447 -------- -------- Cash flows from investing activities: Proceeds from sale of property and equipment........... 41 721 Purchases of property and equipment.................... (6,830) (8,383) (Increase) decrease in other assets.................... (6,762) 2,069 -------- -------- Net cash (used in) provided by investing activities................................ (13,551) (5,593) -------- -------- Cash flows from financing activities: Repayment of long-term debt, net.......................... 4,875 14,590 Proceeds from issuance of capital stock................... 4,755 215 Repurchase of capital stock............................... (10,361) (8,844) Payment of cash portion of patronage dividends............ (9,656) (11,140) -------- -------- Net cash used in financing activities........ (10,387) (5,179) -------- -------- Net decrease in cash........................................ (3,718) (4,325) Cash at beginning of period................................. 5,172 5,833 -------- -------- Cash at end of period....................................... $ 1,454 $ 1,508 ======== ========
49 52 REPORT OF INDEPENDENT ACCOUNTANTS To the Owners of SERVISTAR Corporation: We have audited the accompanying consolidated and combined balance sheets of SERVISTAR Corporation and Coast to Coast Stores, Inc. as described in Note B to the financial statements as of June 30, 1996 and 1995 and the related statement of operations and cash flows for each of the three years in the period ended June 30, 1996. These financial statements are the responsibility of the Corporation's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of SERVISTAR Corporation as of June 30, 1996 and 1995, and the results of its operations and cash flows for each of the three years in the period ended June 30, 1996 in conformity with generally accepted accounting principles. COOPERS & LYBRAND LLP Pittsburgh, Pennsylvania July 26, 1996, except for Note J as to which the date is April 1, 1997 50 53 SERVISTAR CORPORATION --------------- CONSOLIDATED AND COMBINED BALANCE SHEETS
AS OF JUNE 30 -------------------- 1996 1995 -------- -------- (IN THOUSANDS EXCEPT PER SHARE DATA) ASSETS Current assets: Cash and cash equivalents................................. $ 5,172 $ 5,833 Receivables, less allowance for doubtful accounts of $1,557 in 1996 and $1,547 in 1995...................... 192,299 193,001 Merchandise inventory..................................... 171,976 173,706 Prepaid expenses.......................................... 8,314 7,653 -------- -------- Total current assets......................... 377,761 380,193 Property and equipment, at cost: Buildings................................................. 81,272 77,365 Office and warehouse equipment............................ 62,013 57,520 -------- -------- 143,285 134,885 Less accumulated depreciation............................. 70,276 63,872 -------- -------- 73,009 71,013 Land...................................................... 5,405 4,674 -------- -------- 78,414 75,687 Other assets................................................ 11,607 10,950 -------- -------- Total assets................................. $467,782 $466,830 ======== ========
The accompanying notes are an integral part of the financial statements. 51 54 SERVISTAR CORPORATION --------------- CONSOLIDATED AND COMBINED BALANCE SHEETS
AS OF JUNE 30 -------------------- 1996 1995 -------- -------- (IN THOUSANDS EXCEPT PER SHARE DATA) LIABILITIES AND OWNERS' EQUITY Current liabilities: Accounts payable.......................................... $183,357 $191,981 Accrued liabilities....................................... 29,255 27,513 Patronage dividends payable -- SERVISTAR.................. 7,172 7,957 Patronage dividends payable -- Coast to Coast Stores, Inc. .................................................. 2,484 3,182 Current portion of long-term debt......................... 5,645 6,171 -------- -------- Total current liabilities.................... 227,913 236,804 Long-term debt, less current portion........................ 118,476 108,592 -------- -------- Total liabilities............................ 346,389 345,396 Owners' equity: Capital stock: Preferred (as to assets only) nonparticipating, $50 par value; authorized shares, 3,000,000; outstanding shares: 1996, 1,858,940; 1995, 1,813,480.............. 92,947 90,674 Common, $100 par value; authorized shares, 300,000; outstanding shares: 1996, 31,840; 1995, 32,072........ 3,184 3,207 Common preference redeemable, $100 par value; authorized shares, 5,000; outstanding shares: 1995, 1,000................................................. -- 100 Amounts due owners in preferred stock -- SERVISTAR........ 8,269 9,439 Amounts due owners in preferred stock -- Coast to Coast Stores, Inc. .......................................... 2,138 2,947 Capital stock of subsidiary............................... 819 790 Capital stock of Coast to Coast Stores, Inc.: Preferred (as to assets only) nonparticipating, $50 par value; authorized shares, 3,000,000; outstanding shares: 1996, 300,100; 1995, 284,920.................. 15,005 14,246 Common, $600 par value; authorized shares, 300,000; outstanding shares: 1996, 8,390; 1995, 8,450 (net of stock subscriptions receivable of: 1996, $550; 1995, $413)................................................. 4,484 4,657 Retained earnings (deficit): Parent................................................. 76 76 Subsidiaries........................................... (5,529) (4,702) -------- -------- Total owners' equity......................... 121,393 121,434 -------- -------- Total liabilities and owners' equity......... $467,782 $466,830 ======== ========
The accompanying notes are an integral part of the financial statements. 52 55 SERVISTAR CORPORATION ------------------ CONSOLIDATED AND COMBINED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JUNE 30 ---------------------------------------- 1996 1995 1994 ---- ---- ---- (IN THOUSANDS) Net revenues......................................... $1,729,908 $1,802,103 $1,734,905 Costs and expenses: Cost of goods sold................................. 1,611,174 1,679,615 1,613,257 Distribution, selling and administrative expenses........................................ 93,080 95,179 93,006 Interest expense................................... 10,091 10,825 10,076 Other income, net.................................. (3,471) (6,886) (6,866) ---------- ---------- ---------- Total costs and expenses................... 1,710,874 1,778,733 1,709,473 ---------- ---------- ---------- Net margins.......................................... $ 19,034 $ 23,370 $ 25,432 ========== ========== ========== Retained deficit at beginning of year................ $ (4,626) $ (4,675) $ (4,043) Net margins.......................................... 19,034 23,370 25,432 Patronage dividends.................................. (19,861) (23,321) (26,064) ---------- ---------- ---------- Retained deficit at end of year...................... $ (5,453) $ (4,626) $ (4,675) ========== ========== ==========
The accompanying notes are an integral part of the financial statements. 53 56 SERVISTAR CORPORATION ------------------ CONSOLIDATED AND COMBINED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30 -------------------------------------- 1996 1995 1994 ---- ---- ---- (IN THOUSANDS) Cash flows from operating activities: Net margins............................................. $ 19,034 $ 23,370 $ 25,432 Adjustments to reconcile net margins to net cash provided by operating activities: Depreciation......................................... 7,187 7,110 6,285 Amortization......................................... 2,343 3,698 3,048 Gain on disposition of property and equipment........ (410) (152) -- Increase (decrease) from changes in: Receivables........................................ 702 5,627 (4,108) Merchandise inventory.............................. 1,730 2,443 (4,406) Prepaid expenses................................... (661) 655 (211) Accounts payable and accrued expenses.............. (6,882) (24,183) 41,150 Other adjustments, net............................. 15 (3,028) 317 -------- -------- -------- Net cash provided by operating activities..... 23,058 15,540 67,507 Cash flows from investing activities: Proceeds from sale of property and equipment............ 1,507 431 56 Purchases of property and equipment..................... (11,011) (7,518) (2,714) (Increase) decrease in other assets..................... (3,014) (236) 842 -------- -------- -------- Net cash used in investing activities......... (12,518) (7,323) (1,816) Cash flows from financing activities: Proceeds from long-term debt............................ 20,245 34,400 (12,800) Payments on long-term debt.............................. (10,887) (22,453) (35,974) Proceeds from issuance of capital stock................. 333 333 597 Repurchase of capital stock............................. (9,963) (8,539) (7,770) Payment of cash portion of patronage dividends.......... (10,929) (12,803) (9,419) -------- -------- -------- Net cash used in financing activities......... (11,201) (9,062) (65,366) -------- -------- -------- Net (decrease) increase in cash and cash equivalents...... (661) (845) 325 Cash and cash equivalents at beginning of year............ 5,833 6,678 6,353 -------- -------- -------- Cash and cash equivalents at end of year.................. $ 5,172 $ 5,833 $ 6,678 ======== ======== ======== Supplemental disclosure of cash flow information: Cash paid during the year for interest.................. $ 9,430 $ 10,049 $ 8,639 ======== ======== ======== Non-cash financing activities: SERVISTAR preferred stock patronage dividend............ $ 9,439 $ 8,631 $ 9,777 ======== ======== ======== Coast to Coast Stores, Inc. preferred stock patronage dividends............................................ $ 2,947 $ 4,914 $ 4,549 ======== ======== ======== Deferred acquisition payments in conjunction with the acquisition.......................................... -- -- $ 3,000 ======== ======== ========
The accompanying notes are an integral part of the financial statements. 54 57 SERVISTAR CORPORATION ------------------ NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS) A. ORGANIZATION: SERVISTAR Corporation (SERVISTAR) and Coast to Coast Stores, Inc. (CTC) are marketing and purchasing cooperatives. SERVISTAR/Coast to Coast Corporation (SCC) is a hardlines wholesaler. SERVISTAR's wholly-owned subsidiaries include SCC, KCI Coatings, Inc. (Kurfees), Speer Hardware Company, Taylor Rental Corporation (Taylor), and Advocate Services, Inc. and its subsidiaries, Total Exposition Concepts, Inc. and Advocate Retail Services, Inc. SERVISTAR, its wholly-owned subsidiaries and CTC are collectively referred to as the Corporation. B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: Basis of Presentation: The financial statements include the consolidated accounts of SERVISTAR and its wholly-owned subsidiaries combined with the accounts of CTC. These consolidated and combined statements have been presented to reflect the common management of, and the interlocking business arrangements between, SCC and CTC. All intercompany balances and transactions have been eliminated. On July 1, 1996, SCC and CTC were merged into SERVISTAR on a tax free basis as described in Note C. Estimates: The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities and reported amounts of revenues and expenses. Actual results could differ from those estimates. Cash and Cash Equivalents: The Corporation considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. Merchandise Inventory: Merchandise inventory is stated at the lower of cost or market, with cost determined on the first-in, first-out method. Property and Equipment: Depreciation is taken over the estimated useful lives of the assets using the straight-line method. When properties are retired or otherwise disposed of, the cost and the related accumulated depreciation are removed from the accounts, and gains and losses resulting from such transactions are reflected in operations. Included in property and equipment are certain costs, net of amortization, associated with the capitalization of internally developed software totaling $5,317, and $5,461 in 1996, and 1995, respectively. 55 58 SERVISTAR CORPORATION ------------------ NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS--(CONTINUED) Other Assets: Other assets include prepaid pension costs and amortized costs related to various projects which benefit future periods. Amortization of other assets, excluding the amount related to Taylor, is computed using the straight-line method over a five year period. Credit Concentration: Customers of the Corporation are not concentrated in any specific geographic region, but are concentrated in the retail hardware store, lumber and building supply industries. No single customer accounted for a significant amount of the Corporation's sales and receivables. Income Taxes: SERVISTAR and CTC operate as cooperatives under the Internal Revenue Code and distribute substantially all of their earnings to their owners through patronage dividends. SERVISTAR and its wholly-owned subsidiaries constitute a consolidated group for federal income tax purposes and file a consolidated federal income tax return. CTC files a separate federal income tax return. The Corporation provides for deferred income taxes on all amounts which are reported in different time periods for income tax and financial reporting purposes. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. The Corporation's principal temporary differences relate to receivable reserves, depreciation of property and equipment and pension costs. Revenue Recognition: Revenues are recognized in the period inventory is shipped to owners. Reclassifications: Certain amounts in the 1995 financial statements have been reclassified for comparative purposes. C. MERGER: In March 1996, SERVISTAR, SCC and CTC entered into a Plan and Agreement of Merger (the Merger), which provided for the merger of SCC and CTC into SERVISTAR. The merger was completed on July 1, 1996 and resulted in SERVISTAR changing its name to SERVISTAR COAST TO COAST Corporation (the Surviving Corporation). All assets and liabilities of SCC and CTC were transferred to the Surviving Corporation, which continues to operate as a marketing and purchasing cooperative. The Merger was accounted for as a reorganization of companies under common control in a manner similar to a pooling of interests. Common and preferred stock of CTC was converted to common and preferred stock of the Surviving Corporation. All other stock of CTC and SCC was canceled and retired. 56 59 SERVISTAR CORPORATION ------------------ NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS--(CONTINUED) Patronage dividends for 1996 will be determined in a manner consistent with prior years based on the separate operations of SERVISTAR and CTC and will be paid subsequent to June 30, 1996. In connection with the Merger, the borrowing facilities of SCC described in Note D were retired on July 1, 1996 and replaced by increased credit lines available to the Surviving Corporation. As a result of the Merger, the Corporation incurred a restructuring charge of $2,113 in 1996. Included in this restructuring charge were costs pertaining to severance, relocation, facility closure and professional fees. These costs were shared by SERVISTAR and CTC in a plan that was reviewed by the respective Boards of Directors. D. LONG-TERM DEBT: Long-term debt at June 30, 1996 and 1995 consisted of the following:
1996 1995 -------- -------- SERVISTAR revolving credit agreement..................... $ 18,000 $ 12,000 SERVISTAR uncollateralized lines of credit............... 19,000 18,000 SCC revolving credit agreements.......................... 43,200 30,900 Notes, due September 1, 2000............................. 40,950 44,350 Notes, due December 1, 1998.............................. -- 6,286 IDA bonds, due October 1, 1997........................... 540 1,090 Other loans and notes with interest rates of 6.0% with due dates ranging from 1997 to 2001.................... 2,431 2,137 -------- -------- 124,121 114,763 Less current portion..................................... 5,645 6,171 -------- -------- $118,476 $108,592 ======== ========
SERVISTAR and certain subsidiaries maintain a revolving credit agreement with a group of banks which provides a revolving line of credit of $87,500 until January 31, 1999. The expiration date of the revolving line of credit may be extended by mutual consent. SERVISTAR may select among various interest rate options on outstanding borrowings during the term of the revolving credit agreement. The weighted average interest rate on amounts outstanding at June 30, 1996 and 1995 was 6.4% and 7.2%, respectively. SERVISTAR is required to pay a commitment fee of 1/4 of 1% per annum on the daily unborrowed amount. On July 1, 1996, this facility was amended to increase the line of credit to $115,000. SERVISTAR has uncollateralized lines of credit with banks providing for borrowings of up to $29,000 with interest at variable rates as determined periodically by the banks. The amounts under these borrowings are classified as long-term debt as SERVISTAR has the ability and the intent to refinance the debt on a long-term basis. Borrowings under these facilities were $19,000 and $18,000 at June 30, 1996 and 1995, respectively. The interest rate on amounts outstanding at June 30, 1996 and 1995 was 6.4% and 7.0%, 57 60 SERVISTAR CORPORATION ------------------ NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS--(CONTINUED) respectively. In connection with the Merger, available uncollateralized lines of credit were increased to $40,000 effective July 1, 1996. SCC's $40,000 revolving credit agreement, as amended, was retired on July 1, 1996 in conjunction with the Merger. The weighted average interest rate on amounts outstanding at June 30, 1996 and 1995 was 6.7% and 7.4%, respectively. This revolving line of credit is guaranteed by CTC. Borrowings under this facility were $33,200 and $27,500 at June 30, 1996 and 1995, respectively. SCC also has a $5,000 revolving line of credit and a $5,000 uncommitted short-term borrowing agreement which were retired effective July 1, 1996. The borrowings under these agreements are classified as long-term debt since the Surviving Corporation has the ability and the intent to refinance the debt on a long-term basis. Borrowings under the $5,000 revolving line of credit facility were $5,000 and $3,400 at June 30, 1996 and 1995, respectively. The effective rate on outstanding borrowings was 6.4% and 7.0% at June 30, 1996 and 1995, respectively. Outstanding borrowings on the uncommitted borrowing facilities were $5,000 and -0-at June 30, 1996 and 1995, respectively. The effective interest rate on outstanding borrowings was 6.4% at June 30, 1996. The notes due September 1, 2000 were issued in September 1990, and bear interest at a fixed interest rate of 10.23% per annum. Interest is payable semi-annually on the first day of March and September through maturity. Annual principal payments commenced on September 1, 1993 and will continue through September 1, 1999 in amounts varying between $2,250 and $4,550. A final balloon payment of $22,750 is due September 1, 2000. The notes due December 1, 1998 were issued in December 1988, and bore interest at an amended rate of 10.57%. Annual principal payments of $1,571 commenced on December 1, 1992. The notes were paid in full December 1, 1995. Interest on the IDA bonds reflects a variable tax-free interest rate which changes based on market conditions. The bonds can be tendered at any time at the option of the holder, at a purchase price equal to 100% of the principal amount of the bonds plus accrued interest. The bonds may be remarketed at the time of such tender. At June 30, 1996, the interest rate was 3.38%. The bonds are backed by an irrevocable letter of credit of $567. The letter of credit fee is 1 3/8%. During 1995, the expiration date of the irrevocable letter of credit was extended to December 15, 1996. The SERVISTAR revolving credit agreement and various note agreements require SERVISTAR and certain subsidiaries to maintain certain specified financial ratios. The most restrictive of these provisions requires SERVISTAR and those subsidiaries to maintain a ratio of net income before interest expense to interest expense of 2.6 at June 30, 1996 for which the ratio was 3.45 at June 30, 1996. The SCC revolving credit agreement also requires SCC and CTC to maintain certain specified financial ratios. The prime rate at June 30, 1996 was 8.25%. Principal payments on long-term debt become due in the years ending June 30 as follows: 1997--$5,645; 1998--$5,272; 1999--$85,281; 2000--$4,951; 2001--$22,943; and thereafter--$29. 58 61 SERVISTAR CORPORATION ------------------ NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS--(CONTINUED) The carrying value of long-term debt approximates fair value since the interest rates on existing debt approximate the rates at which the Corporation believes it could obtain new debt. E. LEASES: The Corporation has various noncancelable lease agreements which provide for basic rent over a specified period. Rent expense for the years ended June 30, 1996, 1995 and 1994 was $7,859, $8,435, and $8,072, respectively. Future minimum rental commitments for years ending June 30 are: 1997--$6,564; 1998--$6,058; 1999--$5,019; 2000--$3,256; 2001--$1,110; and thereafter--$2,144. F. EMPLOYEE BENEFIT PLANS: SERVISTAR has a noncontributory, defined benefit pension plan covering substantially all employees. Effective June 30, 1996, the plan has been amended to a cash balance plan, where the benefit formula in effect prior to June 30, 1996 was frozen. The plan amendment provides for contributions based upon length of service and percent of compensation. Interest earned on cash balance contributions is based on the 30-year treasury maturity rate set each April for the following year. Pension costs accrued are funded on a current basis, as required by statutory funding standards. Pension expense included the following components:
1996 1995 1994 ------- ------- ------- Service cost-benefits earned....................... $ 3,077 $ 2,259 $ 1,848 Interest cost on projected benefit obligations..... 5,588 4,857 4,088 Actual investment income earned on assets.......... (7,728) (6,382) 300 Net amortization and deferral...................... 3,152 1,787 (5,730) ------- ------- ------- Net pension expense................................ $ 4,089 $ 2,521 $ 506 ======= ======= =======
59 62 SERVISTAR CORPORATION ------------------ NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS--(CONTINUED) The funded status of the plan and the prepaid pension cost follow:
1996 1995 -------- -------- Accumulated benefit obligations, including vested benefits of $53,776 in 1996 and $50,020 in 1995........ $ 59,400 $ 54,844 ======== ======== Plan assets at fair value, primarily commingled funds, corporate and government debt securities, marketable equity securities and privately placed debt............ 62,946 56,029 Projected benefit obligation for participants' service rendered to date....................................... 59,400 70,854 -------- -------- Plan assets greater than (less than) projected benefit obligation............................................. 3,546 (14,825) Unrecognized net loss and effects of changes in actuarial assumptions............................................ 19,611 21,399 Unrecognized prior service costs......................... (18,841) 1,174 Remaining unrecognized net assets being recognized over participants' average remaining service period......... (4,211) (4,679) -------- -------- Prepaid pension cost..................................... $ 105 $ 3,069 ======== ========
The projected benefit obligation was determined using an assumed discount rate of 8% in 1996 and 1995 and 9% in 1994. The assumed rate of increase in future compensation was 4.75% for 1996, 1995 and 1994. The expected long-term rate of return on plan assets was 9% in 1996, 1995 and 1994. The decrease in the projected benefit obligation and unrecognized prior service charge relates to the cash balance plan amendment effective June 30, 1996. The discount rate on the long-term rate of return can have a significant effect on the accumulated benefit obligation and pension cost. A 1% decrease in the discount rate would have increased the accumulated benefit obligation by $9,007 at June 30, 1996. A 1% decrease in the discount rate and the long-term rate of return would have increased the pension cost by $1,890 at June 30, 1996. SERVISTAR also has a defined contribution profit-sharing plan which covers substantially all employees. Contributions are based on a fixed yearly percentage of participating employee compensation adjusted by performance under SERVISTAR's annual profit goals. Additional contributions may be made to the plan on a discretionary basis. Profit-sharing expense was -0- in 1996, $1,934 in 1995 and $1,813 in 1994. In addition to providing pension benefits, SERVISTAR provides certain health care and life insurance benefits for retired employees. SERVISTAR adopted Statement of Financial Accounting Standards No. 106, "Employers' Accounting for Postretirement Benefits other than Pensions" in the first quarter of 1996 using the delayed recognition method. The accumulated postretirement benefit obligation (APBO) was $5,700 at 60 63 SERVISTAR CORPORATION ------------------ NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS--(CONTINUED) July 1, 1995, which is being amortized over a 20 year period. Postretirement benefit cost was approximately $850 in 1996. The health care cost trend rate assumption can have a significant effect on the APBO, health care and death benefit liabilities and net periodic benefit costs. For 1996, a 1% increase in the trend rate for health care costs would have increased the APBO by 11% and the service and interest costs by 10%. SCC has adopted a profit-sharing 401(k) plan covering substantially all employees. Employees may contribute up to 16% of their compensation to the plan, which remains fully vested with the employee. The plan provides for a discretionary annual contribution by SCC based on its profits and an annual matching contribution based on the achievement of various profit targets for SCC. Employees vest in discretionary contributions of SCC over a five-year period and in the matching contributions immediately, if profit targets are met. SCC accrued total contributions of $555, $673, and $788 to the plan in 1996, 1995 and 1994, respectively. Contributions for 1994 were paid in August 1994. Contributions for 1995 were paid in August 1995 and payment for 1996 contributions will be made subsequent to June 30, 1996. This plan was combined with SERVISTAR's defined contribution plan in July 1996 in connection with the Merger. G. CAPITAL STOCK: An analysis of the changes in issued shares of capital stock follows:
SERVISTAR ------------------------------------------- PREFERRED STOCK COMMON STOCK -------------------- ------------------- NUMBER OF PAR NUMBER OF PAR SHARES VALUE SHARES VALUE --------- ------- --------- ------ (000'S) Balance, June 30, 1994................... 1,785 $89,239 32 $3,220 Shares issued.......................... 169 8,450 3 268 Shares acquired........................ (141) (7,015) (3) (281) ----- ------- -- ------ Balance, June 30, 1995................... 1,813 90,674 32 3,207 Shares issued.......................... 189 9,450 3 280 Shares acquired........................ (143) (7,177) (3) (303) ----- ------- -- ------ Balance, June 30, 1996................... 1,859 $92,947 32 $3,184 ===== ======= == ======
In connection with the acquisition of Taylor, SERVISTAR issued 5,000 shares of redeemable common preference stock during the year ended June 30, 1993. SERVISTAR redeemed 1,000 and 3,000 shares during 1995 and 1994, respectively, at par value. During fiscal year 1996 SERVISTAR redeemed, at par value, the remaining 1,000 shares. Shares of CTC common stock issued during the years ended June 30, 1996 and 1995 were 1,090 and 630, respectively. Shares of CTC common stock redeemed during the years ended June 30, 1996 and 1995 were 1,150 and 740, respectively. 61 64 SERVISTAR CORPORATION ------------------ NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS--(CONTINUED) Amounts due owners in preferred stock represent the portion of the patronage dividend to be distributed to the owners in preferred stock in the following fiscal year. Preferred and common shares of SERVISTAR and CTC stock are redeemable at their respective par values. Payment of the redemption price can be made by issuing a note to the member-owner maturing over an extended period, normally five years, or in cash immediately upon termination of membership, as defined by SERVISTAR's and CTC's Membership Termination Policies. On July 1, 1996, substantially all of the preferred and common stock of CTC was converted into stock of the Surviving Corporation effective with the Merger. Capital stock of subsidiary shown on the accompanying balance sheets of $819 for 1996 and $790 for 1995 represents the common preference stock and the preferred stock held by the owners of Speer Hardware Company. H. INCOME TAXES: The Corporation has minimal expense for income taxes for financial reporting purposes for the years ended June 30, 1996, 1995 and 1994, because the volume rebate owed to CTC eliminates all of SCC's income and all of SERVISTAR's and CTC's incomes are distributed to their owners in the form of patronage dividends. I. CONTINGENCIES: SERVISTAR is involved in various litigation arising in the ordinary course of business. Although the final outcome of these legal matters cannot be determined, it is management's opinion that these matters will not have a material adverse effect on SERVISTAR's financial condition or results of operations. J. SUBSEQUENT EVENT On April 1, 1997, the members of the Corporation voted to merge with Cotter & Company effective July 1, 1997. 62 65 UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS The following unaudited pro forma consolidated financial statements are based on the historical financial statements of Cotter & Company ("Cotter") and ServiStar Coast to Coast Corporation ("SCC") adjusted to give effect to the merger of SCC with and into Cotter (the "Merger"), pursuant to the Agreement and Plan of Merger dated December 9, 1996. Cotter will be the surviving corporation and will thereafter be known as TruServ Corporation ("TruServ"). The unaudited pro forma consolidated balance sheet as of March 29, 1997 has been prepared as if the Merger had occurred on March 29, 1997. The unaudited pro forma consolidated statement of operations for the year ended December 28, 1996 has been prepared as if the Merger had occurred on December 31, 1995. The unaudited pro forma consolidated statement of operations for the three months ended March 29, 1997 has been prepared as if the Merger had occurred on December 29, 1996. The Merger will be accounted for using the purchase method of accounting. The pro forma adjustments reflect the preliminary allocation of purchase price based on the estimated fair value of the assets and liabilities of SCC and are based upon currently available information and certain assumptions that management believes are reasonable. While management does not expect the nature of the purchase accounting adjustments to change significantly, it is likely that the amount of the actual purchase accounting adjustments will differ from the adjustments set forth in the pro forma financial statements because management has not completed appraisals of the SCC assets and because the Merger is not expected to be consummated until July 1, 1997. The actual purchase price adjustments and other Merger related adjustments will be determined based on the fair value of the assets and liabilities acquired and may differ from the amounts reflected in the pro forma adjustments. Under the proposed terms of the Merger, SCC members will exchange their SCC common stock and SCC preferred stock for TruServ stock at a par value of $100.00 per share. SCC shareholders owning in excess of 40 shares of SCC common stock (representing five stores), will have those excess shares purchased by Cotter, at their $100 per share par value, in exchange for cash or by a credit against amounts owed by those shareholders to SCC in respect of shares of SCC common stock and SCC Series A stock. The unaudited pro forma consolidated statement of operations does not include the effects of certain cost savings that are expected to be realized as a result of the actions TruServ management plans to take following the Merger. When fully implemented, such cost savings are estimated to be approximately $50 million annually and include savings from reductions in employees and duplicate facilities following the Merger as well as from increased vendor credits and lower merchandise costs based on increased purchasing volumes. The unaudited pro forma consolidated financial statements are intended for informational purposes only and are not necessarily indicative of the financial position or results of operations which would have been achieved had the Merger occurred on the indicated dates, nor are they necessarily indicative of the results of future operations. The unaudited pro forma consolidated financial statements should be read in conjunction with the financial statements and notes thereto of Cotter and SCC included or incorporated by reference herein. 63 66 COTTER & COMPANY UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET AS OF MARCH 29, 1997
AS REPORTED -------------------- PRO FORMA PRO FORMA COTTER SCC ADJUSTMENTS CONSOLIDATED ------ --- ----------- ------------ (000'S OMITTED) ASSETS Current Assets: Cash and cash equivalents........................... $ 1,863 $ 1,454 $ 3,317 Accounts and notes receivable....................... 336,733 196,075 $ (5,000)(1) 527,808 Inventories......................................... 390,358 174,889 (6,000)(2) 559,247 Prepaid expenses.................................... 21,915 3,534 25,449 -------- -------- -------- ---------- Total current assets......................... 750,869 375,952 (11,000) 1,115,821 Properties owned, less accumulated depreciation....... 168,792 79,933 248,725 Properties under capital leases, less accumulated amortization........................................ 3,270 -- 3,270 Unallocated purchase price............................ -- -- 48,282(3) 48,282 Other assets.......................................... 13,578 16,214 (1,000)(4) 28,792 -------- -------- -------- ---------- Total assets................................. $936,509 $472,099 $ 36,282 $1,444,890 ======== ======== ======== ========== LIABILITIES AND CAPITALIZATION Current liabilities: Accounts payable and accrued expenses............... $394,863 $220,611 $ 29,500(5) $ 644,974 Short-term borrowings............................... 116,101 -- 17,000(6) 133,101 Current maturities of notes, long-term debt and lease obligations................................. 43,495 5,568 49,063 Patronage dividends payable in cash................. 1,109 3,699 4,808 -------- -------- -------- ---------- Total current liabilities.................... 555,568 229,878 46,500 831,946 -------- -------- -------- ---------- Long-term debt and obligations under capital leases... 79,673 123,428 203,101 -------- -------- -------- ---------- Capitalization: Estimated patronage dividends to be distributed principally by the issuance of promissory (subordinated) notes and Class B nonvoting common stock............................................. 939 -- -- 939 Promissory (subordinated) and instalment notes...... 182,972 -- 10,000(7) 192,972 Class A common stock and partially paid subscriptions and common stock of SCC............. 4,804 12,718 25,100(8) 42,622 Class B nonvoting common stock and paid-in capital and preferred shares of SCC....................... 111,961 112,857 (52,100)(9) 172,718 Retained earnings (deficit)......................... 1,481 (6,782) 6,782(10) 1,481 -------- -------- -------- ---------- 302,157 118,793 (10,218) 410,732 Foreign currency translation adjustment............. (889) -- (889) -------- -------- -------- ---------- Total capitalization......................... 301,268 118,793 (10,218) 409,843 -------- -------- -------- ---------- Total liabilities and capitalization......... $936,509 $472,099 $ 36,282 $1,444,890 ======== ======== ======== ==========
See accompanying Notes to Unaudited Pro Forma Consolidated Balance Sheet. 64 67 NOTES TO UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET (1) Adjustment to reflect potential added risk of collectibility of receivables resulting from Members withdrawing subsequent to the Merger. (2) Represents the resulting adjustments from anticipated mark-downs in commonizing the inventory mix and inventory that will be sold at reduced prices due to the closure of certain SCC distribution centers. Other commonization expenses are anticipated but are not reflected due to the uncertainty as to amount. (3) Represents a preliminary estimate of the excess of cost over the fair value of the net assets of SCC. At each balance sheet date following the Merger, TruServ will evaluate potential impairment of any goodwill created as a result of the Merger using undiscounted future cash flows. (4) Adjustment to other intangibles. (5) Represents accrual of certain expenses and purchase accounting adjustments as set forth below:
(000'S OMITTED) --------------- Employee benefits: Principally to adjust for the effect of recording SCC's postretirement benefit obligation...................... $ 7,200 Adjustment of SCC's vacation pay accrual to conform to Cotter's vacation pay policy........................... 2,800 Closure of facilities--severance payments, lease and asset disposal costs associated with the closure of SCC's Butler office facility, paint plant and certain distribution centers................................................... 9,300 Legal, accounting and other transaction costs............... 7,000 Other....................................................... 3,200 ------- $29,500 =======
(6) Adjustment to reflect short-term borrowings for redemption of Cotter Class B common stock at par value. (7) Adjustment to reflect promissory notes issued to SCC members in connection with the redemption of SCC preferred stock. Such redemption relates to certain SCC members with preferred stock investments in excess of the proposed TruServ investment requirements. (8) Represents the conversion of Cotter Class B common stock to Class A common stock to meet additional required investment level. Under the proposed terms of the Merger, additional Class A common stock investment is required for Cotter Members to increase their investment to $6,000 per store for up to five stores. (9) Items (6), (7) and (8). (10) Acquisition of SCC's capital stock through exchange of TruServ shares and elimination of SCC's retained deficit. 65 68 COTTER & COMPANY UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS FOR THE THIRTEEN WEEKS ENDED MARCH 29, 1997
AS REPORTED -------------------- PRO FORMA PRO FORMA COTTER SCC ADJUSTMENTS CONSOLIDATED ------ --- ----------- ------------ (000'S OMITTED) Revenues.......................................... $561,696 $405,477 $ -- $967,173 -------- -------- ----- -------- Cost and expenses: Cost of revenues................................ 518,179 374,629 892,808 Warehouse, general and administrative........... 35,119 27,721 302(1) 63,142 Interest paid to Members........................ 4,297 -- 200(2) 4,497 Other interest expense.......................... 3,033 2,649 233(3) 5,915 Other income, net............................... (163) (661) (824) Income tax expense.............................. 160 99 259 -------- -------- ----- -------- 560,625 404,437 735 965,797 -------- -------- ----- -------- Net margins....................................... $ 1,071 $ 1,040 $(735) $ 1,376 ======== ======== ===== ========
See Accompanying Notes to Unaudited Pro Forma Consolidated Statements of Operation 66 69 COTTER & COMPANY UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 28, 1996
AS REPORTED ------------------------ PRO FORMA PRO FORMA COTTER SCC ADJUSTMENTS CONSOLIDATED ------ --- ----------- ------------ (000'S OMITTED) Revenues....................................... $2,441,707 $1,769,872 $ -- $4,211,579 ---------- ---------- ------- ---------- Cost and expenses: Cost of revenues............................. 2,245,071 1,645,080 3,890,151 Warehouse, general and administrative........ 115,457 98,556 1,207(1) 215,220 Interest paid to Members..................... 18,460 -- 800(2) 19,260 Other interest expense....................... 10,175 9,765 935(3) 20,875 Other income, net............................ (228) (4,210) (4,438) Income tax expense (benefit)................. 362 (140) 222 ---------- ---------- ------- ---------- 2,389,297 1,749,051 2,942 4,141,290 ---------- ---------- ------- ---------- Net margins.................................... $ 52,410 $ 20,821 $(2,942) $ 70,289 ========== ========== ======= ==========
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS - --------------- (1) Adjustment for amortization of the excess of cost over the fair value of the net assets of SCC. Amortization has been calculated using the straight-line method over an estimated useful life of 40 years. (2) Adjustment for interest expense on promissory notes to be issued in connection with the Merger. Such interest was calculated at an assumed interest rate of 8%. (3) Adjustment for interest expense on short-term borrowings to be issued in connection with the Merger. Such interest calculated at an assumed interest rate of 5.5%. 67 70 ========================================================= NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED OR INCORPORATED BY REFERENCE IN THIS PROSPECTUS IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OR SOLICITATION BY ANYONE IN ANY STATE IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANYONE TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. TABLE OF CONTENTS
Page ---- Available Information..................... 2 Reports to Security Holders............... 2 Documents Incorporated by Reference....... 2 Summary................................... 3 The Company............................... 4 Consolidated Ratio of Earnings to Fixed Charges of the Company.................. 4 The TruServ Variable Denomination Floating Rate Demand Note Investment Program..... 5 Use of Proceeds........................... 7 Arbitration............................... 7 Certain Terms of the Notes................ 8 Plan of Distribution...................... 9 Agent Bank and Administration............. 9 Taxes..................................... 10 Risk Factors.............................. 10 Merger.................................... 10 Dividends................................. 12 Selected Financial Data................... 12 Management's Discussion and Analysis of Financial Condition and Results of Operations.............................. 13 Business.................................. 16 Distribution of Patronage Dividends....... 18 Management................................ 22 Legal Matters............................. 22 Index to Consolidated Financial Statements Covered by Report of Independent Auditors................................ 23 Unaudited Pro Forma Consolidated Financial Statements.............................. 63
========================================================= ========================================================= $50,000,000 COTTER & COMPANY VARIABLE DENOMINATION FLOATING RATE DEMAND NOTES FOR INFORMATION CONCERNING THE TRUSERV INVESTMENT PROGRAM, WRITE TO: THE TRUSERV INVESTMENT PROGRAM P.O. BOX 75928 CHICAGO, ILLINOIS 60675-7598 OR CALL: TOLL FREE NUMBER 1-800-507-9000 PROSPECTUS ------------------------ DATED MAY , 1997 ========================================================= 71 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION The following are the actual or estimated expenses in connection with the issuance and distribution of the Variable Denomination Floating Rate Demand Notes being registered: Registration Fee............................................ $15,152 Printing of Registration Statement and Prospectus........... 16,000 Accounting Fees and Expenses................................ 10,000 Legal Fees.................................................. 10,000 Trustee Fee................................................. 3,000 Fees and Expenses for Qualifying Securities under "Blue Sky" Laws of Various States............................................ 35,000 ------- Total....................................................... $89,152 =======
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS The Company's Certificate of Incorporation, as amended, provides that the Company shall indemnify, in accordance with and to the full extent permitted by the Delaware General Corporation Law, any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (including, without limitation, an action by or in the right of the Company), by reason of the fact that such person is or was a director, officer, employee or agent of the Company, or is or was serving at the request of the Company as a director, officer, employee or agent of another Company, partnership, joint venture, trust or other enterprise, against any liability or expense actually and reasonably incurred by such person in respect thereof. Such indemnification is not exclusive of any other right of such director, officer, or employee to indemnification provided by law or otherwise. Additionally, pursuant to Section 145(a)-(g) of the Delaware General Corporation Law which empowers a corporation to indemnify its directors, officers, employees and agents, the Board of Directors of the Company on July 23, 1973 adopted a By-Law (Article XII, Indemnification of Directors, Officers and Employees--Exhibit 3-A to the Company's Form 10-K Annual Report for the year ended January 1, 1994 and incorporated herein by reference) providing for such indemnification. The following is a summary of the most significant provisions of said By-Law: As against third parties, the Company shall indemnify any director, officer, employee or agent for any expenses (including attorneys' fees, judgments, fines and amounts paid in settlement) actually and reasonably incurred in defending any threatened, pending or completed suit or proceeding, whether civil, criminal, administrative or investigative brought against such person by reason of the fact that he was or is a director, officer, employee or agent, if such person acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interest of the Company, and with respect to any criminal action or proceeding if he had no reasonable cause to believe his conduct unlawful. In any action or suit by or in the right of the Company, the Company shall indemnify any director, officer, employee or agent who is or was a party or threatened to be made a party to such threatened, pending or completed action or suit, for expenses (including attorney's fees and amounts paid in settlement) reasonably II-1 72 and actually incurred in connection with the defense or settlement of such suit or action, if such person acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interest of the Company, except that no indemnification shall be made if such person has been adjudged to be liable for negligence or misconduct in the performance of his duty to the Company unless and only to the extent that the Court of Chancery of Delaware or the court where the suit was brought finds that in view of all the circumstances of the case, such person is entitled to indemnification. Any indemnification, unless ordered by a court, shall be made by the Company only as authorized in the specific case upon a determination that indemnification is proper in the circumstances because the party to be indemnified has met the applicable standard of conduct. Such determination shall be made by the Board of Directors by a majority vote of a quorum, consisting of directors who were not parties of such action, suit or proceeding, or if such a quorum is not obtainable, or even if obtainable, if a quorum of disinterested directors so directs, by independent legal counsel in a written opinion, or by the stockholders. Additionally, the shareholders of the Company have approved an amendment to the Certificate of Incorporation to eliminate personal liability of directors to the Company or its shareholders for monetary damages for breach of fiduciary duty of care. The amendment provides that a director of the Company shall not be liable to the Company or its stockholders for monetary damages for breach of fiduciary duty as a director, except to the extent such exemption from liability or limitation thereof is not permitted under the Delaware General Corporation Law as the same exists or may hereafter be amended. Insofar as indemnification for liabilities arising under the Securities Act of 1933 is concerned, see Item 17 "Undertakings" below. ITEM 16. EXHIBITS.
EXHIBIT NUMBER DESCRIPTION ------- ----------- 2-A Agreement and Plan of Merger dated as of December 9, 1996 between the Company and ServiStar Coast to Coast Corporation ("SCC"). Incorporated by Reference--Exhibit 2-A to Registration Statement on Form S-4 (No. 333-18397). 4-A Article Fourth of the Certificate of Incorporation of the Company, setting forth the designations and the powers, preferences and rights, and the qualifications, limitations and restrictions of the Class A common stock and Class B common stock of the Company. Article Twelfth of the Certificate of Incorporation of the Company, setting forth certain limitations on the rights of shareholders to bring an action against directors for breach of the duty of care. Incorporated by reference--Exhibit 3-A to the Company's Form 10-K Annual Report for the year ended January 1, 1994. 4-B Articles VI, VII, VIII, IX and XI of the By-Laws of the Company relating to: certain qualifications, limitations and restrictions on the common stock of the Company; the Member agreement between the Company and its shareholders; the payment of patronage dividends; dividends; qualifying shares; and valuation of Class B common stock of the Company issued as part of the annual patronage dividend. Incorporated by reference--Exhibit 3-B to the Company's Form 10-K Annual Report for the year ended January 1, 1994 . 4-C Specimen certificate of Class A common stock. Incorporated by reference--Exhibit 4-A to Registration Statement on Form S-2 (No. 2-82836). 4-D Specimen certificate of Class B common stock. Incorporated by reference--Exhibit 4-B to Registration Statement on Form S-2 (No. 2-82836).
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EXHIBIT NUMBER DESCRIPTION ------- ----------- 4-E Promissory (subordinated) note form effective for the year-ending December 31, 1986 and thereafter. Incorporated by reference--Exhibit 4-H to Registration Statement on Form S-2 (No. 33-20960). 4-F Instalment note form. Incorporated by reference--Exhibit 4-F to Registration Statement on Form S-2 (No. 2-82836). 4-G Copy of Note Agreement with Prudential Insurance Company of America dated April 13, 1992 securing 8.60% Senior Notes in the principal sum of $50,000,000 with a maturity date of April 1, 2007. Incorporated by reference--Exhibit 4-J to Post-Effective Amendment No. 2 to Registration Statement on Form S-2 (No. 33-39477). 4-H Cotter & Company $50,000,000 Private Shelf Agreement with Prudential Insurance Company of America dated December 29, 1995 incorporating amendment on existing Note Agreement with Prudential Insurance Company of America dated April 13, 1992 securing 8.60% Senior Notes in the principal sum of $50,000,000 with a maturity date of April 1, 2007. Incorporated by reference--Exhibit 4-H to Post-Effective Amendment No. 5 to Registration Statement on Form S-2 (No. 33-39477). 4-I Trust Indenture between Cotter & Company and First Trust of Illinois (formerly Bank of America). Incorporated by reference--Exhibit T3C to Cotter & Company Form T-3 (No. 22-26210). 4-J Credit Agreement dated March 29, 1996 for $125,000,000 revolving credit between Cotter & Company, various Financial institutions, and Bank of America. Incorporated by Reference-- Exhibit 4-J to the Company's Registration Statement on Form S-2 (No. 33-39477). *4-K Amended and Restated Trust Indenture between Cotter & Company and First Trust National Association for $50,000,000 principal amount of Variable Denomination Floating Rate Demand Notes. *5 Opinion of Messrs. Arnstein & Lehr. 10-A Current Form of "Retail Member Agreement with Cotter & Company" between the Company and its Members that offer primarily hardware and related items. Incorporated by reference--Exhibit 10-A to the Company's Registration Statement on Form S-4 (No. 333-18397). 10-B Current form of "Subscription to Shares of Cotter & Company". Incorporated by reference--Exhibit 10-H to Registration Statement on Form S-2 (No. 2-82836). 10-C Cotter & Company Defined Lump Sum Pension Plan (As Amended and Restated Effective As Of January 1, 1996). Incorporated by reference--Exhibit 10-C to Post-Effective Amendment No. 5 to Registration Statement on Form S-2 (No. 33-39477). 10-D Cotter & Company Employees' Savings and Compensation Deferral Plan (As Amended and Restated Effective April 1, 1994). Incorporated by reference--Exhibit 10-D to Post-Effective Amendment No. 4 to Registration Statement on Form S-2 (No. 33-39477). 10-E Cotter & Company Supplemental Retirement Plan between Cotter & Company and selected executives of the Company (As Amended and Restated January 2, 1996 Effective As Of January 1, 1996). Incorporated by reference--Exhibit 10-E to Post-Effective Amendment No. 5 to Registration Statement on Form S-2 (No. 33-39477).
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EXHIBIT NUMBER DESCRIPTION - ------- ----------- 10-F Annual Incentive Compensation Program and Long-Term Incentive Compensation Program between Cotter & Company and selected executives of the Company. Incorporated by reference--filed as Exhibits A and B to Exhibit 10-N to Registration Statement on Form S-2 (No. 33-39477). 10-G Cotter & Company Long-Term Incentive Compensation Program for Executive Management (Amended) dated November 7, 1994. Incorporated by reference--Exhibit 10-I to Post-Effective Amendment No. 4 to Registration Statement on Form S-2 (No. 33-39477). 10-H Employment Agreement between Cotter & Company and Daniel A. Cotter dated October 15, 1984. Incorporated by reference--Exhibit 10-N to Post-Effective Amendment No. 2 to Registration Statement on Form S-2 (No. 2-82836). 10-I Amendment No. 1 to Employment Agreement between Cotter & Company and Daniel A. Cotter dated October 15, 1984 effective January 1, 1991. Incorporated by reference--Exhibit 10-N to Registration Statement on Form S-2 (No. 33-39477). 10-J Contract between Daniel T. Burns and the Company. Incorporated by reference--Exhibit 10-J to Post-Effective No. 5 to Registration Statement in Form S-2 (No. 33-39477). 10-K Contract between Kerry J. Kirby and the Company. Incorporated by reference--Exhibit 10-K to Post-Effective No. 5 to Registration Statement on Form S-2 (No. 33-39477). 10-L Retail Conversion Funds Agreement dated as of December 9, 1996 between the Company and SCC. Incorporated by reference--Exhibit 10-L to Registration Statement on Form S-4 (No. 333-18397). *12 Statement of Computation of Consolidated Ratio of Earnings to Fixed Charges for the Quarters Ended March 29, 1997 and March 30, 1996 and for the Fiscal Years Ended 1996, 1995, 1994, 1993, and 1992. *23-A Consent of Arnstein & Lehr (included in Exhibit 5 to this Registration Statement). *23-B Consent of Ernst & Young LLP (included on page II-8). *23-C Consent of Coopers & Lybrand LLP (included on page II-9). *25 Statement of Eligibility of Trustee. *99-A Application Form and Related Materials for TruServ Variable Denomination Floating Rate Demand Note Investment Program--SCC Members. *99-B Application Form for TruServ Variable Denomination Floating Rate Demand Note Investment Program--Cotter Members.
* Filed herewith. II-4 75 ITEM 17. UNDERTAKINGS. The undersigned Registrant hereby undertakes: (1) To file, during any period in which offers or sales are being made, 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 the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the Registration Statement. (iii) To include any material information with respect to the plan of distribution not previously disclosed in the Registration Statement or any material change to such information in the Registration Statement. (2) That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new Registration Statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the Company pursuant to the foregoing provisions described in Item 15, or otherwise, the Company has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Company of expenses incurred or paid by a director, officer or controlling person of the Company in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Company will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. II-5 76 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 REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF CHICAGO, STATE OF ILLINOIS, ON THE 20TH DAY OF MAY 1997. COTTER & COMPANY By: /s/ DANIEL A. COTTER ------------------------------------ Daniel A. Cotter President, Chief Executive Officer and Director PURSUANT TO THE REQUIREMENTS OF 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 --------- ----- ---- /s/ DANIEL A. COTTER President, Chief Executive May 20, 1997 - ----------------------------------------------------- Officer and Director Daniel A. Cotter /s/ KERRY J. KIRBY Vice President, Treasurer, May 20, 1997 - ----------------------------------------------------- Chief Accounting Officer and Kerry J. Kirby Chief Financial Officer /s/ ROBERT J. LADNER Chairman of the Board May 20, 1997 - ----------------------------------------------------- and Director Robert J. Ladner /s/ JOE W. BLAGG Director May 20, 1997 - ----------------------------------------------------- Joe W. Blagg /s/ WILLIAM M. CLAYPOOL, III Director May 20, 1997 - ----------------------------------------------------- William M. Claypool, III /s/ SAMUEL D. COSTA, JR. Director May 20, 1997 - ----------------------------------------------------- Samuel D. Costa, Jr. /s/ LEONARD C. FARR Director May 20, 1997 - ----------------------------------------------------- Leonard C. Farr /s/ WILLIAM M. HALTERMAN Director May 20, 1997 - ----------------------------------------------------- William M. Halterman /s/ JERRALD T. KABELIN Director May 20, 1997 - ----------------------------------------------------- Jerrald T. Kabelin /s/ JOHN F. LOTTES, III Director May 20, 1997 - ----------------------------------------------------- John F. Lottes, III
II-6 77
SIGNATURE TITLE DATE --------- ----- ---- /s/ KENNETH M. NOBLE Director May 20, 1997 - ----------------------------------------------------- Kenneth M. Noble /s/ RICHARD L. SCHAEFER Director May 20, 1997 - ----------------------------------------------------- Richard L. Schaefer /s/ GEORGE V. SHEFFER Director May 20, 1997 - ----------------------------------------------------- George V. Sheffer /s/ DENNIS A. SWANSON Director May 20, 1997 - ----------------------------------------------------- Dennis A. Swanson /s/ JOHN M. WEST, JR. Director May 20, 1997 - ----------------------------------------------------- John M. West, Jr.
II-7 78 CONSENT OF INDEPENDENT AUDITORS We consent to the use of our report dated February 10, 1997, except for Note 11 as to which the date is April 1, 1997, in Amendment No. 1 to Registration Statement on Form S-2 (File No. 333-26727) and related Prospectus of Cotter & Company for the registration of $50,000,000 of Variable Denomination Floating Rate Demand Notes. We also consent to the incorporation by reference therein of our report dated February 10, 1997 with respect to the consolidated financial statements of Cotter & Company included in its Annual Report (Form 10-K) for the year ended December 28, 1996, filed with the Securities and Exchange Commission. ERNST & YOUNG LLP Chicago, Illinois May 20, 1997 II-8 79 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the inclusion in Amendment No. 1 to Registration Statement on Form S-2 (File No. 333-26727) and related Prospectus of Cotter & Company for the registration of $50,000,000 of Variable Denomination Floating Rate Demand Notes of our report dated July 26, 1996, except for Note J as to which the date is April 1, 1997, on our audits of the consolidated and combined financial statements of SERVISTAR Corporation and Coast to Coast Stores, Inc. COOPERS & LYBRAND LLP Pittsburgh, Pennsylvania May 20, 1997 II-9 80 INDEX TO EXHIBITS FILED TO REGISTRATION STATEMENT ON FORM S-2 OF COTTER & COMPANY
EXHIBIT NUMBER EXHIBIT - ------- ------- 4-K Amended and Restated Trust Indenture between Cotter & Company and First Trust National Association for $50,000,000 principal amount of Variable Denomination Floating Rate Demand Notes. 5 Opinion and Consent of Messrs. Arnstein & Lehr. 12 Statement of Computation of Consolidated Ratio of Earnings to Fixed Charges for the Quarters Ended March 29, 1997 and March 30, 1996 and for the Fiscal Years Ended 1996, 1995, 1994, 1993 and 1992. 23-A Consent of Arnstein & Lehr (contained in Exhibit 5). 23-B Consent of Ernst & Young LLP (included on page II-8). 23-C Consent of Coopers & Lybrand LLP (included on page II-9). 25 Statement of Eligibility of Trustee. 99-A Application Form and Related Materials for TruServ Variable Denomination Floating Rate Demand Note Investment Program -- SCC Members 99-B Current Application Form for TruServ Variable Denomination Floating Rate Demand Note Investment Program -- Cotter Members
Exhibits incorporated by reference are listed on Pages II-2, II-3 and II-4 of this Registration Statement on Form S-2 of Cotter & Company. II-10 EX-4.K 2 AMENDED AND RESTATED TRUST INDENTURE 1 EXHIBIT 4-K COTTER & COMPANY Issuer and FIRST TRUST NATIONAL ASSOCIATION Trustee Amended and Restated Indenture Dated as of May 8, 1997 Variable Denomination Floating Rate Demand Notes 2 Reconciliation and Tie between Trust Indenture Act of 1939 and Indenture
Trust Indenture Trust Indenture Act Section Indenture Section Act Section Indenture Section - ----------- ----------------- --------------- ----------------- Section 310 (a)(1) 609 Section 316 (a) 101 (a)(2) 609 (a)(1)(A) 512 (a)(3) Not Applicable (a)(1)(B) 513 (a)(4) Not Applicable (a)(2) Not Applicable (a)(5) 609 (b) 508 (b) 608 and 610 (c) 104(5) Section 311 (a) 613(1) Section 317 (a)(1)503 (b) 613(2) (a)(2) 504 (b)(2) 613(2)(b), 703(2) (b) 903 Section 312 (a) 701, 702(1) Section 318 (a) 107 (b) 702(2) (c) 702(2)(c) Section 313 (a) 703(1) (b) 703(2) (c) 703(1), 703(2) (d) 703(3) Section 314 (a)(1) 704 (a)(2) 704 (a)(3) 704 (a)(4) 904 (b) Not Applicable (c)(1) 102 (c)(2) 102 (c)(3) Not Applicable (d) Not Applicable (e) 102 Section 315 (a) 601(1) (b) 602, 703(1)(g) (c) 601(2) (d) 601(3) (d)(1) 601(1)(a) (d)(2) 601(3)(b) (d)(3) 601(3)(c) (e) 514
Note: This reconciliation and tie shall not, for any purpose, be deemed to be a part of the Indenture. 2 3 TABLE OF CONTENTS ARTICLE ONE DEFINITIONS AND OTHER PROVISIONS OF GENERAL APPLICATION
PAGE ---- SECTION 101. Definitions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Affiliate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Agent Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Board of Directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Board Resolution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Business Day . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Commission . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 Company Request . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 Company Order . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 Consolidated Net Tangible Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 Corporate Trust Office . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 Event of Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 Holder . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 Indenture . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 Officers' Certificate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 Opinion of Counsel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 Outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 Paying Agent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 Person . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 Program . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 Principal Amount . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 Redemption Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 Responsible Officer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 Secured Debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 Security . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 Security Register . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 Subsidiary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 Trust Indenture Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 Vice President . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 Wholly-owned Subsidiary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
3 4 SECTION 102. Compliance Certificates and Opinions. . . . . . . . . . . . . . . . . . . . . . 13 SECTION 103. Form of Documents Delivered to Trustee. . . . . . . . . . . . . . . . . . . . . 13 SECTION 104. Acts of Holders. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 SECTION 105. Notices, Etc., to Trustee and Company. . . . . . . . . . . . . . . . . . . . . 15 SECTION 106. Notice to Holders; Waiver. . . . . . . . . . . . . . . . . . . . . . . . . . . 16 SECTION 107. Conflict with Trust Indenture Act. . . . . . . . . . . . . . . . . . . . . . . 16 SECTION 108. Effect of Headings, Table of Contents, Reconciliation and Tie. . . . . . . . . 16 SECTION 109. Successors and Assigns. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 SECTION 110. Separability Clause. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 SECTION 111. Benefits of Indenture. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 SECTION 112. Governing Law. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 SECTION 113. Legal Holidays. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 SECTION 114. Persons Deemed Owners. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 ARTICLE TWO AMOUNT, PAYMENT AND RESTRICTION OF TRANSFER OF SECURITIES SECTION 201. Amount Limited. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 SECTION 202. Payment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 SECTION 203. Restriction on Transfer of Securities. . . . . . . . . . . . . . . . . . . . . 18 ARTICLE THREE REDEMPTION OF SECURITIES SECTION 301. Redemption at Option of the Company. . . . . . . . . . . . . . . . . . . . . . 18
4 5 SECTION 302. Notice of Redemption. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 SECTION 303. Payment of Redemption Price. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 SECTION 304. Redemption of Securities if Holder is Not Eligible to Participate in the Program . . . . . . 18 SECTION 305. Redemption at Option of the Holder. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 ARTICLE FOUR SATISFACTION AND DISCHARGE OF INDENTURE SECTION 401. Satisfaction and Discharge of Indenture. . . . . . . . . . . . . . . . . . . . . . . . . . . 19 SECTION 402. Application of Trust Money. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 SECTION 403. Repayment by Paying Agents. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 ARTICLE FIVE REMEDIES SECTION 501. Events of Default. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 SECTION 502. Acceleration of Maturity; Rescission and Annulment. . . . . . . . . . . . . . . . . . . . . . 22 SECTION 503. Collection of Indebtedness and Suits for Enforcement by Trustee. . . . . . . . . . . . . . . 23 SECTION 504. Trustee May File Proofs of Claim. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 SECTION 505. Trustee May Enforce Claim Without Possession of Securities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 SECTION 506. Application of Money Collected. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 SECTION 507. Limitation on Suits. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 SECTION 508. Unconditional Right of Holders to Receive Principal, Premium and Interest . . . . . . . . . . 26 SECTION 509. Restoration of Rights and Remedies. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
5 6 SECTION 510. Rights and Remedies Cumulative. . . . . . . . . . . . . . . . . . . . . . . . . . . 26 SECTION 511. Delay or Omission Not Waiver. . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 SECTION 512. Control by Holders. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 SECTION 513. Waiver of Past Defaults. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 SECTION 514. Undertaking for Costs. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 SECTION 515. Waiver of Stay or Extension Laws. . . . . . . . . . . . . . . . . . . . . . . . . . 28 ARTICLE SIX THE TRUSTEE SECTION 601. Certain Duties and Responsibilities. . . . . . . . . . . . . . . . . . . . . . . . 28 SECTION 602. Notice of Defaults. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 SECTION 603. Certain Rights of Trustee. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 SECTION 604. Not responsible for Recitals or Issuance of Securities. . . . . . . . . . . . . . . 31 SECTION 605. May Hold Securities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 SECTION 606. Money Held in Trust. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 SECTION 607. Compensation and Reimbursement. . . . . . . . . . . . . . . . . . . . . . . . . . . 32 SECTION 608. Disqualification; Conflicting Interests. . . . . . . . . . . . . . . . . . . . . . 32 SECTION 609. Corporate Trustee Required; Eligibility. . . . . . . . . . . . . . . . . . . . . . 32 SECTION 610. Resignation and Removal; Appointment of Successor. . . . . . . . . . . . . . . . . 33 SECTION 611. Acceptance of Appointment by Successor. . . . . . . . . . . . . . . . . . . . . . . 34 SECTION 612. Merger, Conversion, Consolidation or Succession to Business. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 SECTION 613. Preferential Collection of Claim Against Company. . . . . . . . . . . . . . . . . . 35
6 7 ARTICLE SEVEN HOLDERS' LISTS AND REPORTS BY TRUSTEE AND COMPANY SECTION 701. Company to Furnish Trustee Names and Addresses of Holders. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 SECTION 702. Preservation of Information; Communications to Holders. . . . . . . . . . . . . 40 SECTION 703. Reports by Trustee. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 SECTION 704. Reports by Company. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42 ARTICLE EIGHT SUPPLEMENTAL INDENTURES SECTION 801. Supplemental Indentures without Consent of Holders. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 SECTION 802. Supplemental Indentures with Consent of Holders. . . . . . . . . . . . . . . . 44 SECTION 803. Execution of Supplemental Indentures. . . . . . . . . . . . . . . . . . . . . . 45 SECTION 804. Effect of Supplemental Indentures. . . . . . . . . . . . . . . . . . . . . . . 45 SECTION 805. Conformity with Trust Indenture Act. . . . . . . . . . . . . . . . . . . . . . 45 ARTICLE NINE COVENANTS SECTION 901. Administration of Program; Payment of Principal and Interest; Subordination . . 45 SECTION 902. Maintenance of Security Register, Maintenance of Office or Agency. . . . . . . 46 SECTION 903. Money for Securities Payments to Be Held in Trust. . . . . . . . . . . . . . . 46 SECTION 904. Certificate of Officers of the Company. . . . . . . . . . . . . . . . . . . . . 47 SECTION 905. Waiver of Certain Covenants. . . . . . . . . . . . . . . . . . . . . . . . . . 48
7 8 INDENTURE, dated as of May 8, 1997, between Cotter & Company, a corporation duly organized and existing under the laws of the State of Delaware, (herein called the "Company"), having its principal office at 8600 West Bryn Mawr Avenue, Chicago Illinois, and First Trust National Association, having its principal offices at 111 East Wacker Drive, Chicago, Illinois, a national banking association duly organized and existing under the laws of the United States of America, as Trustee (herein called the "Trustee"). RECITALS OF THE COMPANY The Company has duly authorized the execution and delivery of this Indenture to provide for the issuance from time to time of its unsecured variable denomination floating rate demand notes (herein called the "Securities") pursuant to the Program (as defined below). All things necessary to make this Indenture a valid agreement of the Company, in accordance with its terms, have been done. NOW, THEREFORE, THIS INDENTURE WITNESSETH: For and in consideration of the premises and the purchase of the Securities by the Holders thereof, it is mutually covenanted and agreed, for the equal and proportionate benefit of all Holders of the Securities, as follows: ARTICLE ONE DEFINITIONS AND OTHER PROVISIONS OF GENERAL APPLICATION SECTION 101. Definitions. For all purposes of this Indenture, except as otherwise expressly provided or unless the context otherwise requires: (1) the terms defined in this Article have the meanings assigned to them in this Article and include the plural as well as the singular; (2) all other terms used herein which are defined in the Trust Indenture Act or by Commission rule under the Trust Indenture Act, either directly or by reference therein, have the meanings assigned to them therein; (3) all accounting terms not otherwise defined herein have the meanings assigned to them in accordance with generally accepted accounting principles, and, 8 9 except as otherwise herein expressly provided, the term "generally accepted accounting principles" with respect to any computation required or permitted hereunder shall mean such accounting principles as are generally accepted in the United States of America at the date of such computation; and (4) the words "herein", "hereof" and "hereunder" and other words of similar import refer to this Indenture as a whole and not to any particular Article, Section or other subdivision. Certain terms, used principally in Article Six, are defined in that Article. "Act", when used with respect to any Holder, has the meaning specified in Section 104. "Affiliate" of any specified Person means any other Person directly or indirectly controlling or controlled by or under direct or indirect common control with such specified Person. For the purposes of this definition, "control" when used with respect to any specified Person means the power to direct the management and policies of such Person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise; and the terms "controlling" and "controlled" have meanings correlative to the foregoing. "Agent Bank" means a bank or corporation, and its successors and assigns, appointed by the Company to act as agent under the Program and to perform all functions required of such agent pursuant to the provisions of the Program and to serve as Paying Agent pursuant to the provisions of this Indenture. "Board of Directors" means either the board of directors of the Company or any duly authorized committee of that board. "Board Resolution" means a copy of a resolution certified by the Secretary or an Assistant Secretary of the Company to have been duly adopted by the Board of Directors and to be in full force and effect on the date of such certification, and delivered to the Trustee. "Business Day" means each Monday, Tuesday, Wednesday, Thursday and Friday which is not a day on which the Agent Bank is authorized or obligated by law to close. "Commission" means the Securities and Exchange Commission, as from time to time constituted, created under the Securities Exchange Act of 1934, or, if at any time after the execution of this instrument such Commission is not existing and performing the duties now assigned to it under the Trust Indenture Act, then the body performing such duties at such time. 9 10 "Company" means the Person named as the "Company" in the first paragraph of this instrument until a successor corporation shall have become such pursuant to the applicable provisions of this Indenture, and thereafter "Company" shall mean such successor corporation. "Company Request" or "Company Order" means a written request or order signed in the name of the Company by its Chief Executive Officer, Chairman of the Board, its President or a Vice President, and by its Treasurer, an Assistant Treasurer, its Secretary or an Assistant Secretary, and delivered to the Trustee. "Consolidated Net Tangible Assets" means as of any particular time the aggregate amount of assets after deducting therefrom (a) all current liabilities (excluding any such liability that by its terms is extendable or renewable at the option of the obligor thereon to a time more than 12 months after the time as of which the amount thereof is being computed) and (b) all goodwill, excess of cost over assets acquired, patents, copyrights, trademarks, trade names, unauthorized debt discount and expense and other like intangibles, all as shown in the most recent consolidated financial statements of the Company and its Subsidiaries prepared in accordance with generally accepted accounting principles. "Corporate Trust Office" means an office of the Trustee at which at any particular time its corporate trust business shall be administered. "Corporation" includes corporations, associations, companies and business trusts. "Event of Default" has the meaning specified in Section 501. "Holder" means, with respect to a Security, a Person in whose name at the time a particular Security is registered in the Security Register. "Indenture" means this instrument as originally executed or as it may from time to time be supplemented or amended by one or more indentures supplemental hereto entered into pursuant to the applicable provisions hereof. "Officer's Certificate" means a certificate signed by the Chief Executive Officer, Chairman of the Board, the President or a Vice President, and by the Treasurer, an Assistant Treasurer, the Secretary or an Assistant Secretary, of the Company, and delivered to the Trustee. "Opinion of Counsel" means a written opinion of counsel, who may be counsel for or an employee of the Company or other counsel satisfactory to the Trustee, which is delivered to the Trustee. 10 11 "Outstanding", when used with respect to Securities, means, as of the date of determination, all Securities in which Holders have made investments as shown on the Securities Register, except: (1) Securities or portions thereof theretofore redeemed by the Holders pursuant to the provisions of the Program and this Indenture; (2) Securities or portions thereof theretofore redeemed by the Company pursuant to the provisions of this Indenture; (3) Securities or portions thereof for whose payment or redemption money in the necessary amount has been theretofore deposited with the Trustee or any Paying Agent (other than the Company) in trust or set aside and segregated in trust by the Company (if the Company shall act as its own Paying Agent), for the Holders of such Securities; provided that, if such Securities are to be redeemed, notice of such redemption has been duly given pursuant to this Indenture or provision therefor satisfactory to the Trustee has been made; provided, however, that in determining whether the Holders of the requisite principal amount of the Outstanding Securities have given any request, demand, authorization, direction, notice, consent or waiver hereunder, Securities owned by the Company or any other obligor upon the Securities or any Affiliate of the Company or of such other obligor shall be disregarded and deemed not to be Outstanding, except that, in determining whether the Trustee shall be protected in relying upon any such request, demand, authorization, direction, notice, consent or waiver, only Securities which the Trustee knows to be so owned shall be so disregarded. "Paying Agent" means any Person authorized by the Company to pay the principal of (and premium, if any) or interest on any Securities on behalf of the Company. The Agent Bank shall serve as Paying Agent pursuant to the terms of this Indenture. "Person" means any individual, corporation, partnership, joint venture, association, joint-stock company, trust, unincorporated organization or government or any agency or political subdivision thereof. "Program" means the TruServ Variable Denomination Floating Rate Demand Note Investment Program established by the Company and in effect on the date hereof, as the same may be amended or supplemented by the Company from time to time. "Principal Amount", when used with reference to a Security, means, as of a particular time, the sum of the funds invested in a Security, plus the sum of interest accrued, paid and reinvested in a Security, less the sum of redemptions from time to time. 11 12 "Redemption Date", when used with respect to any Security to be redeemed, means the date fixed for such redemption by or pursuant to this Indenture. "Responsible Officer", when used with respect to the Trustee, means the chairman or any vice-chairman of the board of directors, the chairman or any vice-chairman of the executive committee of the board of directors, the chairman of the trust committee, the president, any vice president, the secretary, any assistant secretary, the treasurer, any assistant treasurer, the cashier, any assistant cashier, any trust officer or assistant trust officer, the controller or any assistant controller or any other officer of the Trustee customarily performing functions similar to those performed by any of the above designated officers and also means, with respect to a particular corporate trust matter, any other officer to whom such matter is referred because of his knowledge of and familiarity with the particular subject. "Secured Debt" means indebtedness for money borrowed which is secured by a mortgage, pledgee, lien, security interest or encumbrance on any property of any character of the Company. "Security" or "Securities" means any Variable Denomination Floating Rate Demand Note or Notes, as the case may be, issued pursuant to the Program and under this Indenture, which are evidenced by an individual record or entries in the name of the Particular Holder established on the Security Register. "Security Register" has the meaning specified in Section 902. "Subsidiary" means with respect to the Company, a corporation more than fifty percent (50%) of the outstanding voting stock of which is owned, directly or indirectly, by the Company or by one or more other Subsidiaries, or by the Company and one or more other Subsidiaries. For the purposes of this definition, "voting stock" means stock which ordinarily has voting power for the election of directors, whether at all times or only so long as no senior class of stock has such voting power by reason of any contingency. "Trustee" means the Person named as the "Trustee" in the first paragraph of this instrument until a successor Trustee shall have become such pursuant to the applicable provisions of this Indenture, and thereafter "Trustee" shall mean or include each Person who is then a Trustee hereunder. "Trust Indenture Act" means the Trust Indenture Act of 1939 as in force at the date as of which this instrument was executed, except as provided in Section 805. "United States" means the United States of America (including the States and the District of Columbia), its territories, its possessions and other areas subject to its jurisdiction. 12 13 "Vice President", when used with respect to the Company, means any vice president, whether or not designated by a number or a word or words added before or after the title "vice president". "Wholly-owned Subsidiary" means any Subsidiary of which, at the time of determination, all of the outstanding voting stock (other than directors' qualifying shares) is owned by the Company, directly or indirectly. For purposes of this definition, "voting stock" has the same meaning as under the definition of "Subsidiary". SECTION 102. Compliance Certificates and Opinions. Upon any application or request by the Company to the Trustee to take any action under any provision of this Indenture, the Company shall furnish to the Trustee an Officers' Certificate stating that all conditions precedent, if any, provided for in this Indenture relating to the proposed action have been complied with and an Opinion of Counsel stating that in the opinion of such counsel all such conditions precedent, if any, have been complied with, except that in the case of any such application or request as to which the furnishing of such documents is specifically required by any provision of this Indenture relating to such particular application or request, no additional certificate or opinion need be furnished. Every certificate or opinion with respect to compliance with a condition or covenant provided for in this Indenture (other than annual certificates provided pursuant to Section 904) shall include: (1) a statement that each individual signing such certificate or opinion has read such covenant or condition and the definitions herein relating thereto; (2) a brief statement as to the nature and scope of the examination or investigation upon which the statements or opinions contained in such certificate or opinion are based; (3) a statement that, in the opinion of each such individual, he/she has made such examination or investigation as is necessary to enable him/her to express an informed opinion as to whether or not such covenant or condition has been complied with; and (4) a statement as to whether, in the opinion of each such individual, such condition or covenant has been complied with. SECTION 103. Form of Documents Delivered to Trustee. In any case where several matters are required to be certified by, or covered by an 13 14 opinion of, any specified Person, it is not necessary that all such matters be certified by, or covered by the opinion of, only one such Person, or that they be so certified or covered by only one document, but one such Person may certify or give an opinion with respect to some matters and one or more other such Persons as to other matters, and any such Person may certify or give an opinion as to such matters in one or several documents. Any certificate or opinion of an officer of the Company may be based, insofar as it relates to legal matters, upon a certificate or opinion of, or representations by, counsel, unless such officer knows, or in the exercise of reasonable care should know, that the certificate or opinion or representations with respect to the matters upon which his/her certificate or opinion is based are erroneous. Any such certificate or Opinion of Counsel may be based, insofar as it relates to factual matters, upon a certificate or opinion of, or representations by, an officer or officers of the Company stating that the information with respect to such factual matters is in the possession of the Company, unless such counsel knows, or in the exercise of reasonable care should know, that the certificate or opinion or representations with respect to such matters are erroneous. Where any Person is required to make, give or execute two or more applications, requests, consents, certificates, statements, opinions or other instruments under this Indenture, they may, but need not, be consolidated and form one instrument. SECTION 104. Acts of Holders. (1) Any request, demand, authorization, direction, notice, consent, waiver or other action provided by this Indenture to be given or taken by Holders may be embodied in and evidenced by one or more instruments of substantially similar tenor signed by such Holders in person or by agent duly appointed in writing; and, except as herein otherwise expressly provided, such action shall become effective when such instrument or instruments are delivered to the Trustee and, where it is hereby expressly required, to the Company. Such instrument or instruments (and the action embodied therein and evidenced thereby) are herein sometimes referred to as the "Act" of the Holders signing such instrument or instruments. Proof of execution of any such instrument or of a writing appointing any such agent shall be sufficient for any purpose of this Indenture and (subject to Section 601) conclusive in favor of the Trustee and the Company, if made in the manner provided in this Section. (2) The fact and date of the execution by any Person of any such instrument or writing may be proved by the affidavit of a witness of such execution or by a certificate of a notary public or other officer authorized by law to take acknowledgments of deeds, certifying that the individual signing such instrument or writing acknowledged to him the execution thereof. Where such execution is by a signer acting in a capacity other than his individual capacity, such certificate or 14 15 affidavit shall also constitute sufficient proof of his authority. The fact and date of the execution of any such instrument or writing, or the authority of the Person executing the same, may also be proved in any other manner which the Trustee deems sufficient. (3) The ownership of Securities shall be proved by reference to the Security Register. (4) Any request, demand, authorization, direction, notice, consent, waiver or other Act of the Holder of any Security shall bind every future Holder of the same Security and the Holder of every Security issued upon the registration of transfer thereof or in exchange therefor or in lieu thereof in respect of anything done, omitted or suffered to be done by the Trustee or the Company in reliance thereon, whether or not notation of such action is made upon such Security. (5) The Company may set a record date for purposes of determining the identity of Holders entitled to give any request, demand, authorization, direction, notice, consent, waiver or other Act which record date shall be the later of ten (10) days prior to the first solicitation of such action or the date of the most recent list of Holders furnished to the Trustee pursuant to Section 701 of this Indenture prior to such solicitation. If a record date is fixed, those persons who were Holders of Securities at such record date (or their duly designated proxies), and only those persons shall be entitled to take such action or to revoke any such previous action, whether or not such persons continue to be Holders after such record date. No such request, demand, authorization, direction, notice, consent, waiver or other Act shall be valid or effective for more than one hundred and twenty (120) days after such record date. SECTION 105. Notices, Etc., to Trustee and Company. Any request, demand, authorization, direction, notice, consent, waiver or Act of Holders or other document provided or permitted by this Indenture to be made upon, given or furnished to, or filed with, (1) the Trustee by any Holder or by the Company shall be sufficient for every purpose hereunder if made, given, furnished or filed in writing to or with the Trustee at its Corporate Trust Office, Attention: Corporate Trust Department, or (2) the Company by the Trustee or by any Holder shall be sufficient for every purpose hereunder (unless otherwise herein expressly provided) if in writing and mailed, first-class postage prepaid, to the Company addressed to it at the address of its principal office specified in the first paragraph of this instrument or at any other address previously furnished in writing, to the Trustee or Holders by the 15 16 Company. SECTION 106. Notice to Holders; Waiver. Where this Indenture provides for notice to Holders of any event, such notice shall be sufficiently given (unless otherwise herein expressly provided) if in writing and mailed, first-class postage prepaid, to each Holder affected by such event, at his address, as it appears in the Security Register, not later than the latest date, and not earlier than the earliest date, prescribed for the giving of such notice. In any case where notice to Holders is given by mail, neither the failure to mail such notice, nor any defect in any notice so mailed to any particular Holder shall affect the sufficiency of such notice with respect to other Holders. Where this Indenture provides for notice in any manner, such notice may be waived in writing by the Person entitled to receive such notice, either before or after the event, and such waiver shall be the equivalent of such notice. Waivers of notice by Holders shall be filed with the Trustee, but such filing shall not be a condition precedent to the validity of any action taken in reliance upon such waiver. In case by reason of the suspension of regular mail service or by reason of any other cause it shall be impracticable to give such notice by mail, then such notification as shall be made with the approval of the Trustee shall constitute a sufficient notification for every purpose hereunder. SECTION 107. Conflict with Trust Indenture Act. If any provision hereof limits, qualifies or conflicts with the duties imposed by any of Sections 310 to 317, inclusive, of the Trust Indenture Act through operation of Section 318(c) thereof, such imposed duties shall control. SECTION 108. Effect of Headings, Table of Contents, and Reconciliation and Tie. The Article and Section headings herein and the Table of Contents and Reconciliation and Tie are for convenience only and shall not affect the construction hereof. SECTION 109. Successors and Assigns. All covenants and agreements in this Indenture by the Company shall bind its successors and assigns, whether so expressed or not. SECTION 110. Separability Clause. In case any provision in this Indenture or in the Securities shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall 16 17 not in any way be affected or impaired thereby. SECTION 111. Benefits of Indenture. Nothing in this Indenture or in the Securities, express or implied, shall give to any Person, other than the parties hereto and their successors hereunder and the Holders, any benefit or any legal or equitable right, remedy or claim under this Indenture. SECTION 112. Governing Law. This Indenture and the Securities shall be governed by and construed in accordance with Federal law and with the laws of the State of Illinois. SECTION 113. Legal Holidays. In any case where any Redemption Date shall not be a Business Day, then (notwithstanding any other provision of this Indenture or of the Securities) payment of the redemption price need not be made on such date, but may be made on the next succeeding Business Day with the same force and effect as if made on the Redemption Date, provided that no interest shall accrue for the period from and after such Redemption Date. SECTION 114. Persons Deemed Owners. The Company, the Trustee and any agent of the Company or the Trustee may treat the Person in whose name such Security is registered as the owner of such Security for the purpose of receiving payment of principal of or interest on such Security and for all other purposes whatsoever, whether or not such Security be overdue, and neither the Company, the Trustee nor any agent of the Company or the Trustee shall be affected by notice to the contrary. ARTICLE TWO AMOUNT, PAYMENT AND RESTRICTION OF TRANSFER OF SECURITIES SECTION 201. Amount Limited. The Securities shall be issued pursuant to the Program and under this Indenture in a principal amount not to exceed the amount of Securities as stated in the Program's annual prospectus. SECTION 202. Payment. 17 18 The Securities shall be payable at the office or agency of the Agent Bank as may from time to time be designated in writing, maintained for such purpose in such coin or currency of the United States of America as at the time of payment is legal tender for the payment of public and private debts. SECTION 203. Restriction on Transfer of Securities. The Securities may not be transferred, in whole or in part, either directly or by operation of law or otherwise. ARTICLE THREE REDEMPTION OF SECURITIES SECTION 301. Redemption at Option of the Company. The Company may redeem, at any time in its discretion, all or any portion of the Securities issued pursuant to the Program and under this Indenture. Any partial redemption of the entirety of the Securities will be effected by lot or pro rata or by any other method that is deemed fair and appropriate by the Trustee. SECTION 302. Notice of Redemption. The Company will give prior written notice of at least thirty (30) days but not more than ninety (90) days to Holders whose Securities are subject to full or partial redemption. Such notice from the Company will specify the effective date of redemption, the amount being redeemed and the effective date the redeemed amount shall become due and payable and that interest shall cease to accrue as of that date. All partial redemption notices will list the remaining, principal amount of the Security. SECTION 303. Payment of Redemption Price. The full or partial Security being redeemed, plus accrued and unpaid interest therein to the date of redemption, shall be paid by check to the Holder. The Company covenants that it will pay or cause to be paid to the Trustee or to the Agent Bank or to another Paying Agent cash in an amount sufficient to pay the principal amount of the Security or portion thereof to be redeemed on such date, together with accrued and unpaid interest to the date fixed for redemption. Interest on the redeemed amount shall cease to accrue on and after the effective date the redeemed amount shall have become due and payable. SECTION 304. Redemption of Securities if Holder is Not Eligible to Participate in the Program. 18 19 The Company also may redeem, at any time in its sole and absolute discretion, any Security issued pursuant to the Program and under this Indenture held in an Account not meeting guidelines established by the TruServ Investment Program Committee. Notice of such redemption will be given in the manner provided in Section 302, and payment of the redemption price shall be made as provided in Section 303. SECTION 305. Redemption at Option of the Holder. Subject to the terms and conditions of the Program, a Security may be redeemed in full or in part at any time at the option of, and upon demand by, the Holder. Subject to the terms and conditions of the Program, demand may be made for full or partial redemption of a Security by written demand to the Agent Bank. The Company covenants that it will pay or cause to be paid to the Trustee or to the Agent Bank or to another paying Agent cash in an amount sufficient to pay the principal of the Security to be redeemed. ARTICLE FOUR SATISFACTION AND DISCHARGE OF INDENTURE SECTION 401. Satisfaction and Discharge of Indenture. If at any time: (1) the Company shall have terminated the Program pursuant to its provisions, (2) all the Securities shall have become due and payable, (3) the Company shall have deposited or caused to be deposited with the Trustee as trust funds the entire amount (other than moneys repaid by any Paying Agent to the Trustee in accordance with Section 403) sufficient to pay all the Securities, including principal and interest due or to become due to such date of payment, and (4) the Company shall have paid or caused to be paid all other sums payable hereunder by the Company, then this Indenture shall cease to be of further effect, and the Trustee, on demand of and at the cost and expense of the Company shall execute proper instruments acknowledging satisfaction of and discharge of this Indenture. The Company agrees to reimburse the Trustee for any costs or expenses thereafter reasonably and properly incurred by the Trustee in connection with this Indenture, the Program or the Securities. 19 20 SECTION 402. Application of Trust Money. All moneys deposited with the Trustee pursuant to Section 401 shall be held in trust and applied by it to the payment, either directly or through any Paying Agent (including the Company acting as its own Paying Agent), to the Holders of the Securities for the payment of which such moneys have been deposited with the Trustee of all sums due and to become due thereon for principal and interest. The Trustee shall be under no obligation to invest or pay interest on any moneys so held in trust. SECTION 403. Repayment by Paying Agents. In connection with the satisfaction and discharge of this Indenture all moneys then held by any Paying Agent under the provisions of this Indenture shall, upon demand of the Company, be repaid to it or paid to the Trustee and thereupon such Paying Agent shall be released from all further liability with respect to such moneys. ARTICLE FIVE REMEDIES SECTION 501. Events of Default. "Events of Default", means any one of the following events (whatever the reason for such Event of Default and whether it shall be voluntary or involuntary or be effected by operation of law or pursuant to any judgment, decree or order of any court or any order, rule or regulation of any administrative or governmental body): (1) default in the payment of any part of or all the principal of or interest on any Security as and when the same shall be due and payable, in accordance with the then current provisions and rules and regulations of the Program and this Indenture, and continuance of such default for a period of twenty (20) days; provided, however, that: (a) the failure of the Company to make any payment of the principal of or interest on any Security, or any delay in making such payment shall not be considered in determining whether an "Event of Default" shall have occurred if: (i) the Trustee believes in good faith that the Security is subject to a conflicting claim, attachment, lien or proceeding, or any person demanding such payment is not, or may not be, legally entitled thereto, or the amount of the payment demanded exceeds the principal amount of the Security according to the Security Register, or the demand for payment has not been made in accordance with 20 21 the then current provisions and rules and regulations of the Program, or the payment cannot be made in accordance with the then currentprovisions and rules and regulations of the Program, or (ii) the Company shall have paid over to the Trustee for deposit to an account not subject to offset, charge or encumbrance by the Trustee the amount of the principal of or interest on any Security which has become due and payable, and if requested by the Trustee the Company shall have furnished the Trustee with an Officer's Certificate as to the matters described in the foregoing clauses (i) and (ii); and (b) an administrative error relating to a Security or improperly identifying the Security of a Holder shall not be considered in determining whether an "Event of Default" shall have occurred unless such error shall have continued uncorrected for a period of sixty (60) days after written notification thereof to the Agent Bank or the Trustee by a Holder, the Trustee to be the sole judge of whether the error has been corrected (the above enumeration of specific examples of situations which shall not be considered in determining whether an "Event of Default" shall have occurred shall not be exclusive, and the Trustee may determine in any particular instance and, absence bad faith, shall incur no liability to any person in so determining whether the circumstances concerning a particular Security should be considered in determining whether an "Event of Default" shall have occurred); or (2) default in the performance, or breach, of any covenant or warranty of the Company in this Indenture (other than a covenant or warranty a default in whose performance or whose breach is elsewhere in this Section specifically dealt with), and continuance of such default or breach for a period of sixty (60) days after there has been given, by registered or certified mail, to the Company by the Trustee or to the Company and the Trustee by the Holders of at least twenty-five per cent (25%) in principal amount of the Outstanding Securities a written notice specifying such default or breach and requiring it to be remedied and stating that such notice is a "Notice of Default" hereunder; or (3) the entry by a court having jurisdiction in the premises of: (a) a decree or order for relief in respect of the Company in an involuntary case or proceeding under any applicable Federal or State bankruptcy, insolvency, reorganization or other similar law or (b) a decree or order adjudging the Company a bankrupt or insolvent, or 21 22 approving as properly filed a petition seeking reorganization, arrangement, adjustment or composition of or in respect of the Company under any applicable Federal or State law, or appointing a custodian, receiver, liquidator, assignee, trustee, sequestrator or other similar official of the Company or of any substantial part of its property, or ordering the winding up or liquidation of its affairs, and the continuance of any such decree or order for relief or any such other decree or order unstayed and in effect for a period of sixty (60) consecutive days; or (4) the commencement by the Company of a voluntary case or proceeding under any applicable Federal or State bankruptcy, insolvency, reorganization or other similar law or of any other case or proceeding to be adjudicated a bankrupt or insolvent, or the consent by it to the entry of a decree or order for relief in respect of the Company in an involuntary case or proceeding under any applicable Federal or State bankruptcy, insolvency, reorganization or other similar law or to the commencement of any bankruptcy or insolvency case or proceeding against it, or the filing by it of a petition or answer or consent seeking reorganization or relief under any applicable Federal or State law, or the consent by it to the filing of such petition or to the appointment of or taking possession by a custodian, receiver, liquidator, assignee, trustee, sequestrator or similar official of the Company or of any substantial part of its property, or the making by it of an assignment for the benefit of creditors, or the admission by it in writing of its inability to pay its debts generally as they become due, or the taking of corporate action by the Company in furtherance of any such action; or (5) in connection with any proceeding under any law relating to bankruptcy, insolvency or reorganization or relief of debtors, involving the Company or one of its Subsidiaries an order for relief shall be entered by a court of competent jurisdiction which affects any significant part of the assets of the Company or any of its Subsidiaries. SECTION 502. Acceleration of Maturity; Rescission and Annulment. If an Event of Default with respect to the Securities occurs and is continuing, then in every such case the Trustee or the Holders of not less than fifty percent (50%) in the principal amount of the Outstanding Securities may declare all of the Securities to be due and payable immediately, by a notice in writing to the Company (and to the Trustee if given by Holders), and upon any such declaration such principal amount shall become immediately due and payable. At any time after such a declaration of acceleration with respect to the Securities has been made and before a judgment or decree for payment of the money due has been 22 23 obtained by the Trustee as hereinafter in this Article provided, the Holders of a majority in principal amount of the Outstanding Securities, by written notice to the Company and the Trustee, may rescind and annul such declaration and its consequences if: (1) the Company has paid or deposited with the Trustee a sum sufficient to pay (a) the principal of any Securities which have become due otherwise than by such declaration of acceleration and interest thereon at the rate or rates prescribed therefor in such Securities; (b) to the extent that payment of such interest is lawful, interest upon overdue interest at the rate or rates prescribed therefor in such Securities, and (c) all sums paid or advanced by the Trustee hereunder and the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel; and (2) all Events of Default with respect to the Securities, other than the non-payment of the principal of Securities which have become due solely by such declaration of acceleration, have been cured or waived as provided in Section 513. No such rescission shall affect any subsequent default or impair any right consequent thereon. SECTION 503. Collection of Indebtedness and Suits for Enforcement by Trustee. The Company covenants that if default is made in the payment of the principal of or interest on any Security when the same shall have become due and payable the Company will, upon demand of the Trustee, pay to it, for the benefit of the Holders of such Securities, the whole amount then due and payable on such Securities for principal and interest and, to the extent that payment of such interest shall be legally enforceable, interest on any overdue principal and on any overdue interest, at the rate or rates prescribed therefor in such Securities, and, in addition thereto, such further amount as shall be sufficient to cover the costs and expenses of collection, including the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel. If the Company fails to pay such amounts forthwith upon such demand, the Trustee, in its own name and as trustee of an express trust, may institute a judicial proceeding for the collection of the sums so due and unpaid, may prosecute such proceeding to judgment or final decree and may enforce the same against the Company or any other obligor upon such Securities and collect the moneys adjudged or decreed to be payable in the manner 23 24 provided by law out of the property of the Company or any other obligor upon such Securities, wherever situated. If an Event of Default with respect to the Securities occurs and is continuing, the Trustee may in its discretion proceed to protect and enforce its rights and the rights of the Holders of the Securities by such appropriate judicial proceedings as the Trustee shall deem most effectual to protect and enforce any such rights, whether for the specific enforcement of any covenant or agreement in this Indenture or in aid of the exercise of any power granted herein, or to enforce any other proper remedy. SECTION 504. Trustee May File Proofs of Claim. In case of the pendency of any receivership, insolvency, liquidation, bankruptcy, reorganization, arrangement, adjustment, composition or other judicial proceeding relative to the Company or any other obligor upon the Securities or the property of the Company or of such other obligor or their creditors, the Trustee (irrespective of whether the principal of the Securities shall then be due and payable as therein expressed or by declaration or otherwise and irrespective of whether the Trustee shall have made any demand on the Company for the payment of overdue principal or interest) shall be entitled and empowered, by intervention in such proceeding or otherwise: (1) to file and prove a claim for the whole amount of principal and interest owing and unpaid in respect of the Securities and to file such other papers or documents as may be necessary or advisable in order to have the claims of the Trustee (including any claim for the reasonable compensation, expenses, disbursements and advances of the Trustee and any predecessor Trustee, their agents and counsel) and of the Holders allowed in such judicial proceeding, and (2) to collect and receive any moneys or other property payable or deliverable on any such claims and to distribute the same; and any custodian, receiver, assignee, trustee, liquidator, sequestrator or other similar official in any such judicial proceeding is hereby authorized by each Holder to make such payments to the Trustee and, in the event that the Trustee shall consent to the making of such payments directly to the Holders, to pay to the Trustee any amount due it for the reasonable compensation, expenses, disbursements and advances of the Trustee and any predecessor Trustee, their agents and counsel, and any other amounts due the Trustee and any predecessor Trustee under Section 607. Nothing herein contained shall be deemed to authorize the Trustee to authorize or consent to or accept or adopt on behalf of any Holder any plan of reorganization, arrangement, adjustment or composition affecting the Securities or the rights of any Holder thereof or to authorize the Trustee to vote in respect of the claim of any Holder in any such 24 25 proceeding. SECTION 505. Trustee May Enforce Claim Without Possession of Securities. All rights of action and claims under this Indenture or the Securities may be prosecuted and enforced by the Trustee without the possession of any of the Securities or the production thereof in any proceeding relating thereto, and any such proceeding instituted by the Trustee shall be brought in its own name as trustee of an express trust, and any recovery of judgment shall, after provision for the payment of the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel, be for the ratable benefit of the Holders of the Securities. SECTION 506. Application of Money Collected. Any money collected by the Trustee pursuant to this Article shall be applied in the following order, at the date or dates fixed by the Trustee: FIRST: To the payment of all amounts due the Trustee and any predecessor Trustee under Section 607; and SECOND: To the payment of the amounts then due and unpaid for principal of and interest on the Securities in respect of which or for the benefit of which such money has been collected, ratably, without preference or priority of any kind, according to the amounts due and payable on such Securities for principal and interest, respectively. SECTION 507. Limitation on Suits. No Holder of any Security shall have any right to institute any proceeding, judicial or otherwise, with respect to this Indenture, or for the appointment of a receiver or trustee, or for any other remedy hereunder, unless: (1) such Holder has previously given written notice to the Trustee of a continuing Event of Default with respect to the Securities; (2) the Holders of not less than fifty percent (50%) in principal amount of the Outstanding Securities shall have made written request to the Trustee to institute proceedings in respect of such Event of Default in its own name as Trustee hereunder; (3) such Holder or Holders have offered to the Trustee reasonable indemnity against the costs, expenses and liabilities to be incurred in compliance with such request; (4) the Trustee for sixty (60) days after its receipt of such notice, request and offer of indemnity has failed to institute any such proceeding; and 25 26 (5) no direction inconsistent with such written request has been given to the Trustee during such sixty (60) day period by the Holders of a majority in principal amount of the Outstanding Securities; it being understood and intended that no one or more of such Holders shall have any right in any manner whatever by virtue of, or by availing of, any provision of this Indenture to affect, disturb or prejudice the rights of any other of such Holders, or to obtain or to seek to obtain priority or preference over any other of such Holders or to enforce any right under this Indenture, except in the manner herein provided and for the equal and ratable benefit of all such Holders. SECTION 508. Unconditional Right of Holders to Receive Principal, Premium and Interest. Notwithstanding any other provision in this Indenture, the Holder of any Security shall have the right, which is absolute and unconditional, to receive payment of the principal of and interest on such Security on the applicable due date provided therefor pursuant to the Program (or, in the case of redemption, on the redemption date) and to institute suit for the enforcement of any such payment, and such rights shall not be impaired without the consent of such Holder. SECTION 509. Restoration of Rights and Remedies. If the Trustee or any Holder has instituted any proceeding to enforce any right or remedy under this Indenture and such proceeding has been discontinued or abandoned for any reason, or has been determined adversely to the Trustee or to such Holder, then and in every such case, subject to any determination in such proceeding, the Company, the Trustee and the Holders shall be restored severally and respectively to their former positions hereunder and thereafter all rights and remedies of the Trustee and the Holders shall continue as though no such proceeding had been instituted. SECTION 510. Rights and Remedies Cumulative. No right or remedy herein conferred upon or reserved to the Trustee or to the Holders is intended to be exclusive of any other right or remedy, and every right and remedy shall, to the extent permitted by law, be cumulative and in addition to every other right and remedy given hereunder or now or hereafter existing at law or in equity or otherwise. The assertion or employment of any right or remedy hereunder, or otherwise, shall not prevent the concurrent assertion or employment of any other appropriate right or remedy. SECTION 511. Delay or Omission Not Waiver. No delay or omission of the Trustee or of any Holder of any Securities to exercise 26 27 any right or remedy acting upon any Event of Default shall impair any such right or remedy or constitute a waiver of any such Event of Default or an acquiescence therein. Every right and remedy given by this Article or by law to the Trustee or to the Holders may be exercised from time to time, and as often as may be deemed expedient, by the Trustee or by the Holders, as the case may be. SECTION 512. Control by Holders. The Holders of a majority in principal amount of the Outstanding Securities shall have the right to direct the time, method and place of conducting any proceeding for any remedy available to the Trustee, or exercising any trust or power conferred on the Trustee with respect to the Securities, provided that (1) such direction shall not be in conflict with any rule of law or with this Indenture, (2) subject to Section 601, the Trustee shall have the right to decline to follow any such direction if the Trustee shall reasonably determine, in good faith, that the action or proceeding so directed would be unjustly prejudicial to any Holders not joining in such direction or would involve the Trustee in any personal liability unless indemnified to its reasonable satisfaction, and (3) the Trustee may take any other action deemed proper by the Trustee which is not inconsistent with such direction. SECTION 513. Waiver of Past Defaults. The Holders of not less than a majority in principal amount of the Outstanding Securities may on behalf of the Holders of all the Securities waive any past default hereunder and its consequences, except a default: (1) in the payment of the principal of or interest on any Security, or (2) in respect of a covenant or provision hereof which under Article Eight cannot be modified or amended without the consent of the Holders of each Outstanding Security affected. Upon any such waiver, such default shall cease to exist, and any Event of Default arising therefrom shall be deemed to have been cured, for every purpose of this Indenture; but no such waiver shall extend to any subsequent or other default or impair any right consequent thereon. 27 28 SECTION 514. Undertaking for Costs. All Parties to this Indenture agree, and each Holder of any Security by his acceptance thereof shall be deemed to have agreed, that any court may in its discretion require, in any suit for the enforcement of any right or remedy under this Indenture, or in any suit against the Trustee for any action taken, suffered or omitted by it as Trustee, the filing by any party litigant in such suit of an undertaking to pay the costs of such suit, and that such court may in its discretion assess reasonable costs, including reasonable attorneys' fees, against any party litigant in such suit, having due regard to the merits and good faith of the claims or defenses made by such party litigant; but the provisions of this Section shall not apply to any suit instituted by the Company, to any suit instituted by the Trustee, to any suit instituted by any Holder, or group of Holders, holding in the aggregate more than ten percent (10%) in principal amount of the Outstanding Securities, or to any suit instituted by any Holder for the enforcement of the payment of the principal of or interest on the Security on or after the applicable due date therefor provided pursuant to the Program (or, in the case of redemption, on or after, the Redemption Date). SECTION 515. Waiver of Stay or Extension Laws. The Company covenants (to the extent that it may lawfully do so) that it will not at any time insist upon, or plead, or in any manner whatsoever claim or take the benefit or advantage of, any stay or extension law wherever enacted, now or any time hereafter in force, which may affect the covenants or the performance of this Indenture; and the Company (to the extent that it may lawfully do so) hereby expressly waives all benefit or advantage of any such law and covenants that it will not hinder, delay or impede the execution of any power herein granted to the Trustee, but will suffer and permit the execution of every such power as though no such law had been enacted. ARTICLE SIX THE TRUSTEE SECTION 601. Certain Duties and Responsibilities. (1) Except during the continuance of an Event of Default, (a) the Trustee undertakes to perform such duties and only such duties as are specifically set forth in this Indenture, and no implied covenants or obligations shall be read into this Indenture against the Trustee; and (b) in the absence of bad faith on its part, the Trustee may conclusively rely, as to the truth of the statements and the correctness of the opinions expressed therein, upon certificates or opinions furnished to the Trustee and 28 29 conforming to the requirements of the Indenture; but in the case of any such certificates or opinions which by any provision hereof are specifically required to be furnished to the Trustee, the Trustee shall be under a duty to examine the same to determine whether or not they conform to the requirements of this Indenture. (2) In case an Event of Default has occurred and is continuing, the Trustee shall exercise such of the rights and powers vested in it by this Indenture, and use the same degree of care and would in their exercise, as a prudent person would exercise or use under the circumstances in the conduct of his/her own affairs. (3) No provision of this Indenture shall be construed to relieve the Trustee from liability for its own negligent action, its own negligent failure to act, or its own wilful misconduct, except that (a) this Subsection shall not be construed to limit the effect of Subsection (1) of this Section; (b) the Trustee shall not be liable for any error of judgment made in good faith by a Responsible Officer, unless it shall be proved that the Trustee was negligent in ascertaining the pertinent facts; (c) the Trustee shall not be liable with respect to any action taken or omitted to be taken by it in good faith in accordance with the direction of the Holders of a majority in principal amount of the Outstanding Securities, determined as provided in Section 512, relating to the time, method and place of conducting any proceeding for any remedy available to the Trustee, or exercising any trust or power conferred upon the Trustee, under this Indenture with respect to the Securities; and (d) no provision of this Indenture shall require the Trustee to expend or risk its own funds or otherwise incur any financial liability in the performance of any of its duties hereunder, or in the exercise of any of its rights or powers, if it shall have reasonable grounds for believing that repayment of such funds or adequate indemnity against such risk or liability is not reasonably assured to it. (4) Whether or not therein expressly so provided, every provision of this Indenture relating to the conduct or affecting the liability of or affording protection to the Trustee shall be subject to the provisions of this Section. SECTION 602. Notice of Defaults. 29 30 Within ninety (90) days after the occurrence of any default hereunder with respect to the Securities, the Trustee shall transmit by mail to all Holders of Securities, as their names and addresses appear in the Security Register, notice of such default hereunder known to the Trustee, unless such default shall have been cured or waived; provided, however, that, except in the case of a default in the payment of the principal of or interest on any Security, the Trustee shall be protected in withholding such notice if and so long as the board of directors, the executive committee or a trust committee of directors or Responsible Officers of the Trustee in good faith determine that the withholding of such notice is in the interest of the Holders of Securities; and provided, further, that in the case of any default of the character specified in Section 501(3) with respect to the Securities, no such notice to Holders shall be given until at least thirty (30) days after the occurrence thereof. For the purpose of this Section, the term "default" means any event which is, or after notice or lapse of time or both would become, an Event of Default. SECTION 603. Certain Rights of Trustee. Subject to the provisions of Section 601: (1) the Trustee may rely and shall be protected in acting or refraining from acting upon any resolution, certificate, statement, instrument, opinion, report, notice, request, direction, consent, order, bond, debenture, note, other evidence of indebtedness or other paper or document believed to be genuine and to have been signed or presented by the proper party or parties; (2) any request or direction of the Company mentioned herein shall be sufficiently evidenced by a Company Request or Company Order and any resolution of the Board of Directors may be sufficiently evidenced by a Board Resolution; (3) whenever in the administration of this Indenture the Trustee shall deem it desirable that a matter be proved or established prior to taking, suffering or omitting any action hereunder, the Trustee (unless other evidence be herein specifically prescribed) may, in the absence of bad faith on its part, rely upon an Officers' Certificate; (4) the Trustee may consult with counsel and the written advice, or oral advice subsequently confirmed in writing, of such counsel or any Opinion of Counsel shall be full and complete authorization and protection in respect of any action taken, suffered or omitted by it hereunder in good faith and in reliance thereon; (5) the Trustee shall be under no obligation to exercise any of the rights or powers vested in it by this Indenture at the request or direction of any of the Holders pursuant to this Indenture, unless such Holders shall have offered to the Trustee 30 31 reasonable security or indemnity against the costs, expenses and liabilities which might be incurred by it in compliance with such request or direction; (6) the Trustee shall not be bound to make any investigation into the facts or matters stated in any resolution, certificate, statement, instrument, opinion, report, notice, request, direction, consent, order, bond, debenture, note, other evidence of indebtedness or other paper or document, but the Trustee, in its discretion, may make such further inquiry or investigation into such facts or matters as it may see fit, and, if the Trustee shall determine to make such further inquiry or investigation, it shall be entitled to examine the books, records and premises of the Company, personally or by agent or attorney; (7) the Trustee may execute any of the trusts or powers hereunder or perform any duties hereunder either directly or by or through agents or attorneys and the Trustee shall not be responsible for any misconduct or negligence on the part of any agent or attorney appointed with due care by it hereunder; and (8) the Trustee shall not be liable for any action taken, suffered or omitted by it in good faith and believed by it to be authorized or within the discretion or rights or powers conferred upon it by the Indenture. SECTION 604. Not responsible for Recitals or Issuance of Securities. The recitals contained herein shall be taken as the statements of the Company, and the Trustee assumes no responsibility for their correctness. The Trustee makes no representations as to the validity or sufficiency of this Indenture or of the Securities. The Trustee shall not be accountable for the use or application by the Company of securities or the proceeds thereof. SECTION 605. May Hold Securities. Subject to the provisions of the Program with respect to Persons who may hold Securities, the Trustee, the Agent Bank, any Paying Agent, any Security Registrar or any other agent of the Company, in its individual or any other capacity, may become the owner of Securities and, subject to Sections 608 and 613, may otherwise deal with the Company with the same rights it would have if it were not Trustee, Agent Bank, Paying Agent, Security Registrar or such other agent. SECTION 606. Money Held in Trust. Money held by the Trustee in trust hereunder need not be segregated from other funds except to the extent required by law. The Trustee shall be under no liability for interest on any money received by it hereunder except as otherwise agreed with the 31 32 Company SECTION 607. Compensation and Reimbursement. The Company agrees: (1) to pay to the Trustee from time to time reasonable compensation for all services rendered by it hereunder (which compensation shall not be limited by any provision of law in regard to the compensation of a trustee of an express trust); (2) except as otherwise expressly provided herein, to reimburse the Trustee upon its request for all reasonable expenses, disbursements and advances incurred or made by the Trustee in accordance with any provision of this Indenture (including the reasonable compensation and the expenses and disbursements of its agents and counsel), except any such expense, disbursement or advance as may be attributable to its negligence or bad faith or willful misconduct; and (3) to indemnity each of the Trustee and any predecessor Trustee for, and to hold it harmless against, any loss, liability or expense incurred without negligence, bad faith or willful misconduct, on Trustee's or any predecessor Trustee's part, arising out of or in connection with the acceptance or administration of the trust or trusts hereunder or the performance of their duties hereunder, including the costs and expenses of defending itself against any claim or liability in connection with the exercise or performance of any of its powers or duties hereunder. SECTION 608. Disqualification; Conflicting Interests. The Trustee shall be subject to the provisions of Section 310(b) of the Trust Indenture Act during the period of time provided for therein. Nothing herein shall prevent the Trustee from filing with the Commission the application referred to in the second-to-last paragraph of Section 310(b) of the Trust Indenture Act. SECTION 609. Corporate Trustee Required; Eligibility. There shall at all times be a Trustee hereunder which shall be a corporation organized and doing business under the laws of the United States of America, any State thereof or the District of Columbia, authorized under such laws to exercise corporate trust powers, having a combined capital and surplus of at least $50,000,000, subject to supervision or examination by Federal or State authority; provided, however, that if Section 310(a) of the Trust Indenture Act or the rules and regulations of the Commission under the Trust Indenture Act at any time permit a corporation organized and doing business under the laws of any other jurisdiction to serve as trustee of an indenture qualified under the Trust Indenture Act, this Section 609 shall be automatically amended to permit a 32 33 corporation organized and doing business under the laws of any such other jurisdiction to serve as Trustee hereunder. If such corporation publishes reports of condition at least annually, pursuant to law or to the requirements of said supervising or examining authority, then for the purposes of this Section, the combined capital and surplus of such corporation shall be deemed to be its combined capital and surplus as set forth in its most recent report of condition so published. Neither the Company nor any person directly or indirectly controlling, controlled by or under common control with the Company may serve as Trustee. If at any time the Trustee shall cease to be eligible in accordance with the provisions of this Section, it shall resign immediately in the manner and with the effect hereinafter specified in this Article. SECTION 610. Resignation and Removal; Appointment of Successor. (1) No resignation or removal of the Trustee and no appointment of a successor Trustee pursuant to this Article shall become effective until the acceptance of appointment by the successor Trustee in accordance with the applicable requirements of Section 611. (2) The Trustee may resign at any time with respect to the Securities by giving written notice thereof to the Company. If the instrument of acceptance by a successor Trustee required by Section 611 shall not have been delivered to the Trustee within thirty (30) days after the giving of such notice of resignation, the resigning Trustee may petition any court of competent jurisdiction for the appointment of a successor Trustee with respect to the Securities of such series. (3) The Trustee may be removed at any time with respect to the Securities by Act of the Holders of a majority in principal amount of the Outstanding Securities, delivered to the Trustee and to the Company. (4) If at any time: (a) the Trustee shall fail to comply with Section 608 after written request therefor by the Company or by any Holder who has been a bona fide Holder of a Security for at least six (6) months, unless the Trustee's duty to resign has been stayed as provided in Section 310(b) of the Trust Indenture Act, or (b) the Trustee shall cease to be eligible under Section 609 and shall fail to resign after written request therefor by the Company or by any such Holder, or (c) the Trustee shall become incapable of acting or shall be adjudged a bankrupt or insolvent or a receiver of the Trustee or of its property shall be appointed or any public officer shall take charge or control of the Trustee or 33 34 of its property or affairs for the purpose of rehabilitation, conservation or liquidation, then, in any case, (i) the Company by a Board Resolution may remove the Trustee with respect to all Securities, or (ii) subject to Section 514, any Holder who has been a bona fide Holder of a Security for at least six (6) months may, on behalf of himself and all others similarly situated, petition any court of competent jurisdiction for the removal of the Trustee with respect to all Securities and the appointment of a successor Trustee or Trustees. (5) If the Trustee shall resign, be removed or become incapable of acting, or if a vacancy shall occur in the office of Trustee for any cause, the Company, by a Board Resolution, shall promptly appoint a successor Trustee and shall comply with the applicable requirements of Section 611. If, within one (1) year after such resignation, removal or incapability, or the occurrence of such vacancy, a successor Trustee shall be appointed by Act of the Holders of a majority in principal amount of the Outstanding Securities delivered to the Company and the retiring Trustee, the successor Trustee so appointed shall, forthwith upon its acceptance of such appointment in accordance with the applicable requirements of Section 611, become the successor Trustee and to that extent supersede the successor Trustee appointed by the Company. If no successor Trustee shall have been so appointed by the Company or the Holders and accepted appointment in the manner required by Section 611, any Holder who has been a bona fide Holder of a Security for at least six (6) months may, on behalf of himself and all others similarly situated, petition any court of competent jurisdiction for the appointment of a successor Trustee. (6) The Company shall give notice of each resignation and each removal of the Trustee and each appointment of a successor Trustee by mailing written notice of such event by first-class mail, postage prepaid, to all Holders of Securities as their names and addresses appear in the Security Register. Each notice shall include the name of the successor Trustee and the address of its Corporate Trust Office. SECTION 611. Acceptance of Appointment by Successor. (1) In case of the appointment hereunder of a successor Trustee, every such successor Trustee so appointed shall execute, acknowledge and deliver to the Company and to the retiring Trustee an instrument accepting such appointment, and thereupon the resignation or removal of the retiring Trustee shall become effective and such successor Trustee, without any further act, deed or conveyance, shall become vested with all the rights, powers, trusts and duties of the retiring Trustee; but, on the request of the Company or the successor Trustee, such retiring Trustee shall, upon payment of its charges, execute and deliver an instrument 34 35 transferring to such successor Trustee all the rights, powers and trusts of the retiring Trustee and shall duly assign, transfer and deliver to such successor Trustee all property and money held by such retiring Trustee hereunder. (2) Upon request of any such successor Trustee, the Company shall execute any and all instruments for more fully and certainly vesting in and confirming to such successor Trustee all such rights, powers and trusts referred to in paragraph (1) of this Section. (3) No successor Trustee shall accept its appointment unless at the time of such acceptance such successor Trustee shall be qualified and eligible under this Article. SECTION 612. Merger, Conversion, Consolidation or Succession to Business. Any corporation into which the Trustee may be merged or converted or with which it may be consolidated, or any corporation resulting from any merger, conversion or consolidation to which the Trustee shall be a party, or any corporation succeeding to all or substantially all the corporate trust business of the Trustee, shall be the successor of the Trustee hereunder, provided such corporation shall be otherwise qualified and eligible under this Article, without the execution or filing of any paper or any further act on the part of any of the parties hereto. SECTION 613. Preferential Collection of Claim Against Company. (1) Subject to Subsection (2) of this Section, if the Trustee shall be or shall become a creditor, directly or indirectly, secured or unsecured, of the Company in its capacity as trustee within three (3) months prior to a default, as defined in Subsection (3) of this Section, or subsequent to such a default, then, unless and until such default shall be cured, the Trustee shall set apart and hold in a special account for the benefit of the Trust individually, the Holders of the Securities and the holders of other indenture securities, as defined in Subsection (3) of this Section: (a) an amount equal to any and all reductions in the amount due and owing upon any claim as such creditor in respect of principal or interest, effected after the beginning of such three (3) months' period and valid as against the Company and its other creditors, except any such reduction resulting from the receipt or disposition of any property described in paragraph (b) of this Subsection, or from the exercise of any right of set-off which the Trustee could have exercised if a petition in bankruptcy had been filed by or against the Company upon the date of such default; and 35 36 (b) all property received by the Trustee in respect of any claims as such creditor, either as security therefor, or in satisfaction or composition thereof, or otherwise, after the beginning of such three (3) months' period, or an amount equal to the proceeds of any such property, if disposed of, subject, however, to the rights, if any, of the Company and its other creditors in such property or such proceeds. Nothing herein contained, however, shall affect the right of the Trustee: (c) to retain for its own account (i) payments made on account of any such claim by any Person (other than the Company) who is liable thereon, and (ii) the proceeds of the bona fide sale of any such claim by the Trustee to a third Person, and (iii) distributions made in cash, securities or other property in respect of claims filed against the Company in bankruptcy or receivership or in proceedings for reorganization pursuant to the Federal Bankruptcy Code or applicable State law; (d) to realize, for its own account, upon any property held by it as security for any such claim, if such property was so held prior to the beginning of such three (3) months' period; (e) to realize, for its own account, but only to the extent of the claim hereinafter mentioned, upon any property held by it as security for any such claim, if such claim was created after the beginning of such three (3) months' period and such property was received as security therefor simultaneously with the creation thereof, and if the Trustee shall sustain the burden of proving that at the time such property was received the Trustee had no reasonable cause to believe that a default, as defined in Subsection (3) of this Section, would occur within three (3) months; or (f) to receive payment on any claim referred to in paragraph (d) or (e), against the release of any property held as security for such claim as provided in paragraph (d) or (e), as the case may be, to the extent of the fair value of such property. For the purposes of paragraphs (d), (e) and (f), property substituted after the beginning of such three (3) months' period for property held as security at the time of such substitution shall, to the extent of the fair value of the property released, have the same status as the property released, and, to the extent that any claim referred to in any of such paragraphs is created in renewal of or in substitution for or for the purpose of repaying or refunding any preexisting claim of the Trustee as such creditor, such claim shall have the same status as such preexisting claim. 36 37 If the Trustee shall be required to account, the funds and property held in such special account and the proceeds thereof shall be apportioned among the Trustee, the Holders and the holders of other indenture securities in such manner that the Trustee, the Holders and the holders of other indenture securities realize, as a result of payments from such special account and payments of dividends on claims filed against the Company in bankruptcy or receivership or in Proceedings for reorganization pursuant to the Federal Bankruptcy Code or applicable State law, the same percentage of their respective claims, figured before crediting to the claim of the Trustee anything on account of the receipt by it from the Company of the funds and property in such special account and before crediting to the respective claims of the Trustee and the Holders and the holders of other indenture securities dividends on claims filed against the Company in bankruptcy or receivership or in proceedings for reorganization pursuant to the Federal Bankruptcy Code or applicable State law, but after crediting thereon receipts on account of the indebtedness represented by their respective claims from all sources other than from such dividends and from the funds and property so held in such special account. As used in this paragraph, with respect to any claim, the term "dividends" shall include any distribution with respect to such claim, in bankruptcy or receivership or proceedings for reorganization pursuant to the Federal Bankruptcy Code or applicable State law, whether such distribution is made in cash, securities or other property, but shall not include any such distribution with respect to the secured portion, if any, of such claim. The court, in which such bankruptcy, receivership or proceedings for reorganization is pending shall have jurisdiction (i) to apportion among the Trustee, the Holders and the holders of other indenture securities, in accordance with the provisions of this paragraph, the funds and property held in such Special account and proceeds thereof, or (ii) in lieu of such apportionment, in whole or in part, to give to the provisions of this paragraph due consideration in determining the fairness of the distributions to be made to the Trustee and the Holders and the holders of other indenture securities with respect to their respective claims, in which event it shall not be necessary to liquidate or to appraise the value of any securities or other property held in such special account or as security for any such claim, or to make a specific allocation of such distributions as between the secured and unsecured portions of such claims, or otherwise to apply the provisions of this paragraph as a mathematical formula. Any Trustee which has resigned or been removed after the beginning of such three (3) months' period shall be subject to the provisions of this Subsection (1) as though such resignation or removal had not occurred. If any Trustee has resigned or been removed prior to the beginning of such three (3) months' period, it shall be subject to the provisions of this Subsection (1) if and only if the following conditions exist: (g) the receipt of property or reduction of claim, which would have given rise to the obligation to account, if such Trustee had continued as Trustee, 37 38 occurred after the beginning of such three (3) months' period; and (h) such receipt of property or reduction of claim occurred within (3) three months after such resignation or removal. (2) There shall be excluded from the operation of Subsection (1) of this Section a creditor relationship arising from: (a) the ownership or acquisition of securities issued under any indenture, or any security or securities having a maturity of one (1) year or more at the time of acquisition by the Trustee; (b) advances authorized by a receivership or bankruptcy court of competent jurisdiction or by this Indenture, for the purpose of preserving any property which shall at any time be subject to the lien of this Indenture or of discharging tax liens or other prior liens or encumbrances thereon, if notice of such advances and of the circumstances surrounding the making thereof is given to the Holders at the time and in the manner provided in this Indenture; (c) disbursements made in the ordinary course of business in the capacity of trustee under an indenture, transfer agent, registrar, custodian, Paying Agent, fiscal agent or depositary, or other similar capacity; (d) an indebtedness created as a result of services rendered or premises rented; or an indebtedness created as a result of goods or securities sold in a cash transaction, as defined in Subsection (c) of this Section; (e) the ownership of stock or of other securities of a corporation organized under the provisions of Section 25(a) of the Federal Reserve Act, as amended, which is directly or indirectly a creditor of the Company; and (f) the acquisition, ownership, acceptance or negotiation of any drafts, bills of exchange, acceptances or obligations which fall within the classification of self liquidating paper, as defined in Subsection (c) of this Section. (3) For the purposes of this Section only: (a) the term "default" means any failure to make payment in full of the principal of or interest on any of the Securities or upon the other indenture securities when and as such principal or interest becomes due and payable; 38 39 (b) the term "other indenture securities" means securities upon which the Company is an obligor outstanding under any other indenture (i) under which the Trustee is also trustee, (ii) which contains provisions substantially similar to the provisions of this Section, and (iii) under which a default exists at the time of the apportionment of the funds and property held in such special account; (c) the term "cash transaction" means any transaction in which full payment for goods or securities sold is made within seven days after delivery of the goods or securities in currency or in checks or other orders drawn upon banks or bankers and payable upon demand; (d) the term "self-liquidating paper" means any draft, bill of exchange, acceptance or obligation which is made, drawn, negotiated or incurred by the Company for the purpose of financing the purchase, processing, manufacturing, shipment, storage or sale of goods, wares or merchandise and which is secured by documents evidencing title to, possession of, or a lien upon, the goods, wares or merchandise or the receivables or proceeds arising from the sale of the goods, wares or merchandise previously constituting the security, provided the security is received by the Trustee simultaneously with the creation of the creditor relationship with the Company arising from the making, drawing, negotiating or incurring of the draft, bill of exchange, acceptance or obligation; (e) the term "Company" means any obligor upon the Securities; and (f) the term "Federal Bankruptcy Code" means the Bankruptcy Code or Title 11 of the United States Code. ARTICLE SEVEN HOLDERS' LISTS AND REPORTS BY TRUSTEE AND COMPANY SECTION 701. Company to Furnish Trustee Names and Addresses of Holders. The Company will furnish or cause to be furnished to the Trustee: (1) semi-annually, not later than March 1 and September 1 in each year, a list in such form as the Trustee may reasonably require, of the names and addresses of the Holders as of the preceding February 15 or August 15, as the case may be, and (2) at such other times as the Trustee may request in writing, within thirty (30) 39 40 days after the receipt by the Company of any such request, a list of similar form and content as of a date not more than fifteen (15) days prior to the time such list is furnished; excluding from any such list names and addresses received by the Trustee in its capacity as Security Registrar. SECTION 702. Preservation of Information; Communications to Holders. (1) The Trustee shall preserve, in as current a form as is reasonably practicable, the names and addresses of Holders contained in the most recent list furnished to the Trustee as provided in Section 701 and the names and addresses of Holders received by the Trustee in its capacity as Security Registrar. The Trustee may destroy any list furnished to it as provided in Section 701 upon receipt of a new list so furnished. (2) If three (3) or more Holders (herein referred to as "applicants") apply in writing to the Trustee, and furnish to the Trustee reasonable proof that each such applicant has owned a Security for a period of at least six (6) months preceding the date of such application, and such application states that the applicants desire to communicate with other Holders with respect to their rights under this Indenture or under the Securities and is accompanied by a copy of the form of proxy or other communication which such applicants propose to transmit, then the Trustee shall, within five (5) business days after the receipt of such application, at its election, either (a) afford such applicants access to the information preserved at the time by the Trustee in accordance with Section 702(1), or (b) inform such applicants as to the approximate number of Holders whose names and addresses appear in the information preserved at the time by the Trustee in accordance with Section 702(1), and as to the approximate cost of mailing to such Holders the form of proxy or other communication, if any, specified in such application. If the Trustee shall elect not to afford such applicants access to such information, the Trustee shall, upon written request of such applicants, mail to each Holder whose name and address appear in the information preserved at the time by the Trustee in accordance with Section 702(1) a copy of the form of proxy or other communication which is specified in such request, with reasonable promptness after a tender to the Trustee of the material to be mailed and of payment, or provision for the payment, of the reasonable expenses of mailing, unless within five (5) days after such tender the Trustee shall mail to such applicants and file with the 40 41 Commission, together with a copy of the material to be mailed, a written statement to the effect that, in the opinion of the Trustee, such mailing would be contrary to the best interest of the Holders or would be in violation of applicable law. Such written statement shall specify the basis of such opinion. If the Commission, after opportunity for a hearing upon the objections specified in the written statement so filed, shall enter an order refusing to sustain any of such objections or if, after the entry of an order sustaining one or more of such objections, the Commission shall find, after notice and opportunity for hearing, that all the objections so sustained have been met and shall enter an order so declaring, the Trustee shall mail copies of such material to all such Holders with reasonable promptness after the entry of such order and the renewal of such tender; otherwise the Trustee shall be relieved of any obligation or duty to such applicants respecting their application. (c) Every Holder of Securities, by receiving and holding the same, agrees with the Company and the Trustee that neither the Company nor the Trustee nor any agent of either of them shall be held accountable by reason of the disclosure of any such information as to the names and addresses of the Holders in accordance with Section 702(2), regardless of the source from which such information was derived, and that the Trustee shall not be held accountable by reason of mailing any material pursuant to a request made under Section 702. SECTION 703. Reports by Trustee. (1) Within sixty (60) days after May 15 of each year beginning with the year 1998, the Trustee shall transmit by mail to all Holders, as their names and addresses appear in the Security Register, a brief report dated as of such May 15 with respect to any of the following events which may have occurred within the previous twelve (12) months (but if no such event has occurred within such period, no report need be transmitted): (a) any change to its eligibility under Section 609 and its qualifications under Section 608; (b) The creation of or any material change to a relationship specified in Section 310(b)(1) through Section 310(b)(10) of the Trust Indenture Act; (c) the character and amount of any advances (and if the Trustee elects so to state, the circumstances surrounding the making thereof) made by the Trustee (as such) which remain unpaid on the date of such report, and for the reimbursement of which it claims or may claim a lien or charge, prior to that of the Securities, on any property or funds held or collected by it as Trustee, except that the Trustee shall not be required (but may elect) to 41 42 report such advances if such advances so remaining unpaid aggregate not more than one-half of one percent (1/2 of 1%) of the principal amount of the Securities Outstanding on the date of such report; (d) the amount, interest rate and maturity date of all other indebtedness owing by the Company (or by any other obligor on the Securities) to the Trustee in its individual capacity, on the date of such report, with a brief description of any property held as collateral security therefor, except an indebtedness based upon a creditor relationship arising in any manner described in Section 613(2)(b), (c), (d) or (f); (e) the property and funds, if any, physically in the possession of the Trustee as such on the date of such report; (f) any additional issue of Securities which the Trustee has not previously reported; and (g) any action taken by the Trustee in the performance of its duties hereunder which it has not previously reported and which in its opinion materially affects the Securities, except action in respect of a default, notice of which has been or is to be withheld by the Trustee in accordance with Section 602. (2) The Trustee shall transmit by mail to all Holders, as their names and addresses appear in the Security Register, a brief report with respect to the character and amount of any advances (and if the Trustee elects so to state, the circumstances surrounding the making thereof) made by the Trustee (as such) since the date of the last report transmitted pursuant to Subsection (1) of this Section (or if no such report has yet been so transmitted, since the date of execution of this instrument) for the reimbursement of which it claims or may claim a lien or charge, prior to that of the Securities, on property or funds held or collected by it as Trustee and which it has not previously reported pursuant to this Subsection, except that the Trustee shall not be required (but may elect) to report such advances if such advances remaining unpaid at any time aggregate ten percent (10%) or less of the principal amount of the Securities Outstanding at such time, such report to be transmitted within ninety (90) days after such time. (3) A copy of each such report shall, at the time of such transmission to Holders, be filed by the Trustee with each stock exchange upon which any Securities are listed, with the Commission and with the Company. The Company will notify the Trustee when any Securities are listed on any stock exchange. SECTION 704. Reports by Company. 42 43 The Company shall: (1) file with the Trustee, within fifteen (15) days after the Company is required to file the same with the Commission, copies of the annual reports and of the information, documents and other reports (or copies of such portions of any of the foregoing as the Commission may from time to time by rules and regulations prescribe) which the Company may be required to file with the Commission pursuant to Section 13 or Section 15(d) of the Securities Exchange Act of 1934; or, if the Company is not required to file information, documents or reports pursuant to either of said Sections, then it shall file with the Trustee and the Commission, in accordance with rules and regulations prescribed from time to time by the Commission, such of the supplementary and periodic information, documents and reports which may be required pursuant to Section 13 of the Securities Exchange Act of 1934 in respect of a security listed and registered on a national securities exchange as may be prescribed from time to time in such rules and regulations; (2) file with the Trustee and the Commission, in accordance with rules and regulations prescribed from time to time by the Commission, such additional information, documents and reports with respect to compliance by the Company with the conditions and covenants of this Indenture as may be required from time to time by such rules and regulations; and (3) transmit by mail to all Holders, as their names and addresses appear in the Security Register, within thirty (30) days after the filing thereof with the Trustee, such summaries of any information, documents and reports required to be filed by the Company pursuant to paragraphs (1) and (2) of this Section as may be required by rules and regulations prescribed from time to time by the Commission. ARTICLE EIGHT SUPPLEMENTAL INDENTURES SECTION 801. Supplemental Indentures without Consent of Holders. Without the consent of any Holders, the Company, when authorized by a Board Resolution, and the Trustee, at any time and from time to time, may enter into one or more indentures supplemental hereto, in form satisfactory to the Trustee, for any of the following purposes: (1) to evidence the succession of another corporation to the Company and the assumption by any such successor of the covenants of the Company herein and in the Securities; or 43 44 (2) to add to the covenants of the Company for the benefit of the Holders of the Securities or to surrender any right or power herein conferred upon the Company; or (3) to add any additional Events of Default; or (4) to evidence and provide for the acceptance of appointment hereunder by a successor Trustee and to add to or change any of the provisions of this Indenture as shall be necessary to provide for or facilitate the administration of the trusts hereunder by more than one Trustee, pursuant to the requirements of Section 611(2); or (5) to cure any ambiguity, or correct or supplement any provision herein which may be defective or inconsistent with any other provision herein, or to make any other provisions with respect to matters or questions arising under this Indenture, provided that such action shall not adversely affect the interests of the Holders of Securities in any material respect. SECTION 802. Supplemental Indentures with Consent of Holders. With the consent of the Holders of not less than sixty-six and two-thirds percent (66 2/3%) in principal amount of the Outstanding Securities, by Act of said Holders delivered to the Company and the Trustee, the Company, when authorized by a Board Resolution, and the Trustee may enter into an indenture or indentures supplemental hereto for the purpose of adding any provisions to or changing in any manner or eliminating any of the provisions of this Indenture or of modifying in any manner the rights of the Holders of Securities under this Indenture; provided, however, that no such supplemental indenture shall, without the consent of the Holder of each Outstanding Security affected thereby, (1) change the character of the Securities from being payable on demand or reduce the principal amount of any Security or impair the right to institute suit for the enforcement of any such payment on or after the applicable due date thereof (or, in the case of redemption, on or after the Redemption Date), or (2) reduce the percentage in principal amount of the Outstanding Securities, the consent of whose Holders is required for any such supplemental indenture, or the consent of whose Holders is required for any waiver (of compliance with certain provisions of this Indenture or certain defaults hereunder and their consequences) provided for in this Indenture, or (3) Change any obligation of the Company, with respect to Outstanding Securities, to maintain an office or agency in the places and for the purposes specified in 44 45 Section 902, or (4) modify any of the provisions of this Section, Section 513 or Section 904, except to increase any such percentage or to provide that certain other provisions of this Indenture cannot be modified or waived without the consent of the Holder of each outstanding Security affected thereby; provided, however, that this clause shall not be deemed to require the consent of any Holder with respect to changes in the references to "the Trustee" and concomitant changes in this Section and Section 904, or the deletion of this proviso, in accordance with the requirements of Sections 611(2) and 801(5). It shall not be necessary for any Act of Holders under this Section to approve the particular form of any proposed supplemental indenture, but it shall be sufficient if such Act shall approve the substance thereof. SECTION 803. Execution of Supplemental Indentures. In executing, or accepting the additional trusts created by, any supplemental indenture permitted by this Article or the modifications thereby of the trusts created by this Indenture, the Trustee shall be entitled to receive, and (subject to Section 601) shall be fully protected in relying upon, an Opinion of Counsel stating that the execution of such supplemental indenture is authorized or permitted by this Indenture. The Trustee may, but shall not be obligated to, enter into any such supplemental indenture which affects the Trustee's own rights, duties or immunities under this Indenture or otherwise. SECTION 804. Effect of Supplemental Indentures. Upon the execution of any supplemental indenture under this Article, this Indenture shall be modified in accordance therewith, and such supplemental indenture shall form a part of this Indenture for all purposes; and every Holder of Securities theretofore or thereafter authenticated and delivered hereunder shall be bound thereby. SECTION 805. Conformity with Trust Indenture Act. Every supplemental indenture executed pursuant to this Article shall conform to the requirements of the Trust Indenture Act as then in effect. ARTICLE NINE COVENANTS SECTION 901. Administration of Program; Payment of Principal and Interest; Subordination. 45 46 (1) The Company covenants and agrees to maintain and administer the Program and the Securities issued pursuant thereto in accordance with the provisions of the Program, as the same may from time to time be in force and effect, and this Indenture; provided, however, that nothing herein shall prevent the Company from exercising any of its rights to amend, modify or terminate the Program, or to adopt, amend or rescind the rules established under the Program, as provided therein. (2) The Company covenants and agrees for the benefit of Holders of Securities that it will duly and punctually pay the principal of and interest on the Securities in accordance with the terms of the Program and this Indenture. Interest will accrue on the Securities in accordance with the provisions of the Program. The interest rate on the Securities shall be determined in accordance with the provisions of the Program. Interest rates will vary from time to time. There are no minimum or maximum interest rates. (3) The Company covenants and agrees, and each holder of Securities, by his acceptance thereof, likewise covenants and agrees, that the indebtedness represented by the Securities and the payment of the principal of and interest on each and all of the Securities is hereby expressly subordinated, to the extent and in the manner hereinafter set forth, in right of payment to the prior payment in full of all indebtedness of the Company, whether outstanding on the date of execution of this Indenture or thereafter created, for money borrowed from banks, insurance companies and other financial institutions, to trade creditors, or for other indebtedness of the Company, unless in the instrument creating or evidencing such indebtedness it is provided that such indebtedness is not senior in right of payment to the Securities. Each Holder of Securities, by his acceptance thereof, authorizes and directs the Trustee on his behalf to take such action as may be necessary or appropriate to effectuate the subordination provided in this Section and appoints the Trustee his attorney-in-fact for any and all such purposes. Each Holder of Securities, by his acceptance thereof, acknowledges and agrees that the Securities shall rank pari passu with the Company's Variable Denomination Fixed Rate Redeemable Term Notes, whether such Notes are outstanding on the date of execution of this Indenture or thereafter issued. SECTION 902. Maintenance of Security Register, Maintenance of Office or Agency. (1) The Company will keep at an office or agency proper books of record and account (which books may be in written form or in any other form capable of being converted into written form) in which full and correct entries shall be made of all funds invested in the Securities, together with interest accrued thereon, and all redemptions thereof, in accordance with sound accounting practice and which shall contain the names and addresses of all Holders and the principal amounts of their respective Securities (collectively, the "Security Register"). (2) The Company will maintain in the City of Chicago or such other city where the Company maintains its corporate headquarters an office or agency where notices and demands hereunder may be given to or made upon the Company in respect of the Securities and this Indenture may be served. The Company will give prompt written notice to the Trustee and the Holders of the location, and any change in the location, of any such office or agency. If at any time the Company shall fail to maintain any such required office or agency or shall fail to furnish the Trustee with the address thereof, such notices and demands may be made or served at the Corporate Trust Office of the Trustee. SECTION 903. Money for Securities Payments to Be Held in Trust. Whenever the Company shall have one or more Paying Agents, it will, prior to each due date of the principal of, or interest on any Securities, deposit with a Paying Agent a sum sufficient to pay the principal or interest so becoming due, such sum to be held in trust for the benefit of the Persons entitled to such principal or interest, and (unless such Paying Agent is the Trustee) the Company will promptly notify the Trustee of its failure so to act. 46 47 The Company will cause each Paying Agent other than the Trustee to execute and deliver to the Trustee an instrument in which such Paying Agent shall agree with the Trustee, subject, to the provisions of this Section, that such Paying Agent will: (1) hold all sums held by it for the payment of the principal of or interest on Securities in trust for the benefit of the Persons entitled thereto until such sums shall be paid to such Persons or otherwise disposed of as herein provided; (2) give the Trustee notice of any default by the Company (or any other obligor upon the Securities) in the making of any payment of principal or interest on the Securities; and (3) at any time during the continuance of any such default, upon the written request of the Trustee, forthwith pay to the Trustee all sums so held in trust by such Paying Agent. The Company may at any time, for the purpose of obtaining the satisfaction and discharge of this Indenture or for any other purpose, pay, or by Company Order direct any Paying Agent to pay, to the Trustee all sums held in trust by the Company or such Paying Agent, such sums to be held by the Trustee upon the same trusts as those upon which such sums were held by the Company or such Paying Agent; and, upon such payment by any Paying Agent to the Trustee, such Paying Agent shall be released from all further liability with respect to such money. Any money deposited with the Trustee or any Paying Agent, or then held by the Company, in trust for the payment of the principal of or interest on any Security and remaining unclaimed for three years after such principal or interest has become due and payable shall be paid to the Company upon the Company's request; and the Holder of such Security shall thereafter, as an unsecured general creditor, look only to the Company for payment thereof, and all liability of the Trustee or such Paying Agent with respect to such trust money, and all liability of the Company as trustee thereof, shall thereupon cease; provided, however, that the Trustee or such Paying Agent, before being required to make any such repayment, may at the expense of the Company cause to be published once, in a newspaper published in the English language, customarily published on each Business Day and of general circulation in the City of Chicago, notice that such money remains unclaimed and that, after a date specified therein, which shall not be less than thirty (30) days from the date of such publication, any unclaimed balance of such money then remaining will be repaid to the Company. SECTION 904. Certificate of Officers of the Company. On or before the last day of March of each year beginning with the year 1998, the Company will file with the Trustee a certificate of the principal executive officer, principal 47 48 financial officer or principal accounting officer stating whether or not the signer has obtained knowledge of any action or failure to act on the part of the Company during the preceding calendar year in violation of any covenant, agreement, provision or condition contained in this Indenture and, if so, specifying, each such default of which the signers may have knowledge and the nature thereof. For purposes of this Section 904, compliance shall be determined without regard to any period of grace or requirement of notice provided pursuant to the terms of this Indenture. SECTION 905. Waiver of Certain Covenants. The Company may omit in any particular instance to comply with any term, provision or condition set forth in Section 902 or 903, if before the time for such compliance the Holders of at least sixty-six and two-thirds percent (66 2/3%) in principal amount of the Outstanding Securities shall, by Act of such Holders, either waive such compliance in such instance or general waive compliance with such term, provision or condition, but no such waiver shall extend to or affect such term, provision or condition except to the extent so expressly waived, and, until such waiver shall become effective, the obligations of the Company and the duties of the Trustee in respect of any such term, provision or condition shall remain in full force and effect. IN WITNESS WHEREOF, the parties hereto have caused this Indenture to be duly executed, and their respective corporate seals to be hereunto affixed and attested, all as of the day and year first above written. COTTER & COMPANY By: /s/ Kerry J. Kirby --------------------------- Vice President FIRST TRUST NATIONAL ASSOCIATION By: /s/ David S. Vick --------------------------- Vice President 48 49 STATE OF ILLINOIS COUNTY OF COOK On May 15, 1997, before me personally came Kerry J. Kirby, to me known, who, being by me duly sworn, did depose and save that he is a Vice President of Cotter & Company, one of the corporations described in and which executed the foregoing instrument; that he knows the seal of said corporation; that the seal affixed to said instrument is such corporate seal; that it was so affixed by authority of the Board of Directors of said corporation, and that he signed his name thereto by like authority. /s/ Diane Chrzastowski ---------------------- Notary Public 49 50 STATE OF ILLINOIS COUNTY OF COOK On May 20, 1997, before me personally came David S. Vick, to me known, who, being by me duly sworn, did depose and say that he is a Vice President of First Trust National Association, one of the corporations described in and which executed the foregoing instrument; that he knows the seal of said corporation; that the seal affixed to said instrument is such corporate seal; that it was so affixed by authority of the Board of Directors of said corporation, and that he signed his name thereto by like authority. /s/ Stacy Coleman ----------------------- Notary Public 50 EX-5 3 OPINION AND CONSENT OF MESSRS. 1 EXHIBIT 5 [ARNSTEIN & LEHR LETTERHEAD] May 20, 1997 Cotter & Company 8600 West Bryn Mawr Avenue Chicago, Illinois 60631-3505 Re: Registration Statement on Form S-2 Gentlemen: We refer to the Registration Statement on Form S-2 being filed by Cotter & Company, a Delaware corporation (hereinafter referred to as the "Company"), with the Securities and Exchange Commission under the Securities Act of 1933, as amended, pertaining to the registration of $50,000,000 principal amount of the Company's Variable Denomination Floating Rate Demand Notes (the "Notes"). The Notes will be issued and sold directly by the Company in the minimum amount of $250 for cash. Notes will be sold only to members of the Company holding Class A Common Stock and holders of certain Variable Denomination Fixed Rate Redeemable Term Notes of the Company. Based upon our examination, we are of the opinion that: 1. The Company is a corporation duly incorporated, validly existing and in good standing under the laws of the State of Delaware. 2. The proposed offering of $50,000,000 principal amount of the Notes has been duly authorized and when sold as contemplated the Notes will be legally issued, valid and binding obligations of the Company. 2 Cotter & Company May 20, 1997 Page 2 We hereby consent to the use of this opinion as an exhibit to the Registration Statement and the reference to us under the caption "Legal Matters" in the related Prospectus as counsel for the Company who have passed upon the legalities of the securities registered thereunder. Sincerely, Arnstein & Lehr EX-12 4 COMPUT. OF CONSOL. RATIO OF EARN. TO FIX. CHANGES 1 EXHIBIT 12 COTTER & COMPANY SCHEDULE OF COMPUTATION OF THE RATIO OF EARNINGS TO FIXED CHARGES FOR THE QUARTERS ENDED MARCH 29, 1997 AND MARCH 30, 1996 AND FOR THE FISCAL YEARS ENDED 1996, 1995, 1994, 1993, AND 1992 (000'S OMITTED)
QUARTER ENDED QUARTER ENDED YEAR END ---------------------------------------------------------------------------------------------- MARCH 29, 1997 MARCH 30, 1996 1996 1995 1994 1993 1992 -------------- -------------- ---- ---- ---- ---- ---- NET EARNINGS AFTER TAX $ 1,071 $ 2,083 $52,410 $59,037 $60,318 $57,023 $60,629 ADD: TAX PROVISION 160 175 362 176 1,163 2,582 389 ------- ------- ------- ------- ------- ------- ------- PRETAX INCOME 1,231 2,258 52,772 59,213 61,481 59,605 61,018 ------- ------- ------- ------- ------- ------- ------- ADD: FIXED CHARGES INTEREST PAID TO MEMBERS 4,297 4,658 18,460 20,627 22,894 24,458 25,716 OTHER INTEREST PAID 3,033 2,229 10,175 9,298 7,493 7,429 7,273 ------- ------- ------- ------- ------- ------- ------- TOTAL INTEREST EXPENSE 7,330 6,887 28,635 29,925 30,387 31,887 32,989 ------- ------- ------- ------- ------- ------- ------- RENTAL EXPENSES 3,486 3,755 14,971 10,063 9,098 8,749 6,850 % OF RENTAL EXPENSES 33.33% 33.33% 33.33% 33.33% 33.33% 33.33% 33.33% ------- ------- ------- ------- ------- ------- ------- APPLICABLE RENTAL EXPENSES 1,162 1,252 4,990 3,354 3,032 2,916 2,283 ------- ------- ------- ------- ------- ------- ------- TOTAL FIXED CHARGES 8,492 8,139 33,625 33,279 33,419 34,803 35,272 ------- ------- ------- ------- ------- ------- ------- PRETAX EARNINGS BEFORE FIXED CHARGES $ 9,723 $10,397 $86,397 $92,492 $94,900 $94,408 $96,290 ======= ======= ======= ======= ======= ======= ======= PRETAX EARNINGS RATIO TO FIXED CHARGES 1.14 1.28 2.57 2.78 2.84 2.71 2.73 ======= ======= ======= ======= ======= ======= =======
EX-25 5 STATEMENT OF ELIGIBILITY OF TRUSTEE 1 EXHIBIT 25 ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------------------- FORM T-1 STATEMENT OF ELIGIBILITY UNDER THE TRUST INDENTURE ACT OF 1939 OF A CORPORATION DESIGNATED TO ACT AS TRUSTEE CHECK IF AN APPLICATION TO DETERMINE ELIGIBILITY OF A TRUSTEE PURSUANT TO SECTION 305(B)(2) ---------------------- FIRST TRUST NATIONAL ASSOCIATION (EXACT NAME OF TRUSTEE AS SPECIFIED IN ITS CHARTER) 36-4046888 (I.R.S. EMPLOYER IDENTIFICATION NO.) 111 E. WACKER DRIVE, SUITE 3000 60601 CHICAGO, ILLINOIS (ZIP CODE) (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) ---------------------- G. M. CARROLL FIRST TRUST NATIONAL ASSOCIATION 111 E. WACKER DRIVE, SUITE 3000 CHICAGO, ILLINOIS 60601 TELEPHONE (312) 228-9451 (NAME, ADDRESS, AND TELEPHONE NUMBER OF AGENT FOR SERVICE) ---------------------- COTTER & COMPANY (EXACT NAME OF OBLIGOR AS SPECIFIED IN ITS CHARTER) DELAWARE 36-2099896 (STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER OF INCORPORATION OR ORGANIZATION IDENTIFICATION NO.) 8600 WEST BRYN MAWR AVENUE 60631-3505 CHICAGO,ILLINOIS (ZIP CODE) (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) DEBT SECURITIES (TITLE OF INDENTURE SECURITIES) ================================================================================ 2 ITEM 1. GENERAL INFORMATION. FURNISH THE FOLLOWING INFORMATION AS TO THE TRUSTEE: (A) NAME AND ADDRESS OF EACH EXAMINING OR SUPERVISING AUTHORITY TO WHICH IT IS SUBJECT. Comptroller of the Currency, Washington, D.C. (B) WHETHER IT IS AUTHORIZED TO EXERCISE CORPORATE TRUST POWERS. Yes. ITEM 2. AFFILIATIONS WITH THE OBLIGOR. IF THE OBLIGOR IS AN AFFILIATE OF THE TRUSTEE, DESCRIBE EACH SUCH AFFILIATION. The obligor is not an affiliate of the trustee. ITEM 3. VOTING SECURITIES OF THE TRUSTEE. FURNISH THE FOLLOWING INFORMATION AS TO EACH CLASS OF VOTING SECURITIES OF THE TRUSTEE: AS OF APRIL 24,1997
COL. B COL. A AMOUNT TITLE OF CLASS OUTSTANDING --------------- ------------
Not applicable by virtue of response to Item 13. ITEM 4. TRUSTEESHIPS UNDER OTHER INDENTURES. IF THE TRUSTEE IS A TRUSTEE UNDER ANOTHER INDENTURE UNDER WHICH ANY OTHER SECURITIES, OR CERTIFICATES OF INTEREST OR PARTICIPATION, IN ANY OTHER SECURITIES, OF THE OBLIGOR ARE OUTSTANDING, FURNISH THE FOLLOWING INFORMATION: (A) TITLE OF THE SECURITIES OUTSTANDING UNDER EACH SUCH OTHER INDENTURE. Not applicable by virtue of response to Item 13. (B) A BRIEF STATEMENT OF THE FACTS RELIED UPON AS A BASIS FOR THE CLAIM THAT NO CONFLICTING INTEREST WITHIN THE MEANING OF SECTION 310(B)(1) OF THE ACT ARISES AS A RESULT OF THE TRUSTEESHIP UNDER ANY SUCH OTHER INDENTURE, INCLUDING A STATEMENT AS TO HOW THE INDENTURE SECURITIES WILL RANK AS COMPARED WITH THE SECURITIES ISSUED UNDER SUCH OTHER INDENTURE. Not applicable by virtue of response to Item 13. ITEM 5. INTERLOCKING DIRECTORATES AND SIMILAR RELATIONSHIPS WITH THE OBLIGOR OR UNDERWRITERS. IF THE TRUSTEE OR ANY OF THE DIRECTORS OR EXECUTIVE OFFICERS OF THE TRUSTEE IS A DIRECTOR, OFFICER, PARTNER, EMPLOYEE, APPOINTEE OR REPRESENTATIVE OF THE OBLIGOR OR OF ANY UNDERWRITER FOR THE OBLIGOR, IDENTIFY EACH SUCH PERSON HAVING ANY SUCH CONNECTION AND STATE THE NATURE OF EACH SUCH CONNECTION. Not applicable by virtue of response to Item 13. 1 3 ITEM 6. VOTING SECURITIES OF THE TRUSTEE OWNED BY THE OBLIGOR OR ITS OFFICIALS. FURNISH THE FOLLOWING INFORMATION AS TO THE VOTING SECURITIES OF THE TRUSTEE OWNED BENEFICIALLY BY THE OBLIGOR AND EACH DIRECTOR, PARTNER AND EXECUTIVE OFFICER OF THE OBLIGOR. AS OF APRIL 24, 1997
COL. A COL. B COL. C COL. D PERCENTAGE OF VOTING SECURITIES REPRESENTED BY AMOUNT NAME OF TITLE OF AMOUNT OWNED GIVEN OWNER CLASS BENEFICIALLY IN COL. C - ------- -------- ------------ -------------
Not applicable by virtue of response to Item 13. ITEM 7. VOTING SECURITIES OF THE TRUSTEE OWNED BY UNDERWRITERS OR THEIR OFFICIALS. FURNISH THE FOLLOWING INFORMATION AS TO THE VOTING SECURITIES OF THE TRUSTEE OWNED BENEFICIALLY BY EACH UNDERWRITER FOR THE OBLIGOR AND EACH DIRECTOR, PARTNER, AND EXECUTIVE OFFICER OF EACH SUCH UNDERWRITER. AS OF APRIL 24, 1997
COL. A COL. B COL. C COL. D PERCENTAGE OF VOTING SECURITIES REPRESENTED BY AMOUNT NAME OF TITLE OF AMOUNT OWNED GIVEN OWNER CLASS BENEFICIALLY IN COL. C - ------- -------- ------------ -------------
Not applicable by virtue of response to Item 13. ITEM 8. SECURITIES OF THE OBLIGOR OWNED OR HELD BY THE TRUSTEE. FURNISH THE FOLLOWING INFORMATION AS TO SECURITIES OF THE OBLIGOR OWNED BENEFICIALLY OR HELD AS COLLATERAL SECURITY FOR OBLIGATIONS IN DEFAULT BY THE TRUSTEE: AS OF APRIL 24, 1997
COL. A COL. B COL. C COL. D WHETHER THE SECURITIES ARE VOTING OR AMOUNT OWNED BENEFICIALLY OR PERCENT OF CLASS TITLE OF NONVOTING HELD AS COLLATERAL SECURITY REPRESENTED BY AMOUNT CLASS SECURITIES FOR OBLIGATIONS IN DEFAULT GIVEN IN COL. C - ------- ---------- ----------------------------- ---------------------
Not applicable by virtue of response to Item 13. 2 4 ITEM 9. SECURITIES OF UNDERWRITERS OWNED OR HELD BY THE TRUSTEE. IF THE TRUSTEE OWNS BENEFICIALLY OR HOLDS AS COLLATERAL SECURITY FOR OBLIGATIONS IN DEFAULT ANY SECURITIES OF AN UNDERWRITER FOR THE OBLIGOR, FURNISH THE FOLLOWING INFORMATION AS TO EACH CLASS OF SECURITIES OF SUCH UNDERWRITER ANY OF WHICH ARE SO OWNED OR HELD BY THE TRUSTEE. AS OF APRIL 24, 1997
COL. A COL. B COL. C COL. D AMOUNT OWNED BENEFICIALLY OR HELD PERCENT OF CLASS NAME OF ISSUER AS COLLATERAL SECURITY REPRESENTED BY AND TITLE OF AMOUNT FOR OBLIGATIONS IN AMOUNT GIVEN IN CLASS OUTSTANDING DEFAULT BY TRUSTEE COL. C - --------------- ----------- ---------------------- ----------------
Not applicable by virtue of response to Item 13. ITEM 10. OWNERSHIP OR HOLDINGS BY THE TRUSTEE OF VOTING SECURITIES OF CERTAIN AFFILIATES OR SECURITY HOLDERS OF THE OBLIGOR. IF THE TRUSTEE OWNS BENEFICIALLY OR HOLDS AS COLLATERAL SECURITY FOR OBLIGATIONS IN DEFAULT VOTING SECURITIES OF A PERSON WHO, TO THE KNOWLEDGE OF THE TRUSTEE (1) OWNS 10 PERCENT OR MORE OF THE VOTING SECURITIES OF THE OBLIGOR OR (2) IS AN AFFILIATE, OTHER THAN A SUBSIDIARY, OF THE OBLIGOR, FURNISH THE FOLLOWING INFORMATION AS TO THE VOTING SECURITIES OF SUCH PERSON. AS OF APRIL 24, 1997
COL. A COL. B COL. C COL. D AMOUNT OWNED BENEFICIALLY OR HELD PERCENT OF CLASS NAME OF ISSUER AS COLLATERAL SECURITY REPRESENTED BY AND TITLE OF AMOUNT FOR OBLIGATIONS IN AMOUNT GIVEN IN CLASS OUTSTANDING DEFAULT BY TRUSTEE COL. C - --------------- ----------- ---------------------- ----------------
Not applicable by virtue of response to Item 13. ITEM 11. OWNERSHIP OF HOLDINGS BY THE TRUSTEE OR ANY SECURITIES OF A PERSON OWING 50 PERCENT OR MORE OF THE VOTING SECURITIES OF THE OBLIGOR. IF THE TRUSTEE OWNS BENEFICIALLY OR HOLDS AS COLLATERAL SECURITY FOR OBLIGATIONS IN DEFAULT ANY SECURITIES OR A PERSON WHO, TO THE KNOWLEDGE OF THE TRUSTEE, OWNS 50 PERCENT OR MORE OF THE VOTING SECURITIES OF THE OBLIGOR, FURNISH THE FOLLOWING INFORMATION AS TO EACH CLASS OF SECURITIES OF SUCH PERSON ANY OF WHICH ARE SO OWNED OR HELD BY THE TRUSTEE. AS OF APRIL 24, 1997
COL. A COL. B COL. C COL. D AMOUNT OWNED BENEFICIALLY OR HELD PERCENT OF CLASS NAME OF ISSUER AS COLLATERAL SECURITY REPRESENTED BY AND TITLE OF AMOUNT FOR OBLIGATIONS IN AMOUNT GIVEN IN CLASS OUTSTANDING DEFAULT BY TRUSTEE COL. C - --------------- ----------- ---------------------- ----------------
Not applicable by virtue of response to Item 13. 3 5 ITEM 12. INDEBTEDNESS OF THE OBLIGOR TO THE TRUSTEE. EXCEPT AS NOTED IN THE INSTRUCTIONS, IF THE OBLIGOR IS INDEBTED TO THE TRUSTEE, FURNISH THE FOLLOWING INFORMATION: AS OF APRIL 24, 1997
COL. A COL. B COL. C NATURE OF INDEBTEDNESS AMOUNT OUTSTANDING DATE DUE - ---------------------- ------------------ -------- Not applicable by virtue of response to Item 13.
ITEM 13. DEFAULTS BY THE OBLIGOR. (A) STATE WHETHER THERE IS OR HAS BEEN A DEFAULT WITH RESPECT TO THE SECURITIES UNDER THIS INDENTURE. EXPLAIN THE NATURE OF ANY SUCH DEFAULT. There is not nor has there been a default with respect to the securities under this indenture. (B) IF THE TRUSTEE IS A TRUSTEE UNDER ANOTHER INDENTURE UNDER WHICH ANY OTHER SECURITIES, OR CERTIFICATES OF INTEREST OR PARTICIPATION IN ANY OTHER SECURITIES, OF THE OBLIGOR ARE OUTSTANDING, OR IS TRUSTEE FOR MORE THAN ONE OUTSTANDING SERIES OF SECURITIES UNDER THE INDENTURE, STATE WHETHER THERE HAS BEEN A DEFAULT UNDER ANY SUCH INDENTURE OR SERIES, IDENTIFY THE INDENTURE OR SERIES AFFECTED, AND EXPLAIN THE NATURE OR ANY SUCH DEFAULT. There is not nor has there been a default with respect to the securities under this indenture. The trustee is a trustee under other indentures under which securities issued by the obligor are outstanding. There is not and there has not been a default with respect to the securities outstanding under such other indentures. ITEM 14. AFFILIATIONS WITH UNDERWRITERS. If ANY UNDERWRITER IS AN AFFILIATE OF THE TRUSTEE OR THE TRUSTEES, DESCRIBE EACH SUCH AFFILIATION. Not applicable by virtue of response to Item 13. ITEM 15. FOREIGN TRUSTEE. IDENTIFY THE ORDER OR RULE PURSUANT TO WHICH THE FOREIGN TRUSTEE IS AUTHORIZED TO ACT AS SOLE TRUSTEE UNDER INDENTURES QUALIFIED OR TO BE QUALIFIED UNDER THE ACT. Not applicable. ITEM 16. LIST OF EXHIBITS. LIST BELOW ALL EXHIBITS FILED AS A PART OF THIS STATEMENT OF ELIGIBILITY. 1. A copy of the Articles of Association of First Trust National Association as now in effect, incorporated herein by reference to Exhibit 1 to T-1; Registration No. 333-19025 2. A copy of the certificate of authority to commence business, incorporated herein by reference to Exhibit 2 to T-1, Registration No. 33-64175. 3. A copy of the certificate of authority to exercise corporate trust powers, incorporated herein by reference to Exhibit 3 to T-1, Registration No. 33-64175. 4. A copy of the existing By-Laws of First Trust National Association as now in effect filed herewith. 4 6 5. Not applicable by virtue of response to Item 13. 6. The consent of the trustee required by Section 321(b) of the Trust Indenture Act of 1939, incorporated herein by reference of Exhibit 6 to T-1; Registration No. 33-64175. 7. A copy of the latest report of condition of the trustee published pursuant to law or the requirements of its supervising or examining authority, filed herewith. 8. Not applicable. 9. Not applicable. SIGNATURE PURSUANT TO THE REQUIREMENTS OF THE TRUST INDENTURE ACT OF 1939, THE TRUSTEE, FIRST TRUST NATIONAL ASSOCIATION, A NATIONAL BANKING ASSOCIATION ORGANIZED AND EXISTING UNDER THE LAWS OF THE UNITED STATES OF AMERICA, HAS DULY CAUSED THIS STATEMENT OF ELIGIBILITY TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, ALL IN THE CITY OF CHICAGO, AND STATE OF ILLINOIS, AS OF THE 24TH DAY OF APRIL, 1997. First Trust National Association By /s/ G. M. Carroll ------------------------- G. M. Carroll Vice President and Assistant Secretary 7 EXHIBIT 4 FIRST TRUST NATIONAL ASSOCIATION BYLAWS AS LAST AMENDED ON JULY 16, 1996 ARTICLE I Meetings of Shareholders Section 1.1. Annual Meeting. The annual meeting of the shareholders, for the election of directors and the transaction of other business, shall be held at a time and place as the Chairman or President may designate. Notice of such meeting shall be given at least ten days prior to the date thereof, to each shareholder of the Association. If, for any reason, an election of directors is not made on the designated day, the election shall be held on some subsequent day, as soon thereafter as practicable, with prior notice thereof. Section 1.2. Special Meetings. Except as otherwise specially provided by law, special meetings of the shareholders may be called for any purpose, at any time by a majority of the board of directors, or by any shareholder or group of shareholders owning at least ten percent of the outstanding stock. Every such special meeting, unless otherwise provided by law, shall be called upon not less than ten days prior notice stating the purpose of the meeting. Section 1.3. Nominations for Directors. Nominations for election to the board of directors may be made by the board of directors or by any shareholder. Section 1.4. Proxies. Shareholders may vote at any meeting of the shareholders by proxies duly authorized in writing. Proxies shall be valid only for one meeting and any adjournments of such meeting and shall be filed with the records of the meeting. Section 1.5. Quorum. A majority of the outstanding capital stock, represented in person or by proxy, shall constitute a quorum at any meeting of shareholders unless otherwise provided by law. A majority of the votes cast shall decide every question or matter submitted to the shareholders at any meeting, unless otherwise provided by law or by the Articles of Association. 8 ARTICLE II Directors Section 2.1. Board of Directors. The board of directors (hereinafter referred to as the "board"), shall have power to manage and administer the business and affairs of the Association. All authorized corporate powers of the Association shall be vested in and may be exercised by the board. Section 2.2. Powers. In addition to the foregoing, the board of directors shall have and may exercise all of the powers granted to or conferred upon it by the Articles of Association, the Bylaws and by law. Section 2.3. Number. The board shall consist of a number of members to be fixed and determined from to time by resolution of the board or the shareholders at any meeting thereof, in accordance with the Articles of Association. Section 2.4. Organization Meeting. The newly elected board shall meet for the purpose of organizing the new board and electing and appointing such officers of the Association as may be appropriate. Such meeting shall be held on the day of the election or as soon thereafter as practicable, and, in any event, within thirty days thereafter. If, at the time fixed for such meeting, there shall not be a quorum present, the directors present may adjourn the meeting until a quorum is obtained. Section 2.5. Regular Meetings. The regular meetings of the board shall be held, without notice, as the Chairman or President may designate and deem suitable. Section 2.6. Special Meetings. Special meetings of the board may be called by the Chairman or the President of the Association, or at the request of two or more directors. Each member of the board shall be given notice stating the time and place of each such meeting. Section 2.7. Quorum. A majority of the directors shall constitute a quorum at any meeting, except when otherwise provided by law; but fewer may adjourn any meeting. Unless otherwise provided, once a quorum is established, any act by a majority of those constituting the quorum shall be the act of the board. Section 2.8. Vacancies. When any vacancy occurs among the directors, the remaining members of the board may appoint a director to fill such vacancy at any regular meeting of the board, or at a special meeting called for that purpose. -2- 9 ARTICLE III Committees Section 3.1. Advisory Board of Directors. The board may appoint persons, who need not be directors, to serve as advisory directors on an advisory board of directors established with respect to the business affairs of either this Association alone or the business affairs of a group of affiliated organizations of which this Association is one. Advisory directors shall have such powers and duties as may be determined by the board, provided, that the board's responsibility for the business and affairs of this Association shall in no respect be delegated or diminished. Section 3.2. Audit Committee. The board shall appoint an Audit Committee which shall consist of at least two Directors. If legally permissible, the board may determine to name itself as the Audit Committee. The Audit Committee shall direct and review audits of the Association's fiduciary activities. The members of the Audit Committee shall be appointed each year and shall continue to act until their successors are named. The Audit Committee shall have power to adopt its own rules and procedures and to do those things which in the judgment of such Committee are necessary or helpful with respect to the exercise of its functions or the satisfaction of its responsibilities. Section 3.3. Executive Committee. The board may appoint an Executive Committee which shall consist of at least three directors and which shall have, and may exercise, all the powers of the board between meetings of the board or otherwise when the board is not meeting. Section 3.4. Other Committees. The board may appoint, from time to time, committees of one or more persons who need not be directors, for such purposes and with such powers as the board may determine. In addition, either the Chairman or the President may appoint, from time to time, committees of one or more officers, employees, agents or other persons, for such purposes and with such powers as either the Chairman or the President deems appropriate and proper. Whether appointed by the board, the Chairman, or the President, any such Committee shall at all times be subject to the direction and control of the board. Section 3.5. Meeting Minutes and Rules. An advisory board of directors and/or committee shall meet as necessary in consideration of the purpose of the advisory board of directors or committee, and shall maintain minutes in sufficient detail to indicate actions taken or recommendations made; unless required by the members, discussions, votes or other specific details need not be reported. An advisory board of directors or a committee may, in consideration of its purpose, adopt its own rules for the exercise of any of its functions or authority. -3- 10 ARTICLE IV Officers and Employees Section 4.1. Chairman of the Board. The board may appoint one of its members to be Chairman of the board to serve at the pleasure of the board. The Chairman shall supervise the carrying out of the policies adopted or approved by the board; shall have general executive powers, as well as the specific powers conferred by these Bylaws; shall also have and may exercise such powers and duties as from time to time may be conferred upon or assigned by the board. Section 4.2. President. The board may appoint one of its members to be President of the Association. In the absence of the Chairman, the President shall preside at any meeting of the board. The President shall have general executive powers, and shall have and may exercise any and all other powers and duties pertaining by law, regulation or practice, to the Office of President, or imposed by these Bylaws. The President shall also have and may exercise such powers and duties as from time to time may be conferred or assigned by the board. Section 4.3. Vice President. The board may appoint one or more Vice Presidents who shall have such powers and duties as may be assigned by the board and to perform the duties of the President on those occasions when the President is absent, including presiding at any meeting of the board in the absence of both the Chairman and President. Section 4.4. Secretary. The board shall appoint a Secretary, or other designated officer who shall be Secretary of the board and of the Association, and shall keep accurate minutes of all meetings. The Secretary shall attend to the giving of all notices required by these Bylaws to be given; shall be custodian of the corporate seal, records, document and papers of the Association; shall provide for the keeping of proper records of all transactions of the Association; shall have and may exercise any and all other powers and duties pertaining by law, regulation or practice, to the Secretary, or imposed by these Bylaws; and shall also perform such other duties as may be assigned from time to time by the board. Section 4.5. Other Officers. The board may appoint, and may authorize the Chairman or the President to appoint, any officer as from time to time may appear to the board, the Chairman or the President to be required or desirable to transact the business of the Association. Such officers shall exercise such powers and perform such duties as pertain to their several offices, or as may be conferred upon or assigned to them by these Bylaws, the board, the Chairman or the President. Section 4.6. Tenure of Office. The Chairman or the President and all other officers shall hold office for the current year for which the board was elected, unless they shall resign, become disqualified, or be removed. Any vacancy occurring in the Office of Chairman or President shall be filled promptly by the board. -4- 11 Any officer elected by the board or appointed by the Chairman or the President may be removed at any time, with or without cause, by the affirmative vote of a majority of the board or, if such officer was appointed by the Chairman or the President, by the Chairman or the President, respectively. ARTICLE V Stock Section 5.1. Shares of stock shall be transferable on the books of the Association, and a transfer book shall be kept in which all transfers of stock shall be recorded. Every person becoming a shareholder by such transfer shall, in proportion to such person's shares, succeed to all rights of the prior holder of such shares. Each certificate of stock shall recite on its face that the stock represented thereby is transferable only upon the books of the Association properly endorsed. ARTICLE VI Corporate Seal Section 6.1. The Chairman, the President, the Secretary, any Assistant Secretary or other officer designated by the board, the Chairman, or the President, shall have authority to affix the corporate seal to any document requiring such seal, and to attest the same. Such seal shall be substantially in the following form: [FIRST TRUST CORPORATE SEAL] ARTICLE VII Miscellaneous Provisions Section 7.1. Execution of Instruments. All agreements, checks, drafts, orders, indentures, notes, mortgages, deeds, conveyances, transfers, endorsements, assignments, certificates, declarations, receipts, discharges, releases, satisfactions, settlements, petitions, schedules, accounts, affidavits, bonds, undertakings, guarantees, proxies and other instruments or documents may be signed, countersigned, executed, acknowledged, endorsed, verified, delivered or accepted on behalf of the Association, whether in a fiduciary capacity or otherwise, by any officer of the Association, or such employee or agent as may be designated from time to time by the board by resolution, or by the Chairman or the President by written instrument, which resolution or instrument shall be certified as in effect by the -5- 12 Secretary or an Assistant Secretary of the Association. The provisions of this section are supplementary to any other provision of the Articles of Association or Bylaws. Section 7.2. Records. The Articles of Association, the Bylaws and the proceedings of all meetings of the shareholders, the board, and standing committees of the board, shall be recorded in appropriate minute books provided for the purpose. The minutes or each meeting shall be signed by the Secretary, or other officer appointed to act as Secretary of the meeting. Section 7.3. Trust Files. There shall be maintained in the Association files all fiduciary records necessary to assure that its fiduciary responsibilities have been properly undertaken and discharged. Section 7.4. Trust Investments. Funds held in a fiduciary capacity shall be invested according to the instrument establishing the fiduciary relationship and according to law. Where such instrument does not specify the character and class of investments to be made and does not vest in the Association a discretion in the matter, funds held pursuant to such instrument shall be invested in investments in which corporate fiduciaries may invest under law. Section 7.5. Notice. Whenever notice is required by the Articles of Association, the Bylaws or law, such notice shall be by mail, postage prepaid, telegram, in person, or by any other means by which such notice can reasonably be expected to be received, using the address of the person to receive such notice, or such other personal data, as may appear on the records of the Association. Prior notice shall be proper if given not more than 30 days nor less than 10 days prior to the event for which notice is given. ARTICLE VIII Indemnification Section 8.1. The Association shall indemnify to the full extent permitted by, and in the manner permissible under, the Articles of Association and the laws of the United States of America, as applicable and as amended from time to time, any person made, or threatened to be made, a party to any action, suit or proceeding, whether criminal, civil, administrative or investigative, by reason of the fact that such person is or was a director, advisory director, officer or employee of the Association, or any predecessor of the Association, or served any other enterprise as a director or officer at the request of the Association or any predecessor of the Association. Section 8.2. The board in its discretion may, on behalf of the Association, indemnify any person, other than a director, advisory director, officer or employee, made a party to any action, suit or proceeding by reason of the fact that such person is or was an agent of the Association or any predecessor of the Association serving -6- 13 in such capacity at the request of the Association or any predecessor of the Association. ARTICLE IX Interpretation and Amendment Section 9.1. These Bylaws shall be interpreted in accordance with and subject to appropriate provisions of law, and may be amended, altered or repealed, at any regular or special meeting of the board. Section 9.2. A copy of the Bylaws, with all amendments, shall at all times be kept in a convenient place at the main office of the Association, and shall be open for inspection to all shareholders during Association hours. -7- 14 EXHIBIT 7 Consolidated Report of Condition for Insured Commercial and State-Chartered Savings Banks for December 31, 1996 All schedules are to be reported in thousands of dollars. Unless otherwise indicated, report the amount outstanding as of the last business day of the quarter. SCHEDULE RC - BALANCE SHEET Dollar Amounts in Thousands
- ----------------------------------------------------------------------------------------------------------------------- ASSETS 1. Cash and balances due from depository institutions (from Schedule RC-A): a. Noninterest-bearing balances and currency and coin (1)_________________________________________________ 76,629 b. Interest-bearing balances (2)__________________________________________________________________________ 0 2. Securities: a. Held-to-maturity securities (from Schedule RC-B, column A)____________________________________________ 0 b. Available-for-sale securities (from Schedule RC-B, column D)__________________________________________ 3,195 3. Federal funds sold and securities purchased under agreements to resell: a. Federal funds sold ___________________________________________________________________________________ 0 b. Securities purchased under agreements to resell ______________________________________________________ 0 4. Loans and lease financing receivables: a. Loan and leases, net of unearned income ______________________________________________________________ 0 (from Schedule RC-C)__________________________________________________________________________________ 0 b. LESS: Allowance for loan and lease losses____________________________________________________________ 0 c. LESS: Allocated transfer risk reserve _______________________________________________________________ 0 allowance, and reserve (item 4.a minus 4.b and 4.c) __________________________________________________ 0 d. Loans and leases, net of unearned income, 5. Trading assets ___________________________________________________________________________________________ 0 6. Premises and fixed assets (including capitalized leases) _________________________________________________ 99 7. Other real estate owned (from Schedule RC-M) _____________________________________________________________ 0 8. Investments in unconsolidated subsidiaries and associated companies (from Schedule RC-M) ___________________________________________________________________________________________ 0 9. Customers' liability to this bank on acceptances outstanding _____________________________________________ 0 10. Intangible assets (from Schedule RC-M) ___________________________________________________________________ 25,943 11. Other assets (from Schedule RC-F) ________________________________________________________________________ 2,217 12. Total assets (sum of items 1 through 11) _________________________________________________________________ 108,083
- ------------- (1) Includes cash items in process of collection and unposted debits. (2) Includes time certificates of deposit not held for trading. 15 SCHEDULE RC - CONTINUED Dollar Amounts in Thousands
- ---------------------------------------------------------------------------------------------------------------------------------- LIABILITIES 13. Deposits: a. In domestic offices (sum of totals of columns A and C from Schedule RC-E)_________________________________________________________________ 0 13.a (1) Noninterest-bearing (1)_________________________________________________________________________ 0 13.a.1 (2) Interest-bearing________________________________________________________________________________ 0 13.a.2 b. In foreign offices, Edge and Agreement subsidiaries, and IBFs_______________________________________ (1) Noninterest-bearing_____________________________________________________________________________ (2) Interest-bearing________________________________________________________________________________ 14. Federal funds purchased and securities sold under agreements to repurchase: a. Federal funds purchased_____________________________________________________________________________ 0 14.a b. Securities sold under agreements to repurchase______________________________________________________ 0 14.b 15. a. Demand notes issued to the U.S. Treasury____________________________________________________________ 0 15.a b. Trading liabilities_________________________________________________________________________________ 0 15.b 16. Other borrowed money: A. with a remaining maturity of one year or less_______________________________________________________ 0 16.a B. with a remaining maturity of more than one year_____________________________________________________ 0 16.b 17. Mortgage indebtedness and obligations under capitalized leases_________________________________________ 0 17. 18. Bank's liability on acceptances executed and outstanding_______________________________________________ 0 18. 19. Subordinated notes and debentures______________________________________________________________________ 0 19. 20. Other liabilities (from Schedule RC-G)_________________________________________________________________ 1,245 20. 21. Total liabilities (sum of items 13 through 20)_________________________________________________________ 1,245 21. 22. Limited-life preferred stock and related surplus_______________________________________________________ 0 22. EQUITY CAPITAL 23. Perpetual preferred stock and related surplus__________________________________________________________ 0 23. 24. Common stock___________________________________________________________________________________________ 1,000 24. 25. Surplus (exclude all surplus related to preferred stock)_______________________________________________ 106,712 25. 26. a. Undivided profits and capital reserves______________________________________________________________ (874) 26.a b. Net unrealized holding gains (losses) on available-for-sale securities______________________________ 0 26.b 27. Cumulative foreign currency translation adjustments____________________________________________________ 28. Total equity capital (sum of items 23 through 27)______________________________________________________ 106,838 28. 29. Total liabilities, limited-life preferred stock, and equity capital (sum of items 21, 22, and 28________________________________________________________________________________ 108,083 29. MEMORANDUM TO BE REPORTED ONLY WITH THE MARCH REPORT OF CONDITION. 1. Indicate in the box at the right the number of the statement below that best describes the most comprehensive level of auditing work performed for the bank by independent external auditors as of any date during 1995________________________________________ N/A 1= Independent audit of the bank conducted in accordance with generally accepted auditing standards by a certified public accounting firm which submits a report on the bank 2= Independent audit of the bank's parent holding company conducted in accordance with generally accepted auditing standards by a certified public accounting firm which submits a report on the consolidated holding company (but not on the bank separately) 3= Directors' examination of the bank conducted in accordance with generally accepted auditing standards by a certified public accounting firm (may be required by state chartering authority) 4= Directors' examination of the bank performed by other external auditors (may be required by state chartering authority) 5= Review of the bank's financial statements by external auditors 6= Compilation of the banks's financial statements by external auditors 7= Other audit procedures (excluding tax preparation work) 8= No external audit work
___________ (1) Includes total demand deposits and noninterest-bearing time and savings deposits. EX-99.(A) 6 APPLICATION FORM AND RELATED MATERIALS 1 EXHIBIT 99-A SC(SM) SERVISTAR COAST TO COAST Corporation PO Box 1510 Butler PA 16003 1510 412 283 4567 PLEASE READ...! ...ACTION REQUIRED BY JUNE 16TH.... ANNOUNCING NEW TRU*SERV INVESTMENT PROGRAM....AN ATTRACTIVE, CONVENIENT PROGRAM THAT PAYS MONEY MARKET RATES ON YOUR EXCESS CASH....! June 1, 1997 NAME STORE NAME STREET ADDRESS Dear SERVISTAR COAST TO COAST Member: OVERVIEW Thank you for your participation in the SERVISTAR COAST TO COAST Owner Deposit Program. While we will be terminating this program, we are introducing a new, exciting, Tru*Serv investment program that you will find attractive and convenient! With the merger on July 1, 1997 of SERVISTAR COAST TO COAST and Cotter & Company, you will need to make a choice about your money in the Owner Deposit Program. WHAT ARE MY TWO CHOICES? By Monday, June 16, 1997, you must choose one of the following options: (1) Roll over your total deposit, with interest through June 30, 1997, into the new Tru*Serv "Variable Denomination Floating Rate Demand Note" investment program (See attached Prospectus), or (2) Request that your total deposit, with interest through June 30, 1997, be refunded to you. If you do not let us know your choice by Monday, June 16, 1997, we will automatically refund your total deposit, with interest through June 30, 1997. 2 HOW MUCH IS MY DEPOSIT? Your total deposit, with interest through June 30, 1997, is: TOTAL AMT WHAT DO I NEED TO DO? First - Please read the attached "Question and Answer" summary Second - Please read the attached Prospectus Third - If you want your money returned to you, you can do nothing, or simply fill out the half sheet form and return it in the self-addressed return envelope Fourth - If you want to roll over your money into the new program, please fill out the application form, W-9 tax information, and Corporate Resolution and return them in the self-addressed return envelope SUMMARY After you read the attachments, I'm sure you will conclude that this is an attractive, convenient program in which to invest your excess cash! If you have questions on the Owner Deposit Program, please call JoAnn Russin at 412-284-6280. If you have questions on the new, TruServ Investment Program, please contact Liz Odle at 773-695-5388. Again, thanks for your participation in the Owner Deposit Program. Please read the attachments and let us know your decision by June 16, 1997. Sincerely, Patrick T. Kameen Operating Officer & Treasurer PTK:jr Attachments 3 TRU*SERV CORPORATION QUESTIONS AND ANSWERS FOR OWNER DEPOSIT PROGRAM (1) Why is SERVISTAR COAST TO COAST terminating the Owner Deposit Program? We feel that the Tru*Serv Investment program can best serve both memberships. (2) What do I need to do to have my money refunded to me? You can do nothing, or you can fill out the half sheet form (attached) and return it in the self-addressed return envelope. You will receive a check by July 15, 1997. (3) What happens if I do not respond by June 16, 1997? We will assume that you want your money refunded to you. We will mail you a check by July 15, 1997. (4) Will I receive credit for the interest that I have earned on my money? Yes. Whether you roll it over or have it refunded to you, you will receive credit for accrued interest through June 30, 1997. (5) Can I roll some of the money over and ask for some of it to be refunded to me now? No. You can roll it all over, or ask for it all to be refunded to you now. (6) If I choose to roll my money over into this new investment program, when will my interest begin accruing? On July 1, 1997. (7) If I roll my money over into the new program, what will I receive to confirm my decision? First, by July 15, 1997, you will receive a "Welcome Letter and a Confirmation of Deposit" from The Northern Trust Company, the bank administering this program for Tru*Serv. Second, by early October, you will receive your first regular quarterly statement for the quarter ending September 30, 1997. 4 (8) In what name can I register my roll over money? It must continue to be registered in the name of your corporation, partnership, or business entity, just as it is today. (9) Can non-U.S. citizens participate? No. Only U.S. citizens who provide a valid Federal Identification Number (e.g. Social Security Number for sole proprietorships, or Tax Payer Identification Number ("TIN") for corporations or partnerships) may participate in this program. (10) If I choose to roll over my money into this new program, why must I fill out the attached Corporate Resolution? Regulations require that programs such as this have on file the Corporate Resolution of the entity in whose name the money is registered. (11) What happens if I want to roll over my money but do not fill out the Corporate Resolution? We will have to refund your money to you, rather than roll over your money into the new program. (12) If I have my money refunded to me, will I be taxed on the refund? You will be taxed only on the interest on your money. You will receive a 1099 INT in early 1998 for filing your taxes for 1997. (13) Who can I call if I have questions? If your question is about the new program, please call Liz Odle at Cotter & Company at 773-695-5388. If your question is about the old program (Owner Deposit Program), please call JoAnn Russin at 412-284-6280. (14) What is the minimum investment? $250.00. If you currently have less than $250.00 in the Owner Deposit Program, you will automatically receive your total deposit, with interest through June 30, 1997, in the form of a check by July 15, 1997. 5 (15) Give me some quick information about the new Tru*Serv Variable Denomination Floating Rate Demand Notes? You must carefully read the attached Prospectus to fully understand the program and the risks. Below are some highlights of the program: - The Notes are registered under the federal Securities Act of 1933 - It is not insured by the FDIC - It is an obligation of Tru*Serv Corporation, and is not an obligation of a bank - It is administered by The Northern Trust Company - It provides a quarterly statement of all activity - It provides you a checkbook to write checks against, at a minimum check size of $250.00 (16) How is the variable interest rate set? The interest rate is set each week. A Tru*Serv Committee will determine the rate. Typically, the rate will exceed the yield on the average Money Market Fund, as reported by IBC's Money Fund report, which is published weekly each Thursday in The Wall Street Journal. (17) What would be the rate if this Committee were setting the weekly rate today? It would be about 5.10% per annum. (18) Is there any penalty for withdrawal? No. (19) How often is interest compounded? Interest is compounded monthly. Obviously, you earn interest every day. Your daily interest is accumulated at the end of each month and is added to your investment. Then, you begin earning interest on your interest. 6 APPLICATION FOR TRU*SERV VARIABLE DENOMINATION FLOATING RATE DEMAND NOTE INVESTMENT PROGRAM APPLICATION FOR CORPORATIONS, PARTNERSHIPS OR OTHER BUSINESS ENTITIES Please print or type all items except signature. Complete this application and the attached Resolution. Mail both in the enclosed self-addressed envelope ================================================================================ ACCOUNT INFORMATION ================================================================================ - -------------------------------------------------------------------------------- Entity Name - ----------------------------------------- ------------------------------- Mailing Address Tax I.D. Number - ----------------------------------------- ------------------------------- City State Zip Telephone Number INITIAL INVESTMENT - ------------------ [ ] PLEASE ROLL OVER MY TOTAL DEPOSIT FROM THE SCC "OWNER DEPOSIT PROGRAM" [ ] $ _______ ($250 minimum) ================================================================================ SUBSEQUENT INVESTMENTS ================================================================================ By Wire Transfer Subsequent Investments can be made by wire to: The Northern Trust Company, Chicago, Illinois ABA # 071000152 After your initial investment, you will be assigned an account number. For subsequent investments, please provide this account number in your wire transfer instructions. The minimum amount for subsequent investments is $50.00 By Check Investments can be mailed to: Tru*Serv Investment Program P.O. Box 75970 Chicago, Il 60675-5070 The minimum amount for subsequent investments is $50.00 7 ================================================================================ REDEMPTIONS (YOU MUST CHECK ONE OR BOTH) ================================================================================ [ ] By Wire Transfer If you want to make redemptions by wire transfer, please complete the "Designated Bank" information below and attach a voided blank check (minimum by wire transfer redemption of $2,500). You can wire funds to your designated bank account If you call The Northern Trust Company before 2:00 p.m. EST, you will receive a wire transfer no later than the next business day. [ ] By Check The Northern Trust Company will mail you your free supply of checks shortly after your account is opened (minimum check redemption of $250). Written Redemption: Subject to the terms of the Program as amended, you may also redeem any (but not less than $250 at a time) or all of your account by writing: Cotter & Company Investment Program, Investor Services Attn: Agent of Issuer, P.O. Box 75933, Chicago, IL 60675-5933. All Signatures of registered owners are required. Checks will be sent only to your registered account address. ================================================================================ DESIGNATED BANK ================================================================================ If you elected "Bank Wire Transfer Redemption," you must complete this section and attach a voided blank check. Checking [ ] - -------------------------------------- ---------------------------------------------------- Savings [ ] Name of Bank Account Bank Account Number - -------------------------------------- ---------------------------------------------------- Bank Name/Branch ABA Bank Routing Number (9-digit number) - ---------------------------------------------------------------------------------------------- Bank Address
================================================================================ W-9 TAX INFORMATION ================================================================================ [ ] W-9 Information must be completed or application will not be processed. Unless the box is checked, I am not subject to backup withholding because I have X Box If Applicable not been notified by the IRS that I am subject to such withholding, or the IRS has notified me that I am no longer subject to backup withholding. [ ] I am subject to backup withholding under provisions of selection 340(a)(1)(c) of the Internal Revenue Code. The Social Security or Taxpayer ID number provided on this form is correct. Instructions for Completing Payees Request for Taxpayers Identification Certification: Under Federal tax law, you must provide your correct Social Security Number or other Taxpayer ID Number, a certification that the number provided is correct and a certification that you are not subject to backup withholding. Failure to furnish your correct Social Security or Taxpayer ID Number or to so certffy will result in 31% of interest paid to your account being withheld and paid to the IRS. In addition, you may be subject to a penalty imposed by the IRS if you fail to provide your correct Social Security or Taxpayer ID Number or if you make an incorrect certification. ================================================================================ ARBITRATION ================================================================================ This Program shall be enforced and interpreted under the laws of the State of Illinois. Any controversy or claims arising out of or relating ot this Offer, or any breach thereof, including, without limintation, any claim that this Offer or any portion thereof is invalid, illegal or otherwise voidable, shall be submitted to arbitration before and in accordance with the rules of the American Arbitration Association unless another extra judicial dispute resolution process has been agreed to in writing by the parties. Judgment upon the award may be entered in any court having jurisdiction thereof. The location of the arbitration proceedings hsall be at the American Arbitration Association office geographically or physically located closest to teh investor's domicile, unless otherwise agreed upon in writing by the parties. 8 I/We jointly and severally hereby agree to defend, indemnify, reimburse, exonerate, save and hold harmless Cotter & Company and its agents for, from and against any and all losses, damages, claims, demands, and expenses including reasonable attorneys fees of any and every nature actually or allegedly arising in whole or in part out of the written information, tax identification number, certifications, notice or instructions provided by me/us or out of my/our bad faith, negligence, willful misconduct, strict liability of breach of this agreement/application. ================================================================================ YOUR SIGNATURE ================================================================================ The Notes will be subordinated in right of payment to senior notes, indebtedness to banking institutions, trade creditors and other indebtedness of the Company. The Notes are unsecured and rank equally and rateably with all other unsecured and subordinated indebtedness of the Company. By signing below, I certify that I have received the prospectus and agree to be bound by its terms, as may be amended from time to time, and that (1) the information on this application and accompanying resolution, including Tax Identification Number, is correct and complete and (2) the Entity is not currently subject to IRS backup withholding unless box on W-9 information has been checked. - -------------------------------------- ------------------------------------- Authorized Signature Date Entity Name Remember: Please complete and return the accompanying resolution with this application. 9 TRU*SERV CORPORATION REQUEST FOR REFUND OF OWNER DEPOSIT PROGRAM MONEY STORE NO: ----------------------------------------- STORE NAME: --------------------------------------- [ ] I want my Owner Deposit money refunded to me. (I (Please check) understand that, by July 15, 1997, 1 will receive a check for my total deposit, with interest through June 30, 1997.) -------------------------------------- Print Name - ----------------------------------- -------------------------------------- Date Signature Note: Please return to SERVISTAR COAST TO COAST in the enclosed self-addressed envelope 10 TRUSERV VARIABLE DENOMINATION FLOATING RATE DEMAND NOTE INVESTMENT PROGRAM Resolution for Corporations, Partnerships, and Other Business Entities To: TruServ c/o The Northern Trust Company as Agent Bank P.O. Box 75928 Chicago, IL 60675-5928 And: The Current And Any Successor Agent Bank NOTE: RETAIN A COPY OF THIS DOCUMENT FOR YOUR RECORDS. ANY MODIFICATION OF THE INFORMATION BELOW WILL REQUIRE AN AMENDMENT TO THIS FORM. THIS DOCUMENT IS IN FULL FORCE AND EFFECT UNTIL ANOTHER DULY EXECUTED FORM IS RECEIVED BY THE AGENT BANK. Dated and effective as of ---------------------------- [ ] New [ ] Amendment to Form Dated ------------------------------ Name of Registered Owner ------------------------------------------------------ Registered Owner is a: [ ] Corporation [ ] Partnership [ ] Other: -------------------------------------------- (Sole proprietorship, etc.) The undersigned does hereby certify that (s)he is authorized to furnish this Certificate on behalf of the above-named Registered Owner and that the following named persons are currently officers/general partners/other authorized signatories of the Registered Owner, and any __* of them ("Authorized Person(s)") is/are currently authorized under the applicable governing documents and law to act for and on behalf of the Registered Owner with respect to TruServ Variable Denomination Floating Rate Demand Note Accounts, including without limitation the purchase and redemption thereof and disposition of any proceeds thereof, and to execute and deliver any instrument deemed necessary or appropriate by the Agent Bank to effectuate the authority hereby conferred or confirmed: Name (Please print or type) Title Specimen Signature - --------------------------- ---------------------- ------------------------- - --------------------------- ---------------------- ------------------------- - --------------------------- ---------------------- ------------------------- - --------------------------- ---------------------- ------------------------- *INSERT A NUMBER, UNLESS OTHERWISE INDICATED, THE AGENT BANK MAY HONOR INSTRUCTIONS FROM ANY ONE OF THE PERSONS ABOVE, 11 For and on behalf of the Registered Owner the undersigned hereby (a) confirms that TruServ Corporation, the Agent Bank and their respective successors and assigns shall be entitled to rely without inquiry or investigation of any kind upon the instruction of any person(s) purporting to be (an) Authorized Person(s) as named in the Certificate form last received by the Agent Bank until the Agent Bank has received an amended Certificate form and has had a reasonable opportunity to act thereon; and (b) agrees to indemnify, hold harmless and reimburse TruServ Corporation, the Agent Bank and their respective successors and assigns for, from and against any and all losses, damages, claims, demands, and attorneys' fees Incurred or paid as a result of such reliance by any of them upon this Certificate. Signed: -------------------------------------- Type or Print Name: ------------------------- Title: --------------------------------------- INVESTMENTS IN THE TRU*SERV VARIABLE DENOMINATION FLOATING RATE DEMAND NOTE ACCOUNTS DO NOT CONSTITUTE DEPOSITS OF ANY TYPE WITH THE AGENT BANK. REFERENCE IS HEREBY MADE TO THE PROSPECTUS AND ANY SUPPLEMENTS OR REPLACEMENTS AS WELL AS ANY OTHER DOCUMENTS REFERRED TO THEREIN, FOR A FULL STATEMENT OF TRU*SERV CORPORATION'S AND THE AGENT BANK'S DUTIES. SUCH DOCUMENTS SHALL PREVAIL OVER THIS FORM TO THE EXTENT OF ANY CONFLICT OR INCONSISTENCY. EX-99.(B) 7 CURRENT APPLICATION FORM 1 EXHIBIT 99-B AGREEMENT AND APPLICATION FOR TRU*SERV VARIABLE DENOMINATION FLOATING RATE DEMAND NOTE INVESTMENT PROGRAM Please print or type all items except signature. Complete this application and mail in the enclosed self-addressed envelope. ================================================================================ ACCOUNT INFORMATION ================================================================================ Name 1 ---------------------------------------------------------------------- FIRST MIDDLE LAST SSN OR TAX I.D. NO. Name 2 (Joint Tenancy Partner 1) ---------------------------------------------------------------------- FIRST MIDDLE LAST SSN OR TAX I.D. NO. Registered Address --------------------------------------------------------- City, State, and Zip Code --------------------------------------------------- Area Code Telephone ( ) ------------------------------------------------------------------ Name 3 (Joint Tenancy Partner 2) -------------------------------------------- FIRST MIDDLE LAST SSN OR TAX I.D. NO. Name 4 (Joint Tenancy Partner 3) --------------------------------------------- FIRST MIDDLE LAST SSN OR TAX I.D. NO. ================================================================================ PLEASE CHECK ONE AND COMPLETE THE REQUIRED INFORMATION: ================================================================================ / / Cotter & Company Member/Investor - Member Number: - ------- ------- / / Current Cotter & Company Investment Program - Investor Account Number:942---------- ================================================================================ INITIAL INVESTMENT (By Check Only): $___________ ($250 minimum) ================================================================================ PLEASE ENTER ALL THE FOLLOWING INFORMATION BELOW: W-9 INFORMATION MUST BE COMPLETED OR APPLICATION WILL NOT BE PROCESSED. TYPE OF ACCOUNT: (SELECT ONE) / / Individual Ownership / / Joint Tenancy With Rights of Survivorship / / Tenancy of Custodian (Under the Uniform Gift to Minor Act)* / / Living Trust (A copy of the first & last page of Trust Agreement) *A minor is the beneficial owner of the account. An adult Custodian manages the account until the minor comes of age as specified in the Uniform Gift to Minors Act in the applicable state of residence. Custodian's signature is required for all transactions. ================================================================================ SUBSEQUENT INVESTMENTS (Not less than $50) ================================================================================ By Wire Transfer Subsequent Investments can be made by wire to: The Northern Trust Company, Chicago, Illinois ABA # 071000152 After your initial investment, you will be assigned an account number. For subsequent investments, please provide this account number in your wire transfer instructions. The minimum amount for subsequent investments is $50.00 By Check Investments can be mailed to: Tru*Serv Investment Program P.O. Box 75970 Chicago, Il 60675-5070 The minimum amount for subsequent investments is $50.00 2 ================================================================================ REDEMPTIONS (YOU MUST CHECK ONE OR BOTH) ================================================================================ [ ] By Bank Wire If you want to make redemptions by wire transfer, please Transfer complete the "Designated Bank" information below and attach a voided blank check (minimum by wire transfer redemption of $2,500). You can wire funds to your designated bank account If you call The Northern Trust Company before 2:00 p.m. EST, you will receive a wire transfer no later than the next business day. [ ] By Check The Northern Trust Company will mail you your free supply of checks shortly after your account is opened (minimum check redemption of $250). Written Redemption: Subject to the terms of the Program as amended, you may also redeem any (but not less than $250 at a time) or all of your account by writing: Cotter & Company Investment Program, Investor Services Attn: Agent of Issuer, P.O. Box 75933, Chicago, IL 60675-5933. All Signatures of registered owners are required. Checks will be sent only to your registered account address. ================================================================================ DESIGNATED BANK ================================================================================ If you elected "Bank Wire Transfer Redemption," you must complete this section and attach a voided blank check. Checking [ ] - -------------------------------------- ---------------------------------------------------- Savings [ ] Name of Bank Account Bank Account Number - -------------------------------------- ---------------------------------------------------- Bank Name/Branch ABA Bank Routing Number (9-digit number) - ---------------------------------------------------------------------------------------------- Bank Address
================================================================================ W-9 TAX INFORMATION ================================================================================ [ ] W-9 Information must be completed or application will not be processed. Unless the box is checked, I am not subject to backup withholding because I have X Box If Applicable not been notified by the IRS that I am subject to such withholding, or the IRS has notified me that I am no longer subject to backup withholding. [ ] I am subject to backup withholding under provisions of selection 340(a)(1)(c) of the Internal Revenue Code. The Social Security or Taxpayer ID number provided on this form is correct. Instructions for Completing Payees Request for Taxpayers Identification Certification: Under Federal tax law, you must provide your correct Social Security Number or other Taxpayer ID Number, a certification that the number provided is correct and a certification that you are not subject to backup withholding. Failure to furnish your correct Social Security or Taxpayer ID Number or to so certify will result in 31% of interest paid to your account being withheld and paid to the IRS. In addition, you may be subject to a penalty imposed by the IRS if you fail to provide your correct Social Security or Taxpayer ID Number or if you make an incorrect certification. - -------------------------------------------------------------------------------- I/We agree to all terms and conditions of the Cotter & Company TruServ Variable Denomination Floating Rate Demand Note Investment Program (the "Program") as set forth in the Prospectus. I/We acknowledge that I/we have received and reviewed the Prospectus and have reviewed and approved all schedules, including IRS W-9 Taxpayer Certification Form. I/We agree that Cotter & Company may amend the Program from time to time and that such amendments shall be binding upon me/us. I/We agree that Cotter & Company may comply with any levies, garnishments and court orders at the sole and absolute discretion of Cotter & Company. I/We jointly and severally hereby agree to defend, indemnify, reimburse, exonerate, save and hold harmless Cotter & Company and its agents for, from and against any and all losses, damages, claims, demands, and expenses including reasonable attorneys fees of any and every nature actually or allegedly arising in whole or in part out of the written information, tax identification number, certifications, notice or instructions provided by me/us or out of my/our bad faith, negligence, willful misconduct, strict liability of breach of this agreement/application. I/We agree that this Agreement and Application may be terminated by Cotter & Company at any time upon Cotter & Company's written notice mailed to me/us at the address stated herein. I/We understand that the Program is administered by The Northern Trust Company on behalf of Cotter & Company. The Northern Trust Company is not a co-principal of the Program and no investment dollars will be held by The Northern Trust Company. First Trust National Association is the acting indenture trustee of the Cotter & Company Investment Program pursuant to a written trust indenture between Cotter & Company and First Trust National Association. Additional copies of the Prospectus are available upon request by writing to: Cotter & Company Investment Program, Investor Services Attn: Agent of Issuer, P.O. Box 75933, Chicago, IL 60675-5933. This form is intended for the sole use of Investors in the Cotter & Company Investment Program. INCOMPLETE FORMS, MISSING SUPPORTING DOCUMENTATION FOR THE PURCHASE OF NOTE OR NOTES, WILL RESULT IN THE RETURN OF YOUR INVESTMENT. Summary of Key Features of the Program include, (full Program provisions are detailed in the Prospectus): - - The Notes are registered under the Federal Securities Act of 1933 - - It is not insured by the FDIC - - It is an obligation of Tru*Serv Corporation, and is not an obligation of any bank. The Notes will be subordinated in right of payment to senior notes, indebtedness to banking institutions, trade creditors and other indebtedness of the Company. The Notes are unsecured and rank equally and rateably with all other unsecured and subordinated indebtedness of the Company. - - It is administered by The Northern Trust Company - - It provides a quarterly statement of all activity - - It provides you a checkbook to write checks against, in the minimum amount of $250.00 ================================================================================ ARBITRATION ================================================================================ This Program shall be enforced and interpreted under the laws of the State of Illinois. Any controversy or claims arising out of or relating to this Offer, or any breach thereof, including, without limitation, any claim that this Offer or any portion thereof is invalid, illegal or otherwise voidable, shall be submitted to arbitration before and in accordance with the rules of the American Arbitration Association unless another extra judicial dispute resolution process has been agreed to in writing by the parties. Judgment upon the award may be entered in any court having jurisdiction thereof. The location of the arbitration proceedings shall be at the American Arbitration Association office geographically or physically located closest to the Investor's domicile, unless otherwise agreed upon in writing by the parties. By signing below, I/We certify that I/We have received the Prospectus and agree to be bound by its terms, and that (1) the information on this application, including Social Security or Tax Identification Number, is correct and complete and (2) I/We are not currently subject to IRS backup withholding unless the box on W-9 information has been checked. APPLICATIONS WILL BE REJECTED IF THIS FORM IS NOT COMPLETE. ALL APPLICANTS SIGNATURES ARE REQUIRED. PLEASE SIGN HERE PRIMARY SIGNATURE DATE -------------------------- --------------------- CO-APPLICANT SIGNATURE -------------------- CO-APPLICANT SIGNATURE DATE ----------------------- --------------------- CO-APPLICANT SIGNATURE ----------------------- DATE --------------------- 11/95 NM -----END PRIVACY-ENHANCED MESSAGE-----