-----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, Bq76dfUVXoi6aG4f2LJUSo9vRdPRPzH3VAdLmh9SX4c6NJ81zhb9z91tXQx74m82 0XQ3YMXUVIeDQMibCskIDA== 0000950124-98-001807.txt : 19980401 0000950124-98-001807.hdr.sgml : 19980401 ACCESSION NUMBER: 0000950124-98-001807 CONFORMED SUBMISSION TYPE: POS AM PUBLIC DOCUMENT COUNT: 4 FILED AS OF DATE: 19980331 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: TRUSERV CORP 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: POS AM SEC ACT: SEC FILE NUMBER: 333-18397 FILM NUMBER: 98580347 BUSINESS ADDRESS: STREET 1: 8600 WEST BRYN MAWR AVE CITY: CHICAGO STATE: IL ZIP: 60631 BUSINESS PHONE: 773-695-5000 MAIL ADDRESS: STREET 1: 8600 W. BRYN MAWR AVENUE CITY: CHICAGO STATE: IL ZIP: 60631-3505 FORMER COMPANY: FORMER CONFORMED NAME: COTTER & CO DATE OF NAME CHANGE: 19920703 POS AM 1 FORM S-4 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 31, 1998 REGISTRATION NO. 333-18397 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ----------------------- POST-EFFECTIVE AMENDMENT NO. 5 ON FORM S-2 TO FORM S-4 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ----------------------- TRUSERV CORPORATION (PRIOR TO JULY 1, 1997 KNOWN AS COTTER & COMPANY) (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE (STATE OR OTHER JURISDICTION OF INCORPORATION OR ORGANIZATION) 5072 (PRIMARY STANDARD INDUSTRIAL CLASSIFICATION CODE NUMBER) 36-2099896 (I.R.S. EMPLOYER IDENTIFICATION NO.) 8600 WEST BRYN MAWR AVENUE CHICAGO, IL 60631-3505 (773) 695-5000 (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) DANIEL A. COTTER CHIEF EXECUTIVE OFFICER TRUSERV CORPORATION 8600 WEST BRYN MAWR AVENUE CHICAGO, IL 60631-3505 (773) 695-5000 (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE) COPIES TO: DANIEL T. BURNS, ESQ. TRUSERV CORPORATION 8600 WEST BRYN MAWR AVENUE CHICAGO, IL 60631-3505 (773) 695-6601 (773) 695-5465 (fax) WILLIAM K. BLOMQUIST, ESQ. ARNSTEIN & LEHR 120 S. RIVERSIDE PLAZA SUITE 1200 CHICAGO, IL 60606-3913 (312) 876-7128 (312) 876-0288 (fax) 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 / - -------------------------------------------------------------------------------- 2 TRUSERV CORPORATION CROSS REFERENCE SHEET PURSUANT TO ITEM 501 OF REGULATION S-K
S-2 ITEM NUMBER AND HEADING LOCATION IN PROSPECTUS --------------------------- ---------------------- 1. Forepart of Registration Statement and Outside Front Cover Page of Prospectus.................................... Facing Page of Registration Statement; Cross-Reference Sheet; Outside Front Cover Page 2. Inside Front and Outside Back Cover Pages of Prospectus.................................................. Inside Front Cover Page; Available Information; Incorporation of Certain Documents by Reference; Outside Back Cover Page 3. Summary Information, Risk Factors and Ratio of Earnings to Fixed Charges........................................ Summary; Risk Factors 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....................... Description of Common Stock 10. Interests of Named Experts and Counsel........................... Not Applicable 11. Information with Respect to the Registrant....................... Summary, Available Information; Dividends; Selected Financial Data; Management's Discussion and Analysis of Financial Condition and Results of Operations; Business of TruServ; Distribution of Patronage Dividends; Management; Index to Consolidated Financial Statements 12. Incorporation of Certain Information by Reference................ Incorporation of Documents By Reference 13. Disclosure of Commission Position on Indemnification for Securities Act Liabilities................................... Not Applicable
3 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. SUBJECT TO COMPLETION PRELIMINARY PROSPECTUS DATED MARCH 30, 1998 PROSPECTUS TRUSERV CORPORATION 160,557 SHARES CLASS A COMMON STOCK, $100 PAR VALUE (IN UNITS OF SIXTY SHARES) THE COMMON STOCK OFFERED HEREUNDER IS OFFERED EXCLUSIVELY TO RETAILERS AND RENTERS OF HARDWARE, LUMBER AND RELATED PRODUCTS, IN CONNECTION WITH BECOMING MEMBERS OF THE COMPANY. (SEE "PLAN OF DISTRIBUTION" HEREIN.) THE COMMON STOCK OFFERED HEREUNDER IS LIMITED AS TO TRANSFERABILITY BY ITS TERMS. THE COMPANY RETAINS AN AUTOMATIC LIEN AGAINST SUCH COMMON STOCK, AND DIVIDENDS ACCRUING THEREON, FOR ANY INDEBTEDNESS DUE THE COMPANY. (SEE "DESCRIPTION OF COMMON STOCK" HEREIN.) THERE IS NO EXISTING MARKET FOR THE COMMON STOCK OFFERED HEREUNDER AND THERE IS NO EXPECTATION THAT ANY MARKET WILL DEVELOP. THIS PROSPECTUS RELATES TO SHARES OF THE CLASS A COMMON STOCK, PAR VALUE $100 PER SHARE ("CLASS A COMMON STOCK" OR THE "SHARES"), OF TRUSERV CORPORATION, A DELAWARE CORPORATION ("TRUSERV" OR THE "COMPANY"), FORMERLY KNOWN AS COTTER & COMPANY ("COTTER"), TO BE ACQUIRED, IN UNITS OF 60 SHARES EACH (SUBJECT TO A MAXIMUM OF FIVE UNITS PER PERSON), BY PERSONS BECOMING MEMBERS OF TRUSERV. SEE "SUMMARY," "RISK FACTORS" AND "BUSINESS OF TRUSERV" HEREIN FOR FURTHER INFORMATION. SEE "RISK FACTORS" BEGINNING ON PAGE 9 FOR CERTAIN INFORMATION THAT SHOULD BE CONSIDERED BY ANY PERSON CONTEMPLATING BECOMING A MEMBER OF TRUSERV AND ACQUIRING ANY OF THE SHARES. ------------------ 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 UNIT OF 60 SHARES OF PRICE TO DISCOUNTS AND PROCEEDS TO CLASS A COMMON STOCK PUBLIC COMMISSIONS COMPANY - --------------------------------------------------------------------------------------------------------------------- Per Unit(1)............................... $6,000 See (2) Below $6,000(3) Total..................................... $16,055,700 See (2) Below $16,055,700(3)
================================================================================ (1) The shares will be offered only in units of 60 Shares and no stockholder may purchase more than five such units. (2) There will be no underwriters. The subject stock will be sold directly by TruServ 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 TruServ. However, assuming the sale of all securities offered hereunder, and before deduction of approximately $50,000 for estimated expenses in connection with this offering, the total proceeds will be as shown above. ------------------ THE DATE OF THIS PROSPECTUS IS APRIL , 1998. 4 AVAILABLE INFORMATION TruServ (known as Cotter & Company prior to July 1, 1997) has filed with the Securities and Exchange Commission (the "Commission") a Registration Statement on Form S-4 (including all amendments, exhibits, annexes and schedules thereto, the "Registration Statement"), pursuant to the Securities Act of 1933, as amended (the "Securities Act"), and the rules and regulations promulgated thereunder, covering the TruServ Class A common stock. This Prospectus does not contain all of the information set forth in the Registration Statement, certain parts of which are omitted in accordance with the rules and regulations of the Commission. For further information, reference is hereby made to the Registration Statement. Statements made in this Prospectus as to the contents of any contract, agreement or other document are not necessarily complete. With respect to each such contract, agreement or other document filed as an exhibit to the Registration Statement or incorporated by reference herein, reference is made to the exhibit for a more complete description of the matters involved, and each such statement shall be deemed qualified in its entirety by such reference. The Registration Statement, including exhibits filed as a part thereof, is available at the Commission for inspection and copying as set forth below. TruServ 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 Commission. Such reports and other information may be inspected and copied at the public reference facilities maintained by the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and at the following Regional Offices of the Commission: Chicago Regional Office, Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511; and New York Regional Office, 7 World Trade Center, Suite 1300, New York, New York 10048. Copies of such materials can be obtained at prescribed rates 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 TruServ distributes to its Members an annual report containing consolidated financial statements reported upon by a firm of independent auditors. TruServ may, from time to time, also furnish to its Members interim reports, as determined by management. THIS PROSPECTUS INCORPORATES BY REFERENCE DOCUMENTS RELATING TO TRUSERV THAT ARE NOT PRESENTED HEREIN OR DELIVERED HEREWITH. TRUSERV WILL PROVIDE WITHOUT CHARGE TO ANY PERSON TO WHOM THIS PROSPECTUS IS DELIVERED, INCLUDING ANY BENEFICIAL OWNER OF THE SHARES, UPON WRITTEN OR ORAL REQUEST OF SUCH PERSON, A COPY OF ANY OR ALL SUCH DOCUMENTS RELATING TO TRUSERV (OTHER THAN EXHIBITS TO SUCH DOCUMENTS THAT ARE NOT SPECIFICALLY INCORPORATED HEREIN BY REFERENCE). WRITTEN REQUESTS FOR SUCH DOCUMENTS SHOULD BE DIRECTED TO KERRY J. KIRBY, EXECUTIVE VICE PRESIDENT, TREASURER AND CHIEF FINANCIAL OFFICER, TRUSERV CORPORATION, 8600 WEST BRYN MAWR AVENUE, CHICAGO, ILLINOIS 60631-3505; AND TELEPHONE REQUESTS MAY BE MADE TO MR. KIRBY AT 773-695-5000. COPIES OF DOCUMENTS SO REQUESTED WILL BE SENT BY FIRST CLASS MAIL, POSTAGE PAID, WITHIN ONE BUSINESS DAY OF THE RECEIPT OF SUCH REQUEST. ANNUAL REPORT ON FORM 10-K This Prospectus is accompanied by a copy of TruServ's Annual Report on Form 10-K for the fiscal year ended December 31, 1997. i 5 INCORPORATION OF DOCUMENTS BY REFERENCE The TruServ Annual Report on Form 10-K for the year ended December 31, 1997, previously filed by TruServ with the Commission pursuant to the Exchange Act, is hereby incorporated by reference into this Prospectus. Any statement contained in a document incorporated or deemed to be incorporated by reference herein shall be deemed to be modified or superseded for purposes of this Prospectus to the extent that a statement contained herein modifies or supersedes such statement. Any such statement so modified or superseded shall not be deemed, except as so modified or superseded, to constitute a part of this Prospectus. NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS WITH RESPECT TO THE MATTERS DESCRIBED IN THIS PROSPECTUS OTHER THAN THOSE CONTAINED HEREIN OR IN THE DOCUMENTS INCORPORATED BY REFERENCE HEREIN. ANY INFORMATION OR REPRESENTATIONS WITH RESPECT TO SUCH MATTERS NOT CONTAINED HEREIN OR THEREIN MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY TRUSERV. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, SECURITIES, IN ANY JURISDICTION TO OR FROM ANY PERSON TO OR FROM WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION OF AN OFFER IN SUCH JURISDICTION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF TRUSERV SINCE THE DATE HEREOF OR THAT THE INFORMATION IN THE PROSPECTUS OR IN THE DOCUMENTS INCORPORATED BY REFERENCE HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATES HEREOF OR THEREOF. ------------------------- ii 6 TABLE OF CONTENTS
PAGE ---- AVAILABLE INFORMATION................... i REPORTS TO SECURITY HOLDERS............. i ANNUAL REPORT ON FORM 10-K.............. i INCORPORATION OF DOCUMENTS BY REFERENCE............................. ii SUMMARY................................. 1 The Company........................... 1 Common Stock.......................... 2 Risk Factors.......................... 2 Retail Member Agreement............... 2 Franchises and Licenses............... 2 Retail Conversion Funds Agreement..... 3 Comparative Per Share Prices and Dividend Policies.................. 3 Comparative Per Share Data............ 3 Selected Financial Data............... 4 RISK FACTORS............................ 8 Uncertainties Associated with the Integration of Cotter and SCC...... 8 Uncertain Impact of Growth............ 8 Impact of Increasing Competition and Market Changes..................... 8 Potential Loss of Members............. 8 Volatility of Merchandise and Inventory Prices................... 8 Difficulties in Integrating Information Management and Technology Systems............................ 9 Impact of Environmental Issues........ 9 Difficulties of Combining Distribution Facilities and Systems Operations......................... 9
PAGE ---- Regional Variations in Marketing Opportunities...................... 9 Commonization......................... 9 Impact of Franchising and Licensing Laws............................... 9 USE OF PROCEEDS......................... 10 PLAN OF DISTRIBUTION.................... 10 DIVIDENDS............................... 10 BUSINESS OF TRUSERV..................... 10 General............................... 10 Retail Member Agreement; Franchise and License Agreements................. 13 DISTRIBUTION OF PATRONAGE DIVIDENDS..... 13 Payment of Patronage Dividends in Accordance with the Internal Revenue Code....................... 14 MANAGEMENT.............................. 16 DESCRIPTION OF COMMON STOCK............. 17 Dividend Rights....................... 17 Voting Rights......................... 17 Liquidation Rights.................... 17 Preemptive Rights..................... 17 Redemption Provisions................. 17 Stockholders.......................... 18 Other Restrictions and Rights......... 18 LEGAL MATTERS........................... 18 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS............................ 19
iii 7 ------------------------------------- THIS PAGE INTENTIONALLY LEFT BLANK ------------------------------------- 8 SUMMARY The following is a summary of certain information contained elsewhere in this Prospectus, the Exhibits hereto and documents incorporated by reference herein. This summary does not contain a complete statement of any material information relating to TruServ and the other matters discussed herein and is subject to, and is qualified in its entirety by, the more detailed information and financial statements contained or incorporated by reference in this Prospectus. Prospective Members of TruServ should read carefully this Prospectus in its entirety. Certain capitalized terms used in this summary are defined elsewhere in this Prospectus. This Prospectus and the documents incorporated herein by reference contain forward-looking statements about future results that are subject to risks and uncertainties. TruServ's actual results may differ significantly from the results discussed in the forward-looking statements. Factors that might cause such a difference include, but are not limited to, those discussed in "Risk Factors." On April 1, 1997, the stockholders of Cotter and the shareholders of ServiStar Coast to Coast Corporation ("SCC") agreed to merge the two companies pursuant to an Agreement and Plan of Merger (the "Merger Agreement"). The Merger was completed on July 1, 1997. Following completion of the Merger, the Company was renamed TruServ. THE COMPANY TruServ Corporation. TruServ was organized as Cotter & Company, a Delaware corporation in 1953. Upon its organization, it succeeded to the business of Cotter & Company, an Illinois corporation organized in 1948. TruServ's principal executive offices are located at 8600 West Bryn Mawr Avenue, Chicago, Illinois, 60631-3505. The telephone number is (773) 695-5000. TruServ is a Member-owned wholesaler of hardware, lumber/building materials and related merchandise. It was historically and is now the largest cooperative wholesaler of hardware and related merchandise in the United States. The Company manufactures paint and paint applicators. For reporting purposes, the Company operates in a single industry as a Member-owned wholesaler cooperative. The Company serves approximately 9,800 Coast to Coast(R), ServiStar(R) and True Value(R) Hardware Stores throughout the United States. Primary concentrations of Members exist in New York (approximately 8%), Pennsylvania (approximately 7%), California (approximately 5%) and Illinois, Michigan, Ohio and Texas (approximately 4% each). TruServ's Class A common stock $100.00 par value per share ("Class A common stock") being offered hereby is exclusively offered to retailers of hardware, lumber/building and related merchandise, in connection with becoming Members of TruServ. The Class A common stock (which is the sole voting stock) is offered only in sixty (60) share units and no party may acquire more than five units (at the rate of one unit per store). Sales of Class A common stock are made for cash. TruServ Class B nonvoting common stock, par value $100 per share ("Class B nonvoting common stock"), which is non-voting stock, is issuable only in connection with the Members' patronage dividends (see "Distribution of Patronage Dividends" below). Membership, depending on the terms of the Member's Retail Member Agreement with TruServ (the "Retail Member Agreement"), entitles TruServ Members to use certain TruServ trademarks and trade names, including the federally registered Coast to Coast(R), ServiStar(R) and True Value(R) trademarks, service marks and collective membership marks. Generally speaking, former Cotter Members and former SCC Members will continue to conduct their businesses under the same retail banners as before the Merger, except to the extent permitted by TruServ on a case by case basis. As soon as permitted by anticipated operating synergies, those Members and new Members joining TruServ after the Merger will have access to all private labels, except with respect to paint, mower and outdoor power equipment, the private labels of which will be limited to use by their respective retail organizations. Membership also entitles the Member to receive annual patronage dividends based upon the Member's purchases from TruServ. In accordance with TruServ's By-Laws and Retail Member Agreement, the annual patronage dividend is paid to Members out of the gross 1 9 margins from operations and other patronage source income, after deduction for expenses, reserves and provisions authorized by the Board of Directors. COMMON STOCK The Class A common stock being offered hereby is limited as to transferability in that TruServ has a ninety (90) day right of first refusal to repurchase, at par value, a Member's stock before such stock can otherwise be disposed of. Historically, the Company has always exercised the right to repurchase. Additionally, TruServ retains an automatic lien on the Class A common stock, and dividends accruing thereon, for any indebtedness due TruServ. TruServ is obligated to repurchase a Member's Class A common stock and the Member is obligated to sell such stock, at par value, in accordance with the terms and conditions set forth in TruServ's By-Laws upon termination of the Retail Member Agreement. The Agreement may be terminated by either TruServ or the Member upon sixty (60) days written notice. Termination by TruServ requires approval by a two-thirds vote of the Board of Directors, except in the following circumstances where TruServ has the right to immediately terminate the Agreement: the Member becomes insolvent, commits any act of bankruptcy, files a voluntary petition in bankruptcy, is adjudicated as bankrupt, or commits a breach of any obligation under the Agreement, which breach is not cured within ten (10) days after written notice to the Member by TruServ. There is no existing market for the Class A common stock offered hereunder and there is no expectation that any market will develop. TruServ intends to use the proceeds of this offering primarily for general working capital purposes, including the purchase of merchandise for resale to Members. RISK FACTORS The business of TruServ is subject to a number of risks, including: the uncertainties associated with the integration of the business of SCC and Cotter; 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 anticipated economies of scale and operating efficiencies of the post-Merger Company; difficulties in integrating merchandise ordering and purchasing systems, difficulties in integrating wholesale technology and technical support, the 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 TruServ's operations. RETAIL MEMBER AGREEMENT All TruServ Members who were previously Cotter Members, TruServ Members joining TruServ after the Merger, and those SCC Members who voted in favor of the Merger, will be governed by the then current form of TruServ Retail Member Agreement. Such Retail Member Agreement is an amendment and restatement of the existing Cotter Retail Member Agreement. 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, has been assigned by SCC to TruServ without further action. FRANCHISES AND LICENSES TruServ is continuing to review any retail activities which continue to be carried out as franchises. It is anticipated that additional licenses may be entered into periodically with respect to the Taylor Rental Centers and Grand Rental Stations. It is less likely that any additional franchise or license agreements will be entered into with respect to the other retail programs operated as franchises by SCC prior to the Merger. These programs will initially be operated as part of the cooperative activities of TruServ. 2 10 RETAIL CONVERSION FUNDS AGREEMENT In connection with the Merger, TruServ agreed to make available to those Members who were Members at the time of Merger an aggregate amount of $40,000,000 to assist those store owners in defraying various conversion costs associated with the Merger, and costs associated with certain upgrades and expansions of stores. Of this aggregate amount, $14,000,000 will be made available to former SCC Members to assist in defraying the costs of converting to certain TruServ wholesale ordering and retail systems. In addition, the amount of $10,000,000 will be available to former Cotter Members and former SCC Members (one-half thereof to each such group) to assist in defraying a portion of the costs of software consolidation of the businesses. Finally, the amount of $16,000,000 will be made available to former Cotter Members and former SCC Members (one-half thereof to each such group) to assist in defraying a portion of the costs of certain retrofitting and expansion projects at stores which are preapproved by TruServ. Members requesting disbursements from these Funds will agree to remain Members in good standing of TruServ for a period of five years, without material reductions in purchases, and, should they fail to do so, a prorated portion of any disbursement from the funds must be repaid by the Member to TruServ. As of December 31, 1997, TruServ payouts to Members from the Retail Conversion Fund totaled $9,877,000 COMPARATIVE PER SHARE PRICES AND DIVIDEND POLICIES TruServ Class A common stock is not listed or traded on any national securities exchange or on Nasdaq. It is offered exclusively to retailers or renters of hardware, lumber and related products, in connection with becoming Members of TruServ, at a purchase price equal to its par value. The TruServ Class A common stock is restricted as to transferability and no public market for such stock exists or is anticipated to develop in the future. TruServ does not pay dividends with respect to its Class A common stock. For information with respect to payment of patronage dividends, see "Distribution of Patronage Dividends" below. COMPARATIVE PER SHARE DATA Because of the absence of any public market for TruServ stock, and the sale or issuance thereof at its par value and any repurchase thereof at par, earnings per share is inapplicable. The following table sets forth certain book value per share data for TruServ on a historical basis.
HISTORICAL ---------- Book value per share as of: December 31, 1997......................................... $100.40 December 28, 1996......................................... $101.89
- ------------------------- (1) The determination of book value per common share is based on the outstanding common series A and common shares. 3 11 SELECTED FINANCIAL DATA
FOR THE FISCAL YEARS -------------------------------------------------------------- 1997 1996 1995 1994 1993 ---- ---- ---- ---- ---- (IN THOUSANDS EXCEPT PER SHARE DATA) Revenues.................................... $3,331,686 $2,441,707 $2,437,002 $2,574,445 $2,420,727 Gross margins............................... $ 241,020 196,636 202,068 223,331 217,921 Net margins(a).............................. $ 42,716 52,410 59,037 60,318 57,023 Patronage dividends......................... 43,782 53,320 60,140 60,421 54,440 Total assets................................ 1,438,913 853,985 819,576 868,785 803,528 Long-term debt.............................. 169,209 80,145 79,213 75,756 69,201 Promissory (subordinated) and instalment notes payable............................. 172,579 185,366 186,335 199,099 217,996 Class A common stock........................ 47,423 4,876 5,294 6,370 6,633 Class B nonvoting common stock.............. 187,259 114,053 113,062 116,663 110,773 Book value per share of Class A common stock and Class B nonvoting common stock(b)..... 100.40 101.89 102.68 103.57 103.85
- ------------------------- (a) The net margin for Fiscal 1997 includes a deduction of $13,650,000 of non-recurring Merger integration costs. (b) The book value per share of the Company's Class A common stock and Class B nonvoting 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. 4 12 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS BUSINESS COMBINATION On July 1, 1997, TruServ Corporation, formerly Cotter & Company ("Cotter"), merged with ServiStar Coast to Coast Corporation ("SCC") (the "Merger"). SCC was a hardware wholesaler organized in 1935 with a strong presence in retail lumber and building materials. The transaction was accounted for using the purchase accounting method. The Consolidated Balance Sheet at December 31, 1997 reflects the post-Merger Company. The Consolidated Balance Sheet at December 28, 1996 reflects the pre-Merger Company. The Consolidated Statement of Operations and Consolidated Statement of Cash Flows for the year ended December 31, 1997, reflect the results of the post-Merger Company, which includes the results of operations of the former SCC since July 1, 1997. The Consolidated Statement of Operations and Consolidated Statement of Cash Flows for the years ended December 28, 1996 and December 30, 1995 reflect the results of the pre-Merger Company. To facilitate the comparison of fiscal year results for 1997 and 1996, supplemental comparisons have been provided using pro forma financial information. This pro forma information has been prepared for comparative purposes only and does not purport to be indicative of the results of operation that actually would have resulted had the Merger been in effect on the dates indicated, or which may results in the future.
PRO FORMA ------------------------ 1997 1996 ---------- ---------- Revenues.................................................... $4,224,215 $4,211,579 Gross margin................................................ 284,356 321,428 Warehouse, general and administrative....................... 175,774 215,216 Interest expense............................................ 43,459 40,135 Net margins................................................. 67,357 70,293
FISCAL YEAR 1997 COMPARED TO FISCAL YEAR 1996 RESULTS OF OPERATIONS In fiscal year 1997, TruServ Corporation revenues were $3,331,686,000, an increase of 36.4% from fiscal year 1996. The majority of the increase was due directly to the addition of SCC revenues since the July 1, 1997 Merger. The department with the largest increase is the Lumber/Building Material department which is directly connected to the enhanced lumber program effective with the Merger. In the hardware segment the largest increase was reflected in the direct shipment categories with TruServ Members responding to the improved pricing programs. Additionally, TruServ Corporation continued to pursue business opportunities such as trueAdvantage, which increased 3.3% and the Canadian business which increased 6.6%. Overall gross margins as a percentage of revenues decreased for the sixth year in a row to 7.2% from 8.1% last year. The reduction in the gross margin percent was due to a combination of changes in sales mix, pricing improvements and conforming accounting policies. The change in sales mix consisted of large volume increases in Lumber/Building Materials and Direct Shipments, which have lower gross margins. Pricing improvements resulted in lower direct shipment markups and a lower pricing on manufactured products. Warehouse, general and administrative expenses as a percentage of revenues were 4.5%, the lowest in over 10 years. The decrease in operating expenses was attributable to continued efforts to reduce operating costs. Certain estimates of warehouse, general and administrative expenses are recorded throughout the year including expenses related to capitalizable inventory related costs and other expense items. During the fourth quarter of fiscal 1997, the Company recorded approximately $4,000,000 of net reductions in warehouse, general and administrative expenses relating to the refinement of these estimates recorded in the prior three quarters and cost recoveries from manufacturers of approximately $8,000,000 related to the Fall market. 5 13 Interest paid to Members decreased by $595,000 or 3.2% primarily due to a lower average interest rate and the lower principal balance. Other interest expense increased $8,925,000 due to higher borrowings compared to the same period last year. The higher borrowings were required because of the increased cash requirements and inventory levels resulting from the Merger. The effective borrowing rate was lower due to the renegotiation of the rates since the date of the Merger. As a result, the net margin before Merger integration costs is $56,366,000 in fiscal year 1997 compared to $52,410,000 in fiscal year 1996. Merger integration costs of $13,650,000 consist of one time non-recurring expenses directly attributable to the Merger including distribution center closings, severance pay, information systems costs and general and administrative costs. These one time costs reduced the net margin to $42,716,000 for the year ended December 31, 1997. PRO FORMA FISCAL 1997 COMPARED TO PRO FORMA FISCAL 1996 RESULTS OF OPERATIONS On a pro forma basis, TruServ Corporation revenues were $4,224,215,000 for fiscal year 1997 compared to $4,211,579,000 in fiscal year 1996, for an increase of 0.3%. The department with the largest increase is the Lumber/Building Material department which is directly connected to the enhanced lumber program effective with the Merger. Gross margin on a pro forma basis decreased by $37,072,000 and as a percentage of revenues decreased to 6.7% from 7.6% last year. The reduction in the gross margin percent was due to a combination of changes in sales mix, pricing improvements and conforming accounting policies. The change in sales mix consisted of large volume increases in Lumber/Building Materials and Direct Ship, which have lower gross margins. Warehouse, general and administrative expenses on a pro forma basis as a percentage of revenues were 4.2% compared to 5.1% the prior year. The decrease in operating expenses was attributable to continued efforts to reduce operating costs. Interest paid to Members on a pro forma basis decreased by $1,534,000 or 8.0% primarily due to a lower average interest rate and the lower principal balance. Other interest expense increased $4,858,000 due to higher borrowings compared to the same period last year. The higher borrowings were required because of the increased cash requirements and inventory levels resulting from the Merger. The effective borrowing rate was lower due to the renegotiation of the rates since the date of the Merger. As a result of the decreased gross margin and increased borrowing costs, the net margin on a pro forma basis is $67,357,000 in fiscal year 1997 compared to $70,293,000 in fiscal year 1996. FISCAL YEAR 1996 COMPARED TO FISCAL YEAR 1995 RESULTS OF OPERATIONS 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 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, which both increased 14.2%. Also, the Company further expanded the Pinpoint Pricing program to further reduce the selling price of many core hardware 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 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 expenses and an expense recovery associated with prior years' favorable risk loss experience. 6 14 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 $11,000,000 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 $7,000,000 and cost recoveries from manufacturers of approximately $5,000,000 related to the Fall market. Interest paid to Members decreased by $2,167,000 or 10.5% primarily due to 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. LIQUIDITY AND CAPITAL RESOURCES Cash and cash equivalents increased from $1,662,000 at December 28, 1996 to $2,224,000 at December 31, 1997. This increase was primarily due to cash flow provided by operating and financing activities. Cash provided by operating activities was $19,771,000 for the year ended December 31, 1997 compared to cash flow used for operating activities of $9,609,000 for the year ended December 28, 1996. The increase came primarily from better control of accounts and notes receivables resulting in a $47,288,000 reduction in receivables. Inventory levels, accounts payable and accrued expenses all increased with the additional support requirements needed to service a larger Membership base resulting from the Merger. Cash flows used for investing activities increased to $44,359,000 in fiscal year 1997. Total capital expenditures, including those made under capital leases, were $38,493,000 for the fiscal year ended December 31, 1997 compared to $23,530,000 during the comparable period in 1996. These capital expenditures related to additional equipment and technological improvements at the regional distribution centers and at the World Headquarters, in addition to capital requirements resulting from the Merger. Funding of any additional 1998 capital expenditures is anticipated to come from operations and external sources, if necessary. The cash flows used for investing activities were funded by both operating activities and financing activities. The financing activities provided cash flow of $25,150,000 in fiscal year 1997. At December 31, 1997, net working capital decreased to $175,975,000 from $201,304,000 at December 28, 1996. The current ratio decreased to 1.20 at December 31, 1997 compared to 1.43 at December 28, 1996. At December 31, 1997, the Company had established a $300,000,000 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 $210,000,000 and $70,594,000 at December 31, 1997 and December 28, 1996, respectively. The Company's capital is primarily derived from Class A common stock and retained earnings, together with Class B nonvoting common stock issued in connection 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. YEAR 2000 A portion of the Company's information systems are not "Year 2000 Compliant". This means that the Company will need to incur certain costs to modify non-compliant systems prior to the Year 2000 in order to ensure that those systems continue to serve the needs of the Company and its Membership. Based upon an initial investigation of the Company's systems, the Company estimates that such costs could exceed $10,000,000. Actual costs may exceed this estimate depending on Merger efforts and system resource constraints. Actual costs to date are $2,500,000. Further, based upon current FASB Guideline, costs incurred to modify systems to be Year 2000 compliant must be expensed. Accordingly, such costs will reduce our patronage dividends in years in which they are incurred. 7 15 RISK FACTORS This Prospectus contains forward-looking statements which involve risks and uncertainties. TruServ's actual results may differ significantly from the results discussed in the forward-looking statements. Factors that might cause such a difference include, but are not limited to, those discussed below. Such factors, together with the other information in this Prospectus, should be considered carefully. UNCERTAINTIES ASSOCIATED WITH THE INTEGRATION OF COTTER AND SCC The Merger involves the integration of SCC and Cotter's business activities. Among the factors considered by the Cotter Board of Directors and SCC Board of Directors in connection with their approval of the Merger Agreement were the opportunities for operating efficiencies that they expect will ultimately result from the Merger. The integration of TruServ's operations will require the dedication of management resources in order to achieve the anticipated operating efficiencies of the Merger. No assurance can be given that difficulties encountered in integrating TruServ's on-going operations will be overcome or that the benefits expected from such integration will be realized. The difficulties of combining the SCC operations and Cotter's are increased by the necessity of coordinating geographically separated organizations, integrating personnel with disparate business backgrounds and combining different corporate cultures. Difficulties encountered in connection with the Merger and the integration of the operations of SCC and Cotter could have an adverse effect on the business, results of operations or financial condition of TruServ. Loss of key employees may also adversely affect TruServ. UNCERTAIN IMPACT OF GROWTH TruServ is unable to predict the impact anticipated growth in the hardware, DIY and rental industries may have on its future business activities. While TruServ believes such growth will be beneficial to the new cooperative and its Members, no assurances can be given as to whether, when or at what cost these benefits may be achieved. IMPACT OF INCREASING COMPETITION AND MARKET CHANGES In recent years, the hardware, DIY and rental businesses have become increasingly competitive. TruServ will continue to experience intense competition from so-called "Big Box" stores such as Home Depot, Menards, Builders Square and Lowes, as well as from additional emphasis on directly competitive lines of business by diversified retailers such as Sears. In many instances, these competitors have greater resources, larger market shares and more widespread presence than TruServ has. While TruServ believes that because of its structure as a cooperative, it represents the best opportunity for its Members to compete with the Big Boxes and general retailers, no assurances can be given that such competition will be successful in any individual case or as a whole. POTENTIAL LOSS OF MEMBERS If either a significant number of Members or Members representing a disproportionate amount of the Members' aggregate purchases choose to terminate their memberships as a result of dissatisfaction with the Merger, the effect on TruServ could be adverse. Management has projected that approximately 300 former SCC Members may leave the membership within the first 12 months following the Merger. Such loss of members is not expected to have a material impact on TruServ. TruServ has not experienced any material loss of former Members due to the Merger. TruServ believes that various competing cooperative organizations will continue to attempt to persuade former Members of SCC and Cotter to terminate their relationships and become members of such competing organizations. To the extent these recruitment efforts are successful, the effect on TruServ and its Members could be adverse. VOLATILITY OF MERCHANDISE AND INVENTORY PRICES Merchandise and inventory prices in the lumber and building material businesses can change rapidly and as a result of such fluctuations may have periodic adverse effects on TruServ's profit margins and competitive 8 16 abilities. Generally speaking, prices for goods are higher when purchased in smaller lots. While TruServ believes its cooperative structure presents the best opportunity for Members to maximize their purchasing power and acquire merchandise for their Members at lower prices, no assurances can be given that such will be the case for any individual Member or as a whole. DIFFICULTIES IN INTEGRATING INFORMATION MANAGEMENT AND TECHNOLOGY SYSTEMS The Management Information Systems and other technological aspects of the pre-Merger businesses of Cotter and SCC, such as ordering systems, differing types of SKU's, and Member communication systems, among others, are not compatible. TruServ expects to integrate these systems as rapidly as possible, but it is possible that currently unanticipated delays in time and increased costs in achieving such systems integration may be encountered as the business of TruServ goes forward. IMPACT OF ENVIRONMENTAL ISSUES Certain aspects of TruServ's business activities, such as the manufacture of paint and related products, are carried on in environmentally sensitive areas. TruServ is unable to predict whether, or to what extent, such business activities may result in future costs or liabilities which are not currently known. In addition, the environmental area is under constant review and scrutiny by governmental authorities at the federal, state and local levels. No assurances can be given that such governmental scrutiny may not have a material adverse effect on TruServ. DIFFICULTIES OF COMBINING DISTRIBUTION FACILITIES AND SYSTEMS OPERATIONS Because of the disparate nature of existing distribution facilities and methods, TruServ expects to spend significant time, effort and funds in commonizing those activities. While TruServ has no reason to expect that such commonization will not be achieved over time, the cost of doing so may be material. REGIONAL VARIATIONS IN MARKETING OPPORTUNITIES Because TruServ will transact business nationwide, there may from time to time be significant variations in marketing opportunities available to its Members depending on economic conditions in the specific geographic region in which that Member conducts his or her primary business. To the extent that specific geographic regions experience more favorable or unfavorable economic conditions than other areas of the country, the business of Members in those regions would be affected accordingly. TruServ is not able to predict whether the effect of such regional variations might be material to any individual Member. COMMONIZATION Prior to the Merger, Members of SCC and Cotter utilized different pricing strategies in the conduct of their separate businesses, disparate merchandise assortments and merchandise identification systems, procurement and distribution methods, vendor selection rationales, and stock keeping unit systems. These various items will be commonized over time for all Members. TruServ is not currently able to predict the costs of such commonization, which may be material, or the effect on anticipated operating synergies resulting from the Merger. IMPACT OF FRANCHISING AND LICENSING LAWS Prior to the Merger, SCC conducted a portion of its business in the form of franchise and license arrangements with Members. As part of this process, SCC complied with various franchise registration and related laws in approximately fifteen states. Cotter did not conduct any portion of its business as a franchise prior to the Merger. To the extent that additional business activities of TruServ are required to comply with various franchise or licensing laws, rules or regulations, additional costs would be incurred. TruServ cannot currently quantify the potential cost of such compliance. Furthermore, such franchise and license compliance issues could adversely impact the relationship between TruServ and its Members, as well as the manner in 9 17 which TruServ is expected to conduct its operations, and lead to loss of management flexibility and related synergies. USE OF PROCEEDS The proceeds to be received from this offering of Class A common stock will be used by TruServ primarily for general working capital purposes, including the purchase of merchandise for resale to Members and the maintenance of adequate inventory levels. Until used as provided herein, the net proceeds of the sale of the Class A common stock may be invested in short-term commercial paper, bank certificates of deposit, government securities, repurchase agreements, or other similar short-term investments. TruServ will use its best efforts to sell the Class A common stock being offered hereunder but can give no assurances that all such Class A common stock will be sold. As a result, TruServ may not receive the entire amount of estimated proceeds from the sale of said Class A common stock. PLAN OF DISTRIBUTION TruServ's Class A common stock being offered hereby is offered exclusively to retailers of hardware, lumber and related merchandise, in connection with becoming Members of TruServ. Each independent retailer who applies to become a stockholder-Member must subscribe for sixty (60) shares of TruServ's Class A common stock, $100 par value, having a total purchase price of $6,000, for each retail store (up to a maximum of 300 shares at $30,000 for five or more stores). All sales of the Class A common stock will be made for cash. Sales of Class A common stock are primarily made through TruServ's registered securities agent(s) but only after the executive officers of TruServ approve the admission of a new Member. Neither TruServ executive officers nor its agent(s) receive any special or separate compensation or commission in connection with the admission of new Members and concomitant sales of Class A common stock. Although TruServ's retail support representatives frequently are TruServ's initial contact with potential new Members, they do not, and are not empowered to, admit new Members to TruServ. DIVIDENDS Other than the payment of patronage dividends, including the redemption of some nonqualified written notices of allocation, TruServ has not paid dividends on its Class A common stock or Class B nonvoting 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 nonvoting common stock, subject to the provisions of the Company's Certificate of Incorporation, may be declared out of gross margins of TruServ, 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" and "Description of common stock". BUSINESS OF TRUSERV GENERAL TruServ is the largest Member-owned wholesaler of hardware, lumber and related merchandise. Historically, Cotter was the largest and SCC the third largest cooperative wholesaler of hardware and related merchandise in the United States. TruServ also manufactures paint and paint applicators. For reporting purposes, TruServ operates in a single industry as a Member-owned wholesaler cooperative. On April 1, 1997, the stockholders of Cotter and the shareholders of SCC agreed to merge the two companies pursuant to the Merger Agreement. SCC was a $1,700,000,000 hardware wholesaler organized in 10 18 1935 with a strong presence in retail lumber and building materials. The transaction was completed on July 1, 1997. Following completion of the Merger, the Company was renamed TruServ Corporation. Membership entitles a Member to use certain TruServ trademarks and trade names, including the federally registered collective membership trademark True Value(R), indicating membership in Coast to Coast(R), ServiStar(R) and "True Value(R) Hardware Stores". The "True Value(R)" collective membership mark has a present expiration date of January 2, 2003; the ServiStar(R) mark has a present expiration date of September 13, 2003; the Coast to Coast(R) mark expires on November 3, 2004; the InduServe Supply(R) mark has a present expiration date of February 12, 2000; the Grand Rental Station(R) mark has a present expiration date of June 4, 2005; the Taylor Rental(R) mark has a present expiration date of January 15, 2004; the Home & Garden Showplace(R) mark has a present expiration date of February 12, 2000 and the Commercial Sales(R) mark has a present expiration date of December 16, 2007. The precise names and marks entitled to be used are set forth in a Member's Retail Member Agreement. TruServ serves approximately 9,800 Coast to Coast(R), ServiStar(R) and True Value(R) Hardware Stores throughout the United States. Primary concentrations of Members were in New York (approximately 8%), Pennsylvania (approximately 7%), California (approximately 5%) and Illinois, Michigan, Ohio and Texas (approximately 4% each). TruServ's total sales of merchandise to its U.S. Members were divided among the following general classes of merchandise:
FOR THE FISCAL YEARS --------------------- 1997 1996 1995 ----- ----- ----- Lumber and Building Materials...................... 24.5% 12.8% 12.7% Hardware Goods..................................... 19.5% 22.4% 22.3% Electrical and Plumbing............................ 15.8% 18.2% 17.7% Farm and Garden.................................... 13.1% 13.8% 13.3% Painting and Cleaning.............................. 12.0% 14.0% 13.3% Appliances and Housewares.......................... 9.4% 11.2% 11.7% Sporting Goods and Toys............................ 5.7% 7.6% 9.0%
TruServ serves its Members by functioning as a low cost distributor of goods and maximizing its volume purchasing abilities, primarily through lower prices and 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 dividends. TruServ has numerous individual agreements or commitments from its suppliers, virtually all of which are terminable by such suppliers or the Company without cause. Such provisions, either individually or in the aggregate, have not had any material adverse effect on TruServ's ability to conduct its business. The goods and services purchased by TruServ from these suppliers are generally available from a wide variety of sources. TruServ is not dependent upon any one supplier or group of suppliers and has not experienced a problem in obtaining necessary goods. TruServ holds conventions and meetings for its Members in order to keep them better informed as to industry trends and the availability of new merchandise. TruServ also provides each of its Members with an illustrated price catalog showing the products available from TruServ. TruServ's sales to its Members are divided into three categories, as follows: (1) warehouse shipment sales (approximately 44% of total sales); (2) direct shipment sales (approximately 49% of total sales); and (3) relay sales (approximately 7% of total sales). Warehouse shipment sales are sales of products purchased, warehoused, and resold by TruServ upon orders from the Members. Direct shipment sales are sales of products purchased by TruServ but delivered directly to Members from manufacturers. Relay sales are sales of products purchased by TruServ in response to the requests of several Members for a product which is (i) included in future promotions; (ii) not normally held in inventory and (iii) is not susceptible to direct shipment. Generally, TruServ 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 TruServ, it is not warehoused; rather, TruServ breaks up the shipment and "relays" the appropriate quantities to the Members who placed orders. TruServ also manufactures paint and paint applicators. The principal raw materials used by TruServ are chemicals including among other ingredients, resins, solvents, coalescent extenders and pigments. All raw 11 19 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 TruServ from these vendors are generally available from a variety of sources. TruServ is not dependent upon any one supplier and has not experienced a problem in obtaining necessary raw materials. TruServ annually sponsors two "markets". 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 both February 28, 1998 and February 22, 1997, the Company had a backlog of firm orders (including relay orders) of approximately $16,000,000. TruServ'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 TruServ's four markets, for delivery during the several months subsequent to the markets. Thus, TruServ 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 TruServ 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 and brought pressures for lower merchandise costs, to which TruServ has been responsive through a retail oriented competitive pricing strategy on high turnover, price sensitive items. The trueAdvantage(TM) program was introduced by Cotter in 1995 and upgraded in 1997 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 TruServ 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. TruServ 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. TruServ, 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 520 True Value(R) Hardware and V&S(R) Variety Stores, all located in Canada. The cooperative has approximately 350 employees and generated less than 5% of TruServ's consolidated revenue in fiscal year 1997. TruServ operates several other subsidiaries, most of which are engaged in businesses providing additional services to TruServ's Members. In the aggregate, these subsidiaries are not significant to TruServ's results of operations. TruServ employs approximately 5,800 persons in the United States on a full-time basis. Due to the widespread geographical distribution of TruServ's operations, employee relations are governed by the practices prevailing in the particular area and are generally dealt with locally. Approximately 22% of TruServ's hourly-wage employees are covered by collective bargaining agreements which are generally effective for periods of three or four years. In general, TruServ considers its relationship with its employees to be good. 12 20 RETAIL MEMBER AGREEMENT; FRANCHISE AND LICENSE AGREEMENTS The TruServ Retail Member Agreement provides, among other things, that each Member: (i) will be required to own 60 shares of Class A common stock of TruServ for each store owned by such Member (up to a maximum of 300 shares for five or more stores); (ii) will conduct its businesses under the True Value(R), ServiStar(R) or Coast to Coast(R) names (or other affiliated names or marks) subject to the terms of the Retail Member Agreement; (iii) will conduct a retail hardware, lumber, building materials, home center, rental or industrial/ commercial operation at a designated location; (iv) will comply with TruServ's By-Laws as in effect from time to time; (v) will accept patronage dividends in a form complying with the requirement of the Internal Revenue Code for deduction from gross income by TruServ; (vi) may receive different services and pay different charges based on the volume of merchandise purchased by the Member; (vii) agrees to have its Retail Member Agreement terminated in certain circumstances by unilateral action by TruServ's Board of Directors; (viii) agrees to have its Retail Member Agreement automatically modified upon notice to the Member by TruServ of any change in its Certificate of Incorporation or By-Laws or any resolution of the Board of Directors; (ix) agrees to have its Retail Member Agreement governed by Illinois law, and enforced or interpreted only in courts located in Cook County, Illinois or any contiguous county; and (x) may terminate the Retail Member Agreement upon 60 days written notice to TruServ. Some of the licenses and franchise agreements of former SCC Members have been assigned by TruServ to a new wholly-owned limited liability company which was created for the purpose of continuing to operate any license or franchise activities which have been continued in that format after July 1. TruServ will review any retail activities which continue to be carried out as franchises. It is anticipated that additional licenses may be entered into periodically with respect to the Taylor Rental Centers and Grand Rental Stations. It is less likely that any additional franchise or license agreements will be entered into with respect to the other retail programs operated as franchises by SCC prior to the Merger. Rather, it is contemplated that these programs will initially be operated as part of the cooperative activities of TruServ. DISTRIBUTION OF PATRONAGE DIVIDENDS TruServ operates on a cooperative basis with respect to business done with or for Members. All Members are entitled to receive patronage dividend distributions from TruServ on the basis of gross margins of merchandise and/or services purchased by each Member. In accordance with TruServ'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 90 days after the close of TruServ'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 TruServ's fiscal year, and TruServ may elect to distribute the annual patronage dividend at a later time than usual in accordance with the provisions of the Code. TruServ'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 par value thereof, to a maximum of 2% of the Member's net purchases of merchandise from TruServ for the year (except in unusual circumstances of individual hardships, in which 13 21 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 TruServ. TruServ 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 nonvoting common stock of TruServ had historically been limited by the Board of Directors to an amount, the cumulative value of which will not exceed two percent (2%) of the Member's net purchases of merchandise from the Company. Commencing in 1996, the Board established minimum Class B nonvoting ownership requirements (currently $25,000 for hardware stores and $15,000 for lumber stores) which may be varied from time to time and is comprised of the aggregate of a Member's various types of annual purchases multiplied by a specific percentage, that varies from 1% to 14%, decreasing as total dollar purchases by category increase. 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 TruServ, while considering the needs of its 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. Until at least December 31, 1998, new Members who join TruServ will have their patronage dividend computed and distributed in accordance with the method used prior to the Merger by the constituent corporation thereof offering the retail program (e.g., Coast to Coast(R), ServiStar(R), or True Value(R)) chosen by such new Members. PAYMENT OF PATRONAGE DIVIDENDS IN ACCORDANCE WITH THE INTERNAL REVENUE CODE The Code specifically provides for the taxation of cooperatives (such as TruServ) and their patrons (such as TruServ'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 nonvoting common stock and other written notices, which disclose to the recipient the stated amount allocated to him by TruServ and the portion thereof which is a patronage dividend, distributed by TruServ 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 TruServ pay 20% or more of the 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 TruServ 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 TruServ or includable in gross income of the patron (Member) until redeemed by TruServ. 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 nonvoting common stock, 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 and Class B nonvoting common stock. 14 22 In response to the provisions of the Code, TruServ's By-Laws provide for the treatment of the shares of Class B nonvoting common stock 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 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 TruServ) 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 TruServ 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 TruServ in the manner provided in its Retail Member Agreement. Each year since 1978, TruServ 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 have a material adverse effect on the operations of TruServ or its ability to maintain adequate working capital for the normal requirements of its business. However, TruServ 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 nonvoting common stock to each Member, TruServ deposits a bulk certificate 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. 15 23 MANAGEMENT The directors, senior and executive officers of TruServ are as follows: DONALD C. BELT -- 51 Senior Vice President, Marketing and Strategic Development J.W. (BILL) BLAGG -- 48 Director DANIEL T. BURNS -- 47 Senior Vice President and General Counsel WILLIAM M. CLAYPOOL, III -- 75 Director DANIEL A. COTTER -- 62 Director, Chief Executive Officer and Chairman of the Board BERNARD D. DAY -- 50 Senior Vice President, Lumber JAY FEINSOD -- 54 Director DAVE GUTHRIE -- 45 Director WILLIAM M. HALTERMAN -- 50 Director WILLIAM HOOD -- 58 Director JAMES HOWENSTEIN -- 54 Director DONALD J. HOYE -- 49 Executive Vice President -- Business Development JERRALD T. KABELIN -- 60 Director PETER G. KELLY -- 54 Director KERRY J. KIRBY -- 52 Executive Vice President, Finance and Chief Financial Officer ROBERT J. LADNER -- 52 Director PAUL M. LEMERISE -- 52 Executive Vice President, Chief Information Officer EUGENE J. O'DONNELL -- 51 Executive Vice President -- Merchandising ROBERT OSTROV -- 49 Senior Vice President, Human Resources PAUL E. PENTZ -- 57 Director, President & Chief Operating Officer 16 24 JOHN P. SEMKUS -- 52 Senior Vice President, Distribution and Transportation GEORGE V. SHEFFER -- 45 Director DENNIS A. SWANSON -- 58 Director RUSS THOMAS -- 58 Senior Vice President, Human Resources JOHN WAKE, JR. -- 42 Director JOHN M. (MITCH) WEST, JR. -- 45 Director BARBARA B. WILKERSON -- 49 Director During the past five years, the principal occupation of each director of the Company, other than Daniel A. Cotter and Paul E. Pentz, was the operation of retail hardware stores or lumber/building materials stores. DESCRIPTION OF COMMON STOCK DIVIDEND RIGHTS. Dividends (other than patronage dividends) upon the Class A common stock and Class B nonvoting common stock, subject to the provisions of TruServ's Certificate of Incorporation, may be declared out of gross margins of TruServ, 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 "Dividends"). VOTING RIGHTS. The Class A common stock, which is the sole voting stock, is offered only in sixty (60) share units, and no party may acquire more than five units. The holders of Class A common stock have the exclusive voting power upon all questions submitted to stockholders (including the election of Directors), being entitled to one vote per share. Pursuant to the Certificate of Incorporation and By-Laws of TruServ, the Board of Directors consists of directors who are elected for staggered three-year terms. LIQUIDATION RIGHTS. Upon dissolution, liquidation or winding up of the Company, voluntary or involuntary, the assets are to be divided among and distributed ratably to the holders of shares of Class A common stock and Class B nonvoting common stock pro rata in accordance with their holdings and without preference as between the classes. PREEMPTIVE RIGHTS. Each shareholder has the right to purchase, and must purchase when he becomes a stockholder-Member, sixty (60) shares of Class A common stock per store, up to a maximum of 300 shares for five or more stores. No shares of Class A common stock shall be issued or sold except in such units and under such circumstances. No shares of Class B nonvoting common stock shall be issued or sold except to parties who are, at the time of issuance, holders of shares of Class A common stock. REDEMPTION PROVISIONS. The Retail Member Agreement (the "Agreement") may be terminated by either TruServ or the Member on sixty (60) days' written notice. Termination by TruServ requires approval by a two-thirds vote of the Board of Directors, except in the following circumstances where TruServ has the right to immediately terminate the Agreement: the Member becomes insolvent, commits any act of bankruptcy, files a voluntary petition in bankruptcy, is adjudicated as bankrupt, or commits a breach of any obligation under the Agreement, which breach is not cured within sixty (60) days after written notice to the Member by TruServ. In the event the Agreement is terminated, TruServ undertakes to purchase and the Member is required to sell all of his Class A common stock and Class B nonvoting common stock at a price equal to the par value thereof. Payment for the Class A common stock will be in cash. Payment for the Class B nonvoting common stock will be a note payable in five equal annual instalments which bears interest at a rate per annum as determined by the Board of Directors. 17 25 STOCKHOLDERS. As of February 28, 1998, there were approximately 8,998 stockholders of Class A common stock and approximately 8,843 stockholders of Class B nonvoting common stock. OTHER RESTRICTIONS AND RIGHTS. (a) There are no conversion rights, sinking fund provisions, or liability to further calls or assessment by TruServ in regard to the Class A common stock. (b) TruServ is given an automatic lien to secure the payment of any indebtedness due TruServ from any stockholder of record upon the Class A common stock and Class B nonvoting common stock shares of such stockholder and upon any declared and unpaid dividends thereon. (c) There is no existing market for the Class A common stock being offered hereby. Whenever any stockholder may desire to dispose in any manner, by sale, gift or otherwise, of all or any part of his shares of either class of common stock, and whenever any stockholder dies or suffers any other event giving rise to voluntary or involuntary transfer, by operation of law or otherwise, of all or part of his said shares, TruServ is given the option, exercisable within ninety (90) days following the date upon which it receives written notice from the stockholder, his heirs, executors, personal representatives or other party in interest, as the case may be, of the intended disposition or of the death of the stockholder or other event giving rise to voluntary or involuntary transfer of the shares, to repurchase all shares referred to in the notice. The option price in the case of either class of common stock is the par value thereof. Any disposition or attempted disposition or transfer, voluntary or involuntary, of common stock of TruServ is null and void and confers no rights upon the transferee unless and until TruServ has been given the required notice and has failed to exercise its option to purchase within the specified time. The above restrictions do not apply, in the case of a pledge by a stockholder of any of his shares in a bona fide transaction as security for a debt, until the pledge or lienholder forecloses the pledge or lien. The above restrictions do not apply at all in the case of a Class B nonvoting common stock disposition to a person who is the owner of shares of Class A common stock of TruServ. LEGAL MATTERS The legality of the issuance of the Class A common stock offered hereby has been passed upon for TruServ by Messrs. Arnstein & Lehr, Suite 1200, 120 South Riverside Plaza, Chicago, Illinois 60606. 18 26 ITEM 14(A). INDEX TO CONSOLIDATED FINANCIAL STATEMENTS.
PAGE(S) ------- Report of Independent Auditors.............................. 20 Consolidated Balance Sheet at December 31, 1997 and December 28, 1996.................................................. 21 Consolidated Statement of Operations for each of the three years in the period ended December 31, 1997............... 22 Consolidated Statement of Cash Flows for each of the three years in the period ended December 31, 1997............... 23 Consolidated Statement of Capital Stock and Retained Earnings for each of the three years in the period ended December 31, 1997......................................... 24 Notes to Consolidated Financial Statements.................. 25 to 35
19 27 REPORT OF INDEPENDENT AUDITORS To the Members and the Board of Directors TruServ Corporation We have audited the accompanying consolidated balance sheets of TruServ Corporation (formerly Cotter & Company) as of December 31, 1997 and December 28, 1996, 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 31, 1997. 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 TruServ Corporation at December 31, 1997 and December 28, 1996 and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. ERNST & YOUNG LLP Chicago, Illinois February 23, 1998 20 28 TRUSERV CORPORATION CONSOLIDATED BALANCE SHEET
DECEMBER 31, DECEMBER 28, 1997 1996 ------------ ------------ (000'S OMITTED) ASSETS Current assets: Cash and cash equivalents................................. $ 2,224 $ 1,662 Accounts and notes receivable............................. 476,527 307,205 Inventories............................................... 543,946 347,554 Prepaid expenses.......................................... 16,092 13,517 ---------- -------- Total current assets................................... 1,038,789 669,938 Properties, less accumulated depreciation................... 241,236 171,011 Estimated goodwill, net..................................... 107,711 -- Other assets................................................ 51,177 13,036 ---------- -------- Total assets........................................... $1,438,913 $853,985 ========== ======== LIABILITIES AND CAPITALIZATION Current liabilities: Accounts payable.......................................... $ 455,906 $287,291 Accrued expenses.......................................... 116,659 51,149 Short-term borrowings..................................... 215,467 70,594 Current maturities of notes and long-term debt............ 62,640 43,458 Patronage dividend payable in cash........................ 12,142 16,142 ---------- -------- Total current liabilities.............................. 862,814 468,634 Long-term debt.............................................. 169,209 80,145 Capitalization: Promissory (subordinated) and installment notes........... 172,579 185,366 Class A common stock, net of subscriptions receivable; authorized 750,000 shares; issued and fully paid 387,240 and 48,480 shares; issued 144,865 shares (net of receivable of $6,269,000) in 1997; subscribed 5,010 and 290 shares (net of stock subscription receivable of $20,000 and $1,000).................................... 47,423 4,876 Class B nonvoting common stock and paid-in capital; authorized 4,000,000 shares; issued and fully paid 1,681,934 and 1,043,521 shares; issuable as partial payment of patronage dividends 177,655 and 84,194 shares................................................. 187,259 114,053 Retained earnings........................................... 685 1,751 ---------- -------- 407,946 306,046 Foreign currency translation adjustment..................... (1,056) (840) ---------- -------- Total capitalization................................... 406,890 305,206 ---------- -------- Total liabilities and capitalization................... $1,438,913 $853,985 ========== ========
See Notes to Consolidated Financial Statements. 21 29 TRUSERV CORPORATION CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEARS ENDED ------------------------------------------ DECEMBER 31, DECEMBER 28, DECEMBER 30, 1997 1996 1995 ------------ ------------ ------------ (000'S OMITTED) Revenues......................................... $3,331,686 $2,441,707 $2,437,002 Cost and expenses: Cost of revenues............................... 3,090,666 2,245,071 2,234,934 Warehouse, general and administrative.......... 148,767 115,457 114,107 Interest paid to Members....................... 17,865 18,460 20,627 Other interest expense......................... 19,100 10,175 9,298 Gain on sale of properties..................... (990) -- -- Other income, net.............................. (1,688) (228) (1,177) Income tax expense............................. 1,600 362 176 ---------- ---------- ---------- 3,275,320 2,389,297 2,377,965 ---------- ---------- ---------- Net margins before merger integration costs...... 56,366 52,410 59,037 Merger integration costs......................... 13,650 -- -- ---------- ---------- ---------- Net margins...................................... $ 42,716 $ 52,410 $ 59,037 ========== ========== ==========
See Notes to Consolidated Financial Statements. 22 30 TRUSERV CORPORATION CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED ------------------------------------------ DECEMBER 31, DECEMBER 28, DECEMBER 30, 1997 1996 1995 ------------ ------------ ------------ (000'S OMITTED) Operating activities: Net margins............................................. $ 42,716 $ 52,410 $ 59,037 Adjustments to reconcile net margins to cash and cash equivalents from operating activities: Depreciation and amortization........................ 25,451 20,561 20,706 Provision for losses on accounts and notes receivable......................................... 2,361 3,201 3,741 Changes in operating assets and liabilities -- net of acquisition in 1997: Accounts and notes receivable...................... 47,288 (38,581) (13,921) Inventories........................................ (33,953) (32,243) 69,436 Accounts payable................................... (28,464) (10,593) (36,584) Accrued expenses................................... (35,463) (2,563) 7,552 Other adjustments, net............................... (165) (1,801) (3,327) -------- -------- -------- Net cash and cash equivalents provided by (used for) operating activities....................... 19,771 (9,609) 106,640 -------- -------- -------- Investing activities: Additions to properties owned........................... (38,493) (23,530) (24,904) Proceeds from sale of properties owned.................. 2,628 3,151 5,022 Changes in other assets................................. (8,494) (1,388) 617 -------- -------- -------- Net cash and cash equivalents used for investing activities...................................... (44,359) (21,767) (19,265) -------- -------- -------- Financing activities: Payment of patronage dividend........................... (20,619) (18,315) (18,383) Payment of notes, long-term debt and lease obligations.......................................... (179,363) (40,271) (43,106) Proceeds from long-term borrowings...................... 102,897 1,693 3,000 Increase (decrease) in short-term borrowings............ 142,755 67,937 (6,672) Purchase of common stock................................ (24,585) (660) (1,740) Proceeds from sale of Class A common stock.............. 4,065 181 168 -------- -------- -------- Net cash and cash equivalents provided by (used for) financing activities....................... 25,150 10,565 (66,733) -------- -------- -------- Net increase (decrease) in cash and cash equivalents...... 562 (20,811) 20,642 -------- -------- -------- Cash and cash equivalents at beginning of year............ 1,662 22,473 1,831 -------- -------- -------- Cash and cash equivalents at end of year.................. $ 2,224 $ 1,662 $ 22,473 ======== ======== ========
See Notes to Consolidated Financial Statements. 23 31 TRUSERV CORPORATION CONSOLIDATED STATEMENT OF CAPITAL STOCK AND RETAINED EARNINGS
FOR THE THREE YEARS ENDED DECEMBER 31, 1997 ---------------------------------------------- COMMON STOCK -------------------- FOREIGN $100 PAR VALUE CURRENCY -------------------- RETAINED TRANSLATION CLASS A CLASS B EARNINGS ADJUSTMENT ------- ------- -------- ----------- (000'S OMITTED) Balances at December 31, 1994........................ $ 6,370 $116,663 $ 3,764 $ (915) Net margins........................................ 59,037 Foreign currency translation adjustment............ 73 Patronage dividend................................. 6,422 (60,140) Stock subscriptions................................ 156 Stock purchased and retired........................ (1,232) (10,023) ------- -------- -------- ------- Balances at December 30, 1995........................ 5,294 113,062 2,661 (842) Net margins........................................ 52,410 Foreign currency translation adjustment............ 2 Patronage dividend................................. 8,645 (53,320) Stock subscriptions................................ 189 Stock purchased and retired........................ (607) (7,654) ------- -------- -------- ------- Balances at December 28, 1996........................ 4,876 114,053 1,751 (840) Net margins........................................ 42,716 Foreign currency translation adjustment............ (216) Patronage dividend................................. 26,304 (43,782) Stock issued for increase in Class A requirements.................................... 23,100 (23,100) Stock issued for paid-up subscriptions............. 8,386 Stock issued due to acquisition, net of subscription receivable......................... 13,608 117,067 Stock purchased and retired........................ (2,547) (47,065) ------- -------- -------- ------- Balances at December 31, 1997........................ $47,423 $187,259 $ 685 $(1,056) ======= ======== ======== =======
Class A common stock amounts are net of unpaid amounts of $6,289,000 relating to 144,865 issued shares and 5,010 subscribed shares at December 31, 1997 and unpaid amounts of $1,000 at December 28, 1996, December 30, 1995 and December 31, 1994 for 290, 240, and 360 subscribed shares, respectively. See Notes to Consolidated Financial Statements. 24 32 TRUSERV CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. DESCRIPTION OF BUSINESS AND ACCOUNTING POLICIES TruServ Corporation ("TruServ" or the "Company") is a Member-owned wholesaler of hardware, lumber/building materials 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, lumber/building materials and related lines, each of whom has purchased 60 shares per store (up to a maximum of 5 stores) 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 July 1, 1997, TruServ Corporation, formerly Cotter & Company (Cotter), merged with ServiStar Coast to Coast Corporation ("SCC") (the "Merger"). SCC was a hardware wholesaler organized in 1935 with a strong presence in retail lumber and building materials. The transaction was accounted for using the purchase accounting method. The Consolidated Balance Sheet at December 31, 1997 reflects the post-Merger Company. The Consolidated Balance Sheet at December 28, 1996 reflects the pre-Merger Company. The Consolidated Statement of Operations and Consolidated Statement of Cash Flows for the year ended December 31, 1997, reflect the results of the post-Merger Company, which include the results of operations of the former SCC since July 1, 1997. The Consolidated Statement of Operations and Consolidated Statement of Cash Flows for the years ended December 28, 1996 and December 30, 1995 reflect the results of the pre-Merger Company. The significant accounting policies of the Company are summarized below: BUSINESS COMBINATION On July 1, 1997, pursuant to an Agreement and Plan of Merger dated December 9, 1996 between Cotter, a Delaware corporation, and SCC, SCC merged with and into Cotter, with Cotter being the surviving corporation. Cotter was renamed TruServ Corporation effective with the Merger. Each outstanding share of SCC common stock and SCC Series A stock (excluding those shares canceled pursuant to Article III of the Merger Agreement) were 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 were converted into the right to receive one fully paid and non-assessable share of TruServ Class B common stock. A total of 270,500 and 1,170,670 shares of TruServ Class A common stock and Class B common stock, respectively, were issued in connection with the Merger. Also 231,000 additional shares of TruServ Class A common stock were issued in exchange for Class B common stock to pre-Merger stockholders of Cotter to satisfy the Class A common stock ownership requirement of 60 shares per store (up to a maximum of 5 stores) applicable to such Members as a result of the Merger. The following summarized unaudited pro forma operating data for the years ended December 31, 1997 and December 28, 1996 is presented below giving effect to the Merger as if it had been consummated at the beginning of the respective periods. These pro forma results have been prepared for comparative purposes only and do not purport to be indicative of the results of operations that actually would have resulted had the combination been in effect on the dates indicated, or which may result in the future. The pro forma results exclude one-time non-recurring charges or credits directly attributable to the transaction. The pro forma adjustments consist of (i) an adjustment for amortization of the estimated excess of cost over fair value of the net assets of SCC, (ii) an adjustment for interest expense of promissory notes issued to former SCC Members for excess Class B common stock in connection with the Merger, (iii) an adjustment 25 33 TRUSERV CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED for interest expenses on short-term borrowings obtained in connection with the Merger and (iv) an adjustment for incremental differences in depreciation expense.
PRO FORMA FOR THE YEARS ENDED ------------------------------- DECEMBER 31, DECEMBER 28, 1997 1996 ------------ ------------ (000'S OMITTED) Revenues.................................................... $ 4,224,215 $ 4,211,579 Net margin.................................................. $ 67,357 $ 70,293
To refinance the existing debt of SCC and pay related fees and expenses, the Company entered into a revolving loan agreement of up to $300,000,000 in short-term credit facilities with a group of banks and $100,000,000 of long-term debt. The total purchase price of approximately $141,400,000 was allocated to assets and liabilities of the Company based on the estimated fair value as of the date of acquisition. The allocation was based on preliminary estimates which may be revised up until July 1, 1998. The excess of consideration paid over the estimated fair value of net assets acquired in the amount of $109,200,000 has been recorded as goodwill and is being amortized on a straight-line basis over forty years. In connection with the purchase business combination, an estimated liability of $38,200,000 was recognized for costs associated with the Merger plan. The Merger plan specifies that certain former SCC employment positions, approximately 1,200 in total, will be eliminated substantially within one year. As of December 31, 1997, approximately 75% of these employees have been terminated resulting in a $5,700,000 charge against the liability. The Merger plan specifies the closure of redundant former SCC distribution centers and the elimination of overlapping former SCC inventory items stockkeeping units substantially within a one-year period. Distribution centers closing costs include net occupancy and costs after facilities are vacated. In addition, stockkeeping unit reduction costs include losses on the sale of inventory items which have been discontinued solely as a result of the Merger. As of December 31, 1997, $600,000 relating to distribution center closing costs have been charged against the liability. Merger integration costs of $13,650,000 consists of one time non-recurring expenses directly attributable to the Merger including distribution center closings, severance pay, information service costs and general and administrative costs. 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. 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. In accordance with the Merger Agreement, patronage dividends earned through June 30, 1997 were declared and paid to former Cotter & Company Members in August 1997. Patronage dividends earned from July 1, 1997 through December 31, 1997 were declared and will be paid to TruServ Members in the first quarter of 1998, with at least thirty percent of the patronage dividend paid in cash and the remainder paid through the issuance of the Company's Class B nonvoting common stock. The Class B nonvoting common 26 34 TRUSERV CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED stock that will be issued for the December 31, 1997 patronage dividend will be designated as non-qualified and not taxable to the Member until redeemed at a future date. The non-qualified notices in addition to not being taxable will be included as part of a Members required investment in Class B nonvoting common stock. Any further distributions after meeting the Class B nonvoting common stock requirements agreed upon in the Merger Agreement will be in cash rather than in promissory notes. Such patronage dividends, consisting of substantially all of the Company's patronage source income, have been paid since 1949. Membership may be terminated without cause by either the Company or the Member upon ninety 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 nonvoting common stock at par value. Payment for the Class A common stock will be in cash. Payment for the qualified Class B nonvoting common stock will be a note payable in five equal annual installments. 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. Goodwill Goodwill represents the excess of cost over the fair value of net assets acquired and is amortized using the straight line method over 40 years. Asset Impairment For purposes of determining impairment, management groups long-lived assets based on a geographic region or revenue producing activity as appropriate. Such review includes, among other criteria, management's estimate of future cash flows for the region or activity. If the estimated future cash flow (undiscounted and without interest charges) were not sufficient to recover the carrying value of the long-lived assets, including associated goodwill, of the region or activity, such assets would be determined to be impaired and would be written down to fair value. There was no asset impairment as of December 31, 1997. 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. 27 35 TRUSERV CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED 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. Reclassification Certain prior year amounts have been reclassified to conform to the 1997 presentation. Reporting year The Company's reporting year end was changed to December 31 from the Saturday closest to December 31 starting December 31, 1997. 2. INVENTORIES Inventories consisted of:
DECEMBER 31, DECEMBER 28, 1997 1996 ------------ ------------ (000'S OMITTED) Manufacturing inventories: Raw materials............................................. $ 4,878 $ 2,797 Work-in-process and finished goods........................ 29,241 24,558 -------- -------- 34,119 27,355 Merchandise inventories..................................... 509,827 320,199 -------- -------- $543,946 $347,554 ======== ========
3. PROPERTIES Properties consisted of:
DECEMBER 31, DECEMBER 28, 1997 1996 ------------ ------------ (000'S OMITTED) Buildings and improvements.................................. $240,700 $179,206 Machinery and warehouse equipment........................... 92,832 61,183 Office and computer equipment............................... 113,386 74,065 Transportation equipment.................................... 28,470 27,763 -------- -------- 475,388 342,217 Less accumulated depreciation............................... 248,168 183,252 -------- -------- 227,220 158,965 Land........................................................ 14,016 12,046 -------- -------- $241,236 $171,011 ======== ========
28 36 TRUSERV CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED 4. LONG-TERM DEBT AND BORROWING ARRANGEMENTS Long-term debt consisted of:
DECEMBER 31, DECEMBER 28, 1997 1996 ------------ ------------ (000'S OMITTED) Senior Notes: 8.60%..................................................... $ 44,000 $47,000 7.38%..................................................... 50,000 -- 6.91%..................................................... 25,000 -- 6.73%..................................................... 25,000 -- Term loans: 5.97%..................................................... 1,500 2,437 Variable (6.84% and 7.33%, respectively).................. 6,200 6,200 Redeemable (subordinated) term notes: Fixed Interest rates ranging from 6.84% to 7.61%.......... 29,511 26,683 Industrial Revenue Bonds (4.50% and 5.28%, respectively).... 4,000 4,000 Other....................................................... 2,436 3,829 -------- ------- 187,647 90,149 Less amounts due within one year............................ 18,438 10,004 -------- ------- $169,209 $80,145 ======== =======
The principal payments for: the 8.60% senior note are due quarterly in incrementally increasing amounts through maturity in 2007, the 7.38% senior note are due annually in the amount of $4,545,000 starting in 2002 through maturity in 2012, the 6.91% senior note are due annually in the amount of $3,571,000 starting November 2001 until maturity in 2007, the 6.73% senior note is due in full in November 2002 and the 5.97% term loan are due quarterly in the amount of $187,500 which began in 1996 and matures in 1999. Payment for the variable term loan is due in 1999. 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 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 1998, 1999, 2000, 2001, 2002 and thereafter are $18,438,000, $22,372,000, $8,290,000, $10,012,000, $37,224,000 and $91,311,000, respectively. At December 31, 1997, the Company had established a $300,000,000 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 $210,000,000 and $70,594,000 at December 31, 1997 and December 28, 1996, respectively, and were at a weighted average interest rate of 6.4% and 5.5%, respectively. The Company is required to meet certain financial ratios and covenants pertaining to certain debt arrangements. See Note 7 regarding the fair value of financial instruments. 29 37 TRUSERV CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED 5. LEASE COMMITMENTS The Company rents buildings and warehouses, office, computer and transportation equipment. The following is a schedule of future minimum lease payments under long-term non-cancelable leases as of December 31, 1997 (000's omitted):
FISCAL YEARS ------------ 1998...................................................... $ 17,029 1999...................................................... 16,016 2000...................................................... 12,363 2001...................................................... 9,480 2002...................................................... 9,274 Thereafter................................................ 60,389 -------- Net minimum lease payments.................................. $124,551 ========
Rent expense under operating leases was $19,890,000, $14,971,000 and $10,063,000 for the years ended December 31, 1997, December 28, 1996 and December 30, 1995, respectively. 6. CAPITALIZATION Promissory (subordinated) and installment notes consisted of:
DECEMBER 31, DECEMBER 28, 1997 1996 ------------ ------------ (000'S OMITTED) Promissory (subordinated) notes - Due on December 31, 1997 -- 10.00%........................ $ -- $ 16,037 Due on December 31, 1997 -- 7.87%......................... -- 14,832 Due on December 31, 1998 -- 7.47%......................... 14,252 14,886 Due on December 31, 1998 -- 8.00%......................... 25,128 25,684 Due on December 31, 1999 -- 7.86%......................... 14,104 15,349 Due on December 31, 1999 -- 8.00%......................... 23,809 24,254 Due on December 31, 1999 -- 8.20%......................... 22,528 23,431 Due on December 31, 2000 -- 6.50%......................... 22,493 23,010 Due on December 31, 2000 -- 7.42%......................... 14,951 -- Due on December 31, 2000 -- 7.58%......................... 28,357 29,315 Due on December 31, 2001 -- 8.06% (issued in 1997)........ 23,567 25,123 Term (subordinated) notes - Due on June 30, 2002 -- 8.06% (issued in 1998)............ 13,334 -- Installment notes at interest rates of 6.00% to 8.20% with maturities through 2002................................... 14,258 6,899 -------- -------- 216,781 218,820 Less amounts due within one year............................ 44,202 33,454 -------- -------- $172,579 $185,366 ======== ========
Promissory notes were issued for partial 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. Due to a change in the Company's patronage policy effective in 1997, notes will no longer be issued as part of the patronage dividend. 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 30 38 TRUSERV CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED substantially equivalent to competitive market rates of comparable instruments. The Company anticipates that this practice of extending notes will continue. Total maturities of promissory and installment notes for fiscal years 1998, 1999, 2000, 2001 and 2002 are $44,202,000, $64,494,000, $68,746,000, $25,387,000 and $13,952,000, respectively. Term notes were issued in connection with the redemption of excess B stock. Term notes are subordinated to indebtedness to banking institutions, trade creditors and other indebtedness of the Company as specified by its Board of Directors. See note 7 regarding the fair value of financial instruments. 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. 8. INCOME TAXES Significant components of the provision (benefit) for income taxes are as follows:
FOR THE YEARS ENDED ------------------------------------------ DECEMBER 31, DECEMBER 28, DECEMBER 30, 1997 1996 1995 ------------ ------------ ------------ (000'S OMITTED) Current: Federal............................................... $ -- $ -- $(363) State................................................. 491 237 379 Foreign............................................... 343 275 273 ------ ----- ----- Total current......................................... 834 512 289 ------ ----- ----- Deferred: Federal............................................... 703 (147) (145) State................................................. 124 (26) (26) Foreign............................................... (61) 23 58 ------ ----- ----- Total deferred........................................ 766 (150) (113) ------ ----- ----- $1,600 $ 362 $ 176 ====== ===== =====
31 39 TRUSERV CORPORATION 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 qualified 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 1997, 1996 and 1995 is as follows:
FOR THE YEARS ENDED -------------------------------------------- DECEMBER 31, DECEMBER 28, DECEMBER 30, 1997 1996 1995 ------------ ------------ ------------ (000'S OMITTED) Tax at U.S. statutory rate.............................. $ 15,511 $ 18,470 $ 20,725 Effects of: Patronage dividend.................................... (15,324) (18,662) (21,049) State income taxes, net of federal tax benefit........ 400 137 229 Other, net............................................ 1,013 417 271 -------- -------- -------- $ 1,600 $ 362 $ 176 ======== ======== ========
Deferred income taxes reflect the net tax effects of a net operating loss carryforward, which expires in 2012; alternative minimum tax credit carryforwards, which do not expire, and temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. To the extent tax benefits are subsequently recognized in excess of the net deferred tax assets, the valuation allowance for deferred tax assets will reduce goodwill. Significant components of the Company's deferred tax assets and liabilities are as follows:
FOR THE YEARS ENDED ---------------------------- DECEMBER 31, DECEMBER 28, 1997 1996 ------------ ------------ (000'S OMITTED) Deferred tax assets: Net operating loss carryforwards.......................... $ 9,937 $ 466 AMT credit carryforward................................... 911 911 Nonqualified notices of allocation........................ 6,890 -- Bad debt provision........................................ 3,305 1,298 Vacation pay.............................................. 3,225 2,119 Contributions to fund retirement plans.................... 627 886 Rent expense.............................................. 1,819 -- Merger-related valuations and accruals.................... 21,656 -- Other..................................................... 1,280 851 -------- ------ Total deferred tax assets................................... 49,650 6,531 Valuation allowance for deferred tax assets................. (25,000) -- -------- ------ Net deferred tax assets..................................... 24,650 6,531 Deferred tax liabilities: Tax depreciation in excess of book........................ 5,102 2,100 Inventory capitalization.................................. 1,725 835 Other..................................................... 1,333 1,557 -------- ------ Total deferred tax liabilities.............................. 8,160 4,492 -------- ------ Net deferred taxes.......................................... $ 16,490 $2,039 ======== ======
32 40 TRUSERV CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED 9. CASH FLOW On July 1, 1997, the Company merged with SCC. The transaction was accounted for using the purchase accounting method. The Merger was accomplished by converting SCC shares into TruServ shares. See Note 1 for additional comments. The patronage dividend and promissory (subordinated) note renewals relating to non-cash operating and financing activities are as follows:
FOR THE YEAR ENDED ------------------------------------------ DECEMBER 31, DECEMBER 28, DECEMBER 30, 1997 1996 1995 ------------ ------------ ------------ (000'S OMITTED) Patronage dividend payable in cash...................... $ 12,142 $16,142 $18,315 Promissory (subordinated) notes......................... 7,511 15,354 23,536 Class B nonvoting common stock.......................... (21,592) 1,248 (2,592) Installment notes....................................... 11,742 4,605 5,972 Member indebtedness..................................... 29,502 15,971 14,909 -------- ------- ------- $ 39,305 $53,320 $60,140 ======== ======= ======= Note renewals........................................... $ 16,379 $27,938 $23,974 ======== ======= =======
The $39,305,000 above represents the 1997 patronage dividend less amounts already paid in cash. The Company's non-cash financing and investing activities in fiscal year 1996 include a $178,000 acquisition of transportation equipment by entering into capital leases. Cash paid for interest during fiscal years 1997, 1996, and 1995 totaled $34,693,000, $28,694,000, and $29,624,000 respectively. Cash paid for income taxes during fiscal years 1997, 1996, and 1995 totaled $1,148,000, $694,000, and $1,012,000, respectively. 10. RETIREMENT PLANS The components of net pension cost for the Company administered pension plans consisted of:
FOR THE YEARS ENDED -------------------------------------------- DECEMBER 31, DECEMBER 28, DECEMBER 30, 1997 1996 1995 ------------ ------------ ------------ (000'S OMITTED) Income: Actual return on plan assets.......................... $27,243 $13,007 $25,564 Amortization of excess plan assets.................... 835 914 914 ------- ------- ------- 28,078 13,921 26,478 ------- ------- ------- Expenses: Service cost-benefits earned during the year.......... 6,511 4,851 4,152 Interest on projected benefit obligation.............. 10,386 7,623 7,242 Deferral of excess (deficiency) of actual over estimated return on plan assets.................... 15,440 4,223 18,021 ------- ------- ------- 32,337 16,697 29,415 ------- ------- ------- Net pension cost........................................ $ 4,259 $ 2,776 $ 2,937 ======= ======= =======
33 41 TRUSERV CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED 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, 7.25% and 4.50% in fiscal year 1997, 7.75% and 4.50%, in fiscal year 1996 and 7.25% and 4.50% in fiscal year 1995. These changes in actuarial assumptions did not have a material impact on net pension cost for fiscal year 1997 and the Company does not anticipate that these changes will have a material impact on net pension cost in future years. In fiscal years 1997, 1996 and 1995, the expected long-term rate of return on assets was 9.50%. Net periodic pension cost for 1997 includes pension cost for the former employees of SCC subsequent to the Merger. The effect of including these employees was an increase in net periodic pension cost by $1,318,000, an increase in the projected benefit obligation of $73,124,000, and an increase in plan assets of $72,181,000. In 1997, the Company settled $6,600,000 of pension obligations resulting in a minimal reduction in pension expense. During 1996, the Company settled $8,520,000 of pension obligations under its amended plan, resulting in a reduction of $798,000 in pension expense for fiscal 1996. Plan assets are composed primarily of corporate equity and debt securities. Benefits are based on an employee's age, years of service and the employee's compensation during the last ten years of employment, and are coordinated with Social Security retirement benefits. Trusteed net assets and actuarially computed benefit obligations for the Company administered pension plans are presented below:
DECEMBER 31, DECEMBER 28, 1997 1996 ------------ ------------ (000'S OMITTED) Assets: Total plan assets at fair value........................... $198,171 $107,954 ======== ======== Obligations: Accumulated benefit obligations -- Vested................................................. $158,534 $ 70,593 Non-vested............................................. 20,348 13,369 Effect of projected compensation increases................ 10,956 21,015 -------- -------- Total projected benefit obligations....................... 189,838 104,977 -------- -------- Net excess assets (liabilities): Unrecognized -- Unamortized excess assets at original date............. 5,336 6,170 Net actuarial gain (loss).............................. 17,495 5,702 Prior service costs.................................... (8,824) (3,424) Recognized accrued pension cost........................... (5,674) (5,471) -------- -------- Total net excess assets (liabilities)..................... 8,333 2,977 -------- -------- Total obligations and net excess assets (liabilities)....... $198,171 $107,954 ======== ========
The Company also participates in union-sponsored defined contribution plans. Pension costs related to these plans were $654,000, $641,000 and $720,000 for fiscal years 1997, 1996 and 1995, respectively. The Company sponsors a defined benefit retirement medical plan for those SCC employees and former employees that meet certain age and service criteria as of the merger dated July 1, 1997. The components of net periodic postretirement benefit costs only consisted of interest cost of $236,100. The plan was frozen effective with the Merger. 34 42 TRUSERV CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED The trusteed net assets and actuarially computed benefit obligations for the Company administered retiree medical plan are listed below:
DECEMBER 31, 1997 ------------ (000'S OMITTED) Accumulated postretirement benefit obligation............... $(6,646) Fair value of assets........................................ -- ------- Unfunded Status............................................. (6,646) Unrecognized net gain....................................... (7) ------- Accrued postretirement benefit cost......................... $(6,653) =======
The discount rate and the medical trend rate used in determining the actuarial present value of the projected benefit obligation were 7.25% and 5.00%, respectively, in fiscal year 1997. The Company does not anticipate that changes in these rates will have a material impact on retiree medical cost in future years. A 1% increase in the trend rate for health care costs would have increased the accumulated postretirement benefit obligation by 6.4% and the service and interest costs by 12.5%. 35 43 ========================================================= THIS PROSPECTUS DOES NOT CONTAIN ALL THE INFORMATION SET FORTH IN THE REGISTRATION STATEMENT, AND THE EXHIBITS AND SCHEDULES RELATING THERETO, WHICH THE COMPANY HAS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION, WASHINGTON, D. C. UNDER THE SECURITIES ACT OF 1933 AND TO WHICH REFERENCE IS HEREBY MADE FOR FURTHER INFORMATION WITH RESPECT TO THE COMPANY AND THE SECURITIES OFFERED HEREBY. TABLE OF CONTENTS
ITEM PAGE ---- ---- Available Information.................... i Reports to Security Holders.............. i Annual Report on Form 10-K............... i Incorporation of Documents by Reference.............................. ii Summary.................................. 1 Selected Financial Data.................. 4 Management's Discussion and Analysis of Financial Condition and Results of Operations............................. 5 Risk Factors............................. 8 Use of Proceeds.......................... 10 Plan of Distribution..................... 10 Dividends................................ 10 Business of TruServ...................... 10 Distribution of Patronage Dividends...... 13 Management............................... 16 Description of common stock.............. 17 Legal Matters............................ 18 Index to Consolidated Financial Statements............................. 19
NO DEALER, SALESMAN, OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS IN CONNECTION WITH THE OFFERING CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY. ========================================================= ========================================================= TRUSERV CORPORATION 160,557 SHARES CLASS A COMMON STOCK $100 PAR VALUE (IN UNITS OF 60 SHARES) ------------------ PROSPECTUS ------------------ DATED ========================================================= 44 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 Class A common stock being registered: Registration Fee............................................ $ 0 Printing of Registration Statement and Prospectus........... 15,000 Accounting Fees and Expenses................................ 10,000 Legal Fees.................................................. 10,000 Fees and Expenses for Qualifying Securities under "Blue Sky" Laws of Various States............................................ 15,000 ------- Total....................................................... $50,000 =======
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS TruServ's Certificate of Incorporation, as amended, provides that TruServ 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 TruServ), by reason of the fact that such person is or was a director, officer, employee or agent of TruServ, or is or was serving at the request of TruServ 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, on July 23, 1973 the Board of Directors adopted a By-Law (Article XIII, Indemnification of Directors, Officers and Employees--Exhibit 2-A to Registration Statement on Form S-4 (No. 333-18397) 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, TruServ 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 TruServ, 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 TruServ, TruServ 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 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 TruServ, 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 TruServ 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 TruServ only as authorized in the specific case upon a determination that indemnification is proper in the circumstances because the party to be II-1 45 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 stockholders of TruServ have approved an amendment to the Certificate of Incorporation to eliminate personal liability of directors for monetary damages for breach of fiduciary duty of care. The amendment provides that a director of TruServ shall not be liable to TruServ 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 on Exhibit 2-A to Registration Statement on Form S-4 (No. 333-18397) 4-A Amended and Restated Certificate of Incorporation of the Company, effective July 1, 1997. Incorporated by reference -- Exhibit 2-A to Registration Statement on Form S-4 (No. 333-18397). 4-B By-laws of the Company, effective July 1, 1997. Incorporated by reference -- Exhibit 2-A to Registration Statement on Form S-4 (No. 333-18397). 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). 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 July 1, 1997 for $300,000,000 Revolving credit between TruServ Corporation, various financial institutions, and Bank of America.* 4-K Amended and Restated Private Shelf Agreement between TruServ Corporation and Prudential Insurance Company of America dated November 13, 1997 for $150,000,000.* 5 Opinion of Arnstein & Lehr.*
II-2 46
EXHIBIT NUMBER DESCRIPTION ------- ----------- 10-A Current Form of Retail Member Agreement with TruServ Corporation between the Company and its Members that offer primarily hardware and related items. Incorporated by reference--Exhibit 2-A to the Company's Registration Statement on Form S-4 (No. 333-18397). 10-B Form of Subscription to Shares of TruServ Corporation.* 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). 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). 23-A Consent of Arnstein & Lehr (included in Exhibit 5).* 23-B Consent of Ernst & Young LLP (included on page II-7).*
* Filed herewith. II-3 47 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-4 48 SIGNATURES PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT CERTIFIES THAT IT HAS REASONABLE GROUNDS TO BELIEVE THAT IT MEETS ALL OF THE REQUIREMENTS FOR FILING ON FORM S-2 AND HAS DULY CAUSED THIS POST-EFFECTIVE AMENDMENT NO. 5 ON FORM S-2 TO REGISTRATION STATEMENT ON FORM S-4 TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF CHICAGO, STATE OF ILLINOIS, ON THE 30TH DAY OF MARCH, 1998. TRUSERV CORPORATION By: /s/ DANIEL A. COTTER ------------------------------------ Daniel A. Cotter Chief Executive Officer, Chairman of the Board and Director POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, THAT EACH PERSON WHOSE SIGNATURE APPEARS BELOW, CONSTITUTES AND APPOINTS DANIEL A. COTTER, KERRY J. KIRBY AND DANIEL T. BURNS, JOINTLY AND SEVERALLY, ATTORNEYS-IN-FACT AND AGENTS, EACH WITH FULL POWERS OF SUBSTITUTION, FOR HIM OR HER IN ANY AND ALL CAPACITIES TO SIGN ANY AND ALL AMENDMENTS (INCLUDING POST-EFFECTIVE AMENDMENTS) TO THIS REGISTRATION STATEMENT, AND TO FILE THE SAME, AND ALL EXHIBITS THERETO, AND OTHER DOCUMENTS IN CONNECTION THEREWITH, WITH THE SECURITIES AND EXCHANGE COMMISSION, HEREBY SATISFYING AND CONFIRMING ALL THAT EACH OF SAID ATTORNEYS-IN-FACT AND AGENTS, OR HIS OR THEIR SUBSTITUTE OR SUBSTITUTES, MAY LAWFULLY DO OR CAUSE TO BE DONE BY VIRTUE HEREOF. PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS ANNUAL REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED.
SIGNATURE TITLE DATE --------- ----- ---- /s/ DANIEL A. COTTER Chairman of the Board, March 30, 1998 - ----------------------------------------------------- Chief Executive Officer and Daniel A. Cotter Director /s/ PAUL E. PENTZ President, Chief Operating March 30, 1998 - ----------------------------------------------------- Officer and Director Paul E. Pentz /s/ KERRY J. KIRBY Executive Vice President and March 30, 1998 - ----------------------------------------------------- Chief Financial Officer Kerry J. Kirby /s/ PETER G. KELLY Vice Chairman of the Board and March 30, 1998 - ----------------------------------------------------- Director Peter G. Kelly /s/ ROBERT J. LADNER Vice Chairman of the Board and March 30, 1998 - ----------------------------------------------------- Director Robert J. Ladner /s/ JOE W. BLAGG Director March 30, 1998 - ----------------------------------------------------- Joe W. Blagg /s/ WILLIAM M. CLAYPOOL, III Director March 30, 1998 - ----------------------------------------------------- William M. Claypool, III /s/ JAY B. FEINSOD Director March 30, 1998 - ----------------------------------------------------- Jay B. Feinsod
II-5 49
SIGNATURE TITLE DATE --------- ----- ---- /s/ DAVID W. GUTHRIE Director March 30, 1998 - ----------------------------------------------------- David W. Guthrie /s/ WILLIAM M. HALTERMAN Director March 30, 1998 - ----------------------------------------------------- William M. Halterman /s/ WILLIAM H. HOOD Director March 30, 1998 - ----------------------------------------------------- William H. Hood /s/ JAMES D. HOWENSTEIN Director March 30, 1998 - ----------------------------------------------------- James Howenstein /s/ JERRALD T. KABELIN Director March 30, 1998 - ----------------------------------------------------- Jerrald T. Kabelin /s/ GEORGE V. SHEFFER Director March 30, 1998 - ----------------------------------------------------- George V. Sheffer /s/ DENNIS A. SWANSON Director March 30, 1998 - ----------------------------------------------------- Dennis A. Swanson /s/ JOHN B. WAKE, JR. Director March 30, 1998 - ----------------------------------------------------- John B. Wake, Jr. /s/ JOHN M. WEST, JR. Director March 30, 1998 - ----------------------------------------------------- John M. West, Jr. /s/ BARBARA B. WILKERSON Director March 30, 1998 - ----------------------------------------------------- Barbara B. Wilkerson
II-6 50 CONSENT OF INDEPENDENT AUDITORS We consent to the use of our report dated February 23, 1998, in Post-Effective Amendment No. 5 on Form S-2 to Registration Statement on Form S-4 (File No. 333-18397) and related Prospectus of TruServ Corporation (Cotter & Company prior to July 1, 1997) for the registration of 160,557 shares of Class A common stock. We also consent to the incorporation by reference therein of our report dated February 23, 1998 with respect to the consolidated financial statements of TruServ Corporation included in its Annual Report (Form 10-K) for the year ended December 31, 1997, filed with the Securities and Exchange Commission. ERNST & YOUNG LLP Chicago, Illinois March 30, 1998 II-7 51 INDEX TO EXHIBITS FILED TO POST EFFECTIVE AMENDMENT NO. 5 TO REGISTRATION STATEMENT ON FORM S-4 OF TRUSERV CORPORATION
EXHIBIT NUMBER EXHIBIT - ------- ------- 5 Consent of Arnstein & Lehr. 23-B Consent of Ernst & Young LLP (included on page II-7).
Exhibits incorporated by reference are listed on Pages II-2 and II-3 of Post-Effective Amendment No. 5 to this Registration Statement on Form S-4 of TruServ Corporation. Supplemental Information to be Furnished with Reports Filed Pursuant to Section 15(d) of the Act by Registrants which have not Registered Securities Pursuant to Section 12 of the Act. As of the date of the foregoing Report, no annual report for the Registrant's year ended December 31, 1997 has been sent to security holders. Copies of such Annual Report and proxy soliciting materials will subsequently be sent to security holders and furnished to the Securities and Exchange Commission. II-8 EX-4.(J) 2 CREDIT AGREEMENT DATED 7/1/97 1 EXHIBIT 4.J CREDIT AGREEMENT DATED AS OF JULY 1, 1997 AMONG TRUSERV CORPORATION, VARIOUS FINANCIAL INSTITUTIONS, AND BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION, AS AGENT ARRANGED BY BA SECURITIES, INC. 2 Section Page TABLE OF CONTENTS
Section Page ARTICLE I DEFINITIONS 1.1 Certain Defined Terms 1 1.2 Other Interpretive Provisions 20 1.3 Accounting Principles 21 1.4 Currency Equivalents Generally 21 1.5 Introduction of Euro 21 ARTICLE II THE CREDITS 2.1 Amounts and Terms of Commitments 22 2.2 Loan Accounts 22 2.3 Procedure for Committed Borrowing 23 2.4 Conversion and Continuation Elections for Committed Borrowings 24 2.5 Utilization of Commitments in Offshore Currencies 26 2.6 Bid Borrowings 27 2.7 Procedure for Bid Borrowings 28 2.8 Voluntary Termination or Reduction of Commitments 31 2.9 Optional Prepayments 31 2.10 Currency Exchange Fluctuations 32 2.11 Repayment. 32 2.12 Interest 32 2.13 Fees 33 (a) Certain Fees 33 (b) Facility Fees 33 (c) Commitment Fees 34 2.14 Computation of Fees and Interest 34 2.15 Payments by the Company 35 2.16 Payments by the Lenders to the Agent 35 2.17 Sharing of Payments, Etc. 36 2.18 Swing Line Commitment 38 2.19 Borrowing Procedures for Swing Line Loans 38 2.20 Prepayment or Refunding of Swing Line Loans 39 2.21 Participations in Swing Line Loans 39 2.22 Participation Obligations Unconditional 40 2.23 Conditions to Swing Line Loans 40 2.24 BA Subfacility 41 (a) Creation 41 (b) Notice 41 (c) Issuance Fee 41 (d) Payment 42 (e) Participations in BAs 42 (f) Limitation of Liability 43 2.25 Extension of Scheduled Termination Date 43
3 Section Page
ARTICLE III TAXES, YIELD PROTECTION AND ILLEGALITY 3.1 Taxes 44 3.2 Illegality 45 3.3 Increased Costs and Reduction of Return 46 3.4 Funding Losses 47 3.5 Inability to Determine Rates 48 3.6 Reserves on Offshore Rate Loans 48 3.7 Certificates of Lenders 49 3.8 Substitution of Lenders 49 3.9 Survival 49 ARTICLE IV CONDITIONS PRECEDENT 4.1 Conditions to Initial Credit Extensions 49 (a) Credit Agreement and Notes 50 (b) Resolutions; Incumbency; Certificate of Incorporation; By-Laws 50 (c) Good Standing 50 (d) Legal Opinion 50 (e) Payment of Fees 50 (f) Certificate 50 (g) Other Documents 51 4.2 Conditions to All Credit Extensions 51 (a) Notice 51 (b) Continuation of Representations and Warranties 51 (c) No Existing Default 51 ARTICLE V REPRESENTATIONS AND WARRANTIES 5.1 Organization; Subsidiary Preferred Stock 52 5.2 Financial Statements 52 5.3 Actions Pending 53 5.4 Outstanding Debt 53 5.5 Title to Properties 53 5.6 Taxes 53 5.7 Conflicting Agreements and Other Matters 54 5.8 Use of Proceeds 54 5.9 ERISA 55 5.10 Governmental Consent 55 5.11 Environmental Compliance 56 5.12 Disclosure 56 5.13 Hostile Tender Offers 56 5.14 Priority of Obligations 56 5.15 Merger, etc 56 ARTICLE VI AFFIRMATIVE COVENANTS 6.1 Financial Statements 57 6.2 Certificates; Other Information 57 6.3 Notices 58 6.4 Preservation of Corporate Existence, Etc 59 6.5 Maintenance of Property 60
4 Section Page 6.6 Insurance 60 6.7 Payment of Obligations 60 6.8 Compliance with Laws 60 6.9 Compliance with ERISA 61 6.10 Inspection of Property and Books and Records 61 6.11 Environmental Laws 61 6.12 Use of Proceeds 61 6.13 Covenant to Secure Obligations Equally 61 6.14 Cooperative Status 62 ARTICLE VII NEGATIVE COVENANTS 7.1 Fixed Charge Coverage Ratio 62 7.2 Lien Restrictions 62 7.3 Debt Restrictions 63 7.4 Sale of Assets 64 7.5 Merger 64 7.6 Restrictions on Transactions with Affiliates and Stockholders 64 7.7 Issuance of Stock by Subsidiaries 65 7.8 Compliance with ERISA 65 7.9 No Change in Subordination Terms, etc. 65 7.10 Nature of Business 66 7.11 Restricted Investments 66 7.12 Restricted Payments 66 7.13 Use of Proceeds 67 ARTICLE VIII EVENTS OF DEFAULT 8.1 Event of Default 67 8.2 Remedies 69 8.3 Rights Not Exclusive 70 ARTICLE IX THE AGENT 9.1 Appointment and Authorization;"Agent" 71 9.2 Delegation of Duties 71 9.3 Liability of Agent 72 9.4 Reliance by Agent 72 9.5 Notice of Default 73 9.6 Credit Decision 73 9.7 Indemnification of Agent 74 9.8 Agent in Individual Capacity 74 9.9 Successor Agent 75 9.10 Withholding Tax 75 9.11 Co-Agents 77 ARTICLE X MISCELLANEOUS 10.1 Amendments and Waivers 77 10.2 Notices 78
5 Section Page 10.3 No Waiver; Cumulative Remedies 79 10.4 Costs and Expenses 79 10.5 Company Indemnification 80 10.6 Payments Set Aside 80 10.7 Successors and Assigns 81 10.8 Assignments, Participations, etc. 81 10.9 Confidentiality 82 10.10 Set-off 83 10.11 Automatic Debits of Fees 83 10.12 Notification of Addresses, Lending Offices, Etc. 84 10.13 Counterparts 84 10.14 Severability 84 10.15 No Third Parties Benefited 84 10.16 Governing Law and Jurisdiction 84 10.17 Waiver of Jury Trial 85 10.18 Judgment 85 10.19 Entire Agreement 86
6 SCHEDULES Schedule 1.1 Pricing Schedule Schedule 2.1 Commitments and Pro Rata Shares Schedule 5.7 Restrictive Agreements Schedule 7.2 Liens Schedule 7.11 Investments Schedule 10.2 Offshore and Domestic Lending Offices; Addresses for Notices EXHIBITS Exhibit A Form of Notice of Borrowing Exhibit B Form of Notice of Conversion/Continuation Exhibit C Form of Competitive Bid Request Exhibit D Form of Competitive Bid Exhibit E Form of Compliance Certificate Exhibit F Form of Legal Opinion of Counsel to the Company Exhibit G Form of Assignment and Acceptance Exhibit H Form of Note Exhibit I Form of Subordinated Note Exhibit J Form of Request for Extension of Termination Date 7 CREDIT AGREEMENT This CREDIT AGREEMENT is entered into as of July 1, 1997, among TRUSERV CORPORATION, a Delaware corporation (the "Company"), the several financial institutions from time to time party to this Agreement (collectively the "Lenders"; individually each a "Lender"), and BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION, as Accepting Lender, Swing Line Lender and Agent. WHEREAS, the Lenders have agreed to make available to the Company a revolving multi-currency credit facility with swing line and bankers' acceptance subfacilities, all on the terms and conditions set forth in this Agreement; NOW, THEREFORE, in consideration of the mutual agreements, provisions and covenants contained herein, the parties agree as follows: I. ARTICLE DEFINITIONS A. Certain Defined Terms. The following terms have the following meanings: Absolute Rate - see subsection 2.7(b)(ii)(D). Absolute Rate Auction means a solicitation of Competitive Bids setting forth Absolute Rates pursuant to Section 2.7. Absolute Rate Bid Loan means a Bid Loan that bears interest at a rate determined with reference to the Absolute Rate. Acceptance Documents means such documents and agreements as the Accepting Lender may reasonably require in connection with any BA hereunder. Accepting Lender means BofA in its capacity as accepting lender hereunder, together with any successor in such capacity. Affiliate means, as to any Person, any other Person which, directly or indirectly, is in control of, is controlled by, or is under common control with, such Person. A Person shall be deemed to control another Person if the controlling Person possesses, directly or indirectly, the power to direct or cause the direction of the management and policies of such other Person, whether through the ownership of voting securities, membership interests, by contract, or otherwise. 8 Agent means BofA in its capacity as agent for the Lenders hereunder, and any successor agent arising under Section 9.9. Agent-Related Persons means the Agent and any successor thereto in such capacity hereunder, together with their respective Affiliates, and the officers, directors, employees, agents and attorneys-in-fact of such Persons and Affiliates. Agent's Payment Office means (i) in respect of payments in Dollars, the address for payments to the Agent set forth on Schedule 10.2 or such other address as the Agent may from time to time specify in accordance with Section 10.2 and (ii) in the case of payments in any Offshore Currency, such address as the Agent may from time to time specify in accordance with Section 10.2. Agreed Alternative Currency - see subsection 2.5(e). Agreement means this Credit Agreement. Applicable Currency means, as to any particular payment or Loan, Dollars or the Offshore Currency in which it is denominated or is payable. Applicable Margin means the percentage set forth under the heading "Applicable Margin" on Schedule 1.1 opposite the applicable Fixed Charge Coverage Ratio. Arranger means BA Securities, Inc. Assignee - see subsection 10.8(a). Attorney Costs means and includes all fees and charges of any law firm or other external counsel, and, without duplication, the allocated cost of internal legal services and all disbursements of internal counsel. BA means a draft drawn by the Company on, and accepted and discounted by, the Accepting Lender pursuant to Section 2.24 in the standard form for bankers' acceptances used by the Accepting Lender. BA Commission means the percentage set forth under the heading "BA Commission" on Schedule 1.1 opposite the applicable Fixed Charge Coverage Ratio. BA Outstandings means at any time the sum of (a) the maximum aggregate amount which is, or at any time thereafter may become, payable by the Accepting Lender under all BAs which have been accepted plus (b) the aggregate 9 amount of all payments made by the Accepting Lender under BAs and not previously reimbursed by the Company. Bankruptcy Code means the Federal Bankruptcy Reform Act of 1978 (11 U.S.C. Section 101, et seq.). Bankruptcy Law - see subsection 8.1(h). Base Rate means, for any day, the higher of: (a) 0.50% per annum above the latest Federal Funds Rate; and (b) the rate of interest in effect for such day as publicly announced from time to time by BofA in San Francisco, California, as its "reference rate." (The "reference rate" is a rate set by BofA based upon various factors including BofA's costs and desired return, general economic conditions and other factors, and is used as a reference point for pricing some loans, which may be priced at, above, or below such announced rate.) Any change in the reference rate announced by BofA shall take effect at the opening of business on the day specified in the public announcement of such change. Base Rate Committed Loan means a Committed Loan that bears interest based on the Base Rate. Bid Borrowing means a Borrowing hereunder consisting of one or more Bid Loans made to the Company on the same day by one or more Lenders. Bid Loan means a Loan in Dollars by a Lender to the Company under Section 2.6, which may be a LIBOR Bid Loan or an Absolute Rate Bid Loan. Bid Loan Lender means, in respect of any Bid Loan, the Lender making such Bid Loan to the Company. BofA means Bank of America National Trust and Savings Association, a national banking association. Borrowing means a borrowing hereunder consisting of Loans of the same Type and in the same Applicable Currency made to the Company on the same day by one or more Lenders under Article II, and, other than in the case of Base Rate Committed Loans, having the same Interest Period. A Borrowing may be a Bid Borrowing or a Committed Borrowing. Borrowing Date means any date on which a Borrowing occurs under Section 2.3, 2.7 or 2.18. Business Day means any day other than a Saturday, Sunday or other day on which commercial banks in New York City, Chicago or San Francisco are authorized or required by law to close and (i) with respect to disbursements and 10 payments in Dollars relating to Offshore Rate Loans, a day on which dealings are carried on in the applicable offshore Dollar interbank market and (ii) with respect to disbursements and payments in and calculations pertaining to any Offshore Currency, a day on which commercial banks are open for foreign exchange business in London, England, and on which dealings in the relevant Offshore Currency are carried on in the applicable offshore foreign exchange interbank market in which disbursement of or payment in such Offshore Currency will be made or received hereunder. Capital Adequacy Regulation means any guideline, request or directive of any central bank or other Governmental Authority, or any other law, rule or regulation, whether or not having the force of law, in each case, regarding capital adequacy of any bank or of any corporation controlling a bank. Capitalized Lease Obligation means any rental obligation which, under GAAP, is or will be required to be capitalized on the books of the Company or any Subsidiary, taken at the amount thereof accounted for as indebtedness (net of interest expense). Closing Date means the date on which all conditions precedent set forth in Section 4.1 are satisfied or waived by all Lenders (or, in the case of subsection 4.1(e), waived by the Person entitled to receive the applicable payment). Code means the Internal Revenue Code of 1986 and regulations promulgated thereunder. Commitment - see Section 2.1. Commitment Fee Rate means the percentage set forth under the heading "Commitment Fee Rate" on Schedule 1.1 opposite the applicable Fixed Charge Coverage Ratio. Committed Borrowing means a Borrowing hereunder consisting of Committed Loans made by the Lenders ratably from time to time according to their respective Unused Commitment Shares. Committed Loan means a Loan by a Lender to the Company under Section 2.1, which may be an Offshore Rate Committed Loan or a Base Rate Committed Loan (each a "Type" of Committed Loan). Company - see the Preamble. Competitive Bid means an offer by a Lender to make a Bid Loan in accordance with Section 2.7. 11 Competitive Bid Request - see subsection 2.7(a). Compliance Certificate means a certificate substantially in the form of Exhibit E. Computation Date means any date on which the Agent determines the Dollar Equivalent amount of any Offshore Currency Loans pursuant to subsection 2.5(a). Consolidated Capitalization means, as of the time of any determination, the sum of (i) Consolidated Net Worth and (ii) Funded Debt. Consolidated Net Earnings means with respect to any period: (i) consolidated gross revenues of the Company and its Subsidiaries, minus (ii) all operating and non-operating expenses of the Company and its Subsidiaries including all charges of a proper character (including current and deferred taxes on income, provision for taxes on unremitted foreign earnings which are included in gross revenues, and current additions to reserves), but not including in gross revenues: (a) any extraordinary gains or losses (net of expenses and taxes applicable thereto) resulting from the sale, conversion or other disposition of capital assets (i.e., assets other than current assets); (b) any gains resulting from the appraised write-up of assets; (c) any equity of the Company or any Subsidiary in the unremitted earnings of any corporation which is not a Subsidiary; (d) any earnings of any Person acquired by the Company or any Subsidiary through purchase, merger or consolidation or otherwise for any year prior to the year of acquisition; or (e) any deferred credit representing the excess of equity in any Subsidiary at the date of acquisition over the cost of the investment in such Subsidiary; all determined in accordance with GAAP. Consolidated Net Worth means, as of any date of determination, the sum of (i) the par value (or value stated on the books of the Company) of the capital 12 stock of all classes of the Company, plus (or minus in the case of a surplus deficit) (ii) the amount of the consolidated surplus, whether capital or earned, of the Company and its Subsidiaries, all determined in accordance with GAAP. Contractual Obligation means, as to any Person, any provision of any security issued by such Person or of any agreement, undertaking, contract, indenture, mortgage, deed of trust or other instrument, document or agreement to which such Person is a party or by which it or any of its property is bound. Conversion/Continuation Date means any date on which, under Section 2.4, the Company (a) converts Committed Loans of one Type to another Type or (b) continues as Committed Loans of the same Type, but with a new Interest Period, Committed Loans having an Interest Period expiring on such date. Cost of Funds Rate means, for any day, the rate per annum quoted by BofA as its costs for obtaining Federal Funds on such day. The Costs of Funds Rate for any day which is not a Business Day shall be the Cost of Funds Rate for the preceding Business Day. Cotter means Cotter & Company, a Delaware corporation. Credit Extension means and includes (a) the making of any Loan hereunder and (b) the acceptance of any BA hereunder. Debt means Short Term Debt and Funded Debt. Dollar Equivalent means, at any time, (a) as to any amount denominated in Dollars, the amount thereof at such time, and (b) as to any amount denominated in an Offshore Currency, the equivalent amount in Dollars as determined by the Agent at such time on the basis of the Spot Rate for the purchase of Dollars with such Offshore Currency on the most recent Computation Date provided for in subsection 2.5(a) or such other date as is specified herein. Dollars, dollars and $ each mean lawful money of the United States. Effective Date means the later to occur of the date on which the Agent has received counterparts of this Agreement executed by the parties hereto and July 1, 1997. Eligible Assignee means (a) a commercial bank organized under the laws of the United States, or any state thereof, and having a combined capital and surplus of at least $100,000,000; (b) a commercial bank organized under the laws of any other country which is a member of the Organization for Economic Cooperation and Development (the "OECD"), or a political subdivision of any such country, and having a combined capital and surplus of at least $100,000,000, 13 provided that such bank is acting through a branch or agency located in the United States; and (c) a Person that is primarily engaged in the business of commercial banking and that is (i) a Subsidiary of a Lender, (ii) a Subsidiary of a Person of which a Lender is a Subsidiary, or (iii) a Person of which a Lender is a Subsidiary. Environmental Claims means all claims, however asserted, by any Governmental Authority or other Person alleging potential liability or responsibility for violation of any Environmental Law, or for release or injury to the environment. Environmental Laws means all federal, state or local laws, statutes, common law duties, rules, regulations, ordinances and codes, together with all administrative orders, directed duties, requests, licenses, authorizations and permits of, and agreements with, any Governmental Authorities, in each case relating to environmental, health, safety and land use matters. ERISA means the Employee Retirement Income Security Act of 1974 and regulations promulgated thereunder. ERISA Affiliate means any trade or business (whether or not incorporated) under common control with the Company within the meaning of Section 414(b) or (c) of the Code (and Sections 414(m) and (o) of the Code for purposes of provisions relating to Section 412 of the Code). ERISA Event means (a) a Reportable Event with respect to a Pension Plan; (b) a withdrawal by the Company or any ERISA Affiliate from a Pension Plan subject to Section 4063 of ERISA during a plan year in which it was a substantial employer (as defined in Section 4001(a)(2) of ERISA) or a substantial cessation of operations which is treated as such a withdrawal; (c) a complete or partial withdrawal by the Company or any ERISA Affiliate from a Multiemployer Plan or notification that a Multiemployer Plan is in reorganization; (d) the filing of a notice of intent to terminate, the treatment of a Pension Plan amendment as a termination under Section 4041 or 4041A of ERISA, or the commencement of proceedings by the PBGC to terminate a Pension Plan or Multiemployer Plan; (e) an event or condition which might reasonably be expected to constitute grounds under Section 4042 of ERISA for the termination of, or the appointment of a trustee to administer, any Pension Plan or Multiemployer Plan; or (f) the imposition of any liability under Title IV of ERISA, other than PBGC premiums due but not delinquent under Section 4007 of ERISA, upon the Company or any ERISA Affiliate. Event of Default - see Section 8.1. Exchange Act means the Securities Exchange Act of 1934 and regulations promulgated thereunder. 14 Existing Credit Agreement means each of (i) the Loan Agreement dated as of February 1, 1991 among Servistar and NationsBank, N.A., as Agent, and PNC Bank, N.A., as Co-Agent, and various additional banks and other lending institutions, and (ii) the Credit Agreement dated as of March 29, 1996 among Cotter, various financial institutions and Bank of America Illinois, as Agent, in each case as amended prior to July 1, 1997. Facility Fee Rate means the percentage set forth under the heading "Facility Fee Rate" on Schedule 1.1 opposite the applicable Fixed Charge Coverage Ratio. Federal Funds Rate means, for any day, the rate set forth in the weekly statistical release designated as H.15(519), or any successor publication, published by the Federal Reserve Bank of New York (including any such successor, "H.15(519)") on the preceding Business Day opposite the caption "Federal Funds (Effective)"; or, if for any relevant day such rate is not so published on any such preceding Business Day, the rate for such day will be the arithmetic mean as determined by the Agent of the rates for the last transaction in overnight Federal funds arranged prior to 9:00 a.m. (New York City time) on that day by each of three leading brokers of Federal funds transactions in New York City selected by the Agent. Fee Letter - see subsection 2.13(a). Fixed Charge Coverage Ratio means, for any quarter, the ratio of (a) the sum of (i) Consolidated Net Earnings, (ii) operating lease expense, and (iii) interest expense, to (b) the sum of (i) operating lease expense and (ii) interest expense; each determined for the Company and its Subsidiaries on a consolidated basis. FRB means the Board of Governors of the Federal Reserve System, and any Governmental Authority succeeding to any of its principal functions. Funded Debt means and includes, (i) any obligation payable more than one year from the date of creation thereof which under GAAP is shown on a balance sheet as a liability (including Capitalized Lease Obligations and notes payable to Members but excluding reserves for deferred income taxes and other reserves to the extent that such reserves do not constitute an obligation); (ii) indebtedness payable more than one year from the date of creation thereof which is secured by any lien on property owned by the Company or any Subsidiary; and 15 (iii) Guarantees (excluding Guarantees of loans made to Members in an amount not exceeding $10,000,000). Further Taxes means any and all present or future taxes, levies, assessments, imposts, duties, deductions, fees, withholdings or similar charges (including net income taxes and franchise taxes), and all liabilities with respect thereto, imposed by any jurisdiction on account of amounts payable or paid pursuant to Section 3.1. FX Trading Office means the Foreign Exchange Trading Center #5193, San Francisco, California, of BofA, or such other office of BofA or any of its Affiliates as BofA may designate from time to time. GAAP means generally accepted accounting principles set forth from time to time in the opinions and pronouncements of the Accounting Principles Board and the American Institute of Certified Public Accountants and statements and pronouncements of the Financial Accounting Standards Board (or agencies with similar functions of comparable stature and authority within the U.S. accounting profession), which are applicable to the circumstances as of the date of determination. Governmental Authority means any nation or government, any state or other political subdivision thereof, any central bank (or similar monetary or regulatory authority) thereof, any entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government, and any corporation or other entity owned or controlled, through stock or capital ownership or otherwise, by any of the foregoing. Guarantee means, with respect to any Person, any direct or indirect liability, contingent or otherwise, of such Person with respect to any indebtedness, lease, dividend or other obligation of another, including, without limitation, any such obligation directly or indirectly guaranteed, endorsed (other than for collection of deposit in the ordinary course of business) or discounted or sold with recourse by such Person, or in respect of which such Person is otherwise directly or indirectly liable, including, without limitation, any such obligation in effect guaranteed by such Person through any agreement (contingent or otherwise) to purchase, repurchase or otherwise acquire such obligation or any security therefor, or to provide funds for the payment or discharge of such obligation (whether in the form of loans, advances, stock purchases, capital contributions or otherwise), or to maintain the solvency or any balance sheet or other financial condition of the obligor of such obligation, or to make payment for any products, materials or supplies or for any transportation or services regardless of the non-delivery or non-furnishing thereof, in any such case if the purpose or intent of such agreement is to provide assurance that such obligation will be paid or discharged, or that any agreements relating thereto will be complied with, or that the holders of such 16 obligation will be protected against loss in respect thereof. The amount of any Guarantee shall be equal to the outstanding principal amount of the obligation guaranteed or such lesser amount to which the maximum exposure of the guarantor shall have been specifically limited. Hostile Tender Offer means, with respect to the use of proceeds of any Loan or BA, any offer to purchase, or any purchase of, shares of capital stock of any corporation or equity interests in any other entity, or securities convertible into or representing the beneficial ownership of, or rights to acquire, any such shares or equity interests, if such shares, equity interests, securities or rights are of a class which is publicly traded on any securities exchange or in any over-the-counter market, other than purchases of such shares, equity interests, securities or rights representing less than 5% of the equity interests or beneficial ownership of such corporation or other entity for portfolio investment purposes, and such offer or purchase has not been duly approved by the board of directors of such corporation or the equivalent governing body of such other entity prior to the date on which the Company makes the borrowing request for such Loan or the request for such BA. Indebtedness means, with respect to any Person, without duplication, (i) all items (excluding items of contingency reserves or of reserves for deferred income taxes) which in accordance with GAAP would be included in determining total liabilities as shown on the liability side of a balance sheet of such Person as of the date on which Indebtedness is to be determined, (ii) all indebtedness secured by any Lien on any property or asset owned or held by such Person subject thereto, whether or not the indebtedness secured thereby shall have been assumed, and (iii) all indebtedness of others with respect to which such Person has become liable by way of Guarantee. Indemnified Liabilities - see Section 10.5. Indemnified Person - see Section 10.5. Independent Auditor - see subsection 6.1(a). Insolvency Proceeding means, with respect to any Person, (a) any case, action or proceeding with respect to such Person before any court or other Governmental Authority relating to bankruptcy, reorganization, insolvency, liquidation, receivership, dissolution, winding-up or relief of debtors, or (b) any general assignment for the benefit of creditors, composition, marshalling of assets for creditors, or other, similar arrangement in respect of its creditors generally or any substantial portion of its creditors; undertaken under U.S. Federal, state or foreign law, including the Bankruptcy Code. 17 Interest Payment Date means, as to any Loan other than a Base Rate Committed Loan or a Swing Line Loan, the last day of each Interest Period applicable to such Loan, (ii) as to any Base Rate Committed Loan, the last Business Day of each calendar quarter, and (iii) as to any Swing Line Loan, each Business Day (or as otherwise agreed between the Company and the Swing Line Lender); provided that (a) if any Interest Period for an Offshore Rate Committed Loan exceeds three months, the date that falls three months after the beginning of such Interest Period shall also be an Interest Payment Date and (b) as to any Bid Loan, such intervening dates prior to the maturity thereof as may be specified by the Company and agreed to by the applicable Bid Loan Lender in the applicable Competitive Bid also shall be Interest Payment Dates. Interest Period means, (a) as to any Offshore Rate Loan, the period commencing on the Borrowing Date of such Loan or (in the case of any Offshore Rate Committed Loan) on the Conversion/Continuation Date on which the Loan is converted into or continued as an Offshore Rate Committed Loan, and ending on the date one, two, three or six months thereafter as selected by the Company in its Notice of Committed Borrowing, Notice of Conversion/Continuation or Competitive Bid Request, as the case may be; and (b) as to any Absolute Rate Bid Loan, a period of not more than 180 days as selected by the Company in the applicable Competitive Bid Request; provided that: (i) if any Interest Period would otherwise end on a day that is not a Business Day, such Interest Period shall be extended to the following Business Day unless, in the case of an Offshore Rate Loan, the result of such extension would be to carry such Interest Period into another calendar month, in which event such Interest Period shall end on the preceding Business Day; (ii) any Interest Period for an Offshore Rate Loan that begins on the last Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the calendar month at the end of such Interest Period) shall end on the last Business Day of the calendar month at the end of such Interest Period; and (iii) no Interest Period for any Loan shall extend beyond the scheduled Termination Date. Investments means any loan or advance to, or ownership, purchase or acquisition of any security (including stock) or obligations of, or any other interest in, or any capital contribution made to, any Person. IRS means the Internal Revenue Service, and any Governmental Authority succeeding to any of its principal functions under the Code. 18 Lender - see the Preamble. References to the "Lenders" shall include BofA in its capacity as Accepting Lender and as Swing Line Lender. Lending Office means, as to any Lender, the office or offices of such Lender specified as its "Lending Office" or "Domestic Lending Office" or "Offshore Lending Office", as the case may be, on Schedule 10.2, or such other office or offices as such Lender may from time to time notify the Company and the Agent. LIBOR Auction means a solicitation of Competitive Bids setting forth a LIBOR Bid Margin pursuant to Section 2.7. LIBOR Bid Loan means any Bid Loan that bears interest at a rate based upon the Offshore Rate. LIBOR Bid Margin - see subsection 2.7(c)(ii)(C). Lien means any mortgage, pledge, security interest, encumbrance, lien (statutory or otherwise) or charge of any kind (including any agreement to give any of the foregoing, any conditional sale or other title retention agreement, any lease in the nature thereof, and the filing of or agreement to give any financing statement under the Uniform Commercial Code of any jurisdiction) or any other type of preferential arrangement for the purpose, or having the effect, of protecting a creditor against loss or securing the payment or performance of an obligation. Loan means an extension of credit by a Lender to the Company under Article II. A Loan may be a Committed Loan, a Bid Loan or a Swing Line Loan. Loan Documents means this Agreement, any Note, the Fee Letter and all other documents delivered to the Agent or any Lender in connection herewith. Margin Stock means "margin stock" as such term is defined in Regulation G, T, U or X of the FRB. Material Adverse Effect means (a) a material adverse change in, or a material adverse effect upon, the operations, business, properties, condition (financial or otherwise) or prospects of the Company or the Company and its Subsidiaries taken as a whole; (b) a material impairment of the ability of the Company or any Subsidiary to perform its obligations under any Loan Document; or (c) a material adverse effect upon the legality, validity, binding effect or enforceability against the Company or any Subsidiary of any Loan Document. Member means any Person which is a member of the Company. 19 Merger means the merger of Servistar with and into Cotter pursuant to the Merger Agreement. Merger Agreement means the Agreement and Plan of Merger, dated as of December 9, 1996 between Cotter and Servistar. Minimum Tranche means, in respect of Loans comprising part of the same Borrowing, or to be converted or continued under Section 2.4, (a) in the case of Base Rate Committed Loans, $1,000,000 or a higher integral multiple thereof and (b) in the case of Offshore Rate Committed Loans, a minimum Dollar Equivalent amount of $5,000,000 and an integral multiple of 1,000,000 units of the Applicable Currency. Multiemployer Plan means any Plan which is a "multiemployer plan" (as such term is defined in section 4001(a)(3) of ERISA). Note means a promissory note executed by the Company in favor of a Lender pursuant to subsection 2.2(b), in substantially the form of Exhibit H. Notice of Borrowing means a notice in substantially the form of Exhibit A. Notice of Committed Borrowing means a Notice of Borrowing requesting Committed Loans pursuant to Section 2.3. Notice of Conversion/Continuation means a notice in substantially the form of Exhibit B. Obligations means all advances, debts, liabilities, obligations, covenants and duties arising under any Loan Document owing by the Company to any Lender, the Agent or any Indemnified Person, whether direct or indirect (including those acquired by assignment), absolute or contingent, due or to become due, or now existing or hereafter arising. Offshore Currency means at any time Canadian dollars, English pounds sterling, French francs, Deutschemarks, Japanese yen, and any Agreed Alternative Currency. Offshore Currency Loan means any Offshore Rate Committed Loan denominated in an Offshore Currency. Offshore Rate means, for any Interest Period, with respect to Offshore Rate Loans comprising part of the same Borrowing, the rate of interest per annum determined by the Agent as the average (rounded upwards, if necessary, to the nearest 0.01%) of the rates at which deposits in the Applicable Currency in the approximate amount of the Offshore Rate Loan of each Reference Lender (or, in 20 the case of a Bid Borrowing in which no Reference Lender is participating, in the approximate amount of the largest Loan included in such Borrowing) for such Interest Period would be offered by such Reference Lender to major banks in the offshore interbank market at their request at approximately 11:00 a.m. (New York City time) two Business Days prior to the commencement of such Interest Period. Offshore Rate Committed Loan means a Committed Loan that bears interest based on the Offshore Rate. An Offshore Rate Committed Loan may be an Offshore Currency Loan or a Loan denominated in Dollars. Offshore Rate Loan means an Offshore Rate Committed Loan or a LIBOR Bid Loan. Organization Documents means, for any corporation, the certificate or articles of incorporation, the bylaws, any certificate of determination or instrument relating to the rights of preferred shareholders of such corporation, any shareholder rights agreement, and all applicable resolutions of the board of directors (or any committee thereof) of such corporation. Other Taxes means any present or future stamp, court or documentary taxes or any other excise or property taxes, charges or similar levies which arise from any payment made hereunder or from the execution, delivery, performance, enforcement or registration of, or otherwise with respect to, this Agreement or any other Loan Document. Overnight Rate means, for any day, the rate of interest per annum at which overnight deposits in the Applicable Currency, in an amount approximately equal to the amount with respect to which such rate is being determined, would be offered for such day by BofA's London Branch to major banks in the London or other applicable offshore interbank market. The Overnight Rate for any day which is not a Business Day shall be the Overnight Rate for the preceding Business Day. Participant - see subsection 10.8(c). Payment Sharing Notice means a written notice from the Company or any Lender informing the Agent that an Event of Default has occurred and is continuing and directing the Agent to allocate payments received from the Company in accordance with subsection 2.17(b). PBGC means the Pension Benefit Guaranty Corporation, or any Governmental Authority succeeding to any of its principal functions under ERISA. 21 Pension Plan means a pension plan (as defined in Section 3(2) of ERISA) subject to Title IV of ERISA with respect to which the Company or any ERISA Affiliate may have any liability. Person means an individual, partnership, corporation, limited liability company, business trust, joint stock company, trust, unincorporated association, joint venture or Governmental Authority. Plan shall mean any employee pension benefit plan (as such term is defined in section 3 of ERISA) which is or has been established or maintained, or to which contributions are or have been made, by the Company or any ERISA Affiliate. Preferred Stock, as applied to any corporation, means shares of such corporation that shall be entitled to preference or priority over any other shares of such corporation in respect of either the payment of dividends or the distribution of assets upon liquidation, or both. Pro Rata Share means, as to any Lender at any time, the percentage equivalent (expressed as a decimal, rounded to the ninth decimal place) at such time of such Lender's Commitment divided by the combined Commitments of all Lenders (or, after the Commitments have terminated, of (i) the Dollar Equivalent amount of such Lender's Loans plus (without duplication) the participation of such Lender in (or, in the case of the Accepting Lender or the Swing Line Lender, its unparticipated portion of) all BA Outstandings and Swing Line Loans divided by (ii) the Dollar Equivalent amount of all outstanding Loans plus all BA Outstandings). Prudential Agreement means the Private Shelf Agreement dated as of December 29, 1995 between the Company and The Prudential Insurance Company of America and certain of its Affiliates. Reference Lender means each of BofA, Bank of Montreal and PNC Bank, National Association. Replacement Lender - see Section 3.7. Reportable Event means, any of the events set forth in Section 4043(b) of ERISA or the regulations thereunder, other than any such event for which the 30-day notice requirement under ERISA has been waived in regulations issued by the PBGC. Required Lenders means Lenders having Pro Rata Shares of 66-2/3% or more. 22 Requirement of Law means, as to any Person, any law (statutory or common), treaty, rule or regulation or determination of an arbitrator or of a Governmental Authority, in each case applicable to or binding upon the Person or any of its property or to which the Person or any of its property is subject. Responsible Officer means the chief executive officer, chief operating officer, chief financial officer, treasurer or chief accounting officer of the Company, general counsel of the Company or any other officer of the Company involved principally in its financial administration or its controllership function. Restricted Investments shall mean any Investment prohibited by Section 7.11. Restricted Payment - see Section 7.12. Same Day Funds means (i) with respect to disbursements and payments in Dollars, immediately available funds, and (ii) with respect to disbursements and payments in an Offshore Currency, same day or other funds as may be determined by the Agent to be customary in the place of disbursement or payment for the settlement of international banking transactions in the relevant Offshore Currency. SEC means the Securities and Exchange Commission or any Governmental Authority succeeding to any of its principal functions. Secured Funded Debt means Funded Debt which is secured by any Lien. Senior Funded Debt means Funded Debt of the Company which is not Subordinated Debt. Servistar means Servistar COAST TO COAST Corporation, a Pennsylvania corporation. Short Term Debt means, as of any date of determination with respect to any Person, (i) all Indebtedness of such Person for borrowed money other than Funded Debt of such Person and (ii) Guarantees by such Person of Short Term Debt of Persons other than Members. Spot Rate for a currency means the rate quoted by BofA as the spot rate for the purchase by BofA of such currency with another currency through its FX Trading Office at approximately 8:00 a.m. (San Francisco time) on the date two Business Days prior to the date as of which the foreign exchange computation is made. Subordinated Debt shall mean any Indebtedness of the Company which contains terms of subordination identical to or, in the reasonable determination of the Agent no less favorable to the Lenders than, the terms of subordination set 23 forth in Exhibit I hereto and, which by virtue of such language and any necessary action of the Board of Directors of the Company, is subordinated to the Obligations. Subsidiary means any corporation all of the stock of every class of which, except directors' qualifying shares, shall, at the time as of which any determination is being made, be owned by the Company either directly or through Subsidiaries. Notwithstanding the foregoing, for purposes of calculating the financial covenants, Cotter Canada Hardware and Variety Cooperative, Inc. will be deemed a Subsidiary of the Company if, in accordance with GAAP, it is consolidated in the financial statements of the Company required to be delivered pursuant to clauses (a) and (b) of Section 6.1 hereof. Substantial Stockholder means (i) any Person owning, beneficially or of record, directly or indirectly, either individually or together with all other Persons to whom such Person is related by blood, adoption or marriage, stock of the Company (of any class having ordinary voting power for the election of directors) aggregating five percent (5%) or more of such voting power or (ii) any Person related by blood, adoption or marriage to any Person described or coming within the provisions of clause (i) of this definition. Swing Line Commitment means the commitment of the Swing Line Lender to make Swing Line Loans hereunder. The Swing Line Commitment is a subfacility under the combined Commitments and not a separate, independent commitment. Swing Line Lender means BofA in its capacity as swing line lender hereunder, together with any successor thereto in such capacity. Swing Line Loan - see Section 2.18. Taxes means any and all present or future taxes, levies, assessments, imposts, duties, deductions, charges or withholdings, fees, withholdings or similar charges, and all liabilities with respect thereto, excluding, in the case of each Lender and the Agent, such taxes (including income taxes or franchise taxes) as are taxes imposed on or measured by its net income by the jurisdiction (or any political subdivision thereof) under the laws of which such Lender or the Agent, as the case may be, is organized or maintains a lending office. Termination Date means the earlier to occur of: (a) June 30, 2002, as such date may be extended pursuant to Section 2.25; and 24 (b) the date on which the Commitments terminate in accordance with the provisions of this Agreement. Total Outstandings means at any time the sum of (a) the Dollar Equivalent principal amount of all outstanding Loans (whether Committed Loans, Bid Loans or Swing Line Loans) plus (b) BA Outstandings. Type has the meaning specified in the definition of "Committed Loan." Unfunded Pension Liability means the excess of a Pension Plan's benefit liabilities under Section 4001(a)(16) of ERISA, over the current value of that Plan's assets, determined in accordance with the assumptions used for funding the Pension Plan pursuant to Section 412 of the Code for the applicable plan year. United States and U.S. each means the United States of America. Unmatured Event of Default means any event or circumstance which, with the giving of notice, the lapse of time, or both, would (if not cured or otherwise remedied during such time) constitute an Event of Default. Unused Commitment Share means, for any Lender at any time, a fraction (a) the numerator of which is the remainder of (i) the Commitment of such Lender minus (ii) the sum of (x) the aggregate Dollar Equivalent principal amount of all then outstanding Loans of such Lender (excluding, in the case of the Swing Line Lender, all Swing Line Loans) and (b) the denominator of which is the remainder of (i) the aggregate Commitments of all Lenders, minus (ii) the aggregate Dollar Equivalent principal amount of all then outstanding Loans of all Lenders. Solely for purposes of the foregoing, (i) Loans to be repaid with the proceeds of Loans proposed to be made shall be deemed not to be outstanding; and (ii) funded participations in Swing Line Loans pursuant to Section 2.21 and in obligations with respect to BAs pursuant to subsection 2.24(e) shall be deemed to constitute Loans (but unfunded participations of the types described above shall not constitute Loans). A. Other Interpretive Provisions. 1. The meanings of defined terms are equally applicable to the singular and plural forms of the defined terms. 1. The words "hereof", "herein", "hereunder" and similar words refer to this Agreement as a whole and not to any particular provision of this Agreement; and subsection, Section, Schedule and Exhibit references are to this Agreement unless otherwise specified. 25 a) The term "documents" includes any and all instruments, documents, agreements, certificates, indentures, notices and other writings, however evidenced. a) The term "including" is not limiting and means "including without limitation." a) In the computation of periods of time from a specified date to a later specified date, the word "from" means "from and including"; the words "to" and "until" each mean "to but excluding", and the word "through" means "to and including." 1. Unless otherwise expressly provided herein, (i) references to agreements (including this Agreement) and other contractual instruments shall be deemed to include all subsequent amendments and other modifications thereto, but only to the extent such amendments and other modifications are not prohibited by the terms of any Loan Document, and (ii) references to any statute or regulation are to be construed as including all statutory and regulatory provisions consolidating, amending, replacing, supplementing or interpreting the statute or regulation. 1. The captions and headings of this Agreement are for convenience of reference only and shall not affect the interpretation of this Agreement. 1. This Agreement and other Loan Documents may use several different limitations, tests or measurements to regulate the same or similar matters. All such limitations, tests and measurements are cumulative and shall each be performed in accordance with their terms. Unless otherwise expressly provided herein, any reference to any action of the Agent, the Lenders or the Required Lenders by way of consent, approval or waiver shall be deemed modified by the phrase "in its/their sole discretion." 1. This Agreement and the other Loan Documents are the result of negotiations among and have been reviewed by counsel to the Agent, the Company and the other parties, and are the products of all parties. Accordingly, they shall not be construed against the Lenders or the Agent merely because of the Agent's or Lenders' involvement in their preparation. A. Accounting Principles. 1. Unless the context otherwise clearly requires, all accounting terms not expressly defined herein shall be construed, and all financial computations required under this Agreement shall be made, in accordance with GAAP, consistently applied; provided that if the Company notifies the Agent that the Company wishes to amend any covenant in Article VII to eliminate the effect of any change in GAAP on the operation of such covenant (or if the Agent notifies the Company that the 26 Required Lenders wish to amend Article VII for such purpose), then the Company's compliance with such covenant shall be determined on the basis of GAAP in effect immediately before the relevant change in GAAP became effective, until either such notice is withdrawn or such covenant is amended in a manner satisfactory to the Company and the Required Lenders. 1. References herein to "fiscal year" and "fiscal quarter" refer to such fiscal periods of the Company. A. Currency Equivalents Generally. For all purposes of this Agreement (but not for purposes of the preparation of any financial statements delivered pursuant hereto), the equivalent in any Offshore Currency or other currency of an amount in Dollars, and the equivalent in Dollars of an amount in any Offshore Currency or other currency, shall be determined at the Spot Rate. A. Introduction of Euro. For the avoidance of doubt, the parties hereto affirm and agree that neither the fixation of the conversion rate of any Offshore Currency of a country that is a member of the European Union against the Euro as a single currency, in accordance with the Treaty Establishing the European Economic Community, as amended by the Treaty on the European Union (the Maastricht Treaty), nor the conversion of any Obligations under the Loan Documents from an Offshore Currency of a country that is a member of the European Union into Euro, shall require the early termination of this Agreement or the prepayment of any amount due under the Loan Documents or create any liability of one party to another party for any direct or consequential loss arising from any of such events. As of the date that any such Offshore Currency is no longer the lawful currency of its respective country, all payment obligations under the Loan Documents that would otherwise be in such Offshore Currency shall thereafter by satisfied in Euro. 27 I. ARTICLE THE CREDITS A. Amounts and Terms of Commitments. Each Lender severally agrees, on the terms and conditions set forth herein, to make Committed Loans to the Company from time to time on any Business Day during the period from the Closing Date to the Termination Date, in an aggregate Dollar Equivalent amount not to exceed at any time outstanding the amount set forth on Schedule 2.1 (such amount, as the same may be reduced under Section 2.8 or as a result of one or more assignments under Section 10.8, such Lender's "Commitment"); provided, however, that the Total Outstandings shall not at any time exceed the combined Commitments; and provided, further, that the aggregate Dollar Equivalent principal amount of all outstanding Loans (whether Committed Loans or Bid Loans) of any Lender plus such Lender's participation interest in all Swing Line Loans and BA Outstandings shall not at any time exceed such Lender's Commitment. Within the foregoing limits, and subject to the other terms and conditions hereof, the Company may borrow under this Section 2.1, prepay under Section 2.9 and reborrow under this Section 2.1. 1. Loan Accounts. The Loans made by each Lender shall be evidenced by one or more accounts or records maintained by such Lender in the ordinary course of business. The accounts or records maintained by the Agent and each Lender shall be rebuttably presumptive evidence of the amount of the Loans made by the Lenders to the Company, and the interest and payments thereon. Any failure so to record or any error in doing so shall not, however, limit or otherwise affect the obligation of the Company hereunder to pay any amount owing with respect to the Loans. 1. Upon the request of any Lender made through the Agent, the Loans made by such Lender may be evidenced by one or more Notes, instead of or in addition to loan accounts. Each such Lender shall endorse on the schedules annexed to its Note(s) the date, amount and maturity of each Loan made by it and the amount of each payment of principal made by the Company with respect thereto. Each such Lender is irrevocably authorized by the Company to endorse its Note(s) and each Lender's record shall be rebuttably presumptive evidence; provided, however, that the failure of a Lender to make, or an error in making, a notation thereon with respect to any Loan shall not limit or otherwise affect the obligations of the Company hereunder or under any such Note to such Lender. 1. Procedure for Committed Borrowing. Each Committed Borrowing shall be made upon the Company's irrevocable written notice delivered to the Agent in the form of a Notice of Committed Borrowing, which notice must be received by the Agent prior to (i) 11:00 a.m. (Chicago time) four Business Days prior to the requested Borrowing Date, in the case of Offshore Currency Loans, (ii) 9:00 a.m.(Chicago time) two Business Days prior to the requested Borrowing Date, in the case of Offshore Rate 28 Loans denominated in Dollars, and (iii) 11:00 a.m. (Chicago time) on the requested Borrowing Date, in the case of Base Rate Loans, specifying: (1) the amount of the Committed Borrowing, which shall be in an aggregate amount not less than the Minimum Tranche; (1) the requested Borrowing Date, which shall be a Business Day; (1) the Type of Loans comprising such Committed Borrowing; (1) in the case of Offshore Rate Committed Loans, the duration of the initial Interest Period therefor; and (1) in the case of a Borrowing of Offshore Currency Loans, the Applicable Currency. 1. The Dollar Equivalent amount of any Committed Borrowing in an Offshore Currency will be determined by the Agent for such Borrowing on the Computation Date therefor in accordance with subsection 2.5(a). The Agent will promptly notify each Lender of its receipt of any Notice of Committed Borrowing and of the amount of such Lender's Unused Commitment Share of such Borrowing. In the case of a Borrowing comprised of Offshore Currency Loans, such notice will provide the approximate amount of each Lender's Unused Commitment Share of such Borrowing, and the Agent will, upon the determination of the Dollar Equivalent amount of such Borrowing as specified in the related Notice of Committed Borrowing, promptly notify each Lender of the exact amount of such Lender's Unused Commitment Share of such Borrowing. 1. Each Lender will make the amount of its Unused Commitment Share of each Committed Borrowing available to the Agent for the account of the Company at the Agent's Payment Office on the Borrowing Date requested by the Company in Same Day Funds and in the requested currency (i) in the case of a Committed Borrowing comprised of Loans in Dollars, by noon (Chicago time) and (ii) in the case of a Borrowing comprised of Offshore Currency Loans, by such time as the Agent may specify. The proceeds of all such Committed Loans will then be made available to the Company by the Agent at such office by crediting the account of the Company on the books of BofA with the aggregate of the amounts made available to the Agent by the Lenders and in like funds as received by the Agent. 1. After giving effect to any Committed Borrowing, unless the Agent otherwise consents, there may not be more than ten different Interest Periods in effect for all Committed Borrowings. 29 1. Conversion and Continuation Elections for Committed Borrowings. The Company may, upon irrevocable written notice to the Agent in accordance with subsection 2.4(b): a) elect, as of any Business Day, in the case of Base Rate Committed Loans, or as of the last day of the applicable Interest Period, in the case of Offshore Rate Committed Loans denominated in Dollars, to convert any such Committed Loans (or any part thereof in an aggregate amount not less than the Minimum Tranche) into Committed Loans in Dollars of any other Type; or a) elect as of the last day of the applicable Interest Period, to continue any Committed Loans having Interest Periods expiring on such day (or any part thereof in an amount not less than the Minimum Tranche) as Committed Loans of the same Type; provided that if at any time the aggregate amount of Offshore Rate Committed Loans denominated in Dollars in respect of any Committed Borrowing is reduced, by payment, prepayment, or conversion of part thereof, to be less than the Minimum Tranche, such Offshore Rate Committed Loans shall automatically convert into Base Rate Committed Loans. 1. The Company shall deliver a Notice of Conversion/Continuation to be received by the Agent not later than (i) 11:00 a.m. (Chicago time) four Business Days prior to the Conversion/Continuation Date, if the Committed Loans are to be continued as Offshore Currency Loans; (ii) 10:00 a.m. (Chicago time) two Business Days in advance of the Conversion/Continuation Date, if the Committed Loans are to be converted into or continued as Offshore Rate Committed Loans denominated in Dollars; and (iii) 11:00 a.m. (Chicago time) on the Conversion/Continuation Date, if the Committed Loans are to be converted into Base Rate Committed Loans, specifying: (1) the proposed Conversion/Continuation Date; (1) the aggregate amount of Committed Loans to be converted or continued; (1) the Type of Committed Loans resulting from the proposed conversion or continuation; and (1) in the case of conversions into Offshore Rate Committed Loans, the duration of the requested Interest Period. 1. If upon the expiration of any Interest Period applicable to Offshore Rate Committed Loans denominated in Dollars, the Company has failed to select timely a new Interest Period to be applicable to such Offshore Rate Committed 30 Loans, the Company shall be deemed to have elected to convert such Offshore Rate Committed Loans into Base Rate Committed Loans effective as of the expiration date of such Interest Period. If the Company has failed to select a new Interest Period to be applicable to Offshore Currency Loans by the applicable time on the fourth Business Day in advance of the expiration date of the current Interest Period applicable thereto as provided in subsection 2.4(b), or if any Event of Default or Unmatured Event of Default shall then exist, subject to the provisions of subsection 2.5(d), the Company shall be deemed to have elected to continue such Offshore Currency Loans on the basis of a one month Interest Period. 1. The Agent will promptly notify each Lender of its receipt of a Notice of Conversion/Continuation, or, if no timely notice is provided by the Company, the Agent will promptly notify each Lender of the details of any automatic conversion. All conversions and continuations shall be made ratably according to the respective outstanding principal amounts of the Committed Loans with respect to which the notice was given held by each Lender. 1. Unless the Required Lenders otherwise consent, during the existence of an Event of Default or Unmatured Event of Default, the Company may not elect to have a Loan converted into or continued as an Offshore Rate Committed Loan. 1. After giving effect to any conversion or continuation of Committed Loans, unless the Agent shall otherwise consent, there may not be more than ten different Interest Periods in effect for all Committed Loans. 1. Utilization of Commitments in Offshore Currencies. The Agent will determine the Dollar Equivalent amount with respect to (i) any Borrowing comprised of Offshore Currency Loans as of the requested Borrowing Date, (ii) all outstanding Offshore Currency Loans as of the last Business Day of each month, and (iii) any outstanding Offshore Currency Loan as of any redenomination date pursuant to this Section 2.5 or Section 3.2 or 3.5 and any date on which the Commitments are reduced pursuant to Section 2.8. 1. In the case of a proposed Borrowing comprised of Offshore Currency Loans, the Lenders shall be under no obligation to make Offshore Currency Loans in the requested Offshore Currency as part of such Borrowing if the Agent has received notice from any of the Lenders by 3:00 p.m. (Chicago time) four Business Days prior to the day of such Borrowing that such Lender cannot provide Loans in the requested Offshore Currency, in which event the Agent will promptly give notice to the Company that the Borrowing in the requested Offshore Currency is not then available, and notice thereof also will be given promptly by the Agent to the Lenders. If the Agent shall have so notified the Company that any such Borrowing in a requested Offshore Currency is not then available, the Company may, by notice to the Agent not later than 3:00 p.m. (Chicago time) three Business Days prior to the requested date of such Borrowing, withdraw the Notice of Committed Borrowing relating to such requested 31 Borrowing. If the Company does so withdraw such Notice of Committed Borrowing, the Borrowing requested therein shall not occur and the Agent will promptly so notify each Lender. If the Company does not so withdraw such Notice of Committed Borrowing, the Agent will promptly so notify each Lender and such Notice of Committed Borrowing shall be deemed to be a Notice of Committed Borrowing that requests a Borrowing comprised of Base Rate Loans in an aggregate amount equal to the amount of the originally requested Borrowing as expressed in Dollars in the Notice of Committed Borrowing; and in such notice by the Agent to each Lender the Agent will state such aggregate amount of such Borrowing in Dollars and such Lender's Unused Commitment Share thereof. 2. In the case of a proposed continuation of Offshore Currency Loans for an additional Interest Period pursuant to Section 2.4, the Lenders shall be under no obligation to continue such offshore Currency Loans if the Agent has received notice from any of the Lenders by 3:00 p.m. (Chicago time) four Business Days prior to the day of such continuation that such Lender cannot continue to provide Loans in the relevant Offshore Currency, in which event the Agent will promptly give notice to the Company that the continuation of such Offshore Currency Loans in the relevant Offshore Currency is not then available, and notice thereof also will be given promptly by the Agent to the Lenders. If the Agent shall have so notified the Company that any such continuation of Offshore Currency Loans is not then available, any Notice of Continuation/Conversion with respect thereto shall be deemed withdrawn and such Offshore Currency Loans shall be repaid on the last day of the Interest Period with respect to such offshore Currency Loans. 1. Notwithstanding anything herein to the contrary, during the existence of an Event of Default, upon the request of the Required Lenders, all or any part of any outstanding Offshore Currency Loans shall be redenominated and converted into Base Rate Committed Loans in Dollars with effect from the last day of the Interest Period with respect to such Offshore Currency Loans. The Agent will promptly notify the Company of any request pursuant to the foregoing sentence. 1. The Company shall be entitled to request that Loans hereunder also be permitted to be made in any other lawful currency, in addition to the eurocurrencies specified in the definition of "Offshore Currency" herein, that in the opinion of the Required Lenders is at such time freely traded in the offshore interbank foreign exchange markets and is freely transferable and freely convertible into Dollars (an "Agreed Alternative Currency"). The Company shall deliver to the Agent any request for designation of an Agreed Alternative Currency not later than 10:00 a.m. (Chicago time) at least seven Business Days in advance of the date of any Borrowing hereunder proposed to be made in such Agreed Alternative Currency. Upon receipt of any such request the Agent will promptly notify the Lenders thereof, and each Lender will use its best efforts to respond to such request within two Business Days of receipt thereof. Each Lender may grant or accept such request in its sole discretion. The Agent will promptly notify the Company of the acceptance or rejection of any such request. 32 A. Bid Borrowings. In addition to Committed Borrowings pursuant to Section 2.3, each Lender severally agrees that the Company may, as set forth in Section 2.7, from time to time request the Lenders prior to the Termination Date to submit offers to make Bid Loans to the Company; provided that the Lenders may, but shall have no obligation to, submit such offers and the Company may, but shall have no obligation to, accept any such offers; and provided, further, that (a) the Total Outstandings shall not at any time exceed the combined Commitments, (b) the aggregate Dollar Equivalent principal amount of all outstanding Loans (whether Bid Loans or Committed Loans) of any Lender plus such Lender's participation interest in all Swing Line Loans and BA Outstandings shall not at any time exceed such Lender's Commitment, and (c) after giving effect to any Bid Borrowing, there may not be more than ten (10) different Interest Periods in effect for all Bid Borrowings. B. Procedure for Bid Borrowings. 1. When the Company wishes to request the Lenders to submit offers to make Bid Loans hereunder, it shall transmit to the Agent and each Lender by telephone call followed promptly by facsimile transmission a notice in substantially the form of Exhibit C (a "Competitive Bid Request") so as to be received no later than 9:00 a.m. (Chicago time) (x) four Business Days prior to the date of a proposed Bid Borrowing in the case of a LIBOR Auction or (y) on the date of a proposed Bid Borrowing in the case of an Absolute Rate Auction, specifying: a) the date of such Bid Borrowing, which shall be a Business Day; a) the aggregate amount of such Bid Borrowing, which shall be a minimum amount of $3,000,000 or a higher integral multiple of $1,000,000; a) whether the Competitive Bids requested are to be for LIBOR Bid Loans or Absolute Rate Bid Loans or both; and a) the duration of the Interest Period applicable thereto, subject to the provisions of the definition of "Interest Period" herein. Subject to subsection 2.7(b), the Company may not request Competitive Bids for more than three Interest Periods in a single Competitive Bid Request and may not request Competitive Bids more than twice in any period of five Business Days. a) Each Lender may at its discretion submit a Competitive Bid containing an offer or offers to make Bid Loans in response to any Competitive Bid Request. Each Competitive Bid must comply with the requirements of this subsection 2.7(b) and must be submitted to the Company by facsimile transmission at the Company's office for notices not later than 9:30 a.m. (Chicago time) (1) three Business Days prior to the proposed date of Borrowing, in the case 33 of a LIBOR Auction, or (2) on the proposed date of Borrowing, in the case of an Absolute Rate Auction. a) Each Competitive Bid shall be in substantially the form of Exhibit D, specifying therein: (1) the proposed date of Borrowing; (1) the principal amount of each Bid Loan for which such Competitive Bid is being made, which principal amount (x) may be equal to, greater than or less than the Commitment of the quoting Lender, (y) must be $3,000,000 or a higher integral multiple of $1,000,000 and (z) may not exceed the principal amount of Bid Loans for which Competitive Bids were requested; (1) if the Company elects a LIBOR Auction, the margin above or below LIBOR (the "LIBOR Bid Margin") offered for each such Bid Loan, expressed as a percentage (rounded to the nearest 1/16th of 1%) to be added to or subtracted from the applicable LIBOR, and the Interest Period applicable thereto; (1) if the Company elects an Absolute Rate Auction, the rate of interest per annum (which shall be an integral multiple of 1/100th of 1%) (the "Absolute Rate") offered for each such Bid Loan; and (1) the identity of the quoting Lender. A Competitive Bid may contain up to three separate offers by the quoting Lender with respect to each Interest Period specified in the related Competitive Bid Request. a) Any Competitive Bid shall be disregarded if it: (1) is not substantially in conformity with Exhibit D or does not specify all of the information required by subsection (b)(ii) of this Section; (1) contains qualifying, conditional or similar language; (1) proposes terms other than or in addition to those set forth in the applicable Competitive Bid Request; or 34 (1) arrives after the time set forth in subsection (b)(i) of this Section. 1. Not later than 10:00 a.m. (Chicago time) three Business Days prior to the proposed date of Borrowing, in the case of a LIBOR Auction, or 10:00 a.m. (Chicago time) on the proposed date of Borrowing, in the case of an Absolute Rate Auction, the Company shall notify each Lender whose Competitive Bid the Company is accepting of its acceptance of the offer received pursuant to subsection 2.7(b) and the amount of the Bid Loan or Bid Loans to be made by such Lender on the date of the Bid Borrowing. The Company shall be under no obligation to accept any offer and may choose to reject all offers. The Company may accept any Competitive Bid in whole or in part; provided that: a) the aggregate principal amount of each Bid Borrowing may not exceed the applicable amount set forth in the related Competitive Bid Request; a) the principal amount of each Bid Borrowing must be $3,000,000 or a higher integral multiple of $1,000,000; a) acceptance of offers may only be made on the basis of ascending LIBOR Bid Margins or Absolute Rates, as the case may be, within each Interest Period; and a) the Company may not accept any offer that is described in subsection 2.7(b)(iii) or that otherwise fails to comply with the requirements of this Agreement. 1. If offers are made by two or more Lenders with the same LIBOR Bid Margins or Absolute Rates, as the case may be, for a greater aggregate principal amount than the amount in respect of which such offers are accepted for the related Interest Period, the principal amount of Bid Loans in respect of which such offers are accepted shall be allocated by the Company among such Lenders as nearly as possible (in such multiples, not less than $1,000,000, as the Company may deem appropriate) in proportion to the aggregate principal amounts of such offers. a) The Company shall notify the Agent of all Competitive Bids accepted and the amount and maturity of each Bid Loan of each Lender whose Competitive Bid has been accepted. a) Each Lender which has received notice pursuant to subsection 2.7(c) that its Competitive Bid has been accepted shall make the amounts of such Bid Loans available to the Agent for the account of the Company at the Agent's Payment Office by 1:00 p.m. (Chicago time) on the date of the Bid Borrowing, in Same Day Funds. 35 a) Promptly following each Bid Borrowing, the Agent shall notify each Lender of the amount and maturity of each Bid Loan borrowed pursuant to such Bid Borrowing. a) From time to time, the Company and the Lenders shall furnish such information to the Agent as the Agent may request relating to the making of Bid Loans, including the amounts, interest rates, dates of borrowings and maturities thereof, for purposes of the allocation of amounts received from the Company for payment of all amounts owing hereunder. 1. If, on the proposed date of Borrowing, the Commitments have not been terminated and all applicable conditions to funding referenced in Sections 3.2, 3.5 and 4.2 hereof are satisfied, the Lender or Lenders whose offers the Company has accepted will fund each Bid Loan so accepted. Nothing in this Section 2.7 shall be construed as a right of first offer in favor of the Lenders or to otherwise limit the ability of the Company to request and accept credit facilities from any Person (including any of the Lenders), provided that no Event of Default or Unmatured Event of Default would otherwise arise or exist as a result of the Company executing, delivering or performing under such credit facilities. A. Voluntary Termination or Reduction of Commitments. The Company may, upon not less than five Business Days' prior notice to the Agent, terminate the Commitments, or permanently reduce the Commitments by an aggregate amount of $5,000,000 or a higher integral multiple of $1,000,000; unless, after giving effect thereto and to any payments or prepayments of Loans made on the effective date thereof, the aggregate principal Dollar Equivalent amount of all Loans would exceed the amount of the combined Commitments then in effect. Once reduced in accordance with this Section, the Commitments may not be increased. Any reduction of the Commitments shall be applied to each Lender according to its Pro Rata Share. All accrued commitment fees to, but not including, the effective date of any reduction or termination of Commitments, shall be paid on the effective date of such reduction or termination. 1. Optional Prepayments. Subject to Section 3.4, the Company may, from time to time, upon irrevocable notice to the Agent not later than 11:00 a.m. (Chicago time) on any Business Day, ratably prepay Committed Loans in whole or in part, in minimum Dollar Equivalent amounts of not less than the Minimum Tranche. The Company shall deliver a notice of prepayment in accordance with Section 10.2 to be received by the Agent not later than (i) 11:00 a.m. (Chicago time) three Business Days in advance of the prepayment date if the Committed Loans to be prepaid are Offshore Rate Committed Loans, and (ii) 10:00 a.m. (Chicago time) on the prepayment date if the Committed Loans to be prepaid are Base Rate Loans. Such notice of prepayment shall specify the date and amount of such prepayment and whether such prepayment is of Base Rate Loans, Offshore Rate Committed Loans, or any combination thereof and the Applicable Currency. Such notice shall not thereafter be revocable by the Company. The 36 Agent will promptly notify each Lender of its receipt of any such notice, and of such Lender's share of such prepayment (ratably in accordance with each Lender's aggregate Dollar Equivalent principal amount of Loans outstanding). If such notice is given by the Company, the Company shall make such prepayment and the payment amount specified in such notice shall be due and payable on the date specified therein, together with, in the case of Offshore Rate Committed Loans, accrued interest to each such date on the amount prepaid and any amounts required pursuant to Section 3.4. 1. No Bid Loan may be voluntarily prepaid without the consent of the Lender that holds such Bid Loan. A. Currency Exchange Fluctuations. Subject to Section 3.4, if on any Computation Date the Agent shall have determined that the Total Outstandings exceed the combined Commitments of all Lenders by more than $250,000 due to a change in applicable rates of exchange between Dollars, on the one hand, and Offshore Currencies on the other hand, then the Agent shall give notice to the Company that a prepayment is required under this subsection, and the Company agrees thereupon to make prepayments of Loans such that, after giving effect to such prepayment, the Total Outstandings do not exceed the combined Commitments of all Lenders. A. Repayment. The Company shall repay each Bid Loan on the last day of each Interest Period therefor. The Company shall repay all Loans (including any outstanding Bid Loan) on the Termination Date. 1. Interest. Each Committed Loan shall bear interest on the outstanding principal amount thereof from the applicable Borrowing Date at a rate per annum equal to (i) at all times such Committed Loan is a Base Rate Loan, the Base Rate as in effect from time to time and (ii) at all times such Committed Loan is an Offshore Rate Loan, the sum of the Offshore Rate for the applicable Interest Period plus the Applicable Margin as in effect from time to time. Each Bid Loan shall bear interest on the outstanding principal amount thereof from the relevant Borrowing Date at a rate per annum equal to the Offshore Rate plus (or minus) the LIBOR Bid Margin or the Absolute Bid Rate, as the case may be. Each Swing Line Loan shall bear interest on the outstanding principal amount thereof from the applicable Borrowing Date at a rate per annum equal to the sum of (i) Cost of Funds Rate as in effect from time to time plus (ii) 0.10% plus (c) the Applicable Margin as in effect from time to time. 1. Interest on each Loan shall be paid in arrears on each Interest Payment Date. Interest also shall be paid on the date of any conversion of Offshore Rate Committed Loans under Section 2.4 and prepayment of Offshore Rate Committed Loans under Section 2.9, in each case for the portion of the Loans so prepaid. During the existence of any Event of Default, interest shall be paid on demand of the Agent at the request or with the consent of the Required Lenders. 37 1. Notwithstanding subsection (a) of this Section, while any Event of Default exists, the Company shall pay interest (after as well as before entry of judgment thereon to the extent permitted by law) on the principal amount of all outstanding Loans and, to the extent permitted by applicable law, on any other amount payable hereunder or under any other Loan Document, at a rate per annum equal to the rate otherwise applicable thereto pursuant to the terms hereof or such other Loan Document (or, if no such rate is specified, the Base Rate) plus 2%. All such interest shall be payable on demand. 1. Anything herein to the contrary notwithstanding, the obligations of the Company to any Lender hereunder shall be subject to the limitation that payments of interest shall not be required for any period for which interest is computed hereunder, to the extent (but only to the extent) that contracting for or receiving such payment by such Lender would be contrary to the provisions of any law applicable to such Lender limiting the highest rate of interest that may be lawfully contracted for, charged or received by such Lender, and in such event the Company shall pay such Lender interest at the highest rate permitted by applicable law. A. Fees. 1. Certain Fees. The Company shall pay certain fees to the Agent and the Arranger for their own respective accounts at the times and in the amounts required by the letter agreement (the "Fee Letter") among the Company, the Agent and the Arranger dated March 14, 1997. 1. Facility Fees. The Company shall pay to the Agent for the account of each Lender a facility fee on the amount of such Lender's Commitment, regardless of usage, as calculated on a quarterly basis in arrears on the last Business Day of each calendar quarter and on the Termination Date (or such later date on which all Obligations have been paid in full) at the Facility Fee Rate. Such facility fee shall accrue from the Effective Date to the Termination Date (or such later date on which all Obligations have been paid in full) and shall be due and payable quarterly in arrears on the last Business Day of each calendar quarter, on the Termination Date and thereafter on demand; provided that, in connection with any reduction or termination of Commitments under Section 2.8, the accrued facility fee calculated for the period ending on such date shall also be paid on the date of such reduction or termination, with (in the case of a reduction) the following quarterly payment being calculated on the basis of the period from such reduction date to the quarterly payment date. The facility fees shall accrue at all times after the Closing Date, including at any time during which one or more conditions in Article IV are not met. 1. Commitment Fees. The Company shall pay to the Agent for the account of each Lender a commitment fee in such Lender's Pro Rata Share of the unused amount of the combined Commitments, as calculated by the Agent on a quarterly basis in arrears on the last day of each calendar quarter and on the Termination Date, at 38 the Commitment Fee Rate. Such commitment fees shall accrue from the Effective Date to the Termination Date and shall be due and payable quarterly in arrears on the last Business Day of each calendar quarter and on the Termination Date. The commitment fees shall accrue at all times after the Effective Date, including at any time during which one or more conditions in Article IV are not met. 1. Computation of Fees and Interest. All computations of interest for Base Rate Committed Loans when the Base Rate is determined by BofA's "reference rate", and all computations of interest for Offshore Currency Loans demoninated in English pounds sterling shall be made on the basis of a year of 365 or 366 days, as the case may be, and actual days elapsed. All other computations of interest and fees shall be made on the basis of a 360-day year and actual days elapsed. Interest and fees shall accrue during each period during which such interest or such fees are computed from the first day thereof to the last day thereof. 1. Each determination of an interest rate or a Dollar Equivalent amount by the Agent shall be conclusive and binding on the Company and the Lenders in the absence of manifest error. The Agent will, at the request of the Company or any Lender, deliver to the Company or such Lender, as the case may be, a statement showing the quotations used by the Agent in determining any interest rate or Dollar Equivalent amount. Each Reference Lender agrees to deliver to the Agent timely information for the purpose of determining the Offshore Rate. If any one of the Reference Lenders shall fail to furnish such information to the Agent for any such interest rate, the Agent shall determine such interest rate on the basis of the information furnished by the remaining Reference Lender or Reference Lenders. 2. Payments by the Company. All payments to be made by the Company shall be made without set-off, recoupment or counterclaim. Except as otherwise expressly provided herein, all payments by the Company shall be made to the Agent for the account of the Lenders at the Agent's Payment Office, and (i) with respect to principal of, interest on, and any other amount relating to any Offshore Currency Loan, shall be made in the Offshore Currency in which such Loan is denominated or payable, and (ii) with respect to all other amounts payable hereunder, shall be made in Dollars. Such payments shall be made in Same Day Funds and (x) in the case of Offshore Currency payments, no later than such time on the dates specified herein as may be determined by the Agent to be necessary for such payment to be credited on such date in accordance with normal banking procedures in the place of payment, and (y) in the case of any Dollar payments, no later than 11:00 a.m. (Chicago time) on the date specified herein. The Agent will promptly distribute to each Lender its Pro Rata Share (or other applicable share as expressly provided herein) of such payment in like funds as received. Any payment received by the Agent later than the time specified in clause (x) or (y) above shall be deemed to have been received on the following Business Day and any applicable interest or fee shall continue to accrue. 1. Whenever any payment is due on a day other than a Business Day, such payment shall be made on the following Business Day (unless, in the 39 case of an Offshore Rate Loan, the following Business Day is in another calendar month, in which case such payment shall be made on the preceding Business Day), and such extension of time shall in such case be included in the computation of interest or fees, as the case may be. 1. Unless the Agent receives notice from the Company prior to the date on which any payment is due to the Lenders that the Company will not make such payment in full as and when required, the Agent may assume that the Company has made such payment in full to the Agent on such date in Same Day Funds and the Agent may (but shall not be so required), in reliance upon such assumption, distribute to each Lender on such due date an amount equal to the amount then due such Lender. If and to the extent the Company has not made such payment in full to the Agent, each Lender shall repay to the Agent on demand such amount distributed to such Lender, together with interest thereon at the Federal Funds Rate or, in the case of a payment in an Offshore Currency, the Overnight Rate for each day from the date such amount is distributed to such Lender until the date repaid. 1. Payments by the Lenders to the Agent. Unless the Agent receives notice from a Lender on or prior to the Closing Date or, with respect to any Committed Borrowing after the Closing Date, at least one Business Day prior to the date of a Committed Borrowing that such Lender will not make available as and when required hereunder to the Agent for the account of the Company the amount of such Lender's Pro Rata Share of such Committed Borrowing, the Agent may assume that such Lender has made such amount available to the Agent in Same Day Funds on the Borrowing Date and the Agent may (but shall not be so required), in reliance upon such assumption, make available to the Company on such date a corresponding amount. If and to the extent any Lender shall not have made its full amount available to the Agent in Same Day Funds and the Agent in such circumstances has made available to the Company such amount, such Lender shall on the Business Day following such Borrowing Date make such amount available to the Agent, together with interest at the Federal Funds Rate or, in the case of a payment in an Offshore Currency, the Overnight Rate for each day during such period. A notice of the Agent submitted to any Lender with respect to amounts owing under this subsection (a) shall be conclusive, absent manifest error. If such amount is so made available, such payment to the Agent shall constitute such Lender's Committed Loan on the date of Borrowing for all purposes of this Agreement. If such amount is not made available to the Agent on the Business Day following the Borrowing Date, the Agent will notify the Company of such failure to fund and, upon demand by the Agent, the Company shall pay such amount to the Agent for the Agent's account, together with interest thereon for each day elapsed since the date of such Borrowing, at a rate per annum equal to the interest rate applicable at the time to the Committed Loans comprising such Committed Borrowing. 1. The failure of any Lender to make any Loan on any Borrowing Date shall not relieve any other Lender of any obligation hereunder to make a 40 Loan on such Borrowing Date, but no Lender shall be responsible for the failure of any other Lender to make the Loan to be made by such other Lender on any Borrowing Date. 1. Sharing of Payments, Etc. Whenever any payment received by the Agent to be distributed to the Lenders is insufficient to pay in full the amounts then due and payable to the Lenders, and the Agent has not received a Payment Sharing Notice, such payment shall be distributed to the Lenders (and for purposes of this Agreement shall be deemed to have been applied by the Lenders, notwithstanding the fact that any Lender may have made a different application in its books and records) in the following order: first, to the payment of the principal amount of the Loans which is then due and payable and any reimbursement obligation of the Company in respect of any BA which is then due and payable, ratably among the Lenders (including the Accepting Lender and the Swing Line Lender) in accordance with the aggregate amount of such Obligations owed to each Lender; second, to the payment of interest then due and payable on the Loans and on any unpaid reimbursement obligations in respect of BAs, ratably among the Lenders (including the Accepting Lender and the Swing Line Lender) in accordance with the aggregate amount of interest owed to each Lender; third, to the payment of the fees payable under subsection 2.13(b) and (c), ratably among the Lenders in accordance with their respective Pro Rata Shares; and fourth, to the payment of any other amount payable under this Agreement, ratably among the Lenders in accordance with the aggregate amount owed to each Lender. 1. After the Agent has received a Payment Sharing Notice, and for so long thereafter as any Event of Default exists, all payments received by the Agent to be distributed to the Lenders shall be distributed to the Lenders (and for purposes of this Agreement shall be deemed to have been applied by the Lenders, notwithstanding the fact that any Lender may have made a different application in its books and records) in the following order: first, to the payment of amounts payable under Section 10.4, ratably among the Lenders in accordance with the aggregate amount owed to each Lender; second, to the payment of fees payable under subsection 2.13(b) and (c), ratably among the Lenders in accordance with their respective Pro Rata Shares; third, to the payment of the interest accrued on and the principal amount of all of the Loans and all reimbursement obligations of the Company in respect of BAs, regardless of whether any such amount is then due and payable, ratably among the Lenders (including the Accepting Lender and the Swing Line Lender) in accordance with the aggregate amount of such Obligations owed to each Lender; and fourth, to the payment of any other amount payable under this Agreement, ratably among the Lenders (including the Accepting Lender and the Swing Line Lender) in accordance with the aggregate amount owed to each Lender. 1. If, other than as expressly provided elsewhere herein, any Lender shall obtain any payment or other recovery (whether voluntary, involuntary, through the exercise of any right of set-off, or otherwise) on account of principal of or interest on any Loan or any reimbursement obligation in respect of a BA, or any other amount payable hereunder, in excess of the share of payments and other recoveries such Lender would have received if such payment or other recovery had been distributed pursuant to the 41 provisions of subsection 2.17(a) or (b) (whichever is applicable at the time of such payment or other recovery), such Lender shall immediately (i) notify the Agent of such fact and (ii) purchase from the other Lenders such participations in the Loans made by (or other Obligations owed to) them as shall be necessary to cause such purchasing Lender to share the excess payment or other recovery pro rata with each of them in accordance with the order of payments set forth in subsection 2.17(a) or (b), as the case may be; provided that if all or any portion of such excess payment or other recovery is thereafter recovered from the purchasing Lender, such purchase shall to that extent be rescinded and each other Lender shall repay to the purchasing Lender the purchase price paid therefor, together with an amount equal to such paying Lender's ratable share (according to the proportion of (A) the amount of such paying Lender's required repayment to (B) the total amount so recovered from the purchasing Lender) of any interest or other amount paid or payable by the purchasing Lender in respect of the total amount so recovered. The Company agrees that any Lender so purchasing a participation from another Lender may, to the fullest extent permitted by law, exercise all its rights of payment (including the right of set-off, but subject to Section 10.10) with respect to such participation as fully as if such Lender were the direct creditor of the Company in the amount of such participation. The Agent will keep records (which shall be conclusive and binding in the absence of manifest error) of participations purchased under this Section and will in each case notify the Lenders following any such purchases or repayments. A. Swing Line Commitment. Subject to the terms and conditions of this Agreement, the Swing Line Lender agrees to make loans to the Company on a revolving basis (each such loan, a "Swing Line Loan") from time to time on any Business Day during the period from the Closing Date to the Termination Date in an aggregate principal amount at any one time outstanding not to exceed U.S. $30,000,000; provided, however, that, after giving effect to any proposed Swing Line Loan, the Total Outstandings shall not exceed the combined Commitments. A. Borrowing Procedures for Swing Line Loans. The Company shall provide a Notice of Borrowing or telephonic notice (followed by a confirming Notice of Borrowing) to the Agent and the Swing Line Lender of each proposed borrowing pursuant to Section 2.18 not later than 12:00 noon (Chicago time) on the proposed Borrowing Date. Each such notice shall be effective upon receipt by the Agent and the Swing Line Lender and shall specify the date and the principal amount of borrowing. Unless the Swing Line Lender has received written notice prior to 11:00 a.m. (Chicago time) on the proposed Borrowing Date from the Agent or any Lender that one or more of the conditions precedent set forth in Article IV with respect to such borrowing is not then satisfied, the Swing Line Lender shall pay over the requested principal amount to the Company on the requested Borrowing Date in Same Day Funds. Each Swing Line Loan shall be made on a Business Day and shall be in the amount of at least U.S. $500,000 and an integral multiple of U.S. $100,000. The Swing Line Lender will promptly notify the Agent of the making and amount of each Swing Line Loan. 42 1. Prepayment or Refunding of Swing Line Loans. The Company may, at any time and from time to time, prepay any Swing Line Loan in whole or in part, in an amount of at least U.S. $500,000 and an integral multiple of U.S. $100,000. The Company shall deliver a notice of prepayment to the Agent and the Swing Line Lender not later than 11:00 a.m. (Chicago time) on the Business Day of such prepayment, specifying the date and amount of such prepayment. If such notice is given by the Company, the payment amount specified in such notice shall be due and payable on the date specified therein. 1. The Swing Line Lender may, at any time in its sole and absolute discretion, on behalf of the Company (which hereby irrevocably directs the Swing Line Lender to act on its behalf), request each Lender to make a Base Rate Committed Loan in an amount equal to such Lender's Unused Commitment Share of the principal amount of the Swing Line Loans outstanding on the date such notice is given. Unless any of the events described in subsection 8.1(g), (h), (i) or (j) shall have occurred (in which event the procedures of Section 2.21 shall apply), and regardless of whether the conditions precedent set forth in this Agreement to the making of a Base Rate Committed Loan are then satisfied or the aggregate amount of such Base Rate Committed Loans is not in the minimum or integral amount otherwise required hereunder, each Lender shall make the proceeds of its Base Rate Committed Loan available to the Agent for the account of the Swing Line Lender at the Agent's Payment Office prior to 12:00 noon (Chicago time) in Same Day Funds on the Business Day next succeeding the date such notice is given. The proceeds of such Base Rate Committed Loans shall be immediately applied to repay the outstanding Swing Line Loans. 1. Participations in Swing Line Loans. If an event described in subsection 8.1(g), (h), (i) or (j) occurs (or for any reason the Lenders may not make Revolving Loans pursuant to Section 2.20), each Lender will, upon notice from the Agent, purchase from the Swing Line Lender (and the Swing Line Lender will sell to each Lender) an undivided participation interest in all outstanding Swing Line Loans in an amount equal to such Lender's Unused Commitment Share of the outstanding principal amount of the Swing Line Loans (and each Lender will immediately transfer to the Agent, for the account of the Swing Line Lender, in immediately available funds, the amount of its participation). 1. Whenever, at any time after the Swing Line Lender has received payment for any Lender's participation interest in the Swing Line Loans pursuant to subsection 2.21(a), the Swing Line Lender receives any payment on account thereof, the Swing Line Lender will distribute to the Agent for the account of such Lender its participation interest in such amount (appropriately adjusted, in the case of interest payments, to reflect the period of time during which such Lender's participation interest was outstanding and funded) in like funds as received; provided, however, that in the event that such payment received by the Swing Line Lender is required to be returned, such Lender will return to the Agent for the account of the Swing Line Lender any 43 portion thereof previously distributed by the Swing Line Lender to it in like funds as such payment is required to be returned by the Swing Line Lender. A. Participation Obligations Unconditional. (a) Each Lender's obligation to make Base Rate Committed Loans pursuant to Section 2.20 and/or to purchase participation interests in Swing Line Loans pursuant to Section 2.21 shall be absolute and unconditional and shall not be affected by any circumstance whatsoever, including (a) any set-off, counterclaim, recoupment, defense or other right which such Lender may have against the Swing Line Lender, the Company or any other Person for any reason whatsoever; (b) the occurrence or continuance of an Event of Default; (c) any adverse change in the condition (financial or otherwise) of the Company or any other Person; (d) any breach of this Agreement or any other Loan Document by the Company or any other Lender; (e) any inability of the Company to satisfy the conditions precedent to borrowing set forth in this Agreement on the date upon which any Loan is to be refunded or any participation interest therein is to be purchased; or (f) any other circumstance, happening or event whatsoever, whether or not similar to any of the foregoing. (b) Notwithstanding the provisions of subsection 2.22(a), no Lender shall be required to make any Base Rate Committed Loan to the Company to refund a Swing Line Loan pursuant to Section 2.20 or to purchase a participation interest in a Swing Line Loan pursuant to Section 2.21 if, prior to the making by the Swing Line Lender of such Swing Line Loan, the Swing Line Lender received written notice from any Lender specifying that such Lender believes in good faith that one or more of the conditions precedent to the making of such Swing Line Loan were not satisfied and, in fact, such conditions precedent were not satisfied at the time of the making of such Swing Line Loan; provided that the obligation of such Lender to make such Base Rate Committed Loan and to purchase such participation interest shall be reinstated upon the earlier to occur of (i) the date on which such Lender notifies the Swing Line Lender that its prior notice has been withdrawn and (ii) the date on which all conditions precedent to the making of such Swing Line Loan have been satisfied (or waived by the Required Lenders or all Lenders, as applicable). A. Conditions to Swing Line Loans. Notwithstanding any other provision of this Agreement, the Swing Line Lender shall not be obligated to make any Swing Line Loan if an Event of Default or Unmatured Event of Default exists or would result therefrom. 44 A. BA Subfacility. 1. Creation. Subject to the terms and conditions hereof, at any time and from time to time from the Closing Date through the day 30 days prior to the scheduled Termination Date, the Accepting Lender shall create and discount such BAs as the Company may request by notice to the Accepting Lender in accordance with the procedure set forth in subsection (b) below; provided that upon creating and discounting any BA, the Total Outstandings will not exceed the combined Commitments; and provided, further, that BA Outstandings shall not at any time exceed $100,000,000. The maturity of any BA shall not be less than 30 days or more than 180 days and shall not extend beyond the scheduled Termination Date. Each BA shall comply with the Acceptance Documents and shall be executed on behalf of the Company and presented to the Accepting Lender pursuant to such procedures as are provided or required by the Accepting Lender. The face amount of each BA shall be $3,000,000 or a higher integral multiple of $1,000,000. The creation and maturity date of each BA shall be a Business Day. Notwithstanding the foregoing, the Accepting Lender shall not be obligated to create or discount any BA (i) that is not "eligible" pursuant to paragraph 7 of Section 13 of the Federal Reserve Act (12 U.S.C. Section 372), as amended from time to time, (ii) if creation thereof would cause the Accepting Lender to exceed the maximum amount of outstanding bankers' acceptances permitted by applicable law or (iii) if, in the reasonable opinion of the Accepting Lender, general conditions in the public market for rediscounting bankers' acceptances render it inadvisable to do so. 1. Notice. Each request for a BA shall be submitted in writing (or requested by telephone and promptly confirmed in writing) to the Accepting Lender and the Agent by 11:00 a.m. (Chicago time) on the date of creation of the requested BA and shall be accompanied by such documents as are specified therein and in the Acceptance Documents. The Accepting Lender will promptly notify the Agent (which shall promptly advise each Lender) of the creation of each BA and the amount and tenor thereof. 1. Issuance Fee. Upon the creation by the Accepting Lender of a BA, the Accepting Lender shall discount such BA by deducting from the face amount thereof a discount determined by the then current quoted discount rate for bankers' acceptances of the Accepting Lender plus the BA Commission, with such discount and BA Commission applied against the face amount of the BA, and the Accepting Lender shall make such net amount available in immediately available funds to the Company. The Accepting Lender shall retain from the amount so deducted a commission, for the account solely of the Accepting Lender, equal to .05% per annum (computed on the basis of the actual number of days elapsed over a year of 360 days). On the date of issuance of each BA, the Accepting Lender shall make available in immediately available funds to the Lenders, according to their respective Pro Rata Shares, an amount equal to the BA Commission (after the Accepting Lender's issuance fee of .05% has been deducted therefrom) for such BA. The Accepting Lender may retain or 45 rediscount, at its election, any BA and the amount received by the Accepting Lender upon payment thereof at maturity or upon rediscounting shall be solely for the account of the Accepting Lender. 1. Payment. As and when the Accepting Lender honors a BA, the Company agrees to immediately repay the Accepting Lender in immediately available funds the amount advanced by the Accepting Lender. In the event that such funds are not made available to the Accepting Lender by the Company, then, in order to implement the foregoing, the Company irrevocably authorizes the Agent and each Lender to treat each such advance by the Accepting Lender as a request for a Base Rate Committed Loan in the amount of such advance, to issue Base Rate Committed Loans simultaneously with any such advance in the aggregate amount of such advance, and to credit the proceeds of such Base Rate Committed Loan so as to immediately eliminate the liability of the Company to the Accepting Lender pertaining to such BA and immediately eliminate the liability of each other Lender to the Accepting Lender with respect to its Unused Commitment Share relating to such BA. 1. Participations in BAs. Each Lender shall be deemed at all times to have a participation in each outstanding BA in an amount equal to the result obtained by multiplying (i) such Lender's Unused Commitment Share times (ii) the face amount of such BA. Without limiting the scope and nature of each Lender's participation in any BA, to the extent that the Accepting Lender has not been reimbursed by the Company (pursuant to an advance pursuant to clause (d) or otherwise) for any payment required to be made by the Accepting Lender under any BA, each Lender shall, according to its Unused Commitment Share, reimburse the Accepting Lender promptly upon demand for the amount of such payment. The obligation of each Lender to so reimburse the Accepting Lender shall be absolute and unconditional and shall not be affected by the occurrence of an Event of Default, an Unmatured Event of Default or any other occurrence or event. Any such reimbursement shall not relieve or otherwise impair the obligation of the Company to reimburse the Accepting Lender for the amount of any payment made by the Accepting Lender under any BA, together with interest at the Base Rate plus 2%. The Company hereby specifically acknowledges and agrees that if the Company fails to perform in accordance with the terms of any BA, the Acceptance Documents related thereto or this Agreement as it relates to such BA, each lender shall have a claim against the Company, to the extent of such Lender's pro rata participation in such BA. 1. Limitation of Liability. None of the Accepting Lender, any other Lender or any of their respective directors, officers, agents or employees shall be liable, except for gross negligence or willful misconduct, for any action taken or omitted under or in connection with any BA, any draft to which a BA relates or any documents which in turn relate or pertain to any such draft. When dealing with any BA, draft or related document, the Accepting Lender shall be entitled to act (and shall be fully protected against any claim of loss by the Company occasioned by the lack, or claimed lack, of authenticity or authority of the issuance of any draft or any signature thereon, in 46 acting) upon any telegram, telex, teletype, bank wire, cable or radiogram or any written application, notice, report, statement, certificate, resolution, request, order, consent, letter or other instrument or communication reasonably believed in good faith by the Accepting Lender to be genuine and correct and to have been signed or sent or made by a proper Person. The Accepting Lender shall examine Acceptance Documents with reasonable care to ascertain that they appear on their face to be in accordance with the terms and conditions of the related BA. The Company further agrees that, if any BA shall not, in the reasonable opinion of the Agent or the Required Lenders, meet all requirements for "eligible" bankers' acceptances (as determined in accordance with paragraph 7 of Section 13 of the Federal Reserve Act (12 U.S.C. Section 372)), the Company shall, upon demand by the Agent, pay to the Agent for the account of each of the Lenders additional amounts sufficient to compensate the Lenders for any increased costs resulting therefrom (including costs resulting from any reserve requirement, premium liability to the Federal Deposit Insurance Corporation, or a higher discount rate). To demand payment under this subsection 2.24(f), the Agent shall deliver to the Company a certificate setting forth in reasonable detail the amount payable to the Agent (for the account of each of the Lenders) hereunder and such certificate shall be conclusive and binding on the Company in the absence of manifest error. A. Extension of Scheduled Termination Date. The Company may, not more than 120 nor less than 60 days prior to each of June 30, 1998 and June 30, 1999, request all Lenders to extend the scheduled Termination Date by one year by means of a letter, addressed to each Lender and the Agent, substantially in the form of Exhibit J. Each Lender electing (in its sole and complete discretion) so to extend the scheduled Termination Date shall deliver signed counterparts of such letter to the Company and the Agent no later than 30 days after the date of such request by the Company (and any Lender which does not deliver such counterparts shall be deemed to have declined to extend the scheduled Termination Date). If all Lenders elect to extend the scheduled Termination Date, the scheduled Termination Date shall be extended for an additional one-year period on the date on which the Agent has received signed counterparts of such letter from all Lenders (and the Agent shall promptly notify the Company and the Lenders of such extension). If any Lender declines (or is deemed to have declined) to extend the Termination Date, the scheduled Termination Date shall not be extended. I. ARTICLE TAXES, YIELD PROTECTION AND ILLEGALITY 1. Taxes. Any and all payments by the Company to each Lender and each Agent under this Agreement and any other Loan Document shall be made free and clear of, and without deduction or withholding for, any Taxes. In addition, the Company shall pay all Other Taxes. 47 1. If the Company shall be required by law to deduct or withhold any Taxes, Other Taxes or Further Taxes from or in respect of any sum payable hereunder to any Lender or the Agent, then: a) the sum payable shall be increased as necessary so that, after making all required deductions and withholdings (including deductions and withholdings applicable to additional sums payable under this Section), such Lender or the Agent, as the case may be, receives and retains an amount equal to the sum it would have received and retained had no such deductions or withholdings been made; a) the Company shall make such deductions and withholdings; a) the Company shall pay the full amount deducted or withheld to the relevant taxing authority or other authority in accordance with applicable law; and a) the Company shall also pay to the Agent for the account of any applicable Lender or the Agent, at the time interest is paid, all additional amounts which such Lender or the Agent specifies as necessary to preserve the after-tax yield such Lender or Agent would have received if such Taxes, Other Taxes or Further Taxes had not been imposed. 1. The Company agrees to indemnify and hold harmless each Lender and the Agent for the full amount of Taxes, Other Taxes and Further Taxes in the amount that such Lender or the Agent specifies as necessary to preserve the after-tax yield such Lender would have received if such Taxes, Other Taxes or Further Taxes had not been imposed, and any liability (including penalties, interest, additions to tax and reasonable expenses) arising therefrom or with respect thereto, whether or not such Taxes, Other Taxes or Further Taxes were correctly or legally asserted. Payment under this indemnification shall be made within 30 days after the date the Company receives written demand therefor from such Lender or the Agent. 1. Within 30 days after the date of any payment by the Company of Taxes, Other Taxes or Further Taxes, the Company shall furnish to each Lender and the Agent the original or a certified copy of a receipt evidencing payment thereof, or other evidence of payment satisfactory to such Lender or the Agent. 1. If the Company is required to pay any amount to any Lender or the Agent pursuant to subsection (b) or (c) of this Section, then such Lender or the Agent shall use reasonable efforts (consistent with legal and regulatory restrictions) to change the jurisdiction of its Lending Office or other relevant office so as to eliminate any such additional payment by the Company which may thereafter accrue, if such 48 change in the good faith judgment of such Lender or the Agent is not otherwise disadvantageous to such Lender or the Agent. 1. Illegality. If any Lender determines that the introduction of any applicable Requirement of Law, or any change in any applicable Requirement of Law, or in the interpretation or administration of any applicable Requirement of Law, has made it unlawful, or that any central bank or other Governmental Authority has asserted that it is unlawful, for any Lender or its applicable Lending Office to make Offshore Rate Loans in any Applicable Currency, then, on notice thereof by the Lender to the Company through the Agent, any obligation of that Lender to make Offshore Rate Loans in such Applicable Currency (including in respect of any LIBOR Bid Loan as to which the Company has accepted such Lender's Competitive Bid, but which has not yet been borrowed) shall be suspended until the Lender notifies the Agent and the Company that the circumstances giving rise to such determination no longer exist. 1. If a Lender determines that it is unlawful to maintain any Offshore Rate Loan in any Applicable Currency, the Company shall, upon its receipt of notice of such fact and demand from such Lender (with a copy to the Agent), prepay in full such Offshore Rate Loan of such Lender then outstanding, together with interest accrued thereon and amounts required under Section 3.4, either on the last day of the Interest Period thereof or, if earlier, on the date on which such Lender may no longer lawfully continue to maintain such Offshore Rate Loan. If the Company is required to so prepay any Offshore Rate Committed Loan, then concurrently with such prepayment, the Company shall borrow from the affected Lender, in the amount of such repayment, a Base Rate Committed Loan. 1. If the obligation of any Lender to make or maintain Offshore Rate Committed Loans has been so terminated or suspended, all Loans which would otherwise be made by such Lender as Offshore Rate Committed Loans shall be instead Base Rate Committed Loans. 1. Before giving any notice to the Agent or demand upon the Company under this Section, the affected Lender shall designate a different Lending Office with respect to its Offshore Rate Loans if such designation will avoid the need for giving such notice or making such demand and will not, in the good faith judgment of the Lender, be illegal in any respect or otherwise disadvantageous to the Lender. 1. Increased Costs and Reduction of Return. If after the date hereof any Lender determines that, due to either (i) the introduction of or any change (other than any change by way of imposition of or increase in reserve requirements included in the calculation of the Offshore Rate) in or in the interpretation of any law or regulation or (ii) the compliance by that Lender with any guideline or request from any central bank or other Governmental Authority (whether or not having the force of law), there shall be any increase in the cost to such Lender of agreeing to make or making, funding or maintaining any Offshore Rate Loan or of participating in any BA or, in the case of the 49 Accepting Lender, of agreeing to accept or accepting BAs, then the Company shall be liable for, and shall from time to time, upon demand (with a copy of such demand to be sent to the Agent), pay to the Agent for the account of such Lender, additional amounts as are sufficient to compensate such Lender for such increased costs. 1. If after the date hereof any Lender shall have determined that (i) the introduction of any Capital Adequacy Regulation, (ii) any change in any Capital Adequacy Regulation, (iii) any change in the interpretation or administration of any Capital Adequacy Regulation by any central bank or other Governmental Authority charged with the interpretation or administration thereof, or (iv) compliance by the Lender (or its Lending Office) or any corporation controlling the Lender with any Capital Adequacy Regulation, affects or would affect the amount of capital required or expected to be maintained by the Lender or any corporation controlling the Lender and (taking into consideration such Lender's or such corporation's policies with respect to capital adequacy and such Lender's desired return on capital) determines that the amount of such capital is increased as a consequence of its Commitment, loans, credits or obligations under this Agreement, then, upon demand of such Lender to the Company through the Agent, the Company shall pay to the Lender, from time to time as specified by the Lender, additional amounts sufficient to compensate the Lender for such increase. 1. Notwithstanding the foregoing Section 3.3(a) and (b), if any Lender fails to notify the Company of any event which will entitle such Lender to compensation pursuant to this Section 3.3 within 180 days after such Lender obtains knowledge of such event, then such Lender shall not be entitled to any compensation from the Company for any such increased cost or reduction of return arising prior to the date which is 180 days before the date on which such Lender notifies the Company of such event. A. Funding Losses. The Company shall reimburse each Lender and hold each Lender harmless from any loss or reasonable expense which the Lender may sustain or incur as a consequence of: 1. the failure of the Company to make on a timely basis any payment of principal of any Offshore Rate Loan; 1. the failure of the Company to borrow, continue or convert a Loan after the Company has given (or is deemed to have given) a Notice of Borrowing, a Notice of Conversion/ Continuation or accepted a Competitive Bid; 1. the failure of the Company to make any prepayment of a Committed Loan in accordance with any notice delivered under Section 2.8; 1. the prepayment or other payment (including after acceleration thereof) of an Offshore Rate Loan on a day that is not the last day of the relevant Interest Period; or 50 1. the automatic conversion under Section 2.4 of any Offshore Rate Committed Loan to a Base Rate Committed Loan on a day that is not the last day of the relevant Interest Period; including any such loss or reasonable expense arising from the liquidation or reemployment of funds obtained by it to maintain its Offshore Rate Loans or from fees payable to terminate the deposits from which such funds were obtained or from changes relating to any Offshore Currency Loans. For purposes of calculating amounts payable by the Company to the Lenders under this Section and under subsection 3.3(a), each Offshore Rate Loan made by a Lender (and each related reserve, special deposit or similar requirement) shall be conclusively deemed to have been funded at the Offshore Rate used in determining the interest rate for such Offshore Rate Loan by a matching deposit or other borrowing in the interbank eurodollar market for a comparable amount and for a comparable period, whether or not such Offshore Rate Loan is in fact so funded. A. Inability to Determine Rates. If the Agent determines that for any reason adequate and reasonable means do not exist for determining the Offshore Rate for any requested Interest Period with respect to a proposed Offshore Rate Loan, or any Lender determines that the Offshore Rate applicable pursuant to subsection 2.12(a) for any requested Interest Period with respect to a proposed Offshore Rate Loan does not adequately and fairly reflect the cost to such Lender of funding such Loan, the Agent will promptly so notify the Company and each Lender. Thereafter, the obligation of the Lenders to make or maintain Offshore Rate Committed Loans hereunder shall be suspended until the Agent revokes such notice in writing. Upon receipt of such notice, the Company may revoke any Notice of Committed Borrowing or Notice of Conversion/Continuation then submitted by it. If the Company does not revoke such Notice, the Lenders shall make, convert or continue the Committed Loans, as proposed by the Company, in the amount specified in the applicable notice submitted by the Company, but such Loans shall be made, converted or continued as Base Rate Committed Loans instead of Offshore Rate Committed Loans. In the case of any Offshore Currency Loans, the Borrowing or continuation shall be in an aggregate amount equal to the Dollar Equivalent amount of the originally requested Borrowing or continuation in the Offshore Currency, and to that end any outstanding Offshore Currency Loans which are the subject of any continuation shall be redenominated and converted into Base Rate Loans in Dollars with effect from the last day of the Interest Period with respect to such Offshore Currency Loans. A. Reserves on Offshore Rate Loans. The Company shall pay to each Lender, as long as such Lender shall be required under regulations of the FRB to maintain reserves with respect to liabilities or assets consisting of or including Eurocurrency funds or deposits (currently known as "Eurocurrency liabilities") and, in respect of any Offshore Currency Loans, under any applicable regulations of the relevant Governmental Authority in the country in which the Offshore Currency of such Offshore Currency Loan 51 circulates, additional costs on the unpaid principal amount of each Offshore Rate Committed Loan and Offshore Currency Loan equal to the actual costs of such reserves allocated to such Loan by such Lender (as determined by such Lender in good faith, which determination shall be conclusive), payable on each date on which interest is payable on such Loan, provided the Company shall have received at least 15 days' prior written notice (with a copy to the Agent) of the amount of such additional interest from such Lender. If a Lender fails to give notice 15 days prior to the relevant Interest Payment Date, such additional interest shall be payable 15 days from receipt of such notice. A. Certificates of Lenders. Any Lender claiming reimbursement or compensation under this Article III shall deliver to the Company (with a copy to the Agent) a certificate setting forth in reasonable detail the amount payable to the Lender hereunder and such certificate shall be conclusive and binding on the Company in the absence of manifest error. A. Substitution of Lenders. Upon the receipt by the Company from any Lender (an "Affected Lender") of a claim for compensation under Section 3.1 or 3.3 or a notice pursuant to Section 3.2 (which claim or notice results from circumstances applicable to such Lender and not Lenders generally) the Company may: (i) request the Affected Lender to use its best efforts to obtain a replacement bank or financial institution satisfactory to the Company to acquire and assume all or a ratable part of all of such Affected Lender's Loans and Commitment (a "Replacement Lender"); (ii) request one more of the other Lenders to acquire and assume all or part of such Affected Lender's Loans and Commitment; or (iii) designate a Replacement Lender. Any such designation of a Replacement Lender under clause (i) or (iii) shall be subject to the prior written consent of the Agent, the Swing Line Lender and the Accepting Lender (which consents shall not be unreasonably withheld). A. Survival. The agreements and obligations of the Company in this Article III shall survive the payment of all other Obligations. 52 I. ARTICLE CONDITIONS PRECEDENT A. Conditions to Initial Credit Extensions. The obligation of each Lender to make its initial Credit Extension is, in addition to the conditions precedent set forth in Section 4.2, subject to the conditions that (i) the Agent shall have received evidence that all obligations under the Existing Credit Agreements have been (or concurrently will be) paid in full and all commitments under such Agreements have been (or concurrently will be) terminated, (ii) the Merger shall have been completed substantially in accordance with the terms of the Merger Agreement and the surviving corporation shall have changed its name to TruServ Corporation, (iii) the Prudential Agreement shall have been amended pursuant to an amendment substantially in the form provided to the Lenders on June 18, 1997 and (iv) the Agent shall have received all of the following, in form and substance satisfactory to the Agent and each Lender, and in sufficient copies for each Lender: 1. Credit Agreement and Notes. This Agreement and the Notes executed by each party thereto. 1. Resolutions; Incumbency; Certificate of Incorporation; By-Laws. a) Copies of the resolutions of the board of directors of the Company authorizing the transactions contemplated hereby, certified as of the Closing Date by the Secretary or an Assistant Secretary of the Company; a) a certificate of the Secretary or Assistant Secretary of the Company certifying the names and true signatures of the officers of the Company authorized to execute and deliver this Agreement and all other Loan Documents to be delivered by it hereunder; and a) copies of the certificate of incorporation and by-laws of the Company, certified by the Secretary or an Assistant Secretary of the Company. 1. Good Standing. A copy of a good standing certificate as of a recent date for the Company from the Secretary of State (or similar, applicable Governmental Authority) of its state of incorporation. 1. Legal Opinion. An opinion of counsel to the Company, substantially in the form of Exhibit F. 1. Payment of Fees. Evidence of payment by the Company of all accrued and unpaid fees, costs and reasonable expenses to the extent then due and 53 payable on the Closing Date, together with Attorney Costs of the Agent to the extent invoiced prior to or on the Closing Date, plus such additional amounts of Attorney Costs as shall constitute the Agent's reasonable estimate of Attorney Costs incurred or to be incurred by it through the closing proceedings (provided that such estimate shall not thereafter preclude final settling of accounts between the Company and the Agent), including any such costs, fees and reasonable expenses arising under or referenced in Sections 2.13 and 10.4. 1. Certificate. A certificate signed by a Responsible Officer, dated as of the Closing Date, stating that: a) the representations and warranties contained in Article V are true and correct on and as of such date, as though made on and as of such date; a) no Event of Default or Unmatured Event of Default exists or would result from the initial Credit Extension; and a) since June 30, 1996, no event or circumstance has occurred that has resulted or could reasonably be expected to result in a Material Adverse Effect. 1. Other Documents. Such other approvals, opinions, documents or materials as the Agent or any Lender may request. A. Conditions to All Credit Extensions. The obligation of each Lender to make any Credit Extension to be made by it (or any Bid Loan as to which the Company has accepted the relevant Competitive Bid) is subject to the satisfaction of the following conditions precedent on the date of such Credit Extension: 1. Notice. The Agent (and, in the case of a Swing Line Loan, the Swing Line Lender) shall have received a Notice of Borrowing or the Agent and the Accepting Lender shall have received a request for acceptance of a BA. 1. Continuation of Representations and Warranties. The representations and warranties in Article V shall be true and correct on and as of the date of such Credit Extension with the same effect as if made on and as of such date (except to the extent such representations and warranties expressly refer to an earlier date, in which case they shall be true and correct as of such earlier date). 1. No Existing Default. No Event of Default or Unmatured Event of Default shall exist or shall result from such Borrowing. Each Notice of Borrowing, Competitive Bid Request and request for acceptance of a BA submitted by the Company hereunder shall constitute a representation and warranty by 54 the Company that, as of the date of such notice or request and as of the date of the applicable Credit Extension, the conditions in this Section 4.2 are satisfied. I. ARTICLE REPRESENTATIONS AND WARRANTIES The Company represents and warrants to the Agent and each Lender as follows (it being understood that, to the extent that any such representation and warranty relates, in whole or in part, to any period prior to the effective date of the Merger, (i) references to the "Company" shall mean each of Cotter and Servistar and (ii) references to any "Subsidiary" shall mean a Subsidiary of Cotter and/or of Servistar): A. Organization; Subsidiary Preferred Stock. The Company is a corporation duly organized and existing in good standing under the laws of the State of incorporation, each Subsidiary is duly organized and existing in good standing under the laws of the jurisdiction in which it is incorporated, and the Company has and each Subsidiary has the corporate power to own its respective property and to carry on its respective business as now being conducted. No Subsidiary has outstanding any shares of stock of a class which has priority over any other class as to dividends or in liquidation. A. Financial Statements. The Company has furnished each Lender with the following financial statements, identified by a principal financial officer of the Company: (i) a consolidated balance sheet of the Company and its Subsidiaries as at fiscal year end in each of the three fiscal years of the Company most recently completed prior to the date as of which this representation is made or repeated to such Lender (other than fiscal years completed within 90 days prior to such date for which audited financial statements have not been released) and consolidated statements of operations and cash flows and a consolidated statement of capital stock and retained earnings of the Company and its Subsidiaries for each such year, all reported on by Ernst & Young (or any other independent public accounting firm of recognized national standing) and (ii) a consolidated balance sheet of the Company and its Subsidiaries as at the end of the quarterly period (if any) most recently completed prior to such date and after the end of such fiscal year (other than quarterly periods completed within 60 days prior to such date for which financial statements have not been released) and the comparable quarterly period in the preceding fiscal year and consolidated statements of operations and cash flows and a consolidated statement of capital stock and retained earnings for the periods from the beginning of the fiscal years in which such quarterly periods are included to the end of such quarterly periods, prepared by the Company. Such financial statements (including any related schedules and/or notes) are true and correct in all material respects (subject, as to interim statements, to changes resulting from audits and year-end adjustments), have been prepared in accordance with GAAP consistently followed throughout the periods involved and show all liabilities, direct and contingent, of the 55 Company and its Subsidiaries required to be shown in accordance with such principles. The balance sheets fairly present the condition of the Company and its Subsidiaries as at the dates thereof, and the statements of operations, capital stock and retained earnings and cash flows fairly present the results of the operations of the Company and its Subsidiaries and their cash flows for the periods indicated. There has been no material adverse change in the business, property or assets, condition (financial or otherwise), operations or prospects of the Company and its Subsidiaries taken as a whole since the end of the most recent fiscal year for which such audited financial statements have been furnished. A. Actions Pending. There is no action, suit, investigation or proceeding pending or, to the knowledge of the Company, threatened against the Company or any of its Subsidiaries, or any properties or rights of the Company or any of its Subsidiaries, by or before any court, arbitrator or administrative or governmental body which could be reasonably expected to result in any material adverse change in the business, property or assets, condition (financial or otherwise) or operations of the Company and its Subsidiaries taken as a whole or the ability of the Company to perform its obligations under this Agreement. A. Outstanding Debt. Neither the Company nor any of its Subsidiaries has outstanding any Debt except as permitted by Section 7.3. There exists no default under the provisions of any instrument evidencing Debt of the Company or any of its Subsidiaries in an amount greater than $250,000 or of any agreement relating thereto. A. Title to Properties. The Company has and each of its Subsidiaries has good and indefeasible title to its respective real properties (other than properties which it leases) and good title to all of its other respective properties and assets, including the properties and assets reflected in the most recent audited balance sheet referred to in Section 5.2 (other than properties and assets disposed of in the ordinary course of business), subject to no Lien of any kind except Liens permitted by Section 7.2. All leases necessary in any material respect for the conduct of the respective businesses of the Company and its Subsidiaries are valid and subsisting and are in full force and effect. A. Taxes. The Company has and each of its Subsidiaries has filed all federal, state and other income tax returns which, to the best knowledge of the officers of the Company and its Subsidiaries, are required to be filed, and each has paid all taxes as shown on such returns and on all assessments received by it to the extent that such taxes have become due, except such taxes (i) as are being contested in good faith by appropriate proceedings for which adequate reserves have been established in accordance with GAAP or (ii) the non-payment of which (a) could not be reasonably expected to have a material adverse effect on the business, condition (financial or otherwise) or operations of the Company and its Subsidiaries taken as a whole and (b) does not result in the creation of any Lien other than Liens permitted by Section 7.2. 56 A. Conflicting Agreements and Other Matters. Neither the Company nor any of its Subsidiaries is a party to any contract or agreement or subject to any charter or other corporate restriction which materially and adversely affects its business, property or assets, condition (financial or otherwise) or operations. None of the execution and delivery of this Agreement or any other Loan Document, the making of the Loans, the creation of the BAs or the fulfillment of or compliance with the terms and provisions hereof and of the other Loan Documents will conflict with, or result in a breach of the terms, conditions or provisions of, or constitute a default under, or result in any violation of, or result in the creation of any Lien upon any of the properties or assets of the Company or any of its Subsidiaries pursuant to, the charter or by-laws of the Company or any of its Subsidiaries, any award of any arbitrator or any agreement (including any agreement with stockholders), instrument, order, judgment, decree, statute, law, rule or regulation to which the Company or any of its Subsidiaries is subject. Neither the Company nor any of its Subsidiaries is a party to, or otherwise subject to any provision contained in, any instrument evidencing Indebtedness of the Company or such Subsidiary, any agreement relating thereto or any other contract or agreement (including its charter) which limits the amount of, or otherwise imposes restrictions on the incurring of, Debt of the Company of the type that the Obligations constitute except as set forth in the agreements listed in Schedule 5.7 attached hereto (as such Schedule 5.7 may have been modified from time to time by written supplements thereto delivered by the Company and accepted in writing by the Required Lenders). A. Use of Proceeds. None of the proceeds of any Loan or BA will be used, directly or indirectly, for the purpose, whether immediate, incidental or ultimate, of purchasing or carrying any "margin stock" as defined in Regulation U of the Board of Governors of the Federal Reserve System (herein called "margin stock") or for the purpose of maintaining, reducing or retiring any Indebtedness which was originally incurred to purchase or carry any stock that is then currently a margin stock or for any other purpose which might constitute the transactions contemplated hereby a "purpose credit" within the meaning of such Regulation U, unless the Company shall have delivered to the Lenders, on the date of borrowing of such Loan or the acceptance of such BA, an opinion of counsel satisfactory to the Lenders stating that the making of such Loan or the acceptance of such BA does not constitute a violation of such Regulation U. Neither the Company nor any agent acting on its behalf has taken or will take any action which might cause this Agreement or the Loans or the BAs to violate Regulation G, Regulation T, Regulation U or any other regulation of the Board of Governors of the Federal Reserve System or to violate the Exchange Act, in each case as in effect now or as the same may hereafter be in effect. A. ERISA. No accumulated funding deficiency (as defined in section 302 of ERISA and section 412 of the Code), whether or not waived, exists with respect to any Plan (other than a Multiemployer Plan). No liability to the PBGC has been or is expected by the Company or any ERISA Affiliate to be incurred with respect to any Plan (other than a Multiemployer Plan) by the Company, any Subsidiary or any ERISA Affiliate which is or would be materially adverse to the business, property or assets, 57 condition (financial or otherwise) or operations of the Company and its Subsidiaries taken as a whole. Neither the Company, any Subsidiary nor any ERISA Affiliate has incurred or presently expects to incur any withdrawal liability under Title IV of ERISA with respect to any Multiemployer Plan which is or would be materially adverse to the business, property or assets, condition (financial or otherwise) or operations of the Company and its Subsidiaries taken as a whole. The execution and delivery of this Agreement and the making of Loans and the creation and acceptance of the BAs will be exempt from or will not involve any transaction which is subject to the prohibitions of section 406 of ERISA and will not involve any transaction in connection with which a penalty could be imposed under section 502(i) of ERISA or a tax could be imposed pursuant to section 4975 of the Code. A. Governmental Consent. Neither the nature of the Company or of any Subsidiary, nor any of their respective businesses or properties, nor any relationship between the Company or any Subsidiary and any other Person, nor any circumstance in connection with the making of the Loans is such as to require any authorization, consent, approval, exemption or any action by or notice to or filing with any court or administrative or governmental body (other than routine filings after the Closing Date with the Securities and Exchange Commission and/or state Blue Sky authorities) in connection with the execution and delivery of this Agreement, the making of the Loans, the creation and acceptance of the BAs or the fulfillment of or compliance with the terms and provisions of the Loan Documents. A. Environmental Compliance. The Company and its Subsidiaries and all of their respective properties and facilities have complied at all times and in all respects with all applicable foreign, federal, state, local and regional statutes, laws, ordinances and judicial or administrative orders, judgments, rulings and regulations relating to protection of the environment except, in any such case, where failure to so comply could not reasonably be expected to result in a material adverse effect on the business, condition (financial or otherwise) or operations of the Company and its Subsidiaries taken as a whole or the ability of the Company to perform its obligations under this Agreement. A. Disclosure. Neither this Agreement nor any other document, certificate or statement furnished to the Agent or any Lender by or on behalf of the Company in connection herewith contains any untrue statement of a material fact or omits to state a material fact necessary in order to make the statements contained herein and therein not misleading. There is no fact peculiar to the Company or any of its Subsidiaries which materially adversely affects or in the future may (so far as the Company can now foresee) materially adversely affect the business, property or assets, condition (financial or otherwise) or operations of the Company or any of its Subsidiaries and which has not been set forth in this Agreement. A. Hostile Tender Offers. None of the proceeds of any Loans or the BAs will be used to finance a Hostile Tender Offer. 58 A. Priority of Obligations. The Obligations constitute "Superior Indebtedness" as such term is defined in the Company's Promissory (subordinated) Notes, the form of which is attached hereto as Exhibit I and the Subordinated Debt is subordinated to the Obligations. A. Merger, etc. (a) The Merger will be consummated substantially in accordance with the terms of the Merger Agreement. (b) The Merger will comply in all material respects with all applicable legal requirements, and all necessary governmental, regulatory, shareholder and other consents and approvals required for the consummation of the Merger have been, or prior to the consummation thereof will be, duly obtained. (c) The execution and delivery of the Merger Agreement, and the consummation of the Merger, will not violate any statute or regulation of the United States or of any state or other applicable jurisdiction, or any order, judgment or decree of any court or governmental body, or result in a breach of, or constitute a default under, any agreement, indenture, order or decree affecting the Company, Servistar or any of their respective Subsidiaries. I. ARTICLE AFFIRMATIVE COVENANTS So long as any Lender shall have any Commitment hereunder, any BA shall be outstanding or any Loan or other Obligation shall remain unpaid or unsatisfied, unless the Required Lenders waive compliance in writing: A. Financial Statements. The Company shall deliver to the Agent, in form and detail reasonably satisfactory to the Agent and the Required Lenders, with sufficient copies for each Lender: 1. as soon as available, but not later than 120 days after the end of each fiscal year, a copy of the audited consolidated balance sheet of the Company and its Subsidiaries as at the end of such year and the related consolidated statements of income or operations, shareholders' equity and cash flows for such year, setting forth in each case in comparative form the figures for the previous fiscal year, and accompanied by the opinion of Ernst & Young or another nationally-recognized independent public accounting firm ("Independent Auditor") which report (x) shall state that such consolidated financial statements present fairly the financial position for the periods indicated in conformity with GAAP applied on a basis consistent with prior years and (y) 59 shall not be qualified or limited because of a restricted or limited examination by the Independent Auditor of any material portion of the Company's or any Subsidiary's records; and 1. as soon as available, but not later than 60 days after the end of each of the first three fiscal quarters of each fiscal year, a copy of the unaudited consolidated balance sheet of the Company and its Subsidiaries as of the end of such quarter and the related consolidated statements of income, shareholders' equity and cash flows for the period commencing on the first day and ending on the last day of such quarter, and certified by a Responsible Officer as fairly presenting, in accordance with GAAP (subject to ordinary, good faith year-end audit adjustments), the financial position and the results of operations of the Company and the Subsidiaries. A. Certificates; Other Information. The Company shall furnish to the Agent, with sufficient copies for each Lender: 1. concurrently with the delivery of the financial statements referred to in subsection 6.1(a), a certificate of the Independent Auditor stating that in making the examination necessary therefor no knowledge was obtained of any Event of Default or Unmatured Event of Default, except as specified in such certificate; 1. concurrently with the delivery of the financial statements referred to in subsections 6.1(a) and (b), a Compliance Certificate executed by a Responsible Officer; 1. promptly, copies of all financial statements and reports that the Company sends to its shareholders, and copies of all financial statements and regular, periodical or special reports (including Forms 10K, 10Q and 8K) that the Company or any Subsidiary may make to, or file with, the SEC; and 1. promptly, such additional information regarding the business, financial or corporate affairs of the Company or any Subsidiary as the Agent, at the request of any Lender, may from time to time request. A. Notices. The Company shall promptly notify the Agent and each Lender promptly after a Responsible Officer obtains knowledge of: 1. the occurrence of any Event of Default or Unmatured Event of Default; 1. any of the following matters that has resulted or may reasonably be expected to result in a Material Adverse Effect: (i) any breach or non-performance of, or any default under, a Contractual Obligation of the Company or any Subsidiary; (ii) any dispute, litigation, investigation, proceeding or suspension between the Company or any Subsidiary and any Governmental Authority; or (iii) the 60 commencement of, or any material development in, any litigation or proceeding affecting the Company or any Subsidiary including pursuant to any applicable Environmental Law; 1. the occurrence of any of the following events affecting the Company or any ERISA Affiliate (but in no event more than 10 days after such event; provided that the Company shall notify the Agent and each Lender not less than ten days before the occurrence of any event described in clause (ii) below), and deliver to the Agent and each Lender a copy of any notice with respect to such event that is filed with a Governmental Authority and any notice delivered by a Governmental Authority to the Company or any ERISA Affiliate with respect to such event: a) an ERISA Event; a) a contribution failure with respect to a Pension Plan sufficient to give rise to a Lien under Section 302(f) of ERISA; a) a material increase in the Unfunded Pension Liability of any Pension Plan; a) the adoption of, or the commencement of contributions to, any Plan subject to Section 412 of the Code by the Company or any ERISA Affiliate; or a) the adoption of any amendment to a Plan subject to Section 412 of the Code, if such amendment results in a material increase in contributions or Unfunded Pension Liability; and 1. any material change in accounting policies or financial reporting practices by the Company or any of its consolidated Subsidiaries. Each notice under this Section shall be accompanied by a written statement by a Responsible Officer setting forth details of the occurrence referred to therein, and stating what action the Company or any affected Subsidiary proposes to take with respect thereto and at what time. Each notice under subsection 6.3(a) shall describe with particularity any and all clauses or provisions of this Agreement or any other Loan Document that have been breached or violated. A. Preservation of Corporate Existence, Etc. The Company shall, and shall cause each Subsidiary to: 1. preserve and maintain in full force and effect its corporate existence and good standing under the laws of its state or jurisdiction of incorporation; 1. preserve and maintain in full force and effect all governmental rights, privileges, qualifications, permits, licenses and franchises necessary 61 or desirable in the normal conduct of its business except (i) in connection with transactions permitted by Section 7.6 and sales of assets permitted by Section 7.5 and (ii) to the extent the non-preservation or non-maintenance thereof could not reasonably be expected to have a Material Adverse Effect; 1. use reasonable efforts, in the ordinary course of business, to preserve its business organization and goodwill; and 1. preserve or renew all of its registered patents, trademarks, trade names and service marks, the non-preservation of which could reasonably be expected to have a Material Adverse Effect. A. Maintenance of Property. The Company shall, and shall cause each Subsidiary to, maintain and preserve all its property which is used or useful in its business in good working order and condition, ordinary wear and tear excepted and make all necessary repairs thereto and renewals and replacements thereof except where the failure to do so could not reasonably be expected to have a Material Adverse Effect. The Company and each Subsidiary shall use the standard of care typical in the industry in the operation and maintenance of its facilities. A. Insurance. The Company shall, and shall cause each Subsidiary to, maintain with financially sound and reputable insurers, insurance in such amounts and against such liabilities and hazards as customarily maintained by the Company in accordance with its practices, policies and procedures prior to the Closing Date. Together with each delivery of financial statements under subsection 6.1(a), the Company will, upon the request of any Lender, deliver a certificate of a Responsible Officer specifying the details of such insurance in effect. A. Payment of Obligations. The Company shall, and shall cause each Subsidiary to, pay and discharge as the same shall become due and payable all their respective obligations and liabilities, including: 1. all tax liabilities, assessments and governmental charges or levies upon it or its properties or assets, unless the same are being contested in good faith by appropriate proceedings and adequate reserves in accordance with GAAP are being maintained by the Company or such Subsidiary; 1. all lawful claims which, if unpaid, would by law become a Lien upon its property; and 1. all indebtedness, as and when due and payable, but subject to any subordination provisions contained in any instrument or agreement evidencing such Indebtedness. 62 A. Compliance with Laws. The Company shall, and shall cause each Subsidiary to, comply in all material respects with all Requirements of Law of any Governmental Authority having jurisdiction over it or its business (including the Federal Fair Labor Standards Act), except such as may be contested in good faith or as to which a bona fide dispute may exist. B. Compliance with ERISA. The Company shall, and shall cause each of its ERISA Affiliates to: (a) maintain each Plan in compliance in all material respects with the applicable provisions of ERISA, the Code and other federal or state law; (b) cause each Plan which is qualified under Section 401(a) of the Code to maintain such qualification; and (c) make all required contributions to any Plan subject to Section 412 of the Code. A. Inspection of Property and Books and Records. The Company shall, and shall cause each Subsidiary to, maintain proper books of record and account, in which full, true and correct entries in conformity with GAAP consistently applied shall be made of all financial transactions and matters involving the assets and business of the Company and such Subsidiary. The Company shall, and shall cause each Subsidiary to, permit representatives and independent contractors of the Agent or any Lender to visit and inspect any of their respective properties, to examine their respective corporate, financial and operating records, and make copies thereof or abstracts therefrom, and to discuss their respective affairs, finances and accounts with their respective directors, officers, and independent public accountants, all at the reasonable expense of the Company and at such reasonable times during normal business hours and as often as may be reasonably desired, upon reasonable advance notice to the Company; provided that when an Event of Default exists the Agent or any Lender may do any of the foregoing at the reasonable expense of the Company at any time during normal business hours without advance notice. A. Environmental Laws. The Company shall, and shall cause each Subsidiary to, conduct its operations and keep and maintain its property in material compliance with all material Environmental Laws. A. Use of Proceeds. The Company shall use the proceeds of the Loans and the BAs to repay Debt and for working capital and other general corporate purposes not in contravention of any applicable Requirement of Law or of any Loan Document. A. Covenant to Secure Obligations Equally. The Company covenants that, if it or any Subsidiary shall create or assume any Lien upon any of its property or assets, whether now owned or hereafter acquired, other than Liens permitted by the provisions of Section 7.2 (unless prior written consent to the creation or assumption thereof shall have been obtained pursuant to Section 10.1), it will make or cause to be made effective provision whereby the Obligations will be secured by such Lien equally and ratably with any and all other Debt thereby secured so long as any such other Debt shall be so secured. A. Cooperative Status. The Company covenants that it will at all times maintain its status as a cooperative for purposes of Subchapter T of the Code; provided, 63 however, in the event that the Code or other applicable law is modified after the date hereof and as a result of such modification the Company is unable to satisfy its obligations under this Section, then the Required Lenders and the Company shall agree, or in good faith negotiate to agree, to amend the covenants contained in this Agreement so that the application of such covenants (following such modification of the Code or other applicable law and the effect thereof on the Company) will be substantially the same as prior thereto. I. ARTICLE NEGATIVE COVENANTS So long as any Lender shall have any Commitment hereunder, any BA shall be outstanding or any Loan or other Obligation shall remain unpaid or unsatisfied, unless the Required Lenders waive compliance in writing: A. Fixed Charge Coverage Ratio. The Company will not permit the Fixed Charge Coverage Ratio to be less than 1.50 to 1.00, in each case determined at the end of each fiscal quarter for the four consecutive fiscal quarter period then ending. A. Lien Restrictions. The Company will not and will not permit any Subsidiary to create, assume or suffer to exist any Lien upon any of its property or assets, whether now owned or hereafter acquired (whether or not provision is made for the equal and ratable securing of the Obligations in accordance with the provisions of Section 6.13), except: 1. Liens for taxes not yet due or which are being actively contested in good faith by appropriate proceedings, 1. Liens incidental to the conduct of its business or the ownership of its property and assets which were not incurred in connection with the borrowing of money or the obtaining of advances or credit, 1. Liens on property or assets of a Subsidiary to secure obligations of such Subsidiary to the Company or another Subsidiary, 1. Liens in existence on the Closing Date and described on Schedule 7.2, 1. Liens in respect of capital leases entered into in connection with, or any Lien arising in connection with, the acquisition of property, after the date hereof and attaching only to the property being acquired, if the Indebtedness secured thereby does not exceed 100% of the lesser of (i) the fair market value of the property acquired at the time of acquisition thereof and (ii) the total purchase price of the property so acquired, and 64 1. other Liens (including Liens arising under capital leases), in addition to the Liens permitted by clauses (a) through (d) above, securing Indebtedness of the Company or any Subsidiary (other than Indebtedness that constitutes Subordinated Debt); provided, however, that (i) such Indebtedness is permitted by the provisions of Section 7.3 and (ii) the aggregate outstanding principal amount of all such Indebtedness does not at any time exceed an amount equal to ten percent (10%) of the consolidated total assets of the Company. B. Debt Restrictions. The Company will not and will not permit any Subsidiary to create, incur, assume or suffer to exist any Debt, except: 1. Senior Funded Debt in existence as of the Closing Date, 1. Subordinated Debt, 1. Senior Funded Debt (including any Short Term Debt to be included in the computation of Senior Funded Debt pursuant to clause (e) below) of the Company, so long as the aggregate principal amount of all consolidated Senior Funded Debt does not exceed at any time an amount equal to fifty percent (50%) of Consolidated Capitalization, and 1. Short Term Debt of the Company, provided that there shall have been a period of at least thirty (30) consecutive days within the twelve month period immediately preceding the date of determination during which the aggregate principal amount of Short Term Debt of the Company outstanding as of the close of business on any day during such twelve month period did not exceed an amount equal to the amount of Funded Debt which would have been permitted as additional Funded Debt under clause (d) of this Section 7.3 as of the close of business on such day, and provided further that an amount equal to the largest balance of such Short Term Debt outstanding on any day of such 30-day period shall be included in all computations of Senior Funded Debt under clause (d) above until such Short Term Debt has been repaid in full, and 1. Debt under the Existing Credit Agreements which will be repaid prior to or concurrently with the making of the initial Credit Extensions hereunder. For purposes of this Section 7.3, Debt represented by the Loans or arising under the BAs shall be considered Short Term Debt. A. Sale of Assets. The Company will not and will not permit any Subsidiary to sell, lease or transfer or otherwise dispose of any assets of the Company or any Subsidiary other than in the ordinary course of business (which shall be deemed to include the planned sale of up to eight distribution facilities); provided that the Company and its Subsidiaries may sell, lease, transfer or otherwise dispose of assets outside the 65 ordinary course of business so long as the aggregate amount of all assets sold, leased, transferred or otherwise disposed of outside the ordinary course of business during the most recent 36-month rolling period when added together, without duplication, with (a) any shares of stock or Debt of any Subsidiary sold or otherwise disposed of, or with respect to which the Company or any Subsidiary has parted control of, except to the Company or another Subsidiary, during such period and (b) any assets then proposed to be sold outside of the ordinary course of business do not constitute more than 10% of the consolidated total assets of the Company as of the end of the most recent fiscal quarter for which the Company has delivered financial statements pursuant to Section 6.1. A. Merger. The Company will not and will not permit any Subsidiary to merge or consolidate with any other Person, except that Subsidiaries may be merged into the Company or any other Subsidiary and the Company may merge with another Person (including pursuant to the Merger), provided that the Company is the surviving corporation and no Event of Default or Default shall exist either immediately before or after such merger. A. Restrictions on Transactions with Affiliates and Stockholders. The Company will not and will not permit any Subsidiary to directly or indirectly, purchase, acquire or lease any property from, or sell, transfer or lease any property (other than shares of stock of the Company) to, or otherwise deal with (i) any Affiliate or Substantial Stockholder, or (ii) any corporation in which an Affiliate, Substantial Stockholder or the Company (either directly or through Subsidiaries) owns 5% or more of the outstanding voting stock, except that (a) any such Affiliate or Substantial Stockholder may be a director, officer or employee of the Company or any Subsidiary and may be paid reasonable compensation in connection therewith (b) the Company and its Subsidiaries may perform or engage in any of the foregoing in the ordinary course of business upon terms no less favorable to the Company or such Subsidiary (as the case may be) than if no such relationship described in clauses (i) and (ii) above existed and (c) the Company may sell to or purchase from any such Person shares of the Company's stock subject to the provisions of Section 7.11. A. Issuance of Stock by Subsidiaries. The Company will not permit any Subsidiary to (either directly, or indirectly by the issuance of rights or options for, or securities convertible into, such shares) issue, sell or otherwise dispose of any shares of any class of its stock (other than directors' qualifying shares) except to the Company or another Subsidiary; provided, however, Cotter Canada Hardware may issue and sell shares of its stock in the ordinary course of business consistent with its practices as of April 13, 1992. A. Compliance with ERISA. The Company will not and will not permit any Subsidiary to engage in any transaction in connection with which the Company or any Subsidiary could be subject to either a civil penalty assessed pursuant to section 502(i) of ERISA or a tax imposed by section 4975 of the Code, terminate or withdraw from any Plan (other than a Multiemployer Plan) in a manner, or take any other 66 action with respect to any such Plan (including, without limitation, a substantial cessation of operations within the meaning of section 4062(f) of ERISA), which could result in any liability of the Company or any Subsidiary to the PBGC, to a trust established pursuant to section 4041(c)(3)(B)(ii) or (iii) or 4042(i) of ERISA, or to a trustee appointed under section 4042(b) or (c) of ERISA, incur any liability to the PBGC on account of a termination of a Plan under section 4064 of ERISA, fail to make full payment when due of all amounts which, under the provisions of any Plan, the Company or any Subsidiary is required to pay as contributions thereto, or permit to exist any accumulated funding deficiency, whether or not waived, with respect to any Plan (other than a Multiemployer Plan), if, in any such case, such penalty or tax or such liability, or the failure to make such payment, or the existence of such deficiency, as the case may be, could be reasonably expected to have a material adverse effect on the Company and its Subsidiaries taken as a whole. A. No Change in Subordination Terms, etc. The Company will not and will not permit any Subsidiary to amend, alter or otherwise change any provision of any of the subordinated promissory notes now or hereafter issued by the Company or take any other action (or refrain from taking an action) which would have the effect of eliminating or altering in any way the effect of the subordination language appearing in such subordinated promissory notes or the rights of the Agent and the Lenders arising as a result thereof. A. Nature of Business. The Company will not and will not permit any Subsidiary to engage in the business of underwriting risks for insurance purposes, or in any other aspect of insurance related business other than in the ordinary course of business in accordance with its practices as of the Closing Date; or purchase and sell real estate (other than on an agency basis) for purposes other than those relating directly to its principal business except for purchases and sales of store locations in the ordinary course of business which in the aggregate for the Company and its Subsidiaries taken as a whole do not exceed $10,000,000 during any rolling consecutive five year period. A. Restricted Investments. The Company will not and will not permit any Subsidiary to make or permit a Subsidiary to make any Investment except the Company and any Subsidiary may: 1. make or permit to remain outstanding loans or advances to any Subsidiary, 1. own, purchase or acquire stock, obligations or securities of a Subsidiary or of a corporation which immediately after such purchase or acquisition will be a Subsidiary, 1. acquire and own stock, obligations or securities received in settlement of debts (created in the ordinary course of business) owing to the Company or any Subsidiary, 67 1. own, purchase or acquire prime commercial paper, banker's acceptances and certificates of deposit in United States and Canadian commercial banks (having combined capital and surplus of not less than U.S. $100,000,000) and repurchase agreements with respect to the foregoing, in each case due within one year from the date of purchase and payable in the United States in United States dollars, obligations of the government of the United States or any agency thereof, and obligations guaranteed by the government of the United States, 1. make or permit to remain outstanding travel and other similar advances to officers and employees in the ordinary course of business, 1. permit to remain outstanding Investments existing on the Closing Date and described on Schedule 7.11, and 1. to the extent applicable, make Investments permitted under Section 7.12 below. A. Restricted Payments. The Company will not and will not permit any Subsidiary to pay or declare cash dividends, cash patronage dividends or dividends on any class of its stock (other than dividends in kind) or redeem, purchase or otherwise acquire, or make any redemptions, purchase, or other acquisition of any of its stock or apply miscellaneous deductions in lieu of patronage dividends, or make or permit any Subsidiary to make any Restricted Investment (each a "Restricted Payment") except to the extent that the aggregate amount of all such Restricted Payments made after December 28, 1996 shall not exceed an amount equal to the sum of (i) $25,000,000 plus (ii) 100% (or minus 100% in the case of a deficit) of Consolidated Net Earnings for the period (taken as one accounting period) commencing on December 29, 1996 and terminating at the end of the last fiscal quarter preceding the date of any proposed Restricted Payment. A. Use of Proceeds. The Company shall not, and shall not permit any Subsidiary to, use any portion of the proceeds of any Credit Extension, directly or indirectly, (i) to purchase or carry Margin Stock, (ii) to repay or otherwise refinance indebtedness of the Company or others incurred to purchase or carry Margin Stock, (iii) to extend credit for the purpose of purchasing or carrying any Margin Stock, or (iv) to acquire any security in any transaction that is subject to Section 13 or 14 of the Exchange Act. 68 I. ARTICLE EVENTS OF DEFAULT A. Event of Default. Any of the following events which occur and are continuing for any reason whatsoever (and whether such occurrence shall be voluntary or involuntary or come about or be effected by operation of law or otherwise) shall constitute an "Event of Default": 1. The Company defaults in the payment of any principal of any Loan or any amount due in respect of any BA when the same shall become due. 1. The Company defaults in the payment of any interest, fee or other amount payable hereunder or under any other Loan Document for more than three (3) days after the date due. 1. The Company or any Subsidiary defaults (whether as primary obligor or as guarantor or other surety) in any payment of principal of or interest on any other obligation for money borrowed (or any Capitalized Lease Obligation, any obligation under a conditional sale or other title retention agreement, any obligation issued or assumed as full or partial payment for property whether or not secured by a purchase money mortgage or any obligation under notes payable or drafts accepted representing extensions of credit) beyond any period of grace provided with respect thereto, or the Company or any Subsidiary fails to perform or observe any other agreement, term or condition contained in any agreement under which any obligation is created (or if any other event thereunder or under any such agreement shall occur and be continuing) and the effect of such failure or other event is to cause, or to permit the holder or holders of such obligation (or a trustee on behalf of such holder or holders) to cause, such obligation to become due (or to be repurchased by the Company or any Subsidiary) prior to any stated maturity, provided that the aggregate amount of all obligations as to which such a payment default shall occur and be continuing or such a failure or other event causing or permitting acceleration (or resale to the Company or any Subsidiary) shall occur and be continuing exceeds $5,000,000. 1. Any representation or warranty made by the Company herein or in any other Loan Document or by the Company or any of its officers in any writing furnished in connection with or pursuant to this Agreement or any other Loan Document shall be false in any material respect on the date as of which made. 1. The Company fails to perform or observe any agreement contained in Article VIII. 69 1. The Company fails to perform or observe any other agreement, term or condition contained herein and such failure shall not be remedied within 30 days after any Responsible Officer obtains actual knowledge of such failure. 1. The Company or any Subsidiary makes an assignment for the benefit of creditors or is generally not paying its debts as such debts become due. 1. Any decree or order for relief in respect of the Company or any Subsidiary is entered under any bankruptcy, reorganization, compromise, arrangement, insolvency, readjustment of debt, dissolution or liquidation or similar law, whether now or hereafter in effect (herein called a "Bankruptcy Law"), of any jurisdiction. 1. The Company or any Subsidiary petitions or applies to any tribunal for, or consents to, the appointment of, or taking possession by, a trustee, receiver, custodian, liquidator or similar official of the Company or any Subsidiary, or of any substantial part of the assets of the Company or any Subsidiary, or commences a voluntary case under the Bankruptcy Law of the United States or any proceedings (other than proceedings for the voluntary liquidation and dissolution of a Subsidiary) relating to the Company or any Subsidiary under the Bankruptcy Law of any other jurisdiction. 1. Any such petition or application is filed, or any such proceedings are commenced, against the Company or any Subsidiary and the Company or such Subsidiary by any act indicates its approval thereof, consent thereto or acquiescence therein, or an order, judgment or decree is entered appointing any such trustee, receiver, custodian, liquidator or similar official, or approving the petition in any such proceedings, and such order, judgment or decree remains unstayed and in effect for more than 30 days. 1. Any order, judgment or decree is entered in any proceedings against the Company decreeing the dissolution of the Company and such order, judgment or decree remains unstayed and in effect for more than 60 days. 1. Any order, judgment or decree is entered in any proceedings against the Company or any Subsidiary decreeing a split-up of the Company or such Subsidiary which requires the divestiture of assets representing a substantial part, or the divestiture of the stock of a Subsidiary whose assets represent a substantial part, of the consolidated assets of the Company and its Subsidiaries (determined in accordance with GAAP) or which requires the divestiture of assets, or stock of a Subsidiary, which shall have contributed a substantial part of the consolidated net income of the Company and its Subsidiaries (determined in accordance with GAAP) for any of the three fiscal years then most recently ended, and such order, judgment or decree remains unstayed and in effect for more than 60 days. 70 1. A final judgment in an amount in excess of $7,000,000 is rendered against the Company or any Subsidiary and, within 60 days after entry thereof, such judgment is not discharged or execution thereof stayed pending appeal, or within 60 days after the expiration of any such stay, such judgment is not discharged. 1. An Event of Default exists under the Prudential Agreement. A. Remedies. If any Event of Default occurs, the Agent shall, at the request of, or may, with the consent of, the Required Lenders, do any or all of the following: 1. declare the Commitment of each Lender to make Committed Loans, the obligation of the Swing Line Lender to make Swing Line Loans and the obligation of the Accepting Lender to accept BAs to be terminated, whereupon such Commitments and obligations shall be terminated; 1. declare the unpaid principal amount of all outstanding Loans, all interest accrued and unpaid thereon, and all other amounts owing or payable hereunder or under any other Loan Document to be immediately due and payable, without presentment, demand, protest or other notice of any kind, all of which are hereby expressly waived by the Company; 1. demand that the Company deliver to the Agent for the benefit of the Accepting Lender and the Lenders cash collateral in an amount equal to the aggregate maximum amount which may be required to be paid by the Accepting Lender in connection with all outstanding BAs, whereupon the Company shall be obligated to deliver such cash collateral; and 1. exercise on behalf of itself and the Lenders all rights and remedies available to it and the Lenders under the Loan Documents or applicable law; provided, however, that upon the occurrence of any event specified in subsection (g), (h), (i) or (j) of Section 8.1, the obligation of each Lender to make Loans and of the Accepting Lender to accept BAs shall automatically terminate and the unpaid principal amount of all outstanding Loans and all interest and other amounts as aforesaid shall automatically become due and payable and the Company shall automatically become obligated to the Agent for the benefit of the Accepting Lender and the Lenders cash collateral in an amount equal to the aggregate maximum amount which may be required to be paid by the Accepting Lender in connection with all outstanding BAs, all without further act of the Agent or any Lender. 71 A. Rights Not Exclusive. The rights provided for in this Agreement and the other Loan Documents are cumulative and are not exclusive of any other rights, powers, privileges or remedies provided by law or in equity, or under any other instrument, document or agreement now existing or hereafter arising. I. ARTICLE THE AGENT 1. Appointment and Authorization; "Agent". Each Lender hereby irrevocably (subject to Section 9.9) appoints, designates and authorizes the Agent to take such action on its behalf under the provisions of this Agreement and each other Loan Document and to exercise such powers and perform such duties as are expressly delegated to it by the terms of this Agreement or any other Loan Document, together with such powers as are reasonably incidental thereto. Notwithstanding any provision to the contrary contained elsewhere in this Agreement or in any other Loan Document, the Agent shall not have any duties or responsibilities, except those expressly set forth herein, nor shall the Agent have or be deemed to have any fiduciary relationship with any Lender, and no implied covenants, functions, responsibilities, duties, obligations or liabilities shall be read into this Agreement or any other Loan Document or otherwise exist against the Agent. Without limiting the generality of the foregoing sentence, the use of the term "agent" in this Agreement with reference to the Agent is not intended to connote any fiduciary or other implied (or express) obligations arising under agency doctrine of any applicable law. Instead, such term is used merely as a matter of market custom, and is intended to create or reflect only an administrative relationship between independent contracting parties. 1. The Accepting Lender shall act on behalf of the Lenders with respect to any BA accepted by it and the documents associated therewith. The Accepting Lender shall have all of the benefits and immunities (i) provided to the Agent in this Article IX with respect to any acts taken or omissions suffered by the Accepting Lender in connection with BAs accepted by it or proposed to be accepted by it and the documents and agreements pertaining thereto as fully as if the term "Agent", as used in this Article IX, included the Accepting Lender with respect to such acts or omissions and (ii) as additionally provided in this Agreement with respect to the Accepting Lender. 1. The Swing Line Lender shall have all of the benefits and immunities (i) provided to the Agent in this Article IX with respect to any acts taken or omissions suffered by the Swing Line Lender in connection with Swing Line Loans made or proposed to be made by it as fully as if the term "Agent", as used in this Article IX, included the Swing Line Lender with respect to such acts or omissions and (ii) as additionally provided in this Agreement with respect to the Swing Line Lender. 72 A. Delegation of Duties. The Agent may execute any of its duties under this Agreement or any other Loan Document by or through agents, employees or attorneys-in-fact and shall be entitled to advice of counsel concerning all matters pertaining to such duties. The Agent shall not be responsible for the negligence or misconduct of any agent or attorney-in-fact that it selects with reasonable care. A. Liability of Agent. None of the Agent-Related Persons shall (i) be liable for any action taken or omitted to be taken by any of them under or in connection with this Agreement or any other Loan Document or the transactions contemplated hereby (except for its own gross negligence or willful misconduct), or (ii) be responsible in any manner to any of the Lenders for any recital, statement, representation or warranty made by the Company or any Subsidiary or Affiliate of the Company, or any officer thereof, contained in this Agreement or in any other Loan Document, or in any certificate, report, statement or other document referred to or provided for in, or received by the Agent under or in connection with, this Agreement or any other Loan Document, or the validity, effectiveness, genuineness, enforceability or sufficiency of this Agreement or any other Loan Document, or for any failure of the Company or any other party to any Loan Document to perform its obligations hereunder or thereunder. No Agent-Related Person shall be under any obligation to any Lender to ascertain or to inquire as to the observance or performance of any of the agreements contained in, or conditions of, this Agreement or any other Loan Document, or to inspect the properties, books or records of the Company or any of the Company's Subsidiaries or Affiliates. 1. Reliance by Agent. The Agent shall be entitled to rely, and shall be fully protected in relying, upon any writing, resolution, notice, consent, certificate, affidavit, letter, telegram, facsimile, telex or telephone message, statement or other document or conversation believed by it to be genuine and correct and to have been signed, sent or made by the proper Person or Persons, and upon advice and statements of legal counsel (including counsel to the Company), independent accountants and other experts selected by the Agent. The Agent shall be fully justified in failing or refusing to take any action under this Agreement or any other Loan Document unless it shall first receive such advice or concurrence of the Required Lenders (or, if expressly required hereunder, all Lenders) as it deems appropriate and, if it so requests, it shall first be indemnified to its satisfaction by the Lenders against any and all liability and expense which may be incurred by it by reason of taking or continuing to take any such action. The Agent shall in all cases be fully protected in acting, or in refraining from acting, under this Agreement or any other Loan Document in accordance with a request or consent of the Required Lenders and such request and any action taken or failure to act pursuant thereto shall be binding upon all of the Lenders. 1. For purposes of determining compliance with the conditions specified in Section 4.1, each Lender that has executed this Agreement shall be deemed to have consented to, approved or accepted or to be satisfied with, each document or other matter either sent by the Agent to such Lender for consent, approval, 73 acceptance or satisfaction, or required thereunder to be consented to or approved by or acceptable or satisfactory to the Lender. A. Notice of Default. The Agent shall not be deemed to have knowledge or notice of the occurrence of any Event of Default or Unmatured Event of Default, except with respect to defaults in the payment of principal, interest and fees required to be paid to the Agent for the account of the Lenders, unless the Agent shall have received written notice from a Lender or the Company referring to this Agreement, describing such Event of Default or Unmatured Event of Default and stating that such notice is a "notice of default". The Agent will notify the Lenders of its receipt of any such notice. The Agent shall take such action with respect to such Event of Default or Unmatured Event of Default as may be requested by the Required Lenders in accordance with Article VIII; provided, however, that unless and until the Agent has received any such request, the Agent may (but shall not be obligated to) take such action, or refrain from taking such action, with respect to such Event of Default or Unmatured Event of Default as it shall deem advisable or in the best interest of the Lenders. A. Credit Decision. Each Lender acknowledges that none of the Agent-Related Persons has made any representation or warranty to it, and that no act by the Agent hereinafter taken, including any review of the affairs of the Company and its Subsidiaries, shall be deemed to constitute any representation or warranty by any Agent-Related Person to any Lender. Each Lender represents to the Agent that it has, independently and without reliance upon any Agent-Related Person and based on such documents and information as it has deemed appropriate, made its own appraisal of and investigation into the business, prospects, operations, property, financial and other condition and creditworthiness of the Company and its Subsidiaries, and all applicable bank regulatory laws relating to the transactions contemplated hereby, and made its own decision to enter into this Agreement and to extend credit to the Company hereunder. Each Lender also represents that it will, independently and without reliance upon any Agent-Related Person and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit analysis, appraisals and decisions in taking or not taking action under this Agreement and the other Loan Documents, and to make such investigations as it deems necessary to inform itself as to the business, prospects, operations, property, financial and other condition and creditworthiness of the Company. Except for notices, reports and other documents expressly herein required to be furnished to the Lenders by the Agent, the Agent shall not have any duty or responsibility to provide any Lender with any credit or other information concerning the business, prospects, operations, property, financial and other condition or creditworthiness of the Company which may come into the possession of any of the Agent-Related Persons. A. Indemnification of Agent. Whether or not the transactions contemplated hereby are consummated, the Lenders shall indemnify upon demand the Agent-Related Persons (to the extent not reimbursed by or on behalf of the Company and without limiting the obligation of the Company to do so), pro rata, from and against any and all 74 Indemnified Liabilities; provided, however, that no Lender shall be liable for the payment to any Agent-Related Person of any portion of the Indemnified Liabilities resulting solely from such Person's gross negligence or willful misconduct. Without limitation of the foregoing, each Lender shall reimburse the Agent upon demand for its ratable share of any costs or out-of-pocket expenses (including Attorney Costs) incurred by the Agent in connection with the preparation, execution, delivery, administration, modification, amendment or enforcement (whether through negotiations, legal proceedings or otherwise) of, or legal advice in respect of rights or responsibilities under, this Agreement, any other Loan Document, or any document contemplated by or referred to herein, to the extent that the Agent is not reimbursed for such expenses by or on behalf of the Company. The undertaking in this Section shall survive the payment of all Obligations hereunder and the resignation or replacement of the Agent. A. Agent in Individual Capacity. BofA and its Affiliates may make loans to, issue letters of credit for the account of, accept deposits from, acquire equity interests in and generally engage in any kind of banking, trust, financial advisory, underwriting or other business with the Company and its Subsidiaries and Affiliates as though BofA were not the Agent, the Accepting Lender and the Swing Line Lender hereunder, in each case without notice to or consent of the Lenders. The Lenders acknowledge that, pursuant to such activities, BofA or its Affiliates may receive information regarding the Company or its Affiliates (including information that may be subject to confidentiality obligations in favor of the Company or such Subsidiary) and acknowledge that the Agent shall be under no obligation to provide such information to them. With respect to its Loans, BofA and any Affiliate thereof shall have the same rights and powers under this Agreement as any other Lender and may exercise the same as though BofA were not the Agent, the Accepting Lender or the Swing Line Lender. A. Successor Agent. The Agent may, and at the request of the Required Lenders shall, resign as Agent upon 30 days' notice to the Lenders and the Company. If the Agent resigns under this Agreement, the Required Lenders (with, if no Event of Default and Unmatured Event of Default then exists, the consent of the Company, not to be unreasonably withheld) shall appoint from among the Lenders a successor agent for the Lenders. If no successor agent is appointed prior to the effective date of the resignation of the Agent, the Agent may appoint, after consulting with the Lenders and the Company, a successor agent from among the Lenders. Upon the acceptance of its appointment as successor agent hereunder, such successor agent shall succeed to all the rights, powers and duties of the retiring Agent and the term "Agent" shall mean such successor agent and the retiring Agent's appointment, powers and duties as Agent shall be terminated. After any retiring Agent's resignation hereunder as Agent, the provisions of this Article IX and Sections 10.4 and 10.5 shall inure to its benefit as to any actions taken or omitted to be taken by it while it was Agent under this Agreement. If no successor agent has accepted appointment as Agent by the date which is 30 days following a retiring Agent's notice of resignation, the retiring Agent's resignation shall nevertheless thereupon become effective and the Lenders shall perform all of the duties of the Agent hereunder until such time, if any, as the Required Lenders appoint a successor agent as 75 provided for above. Notwithstanding the foregoing, however, BofA may not be removed as the Agent at the request of the Required Lenders unless BofA or any Affiliate of BofA shall also simultaneously be replaced as "Accepting Lender" and as "Swing Line Lender" hereunder pursuant to documentation in form and substance reasonably satisfactory to BofA and, if applicable, such Affiliate. 1. Withholding Tax. If any Lender is a "foreign corporation, partnership or trust" within the meaning of the Code and such Lender claims exemption from, or a reduction of, U.S. withholding tax under Sections 1441 or 1442 of the Code, such Lender agrees with and in favor of the Agent, to deliver to the Agent: a) if such Lender claims an exemption from, or a reduction of, withholding tax under a United States tax treaty, properly completed IRS Forms 1001 and W-8 before the payment of any interest in the first calendar year and before the payment of any interest in each third succeeding calendar year during which interest may be paid under this Agreement; a) if such Lender claims that interest paid under this Agreement is exempt from United States withholding tax because it is effectively connected with a United States trade or business of such Lender, two properly completed and executed copies of IRS Form 4224 before the payment of any interest is due in the first taxable year of such Lender and in each succeeding taxable year of such Lender during which interest may be paid under this Agreement, and IRS Form W-9; and a) such other form or forms as may be required under the Code or other laws of the United States as a condition to exemption from, or reduction of, United States withholding tax. Each such Lender agrees to promptly notify the Agent of any change in circumstances which would modify or render invalid any claimed exemption or reduction. 1. If any Lender claims exemption from, or reduction of, withholding tax under a United States tax treaty by providing IRS Form 1001 and such Lender sells, assigns, grants a participation in, or otherwise transfers all or part of the Obligations of the Company to such Lender, such Lender agrees to notify the Agent of the percentage amount in which it is no longer the beneficial owner of Obligations of the Company to such Lender. To the extent of such percentage amount, the Agent will treat such Lender's IRS Form 1001 as no longer valid. 1. If any Lender claiming exemption from United States withholding tax by filing IRS Form 4224 with the Agent sells, assigns, grants a participation in, or otherwise transfers all or part of the Obligations of the Company to such Lender, such Lender agrees to undertake sole responsibility for complying with the withholding tax requirements imposed by Sections 1441 and 1442 of the Code. 76 1. If any Lender is entitled to a reduction in the applicable with holding tax, the Agent may withhold from any interest payment to such Lender an amount equivalent to the applicable withholding tax after taking into account such reduction. If the forms or other documentation required by subsection (a) of this Section are not delivered to the Agent, then the Agent may withhold from any interest payment to such Lender not providing such forms or other documentation an amount equivalent to the applicable withholding tax. 1. If the IRS or any other Governmental Authority of the United States or other jurisdiction asserts a claim that the Agent did not properly withhold tax from amounts paid to or for the account of any Lender (because the appropriate form was not delivered or was not properly executed, or because such Lender failed to notify the Agent of a change in circumstances which rendered the exemption from, or reduction of, withholding tax ineffective, or for any other reason) such Lender shall indemnify the Agent fully for all amounts paid, directly or indirectly, by the Agent as tax or otherwise, including penalties and interest, and including any taxes imposed by any jurisdiction on the amounts payable to the Agent under this Section, together with all costs and expenses (including Attorney Costs). The obligation of the Lenders under this subsection shall survive the payment of all Obligations and the resignation or replacement of the Agent. A. Co-Agents. None of the Lenders identified on the signature pages of this Agreement or any related document as a "co-agent" shall have any right, power, obligation, liability, responsibility or duty under this Agreement other than those applicable to all Lenders as such. Without limiting the foregoing, none of the Lenders so identified as a "co-agent" shall have or be deemed to have any fiduciary relationship with any Lender. Each Lender acknowledges that it has not relied, and will not rely, on any of the Lenders so identified in deciding to enter into this Agreement or in taking or not taking action hereunder. I. ARTICLE MISCELLANEOUS A. Amendments and Waivers. No amendment or waiver of any provision of this Agreement or any other Loan Document, and no consent with respect to any departure by the Company or any applicable Subsidiary therefrom, shall be effective unless the same shall be in writing and signed by the Required Lenders (or by the Agent at the written request of the Required Lenders) and the Company and acknowledged by the Agent, and then any such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given; provided that no such waiver, amendment, or consent shall, unless in writing and signed by all the Lenders and the Company and acknowledged by the Agent, do any of the following: 77 1. increase or extend the Commitment of any Lender (or reinstate any Commitment terminated pursuant to Section 8.2); 1. postpone or delay any date fixed by this Agreement or any other Loan Document for any payment of principal, interest, fees or other amounts due to the Lenders (or any of them) hereunder or under any other Loan Document; 1. reduce the principal of, or the rate of interest specified herein on, any Loan, reduce the BA Commission or the amount of any BA, or (subject to clause (iv) below) reduce any fees or other amounts payable hereunder or under any other Loan Document; 1. change the percentage of the Commitments or of the aggregate unpaid principal amount of the Obligations which is required for the Lenders or any of them to take any action hereunder; or 1. amend this Section, or Section 2.13, or any provision herein providing for consent or other action by all Lenders; and, provided further, that (i) no amendment, waiver or consent shall, unless in writing and signed by the Agent in addition to the Required Lenders or all the Lenders, as the case may be, affect the rights or duties of the Agent under this Agreement or any other Loan Document, (ii) no amendment, waiver or consent shall, unless in writing and signed by the Accepting Lender in addition to the Required Lenders or all Lenders, as the case may be, affect the rights or duties of the Accepting Lender under this Agreement or any other Loan Document, (iii) no amendment, waiver or consent shall, unless in writing and signed by the Swing Line Lender in addition to the Required Lenders or all Lenders, as the case may be, affect the rights or duties of the Swing Line Lender under this Agreement or any other Loan Document, and (iv) the Fee Letter may be amended, or rights or privileges thereunder waived, in a writing executed by the parties thereto. 1. Notices. All notices, requests and other communications shall be in writing (including, unless the context expressly otherwise provides, by facsimile transmission, provided that any matter transmitted by the Company by facsimile (i) shall be immediately confirmed by a telephone call to the recipient at the number specified on Schedule 10.2, and (ii) shall be followed promptly by delivery of a hard copy original thereof) and mailed, faxed or delivered, to the address or facsimile number specified for notices on Schedule 10.2; or, as directed to the Company or the Agent, to such other address as shall be designated by such party in a written notice to the other parties, and as directed to any other party, at such other address as shall be designated by such party in a written notice to the Company and the Agent. 1. All such notices, requests and communications shall, when transmitted by overnight delivery, or faxed, be effective when delivered or transmitted in 78 legible form by facsimile machine, respectively, or if mailed, upon the third Business Day after the date deposited into the U.S. mail, certified mail, return receipt requested; except that notices pursuant to Article II or IX to the Agent, the Accepting Lender or the Swing Line Lender shall not be effective until actually received by the Agent, as the case may be. 1. Any agreement of the Agent and the Lenders herein to receive certain notices by telephone or facsimile is solely for the convenience and at the request of the Company. The Agent and the Lenders shall be entitled to rely on the authority of any Person purporting to be a Person authorized by the Company to give such notice and the Agent and the Lenders shall not have any liability to the Company or any other Person on account of any action taken or not taken by the Agent or the Lenders in reliance upon such telephonic or facsimile notice. The obligation of the Company to repay the Obligations shall not be affected in any way or to any extent by any failure by the Agent and the Lenders to receive written confirmation of any telephonic or facsimile notice or the receipt by the Agent and the Lenders of a confirmation which is at variance with the terms understood by the Agent and the Lenders to be contained in the telephonic or facsimile notice. A. No Waiver; Cumulative Remedies. No failure to exercise and no delay in exercising, on the part of the Agent or any Lender, any right, remedy, power or privilege hereunder, shall operate as a waiver thereof; nor shall any single or partial exercise of any right, remedy, power or privilege hereunder preclude any other or further exercise thereof or the exercise of any other right, remedy, power or privilege. A. Costs and Expenses. The Company shall: 1. whether or not the transactions contemplated hereby are consummated, pay or reimburse the Agent, the Accepting Lender and the Swing Line Lender within five Business Days after demand (subject to subsection 4.1(e)) for all reasonable costs and expenses incurred by the Agent, the Accepting Lender and the Swing Line Lender, subject to the Fee Letter, in connection with the development, preparation, delivery, administration and execution of, and any amendment, supplement, waiver or modification to (in each case, whether or not consummated), this Agreement, any Loan Document and any other documents prepared in connection herewith or therewith, and the consummation of the transactions contemplated hereby and thereby, including reasonable Attorney Costs incurred by the Agent, the Accepting Lender and the Swing Line Lender with respect thereto; and 1. pay or reimburse the Agent and each Lender within five Business Days after demand (subject to subsection 4.1(e)) for all reasonable costs and expenses (including Attorney Costs) incurred by them in connection with the enforcement, attempted enforcement, or preservation of any rights or remedies under this Agreement or any other Loan Document during the existence of an Event of Default or after acceleration of the Loans and other Obligations (including in connection with any 79 "workout" or restructuring regarding the Loans and other Obligations, and including in any Insolvency Proceeding or appellate proceeding); provided that the Company shall not be obligated to pay or reimburse the Agent or any Lender in respect of any suit or proceeding in which the Company is adverse to the Agent or such Lender and final nonappealable judgment is rendered by a court of competent jurisdiction in favor of the Company on all counts. A. Company Indemnification. Whether or not the transactions contemplated hereby are consummated, the Company shall indemnify and hold the Agent-Related Persons, and each Lender and each of their respective officers, directors, employees, counsel, agents and attorneys-in-fact (each an "Indemnified Person") harmless from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, charges, expenses and disbursements (including Attorney Costs) of any kind or nature whatsoever which may at any time (including at any time following repayment of the Obligations and the termination, resignation or replacement of the Agent or replacement of any Lender) be imposed on, incurred by or asserted against any such Person in any way relating to or arising out of this Agreement or any document contemplated by or referred to herein, or the transactions contemplated hereby or thereby, or any action taken or omitted by any such Person under or in connection with any of the foregoing, including with respect to any investigation, litigation or proceeding (including any Insolvency Proceeding or appellate proceeding) related to or arising out of this Agreement or the Loans or the BAs or the use of the proceeds thereof, or related to any Offshore Currency transactions entered into in connection herewith, whether or not any Indemnified Person is a party thereto (all the foregoing, collectively, the "Indemnified Liabilities"); provided that the Company shall have no obligation hereunder to any Indemnified Person with respect to Indemnified Liabilities resulting solely from the gross negligence or willful misconduct of such Indemnified Person. The agreements in this Section shall survive payment of all other Obligations. A. Payments Set Aside. To the extent that the Company makes a payment to the Agent or any Lender, or the Agent or any Lender exercises its right of set-off, and such payment or the proceeds of such set-off or any part thereof are subsequently invalidated, declared to be fraudulent or preferential, set aside or required (including pursuant to any settlement entered into by the Agent or such Lender in its discretion) to be repaid to a trustee, receiver, or any other party, in connection with any Insolvency Proceeding or otherwise, then (a) to the extent of such recovery the obligation or part thereof originally intended to be satisfied shall be revived and continued in full force and effect as if such payment had not been made or such set-off had not occurred and (b) each Lender severally agrees to pay to the Agent upon demand its pro rata share of any amount so recovered from or repaid by the Agent or any Lender. A. Successors and Assigns. The provisions of this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns, except that the Company may not assign or transfer any of its rights or 80 obligations under this Agreement without the prior written consent of the Agent and each Lender. 1. Assignments, Participations, etc. Any Lender may, with the written consent of the Company (unless an Event of Default exists), the Accepting Lender, the Swing Line Lender and the Agent, which consents shall not be unreasonably withheld, at any time assign and delegate to one or more Eligible Assignees (provided that no written consent of the Company, the Accepting Lender, the Swing Line Lender or the Agent shall be required in connection with any assignment and delegation by a Lender to an Eligible Assignee that is an Affiliate of such Lender) (each an "Assignee") all, or any ratable part of all, of the Loans, the Commitment and the other rights and obligations of such Lender hereunder, in a minimum amount of $10,000,000 (or, if less, all of such Lender's remaining rights and obligations hereunder); provided, however, that the Company, the Accepting Lender, the Swing Line Lender and the Agent may continue to deal solely and directly with such Lender in connection with the interest so assigned to an Assignee until (i) written notice of such assignment, together with payment instructions, addresses and related information with respect to the Assignee, shall have been given to the Company and the Agent by such Lender and the Assignee; (ii) such Lender and its Assignee shall have delivered to the Company and the Agent an Assignment and Acceptance in the form of Exhibit G ("Assignment and Acceptance") together with any Note or Notes subject to such assignment and (iii) the assignor Lender or Assignee has paid to the Agent a processing fee in the amount of $2,500. 1. From and after the date that the Agent notifies the assignor Lender that it has received and provided its consent (and received the consent of the Company, if applicable, the Accepting Lender and the Swing Line Lender) with respect to an executed Assignment and Acceptance and payment of the above-referenced processing fee, (i) the Assignee thereunder shall be a party hereto and, to the extent that rights and obligations hereunder have been assigned to it pursuant to such Assignment and Acceptance, shall have the rights and obligations of a Lender under the Loan Documents, and (ii) the assignor Lender shall, to the extent that rights and obligations hereunder and under the other Loan Documents have been assigned by it pursuant to such Assignment and Acceptance, relinquish its rights and be released from its obligations under the Loan Documents. 1. Any Lender may at any time sell to one or more commercial banks or other Persons not Affiliates of the Company (a "Participant") participating interests in any Loans, the Commitment of such Lender and the other interests of such Lender (the "originating Lender") hereunder and under the other Loan Documents; provided, however, that (i) the originating Lender's obligations under this Agreement shall remain unchanged, (ii) the originating Lender shall remain solely responsible for the performance of such obligations, (iii) the Company, the Agent, the Swing Line Lender and the Accepting Lender shall continue to deal solely and directly with the originating Lender in connection with the originating Lender's rights and obligations under this Agreement and the other Loan Documents, and (iv) no Lender shall 81 transfer or grant any participating interest under which the Participant has rights to approve any amendment to, or any consent or waiver with respect to, this Agreement or any other Loan Document, except to the extent such amendment, consent or waiver would require unanimous consent of the Lenders as described in the first proviso to Section 10.1. In the case of any such participation, the Participant shall be entitled to the benefit of Sections 3.1, 3.3 and 10.5 as though it were also a Lender hereunder, and if amounts outstanding under this Agreement are due and unpaid, or shall have been declared or shall have become due and payable upon the occurrence of an Event of Default, each Participant shall be deemed to have the right of set-off in respect of its participating interest in amounts owing under this Agreement to the same extent as if the amount of its participating interest were owing directly to it as a Lender under this Agreement. 1. Notwithstanding any other provision in this Agreement, any Lender may at any time create a security interest in, or pledge, all or any portion of its rights under and interest in this Agreement and any Note held by it in favor of any Federal Reserve Bank in accordance with Regulation A of the FRB or U.S. Treasury Regulation 31 CFR Section 203.14, and such Federal Reserve Bank may enforce such pledge or security interest in any manner permitted under applicable law. A. Confidentiality. Each Lender agrees to take and to cause its Affiliates to take normal and reasonable precautions and exercise due care to maintain the confidentiality of all information provided to it by the Company or any Subsidiary, or by the Agent on the Company's or such Subsidiary's behalf, under this Agreement or any other Loan Document, and neither such Lender nor any of its Affiliates shall use any such information other than in connection with or in enforcement of this Agreement and the other Loan Documents or in connection with other business now or hereafter existing or contemplated with the Company or any Subsidiary; except to the extent such information (i) was or becomes generally available to the public other than as a result of disclosure by such Lender, or (ii) was or becomes available on a non-confidential basis from a source other than the Company, provided that such source is not bound by a confidentiality agreement with the Company or any Subsidiary known to such Lender; provided, however, that any Lender may disclose such information (A) at the request or pursuant to any requirement of any Governmental Authority to which such Lender is subject or in connection with an examination of such Lender by any such authority; (B) pursuant to subpoena or other court process; (C) when required to do so in accordance with the provisions of any applicable Requirement of Law; (D) to the extent reasonably required in connection with any litigation or proceeding to which the Agent or any Lender or any of their respective Affiliates may be party; (E) to the extent reasonably required in connection with the exercise of any remedy hereunder or under any other Loan Document; (F) to such Lender's independent auditors and other professional advisors; (G) to any Participant or Assignee, actual or potential, provided that such Person agrees in writing to keep such information confidential to the same extent required of the Lenders hereunder; (H) as to any Lender or its Affiliate, as expressly permitted under the terms of any other document or agreement regarding confidentiality to which the Company or any 82 Subsidiary is party or is deemed party with such Lender or such Affiliate; and (I) to its Affiliates. A. Set-off. In addition to any rights and remedies of the Lenders provided by law, if an Event of Default exists, or the Obligations have been accelerated, each Lender is authorized at any time and from time to time, without prior notice to the Company, any such notice being waived by the Company to the fullest extent permitted by law, to set off and apply any and all deposits (general or special, time or demand, provisional or final) at any time held by, and other indebtedness at any time owing by, such Lender to or for the credit or the account of the Company against any and all Obligations owing to such Lender, now or hereafter existing, irrespective of whether or not the Agent or such Lender shall have made demand under this Agreement or any other Loan Document and although such Obligations may be contingent or unmatured. Each Lender agrees promptly to notify the Company and the Agent after any such set-off and application made by such Lender; provided that the failure to give such notice shall not affect the validity of such set-off and application. A. Automatic Debits of Fees. With respect to any non-use fee, arrangement fee or other fee, or any other cost or expense (including Attorney Costs) due and payable to the Agent, the Swing Line Lender, the Accepting Lender or BofA under the Loan Documents, the Company hereby irrevocably authorizes BofA to debit any deposit account of the Company with BofA in an amount such that the aggregate amount debited from all such deposit accounts does not exceed such fee or other cost or expense. If there are insufficient funds in such deposit accounts to cover the amount of the fee or other cost or expense then due, such debits will be reversed (in whole or in part, in BofA's sole discretion) and such amount not debited shall be deemed to be unpaid. No such debit under this Section shall be deemed a set-off. A. Notification of Addresses, Lending Offices, Etc. Each Lender shall notify the Agent in writing of any change in the address to which notices to such Lender should be directed, of addresses of any Lending Office, of payment instructions in respect of all payments to be made to it hereunder and of such other administrative information as the Agent shall reasonably request. A. Counterparts. This Agreement may be executed in any number of separate counterparts, each of which, when so executed, shall be deemed an original, and all of which taken together shall be deemed to constitute but one and the same instrument. A. Severability. The illegality or unenforceability of any provision of this Agreement or any instrument or agreement required hereunder shall not in any way affect or impair the legality or enforceability of the remaining provisions of this Agreement or such instrument or agreement. 83 A. No Third Parties Benefited. This Agreement is made and entered into for the sole protection and legal benefit of the Company, the Lenders, the Agent, the Agent-Related Persons and the Indemnified Persons, and their respective permitted successors and assigns, and no other Person shall be a direct or indirect legal beneficiary of, or have any direct or indirect cause of action or claim in connection with, this Agreement or any other Loan Document. 1. Governing Law and Jurisdiction. THIS AGREEMENT AND ANY NOTES SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAW OF THE STATE OF ILLINOIS; PROVIDED THAT THE COMPANY, THE AGENT AND THE LENDERS SHALL RETAIN ALL RIGHTS ARISING UNDER FEDERAL LAW. 1. ANY LEGAL ACTION OR PROCEEDING WITH RESPECT TO THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT MAY BE BROUGHT IN THE COURTS OF THE STATE OF ILLINOIS OR OF THE UNITED STATES FOR THE NORTHERN DISTRICT OF ILLINOIS, AND BY EXECUTION AND DELIVERY OF THIS AGREEMENT, EACH OF THE COMPANY, THE AGENT AND THE LENDERS CONSENTS, FOR ITSELF AND IN RESPECT OF ITS PROPERTY, TO THE NON-EXCLUSIVE JURISDICTION OF SUCH COURTS. EACH OF THE COMPANY, THE AGENT AND THE LENDERS IRREVOCABLY WAIVES ANY OBJECTION, INCLUDING ANY OBJECTION TO THE LAYING OF VENUE OR BASED ON THE GROUNDS OF FORUM NON CONVENIENS, WHICH IT MAY NOW OR HEREAFTER HAVE TO THE BRINGING OF ANY ACTION OR PROCEEDING IN SUCH JURISDICTION IN RESPECT OF THIS AGREEMENT OR ANY DOCUMENT RELATED HERETO. THE COMPANY, THE AGENT AND THE LENDERS EACH WAIVE PERSONAL SERVICE OF ANY SUMMONS, COMPLAINT OR OTHER PROCESS, WHICH MAY BE MADE BY ANY OTHER MEANS PERMITTED BY ILLINOIS LAW. A. Waiver of Jury Trial. THE COMPANY, THE LENDERS AND THE AGENT EACH WAIVE THEIR RESPECTIVE RIGHTS TO A TRIAL BY JURY OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF OR RELATED TO THIS AGREEMENT, THE OTHER LOAN DOCUMENTS, OR THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY, IN ANY ACTION, PROCEEDING OR OTHER LITIGATION OF ANY TYPE BROUGHT BY ANY OF THE PARTIES AGAINST ANY OTHER PARTY OR ANY AGENT-RELATED PERSON OR INDEMNIFIED PERSON, PARTICIPANT OR ASSIGNEE, WHETHER WITH RESPECT TO CONTRACT CLAIMS, TORT CLAIMS, OR OTHERWISE. THE COMPANY, THE LENDERS AND THE AGENT EACH AGREE THAT ANY SUCH CLAIM OR CAUSE OF ACTION SHALL BE TRIED BY A COURT TRIAL WITHOUT A JURY. WITHOUT LIMITING THE FOREGOING, THE PARTIES FURTHER AGREE THAT THEIR RESPECTIVE RIGHT TO A TRIAL BY JURY IS WAIVED BY OPERATION OF THIS SECTION AS TO ANY ACTION, COUNTERCLAIM OR OTHER PROCEEDING WHICH SEEKS, IN WHOLE OR IN 84 PART, TO CHALLENGE THE VALIDITY OR ENFORCEABILITY OF THIS AGREEMENT OR THE OTHER LOAN DOCUMENTS OR ANY PROVISION HEREOF OR THEREOF. THIS WAIVER SHALL APPLY TO ANY SUBSEQUENT AMENDMENT, RENEWAL, SUPPLEMENT OR MODIFICATION TO THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS. A. Judgment. If, for the purposes of obtaining judgment in any court, it is necessary to convert a sum due hereunder or any other Loan Document in one currency into another currency, the rate of exchange used shall be that at which in accordance with normal banking procedures the Agent could purchase the first currency with such other currency on the Business Day preceding that on which final judgment is given. The obligation of the Company in respect of any such sum due from it to the Agent hereunder or under any other Loan Document shall, notwithstanding any judgment in a currency (the "Judgment Currency") other than that in which such sum is denominated in accordance with the applicable provisions of this Agreement (the "Agreement Currency"), be discharged only to the extent that on the Business Day following receipt by the Agent of any sum adjudged to be so due in the Judgment Currency, the Agent may in accordance with normal banking procedures purchase the Agreement Currency with the Judgment Currency. If the amount of the Agreement Currency so purchased is less than the sum originally due to the Agent in the Agreement Currency, the Company agrees, as a separate obligation and notwithstanding any such judgment, to indemnify the Agent or the Person to whom such obligation was owing against such loss. If the amount of the Agreement Currency so purchased is greater than the sum originally due to the Agent in such currency, the Agent agrees to return the amount of any excess to the Company (or to any other Person who may be entitled thereto under applicable law). A. Entire Agreement. This Agreement, together with the other Loan Documents, embodies the entire agreement and understanding among the Company, the Lenders and the Agent, and supersedes all prior or contemporaneous agreements and understandings of such Persons, verbal or written, relating to the subject matter hereof and thereof. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and delivered by their proper and duly authorized officers as of the day and year first above written. 85 TRUSERV CORPORATION - --------------------------------------------------- 86 By: Title: BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION, as Agent By: Title: BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION, as a Lender By: Title: BANK OF MONTREAL, as Co-Agent and as a Lender By: Title: THE FIRST NATIONAL BANK OF CHICAGO, as Co-Agent and as a Lender By: Title: PNC BANK, NATIONAL ASSOCIATION, as Co-Agent and as a Lender By: Title: WACHOVIA BANK OF GEORGIA, N.A., as Co-Agent and as a Lender EX-4.(K) 3 AMENDED AND RESTATED PRIVATE SHELF AGRMT. 1 Exhibit 4.K TRUSERV CORPORATION 8600 West Bryn Mawr Avenue Chicago, Illinois 60631 As of November 13, 1997 The Prudential Insurance Company of America ("PRUDENTIAL") Each Prudential Affiliate (as hereinafter defined) which becomes bound by certain provisions of this Agreement as hereinafter provided (together with Prudential the "PURCHASERS") c/o Prudential Capital Group Two Prudential Plaza Suite 5600 Chicago, Illinois 60601 Ladies and Gentlemen: The undersigned, TRUSERV CORPORATION, a Delaware corporation formerly known as Cotter & Company (herein called the "COMPANY"), hereby agrees with you as set forth below. Reference is made to paragraph 10 hereof for definitions of capitalized terms used herein and not otherwise defined herein. 1. AMENDMENT AND RESTATEMENT; AUTHORIZATION. 1A. AMENDMENT AND RESTATEMENT. Effective as of the date hereof, the parties hereto agree that this Agreement amends and restates in its entirety that certain Private Shelf Agreement dated as of December 29, 1995 (as amended prior to the date hereof, the "EXISTING 1995 AGREEMENT") between the Company and Prudential. Among other things, this amendment and restatement is intended to increase the maximum amount that may be outstanding under the Existing 1995 Agreement (inclusive of the Series A Notes previously issued, and the Initial Shelf Notes being issued on the date hereof and any other Shelf Notes issued after the date hereof) from $50,000,000 to $150,000,000. After giving effect to the purchase and sale of the Series A Notes and the Initial Shelf Notes, the Available Facility Amount hereunder is $50,000,000 as described in greater detail in paragraph 2B(1) below. From and after the effectiveness of this Agreement, the Existing 1995 Agreement shall be of no force or effect whatsoever except to evidence the terms pursuant to which the Series A Notes were originally issued. 1B. AUTHORIZATION OF ISSUE OF SHELF NOTES. The Company will authorize the issue of its senior promissory notes (the "SHELF NOTES") in the aggregate principal amount of $150,000,000, to be dated the date 2 of issue thereof, to mature, in the case of each Shelf Note so issued, no more than 15 years after the date of original issuance thereof, to have an average life, in the case of each Shelf Note so issued, of no more than 15 years after the date of original issuance thereof, to bear interest on the unpaid balance thereof from the date thereof at the rate per annum, and to have such other particular terms, as shall be set forth, in the case of each Shelf Note so issued, in the Confirmation of Acceptance with respect to such Shelf Note delivered pursuant to paragraph 2B(5), and to be substantially in the form of Exhibit A attached hereto. The terms "NOTE", "NOTES", "INITIAL SHELF NOTE", "INITIAL SHELF NOTES", "SHELF NOTE" and "SHELF NOTES" as used herein shall include each Shelf Note delivered pursuant to any provision of this Agreement and each Shelf Note delivered in substitution or exchange for any such Shelf Note pursuant to any such provision. Notes which have (i) the same final maturity, (ii) the same principal prepayment dates, (iii) the same principal prepayment amounts (as a percentage of the original principal amount of each Note), (iv) the same interest rate, (v) the same interest payment periods and (vi) the same date of issuance (which, in the case of a Note issued in exchange for another Note, shall be deemed for these purposes the date on which such Note's ultimate predecessor Note was issued), are herein called a "SERIES" of Notes. 2. PURCHASE AND SALE OF NOTES. 2A. [INTENTIONALLY LEFT BLANK]. 2B. PURCHASE AND SALE OF SHELF NOTES. 2B(1). FACILITY. Prudential is willing to consider, in its sole discretion and within limits which may be authorized for purchase by Prudential and Prudential Affiliates from time to time, the purchase of Shelf Notes pursuant to this Agreement. The willingness of Prudential to consider such purchase of Shelf Notes is herein called the "FACILITY". At any time, the aggregate principal amount of Shelf Notes stated in paragraph 1B, minus the aggregate principal amount of Shelf Notes purchased and sold pursuant to this Agreement prior to such time, minus the aggregate principal amount of Accepted Notes (as hereinafter defined) which have not yet been purchased and sold hereunder prior to such time, is herein called the "AVAILABLE FACILITY AMOUNT" at such time. NOTWITHSTANDING THE WILLINGNESS OF PRUDENTIAL TO CONSIDER PURCHASES OF SHELF NOTES, THIS AGREEMENT IS ENTERED INTO ON THE EXPRESS UNDERSTANDING THAT NEITHER PRUDENTIAL NOR ANY PRUDENTIAL AFFILIATE SHALL BE OBLIGATED TO MAKE OR ACCEPT OFFERS TO PURCHASE SHELF NOTES, OR TO QUOTE RATES, SPREADS OR OTHER TERMS WITH RESPECT TO SPECIFIC PURCHASES OF SHELF NOTES, AND THE FACILITY SHALL IN NO WAY BE CONSTRUED AS A COMMITMENT BY PRUDENTIAL OR ANY PRUDENTIAL AFFILIATE. The parties hereto agree that after giving effect to the purchase and sale of the Series A Notes and the Initial Shelf Notes, the Available Facility Amount as of the date hereof is $50,000,000. 2B(2). ISSUANCE PERIOD. Shelf Notes may be issued and sold pursuant to this Agreement until the earlier of (i) the third anniversary of the date of this Agreement (or if such anniversary date is not a Business Day, the Business Day next preceding such anniversary) and (ii) the thirtieth day after Prudential shall have given to the Company, or the Company shall have given to Prudential, a written notice stating that it elects to terminate the issuance and sale of Shelf Notes pursuant to this Agreement (or if such thirtieth day is not a Business Day, the Business Day next preceding such thirtieth day). The period during which Shelf Notes may be issued and sold pursuant to this Agreement is herein called the "ISSUANCE PERIOD". 3 2B(3). REQUEST FOR PURCHASE. The Company may from time to time during the Issuance Period make requests for purchases of Shelf Notes (each such request being herein called a "REQUEST FOR PURCHASE"). Exhibit B attached hereto. Each request for Purchase shall be in writing and shall be deemed made when received by Prudential. 2B(4). RATE QUOTES. Not later than five Business Days after the Company shall have given Prudential a Request for Purchase pursuant to paragraph 2B(3), Prudential may, but shall be under no obligation to, provide to the Company by telephone or telecopier, in each case between 9:30 A.M. and 1:30 P.M. New York City local time (or such later time as Prudential may elect) interest rate quotes for the several principal amounts, maturities and principal prepayment schedules of Shelf Notes specified in such Request for Purchase. Each quote shall represent the interest rate per annum payable on the outstanding principal balance of such Shelf Notes at which Prudential or a Prudential Affiliate would be willing to purchase such Shelf Notes at 100% of the principal amount thereof. 2B(5). ACCEPTANCE. Within the ACCEPTANCE WINDOW, the Company may, subject to paragraph 2B(6), elect to accept such interest rate quotes as to not less than $5,000,000 aggregate principal amount of the Shelf Notes specified in the related Request for Purchase. Such election shall be made by an Authorized Officer of the Company notifying Prudential by telephone or telecopier within the Acceptance Window that the Company elects to accept such interest rate quotes, specifying the Shelf Notes (each such Shelf Note being herein called an "ACCEPTED NOTE") as to which such acceptance (herein called an "ACCEPTANCE") relates. The day the Company notifies an Acceptance with respect to any Accepted Notes is herein called the "ACCEPTANCE DAY" for such Accepted Notes. Any interest rate quotes as to which Prudential does not receive an Acceptance within the Acceptance Window shall expire, and no purchase or sale of Shelf Notes hereunder shall be made based on such expired interest rate quotes. Subject to paragraph 2B(6) and the other terms and conditions hereof, the Company agrees to sell to Prudential or a Prudential Affiliate, and Prudential agrees to purchase, or to cause the purchase by a Prudential Affiliate of, the Accepted Notes at 100% of the principal amount of such Notes. As soon as practicable following the Acceptance Day, the Company, Prudential and each Prudential Affiliate which is to purchase any such Accepted Notes will execute a confirmation of such Acceptance substantially in the form of Exhibit C attached hereto (herein called a "CONFIRMATION OF ACCEPTANCE"). If the Company should fail to execute and return to Prudential within three Business Days following receipt thereof a Confirmation of Acceptance with respect to any Accepted Notes, Prudential may at its election at any time prior to its receipt thereof cancel the closing with respect to such Accepted Notes by so notifying the Company in writing. 2B(6). MARKET DISRUPTION. Notwithstanding the provisions of paragraph 2B(5), if Prudential shall have provided interest rate quotes pursuant to paragraph 2B(4) and thereafter prior to the time an Acceptance with respect to such quotes shall have been notified to Prudential in accordance with paragraph 2B(5) the domestic market for U.S. Treasury securities or derivatives shall have closed or there shall have occurred a general suspension, material limitation, or significant disruption of trading in securities generally on the New York Stock Exchange or in the domestic market for U.S. Treasury securities or derivatives, then such interest rate quotes shall expire, and no purchase or sale of Shelf Notes hereunder shall be made based on such expired interest rate quotes. If the Company thereafter notifies Prudential of the Acceptance of any such interest rate quotes, such Acceptance shall be ineffective for all purposes of this Agreement, and Prudential shall promptly notify the Company that the provisions of this paragraph 2B(6) are applicable with respect to such Acceptance. 4 2B(7). FACILITY CLOSINGS. Not later than 11:30 A.M. (New York City local time) on the Closing Day for any Accepted Notes, the Company will deliver to each Purchaser listed in the Confirmation of Acceptance relating thereto at the offices of the Prudential Capital Group, Two Prudential Plaza, Suite 5600, Chicago, Illinois 60601, Attention: Law Department, the Accepted Notes to be purchased by such Purchaser in the form of one or more Notes in authorized denominations as such Purchaser may request for each Series of Accepted Notes to be purchased on the Closing Day, dated the Closing Day and registered in such Purchaser's name (or in the name of its nominee), against payment of the purchase price thereof by transfer of immediately available funds for credit to the Company's account specified in the Request for Purchase of such Notes. If the Company fails to tender to any Purchaser the Accepted Notes to be purchased by such Purchaser on the scheduled Closing Day for such Accepted Notes as provided above in this paragraph 2B(7), or any of the conditions specified in paragraph 3 shall not have been fulfilled by the time required on such scheduled Closing Day, the Company shall, prior to 1:00 P.M., New York City local time, on such scheduled Closing Day notify Prudential (which notification shall be deemed received by each Purchaser) in writing whether (i) such closing is to be rescheduled (such rescheduled date to be a Business Day during the Issuance Period not less than one Business Day and not more than 10 Business Days after such scheduled Closing Day (the "RESCHEDULED CLOSING DAY")) and certify to Prudential (which certification shall be for the benefit of each Purchaser) that the Company reasonably believes that it will be able to comply with the conditions set forth in paragraph 3 on such Rescheduled Closing Day and that the Company will pay the Delayed Delivery Fee in accordance with paragraph 2B(8)(iii) or (ii) such closing is to be canceled. In the event that the Company shall fail to give such notice referred to in the preceding sentence, Prudential (on behalf of each Purchaser) may at its election, at any time after 1:00 P.M., New York City local time, on such scheduled Closing Day, notify the Company in writing that such closing is to be canceled. Notwithstanding anything to the contrary appearing in this Agreement, the Company may not elect to reschedule a closing with respect to any given Accepted Notes on more than one occasion, unless Prudential shall have otherwise consented in writing. 2B(8). FEES. 2B(8)(i). STRUCTURING FEE. In consideration for the time, effort and expense involved in the preparation, negotiation and execution of this Agreement, the Company agrees to pay to Prudential on the date of the execution of this Agreement in immediately available funds a fee (herein called the "STRUCTURING FEE") in the amount of $50,000. 2B(8)(ii). ISSUANCE FEE. The Company will pay to Prudential in immediately available funds a fee (herein called the "ISSUANCE FEE") on each Closing Day in an amount equal to 0.10% of the aggregate principal amount of Notes sold on such Closing Day; provided, however, that no Issuance Fee shall be payable with respect to the Initial Shelf Notes or with respect to the next $25,000,000 drawn under the Facility if such draw is consummated on or before December 31, 1997. 2B(8)(iii).DELAYED DELIVERY FEE. If the closing of the purchase and sale of any Accepted Note is delayed for any reason beyond the original Closing Day for such Accepted Note, the Company will pay to Prudential (a) on the Cancellation Date or actual closing date of such purchase and sale and (b) if earlier, the next Business Day following 90 days after the Acceptance Day for such Accepted Note and on each Business Day following 90 days after the prior payment hereunder, a fee (herein called the "DELAYED DELIVERY FEE") calculated as follows: (BEY - MMY) X DTS/360 X PA 5 where "BEY" means Bond Equivalent Yield, i.e., the bond equivalent yield per annum of such Accepted Note; "MMY" means Money Market Yield, i.e., the yield per annum on a commercial paper investment of the highest quality selected by Prudential on the date Prudential receives notice of the delay in the closing for such Accepted Note having a maturity date or dates the same as, or closest to, the Rescheduled Closing Day or Rescheduled Closing Days (a new alternative investment being selected by Prudential each time such closing is delayed); "DTS" means Days to Settlement, i.e., the number of actual days elapsed from and including the original Closing Day with respect to such Accepted Note (in the case of the first such payment with respect to such Accepted Note) or from and including the date of the next preceding payment (in the case of any subsequent delayed delivery fee payment with respect to such Accepted Note) to but excluding the date of such payment; and "PA" means Principal Amount, i.e., the principal amount of the Accepted Note for which such calculation is being made. In no case shall the Delayed Delivery Fee be less than zero. Nothing contained herein shall obligate any Purchaser to purchase any Accepted Note on any day other than the Closing Day for such Accepted Note, as the same may be rescheduled from time to time in compliance with paragraph 2B(7). 2B(8)(iv). CANCELLATION FEE. If the Company at any time notifies Prudential in writing that the Company is canceling the closing of the purchase and sale of any Accepted Note, or if Prudential notifies the Company in writing under the circumstances set forth in the last sentence of paragraph 2B(5) or the penultimate sentence of paragraph 2B(7) that the closing of the purchase and sale of such Accepted Note is to be canceled, or if the closing of the purchase and sale of such Accepted Note is not consummated on or prior to the last day of the Issuance Period (the date of any such notification, or the last day of the Issuance Period, as the case may be, being herein called the "CANCELLATION DATE"), the Company will pay to Prudential in immediately available funds an amount (the "CANCELLATION FEE") calculated as follows: PI X PA where "PI" means Price Increase, i.e., the quotient (expressed in decimals) obtained by dividing (a) the excess of the ask price (as reasonably determined by Prudential) of the Hedge Treasury Note(s) on the Cancellation Date over the bid price (as reasonably determined by Prudential) of the Hedge Treasury Notes(s) on the Acceptance Day for such Accepted Note by (b) such bid price; and "PA" has the meaning ascribed to it in paragraph 2B(8)(iii). The foregoing bid and ask prices shall be as reported by Telerate Systems, Inc. (or, if such data for any reason ceases to be available through Telerate Systems, Inc., any publicly available source of similar market data). Each price shall be based on a U.S. Treasury security having a par value of $100.00 and shall be rounded to the second decimal place. In no case shall the Cancellation Fee be less than zero. 3. CONDITIONS OF CLOSING. The obligation of any Purchaser to purchase and pay for any Notes is subject to the satisfaction, on or before the Closing Day for such Notes, of the following conditions: 3A. CERTAIN DOCUMENTS. Such Purchaser shall have received the following, each dated the date of the applicable Closing Day: (i) The Note(s) to be purchased by such Purchaser. (ii) Certified copies of the resolutions of the Board of Directors of the Company authorizing the execution and delivery of this Agreement and the issuance of the Notes, and of all documents evidencing other 6 necessary corporate action and governmental approvals, if any, with respect to this Agreement and the Notes. (iii) A certificate of the Secretary or an Assistant Secretary certifying the names and true signatures of the officers of the Company authorized to sign this Agreement and the Notes and the other documents to be delivered hereunder. (iv) Certified copies of the Certificate of Incorporation and By-laws of the Company. (v) A favorable opinion of Daniel T. Burns, general counsel of the Company (or such other counsel designated by the Company and acceptable to the Purchaser(s)) satisfactory to such Purchaser and substantially in the form of Exhibit D-1 attached hereto, in the case of the Series B Notes, and Exhibit D-2 attached hereto, in the case of future Shelf Notes, and as to such other matters as such Purchaser may reasonably request. The Company hereby directs each such counsel to deliver such opinion, agrees that the issuance and sale of any Notes will constitute a reconfirmation of such direction, and understands and agrees that each Purchaser receiving such an opinion will and is hereby authorized to rely on such opinion. (vi) Good standing certificates for the Company from the Secretaries of State of Delaware and Illinois dated of a recent date and such other evidence of the status of the Company as such Purchaser may reasonably request. (vii) Additional documents or certificates with respect to legal matters or corporate or other proceedings related to the transactions contemplated hereby as may be reasonably requested by such Purchaser. 3B. OPINION OF PURCHASER'S SPECIAL COUNSEL. Such Purchaser shall have received from Wiley S. Adams, Assistant General Counsel of Prudential or such other counsel who is acting as special counsel for it in connection with this transaction, a favorable opinion satisfactory to such Purchaser as to such matters incident to the matters herein contemplated as it may reasonably request. 3C. REPRESENTATIONS AND WARRANTIES; NO DEFAULT. The representations and warranties contained in paragraph 8 shall be true on and as of such Closing Day, except to the extent of changes caused by the transactions herein contemplated; there shall exist on such Closing Day no Event of Default or Default; and the Company shall have delivered to such Purchaser an Officer's Certificate, dated such Closing Day, to both such effects. 3D. PURCHASE PERMITTED BY APPLICABLE LAWS. The purchase of and payment for the Notes to be purchased by such Purchaser on the terms and conditions herein provided (including the use of the proceeds of such Notes by the Company) shall not violate any applicable law or governmental regulation (including, without limitation, Section 5 of the Securities Act or Regulation G, T or X of the Board of Governors of the Federal Reserve System) and shall not subject such Purchaser to any tax, penalty, liability or other onerous condition under or pursuant to any applicable law or governmental regulation, and such Purchaser shall have received such certificates or other evidence as it may request to establish compliance with this condition. 7 3E. PAYMENT OF FEES. The Company shall have paid to Prudential any fees due it pursuant to or in connection with this Agreement, including any Structuring Fee due pursuant to paragraph 2B(8)(i), any Issuance Fee due pursuant to paragraph 2B(8)(ii) and any Delayed Delivery Fee due pursuant to paragraph 2B(8)(iii). 4. PREPAYMENTS. Each Shelf Note shall be subject to required prepayment as and to the extent provided in paragraph 4A. Each Shelf Note shall also be subject to prepayment under the circumstances set forth in paragraph 4B. Any prepayment made by the Company pursuant to any other provision of this paragraph 4 shall not reduce or otherwise affect its obligation to make any required prepayment as specified in paragraph 4A. 4A. REQUIRED PREPAYMENTS OF SHELF NOTES. Each Series of Shelf Notes (including, without limitation, the Series A Notes and the Initial Shelf Notes) shall be subject to required prepayments, if any, set forth in the Notes of such Series. 4B. OPTIONAL PREPAYMENT WITH YIELD-MAINTENANCE AMOUNT. The Notes of each Series shall be subject to prepayment, in whole at any time or from time to time in part (in integral multiples of $100,000 and in a minimum amount of $1,000,000), at the option of the Company, at 100% of the principal amount so prepaid plus interest thereon to the prepayment date and the Yield-Maintenance Amount, if any, with respect to each such Note. Any partial prepayment of a Series of the Notes pursuant to this paragraph 4B shall be applied in satisfaction of required payments of principal in inverse order of their scheduled due dates. 4C. NOTICE OF OPTIONAL PREPAYMENT. The Company shall give the holder of each Note of a Series to be prepaid pursuant to paragraph 4B irrevocable written notice of such prepayment not less than 10 Business Days prior to the prepayment date, specifying such prepayment date, the aggregate principal amount of the Notes of such Series to be prepaid on such date, the principal amount of the Notes of such Series held by such holder to be prepaid on that date and that such prepayment is to be made pursuant to paragraph 4B. Notice of prepayment having been given as aforesaid, the principal amount of the Notes specified in such notice, together with interest thereon to the prepayment date and together with the Yield-Maintenance Amount, if any, herein provided, shall become due and payable on such prepayment date. The Company shall, on or before the day on which it gives written notice of any prepayment pursuant to paragraph 4B, give telephonic notice of the principal amount of the Notes to be prepaid and the prepayment date to each Significant Holder which shall have designated a recipient for such notices in the Purchaser Schedule attached hereto or the applicable Confirmation of Acceptance or by notice in writing to the Company. 4D. APPLICATION OF PREPAYMENTS. In the case of each prepayment of less than the entire unpaid principal amount of all outstanding Notes of any Series pursuant to paragraphs 4A or 4B, the amount to be prepaid shall be applied pro rata to all outstanding Notes of such Series (including, for the purpose of this paragraph 4D only, all Notes prepaid or otherwise retired or purchased or otherwise acquired by the Company or any of its Subsidiaries or Affiliates other than by prepayment pursuant to paragraph 4A or 4B) according to the respective unpaid principal amounts thereof. 4E. NO ACQUISITION OF NOTES. The Company shall not, and shall not permit any of its Subsidiaries or Affiliates to, prepay or otherwise retire in whole or in part prior to their stated final maturity (other than by prepayment pursuant to paragraphs 4A or 4B or upon acceleration of such final maturity pursuant to paragraph 7A), or purchase or otherwise acquire, directly or indirectly, Notes held by any holder. Any notes so prepaid or otherwise retired or purchased or otherwise acquired by the Company or any of its Subsidiaries or Affiliates shall not 8 be deemed to be outstanding for any purpose under this Agreement, except as provided in paragraph 4D. 5. AFFIRMATIVE COVENANTS. During the Issuance Period and so long thereafter as any Note is outstanding and unpaid, the Company covenants as follows: 5A. FINANCIAL STATEMENTS. The Company covenants that it will deliver to each Significant Holder in duplicate: 500000000 (i) as soon as practicable and in any event within 60 days after the end of each quarterly period (other than the last quarterly period) in each fiscal year, consolidated statements of operations, capital stock and retained earnings and cash flows of the Company and its Subsidiaries for the period from the beginning of the current fiscal year to the end of such quarterly period, and a consolidated balance sheet of the Company and its Subsidiaries as at the end of such quarterly period, setting forth in each case in comparative form figures for the corresponding period in the preceding fiscal year, all in reasonable detail and satisfactory in form to the Required Holder(s) and certified by an authorized financial officer of the Company, subject to changes resulting from year-end adjustments; (ii) as soon as practicable and in any event within 120 days after the end of each fiscal year, consolidated statements of operations, capital stock and retained earnings and cash flows of the Company and its Subsidiaries for such year, and a consolidated balance sheet of the Company and its Subsidiaries as at the end of such year, setting forth in each case in comparative form corresponding consolidated figures from the preceding annual audit, all in reasonable detail and satisfactory in scope to the Required Holder(s) and, as to such consolidated statements, certified by independent public accountants of recognized national standing selected by the Company whose certificate shall be in scope and substance satisfactory to the Required Holder(s) and, as to such consolidated statements, certified by an authorized financial officer of the Company; (iii) promptly upon transmission thereof, copies of all such financial statements, proxy statements, notices and reports as it shall send to its stockholders and copies of all registration statements (without exhibits) and all reports which it files with the Securities and Exchange Commission (or any governmental body or agency succeeding to the functions of the Securities and Exchange Commission); and (iv) with reasonable promptness, such other financial data as such Significant Holder may reasonably request. Together with each delivery of financial statements required by clauses (i) and (ii) above, the Company will deliver to each Significant Holder an Officer's Certificate demonstrating (with computations in reasonable detail) compliance by the Company and its Subsidiaries with the provisions of paragraph 6 and stating that there exists no Event of Default or Default, or, if any Event of Default or Default exists, specifying the nature and period of existence thereof 9 and what action the Company proposes to take with respect thereto. The Company also covenants that immediately after any Responsible Officer obtains knowledge of an Event of Default or Default, it will deliver to each Significant Holder an Officer's Certificate specifying the nature and period of existence thereof and what action the Company proposes to take with respect thereto. For purposes of this paragraph, the Purchasers agree and acknowledge that the detail and form of the financial statements delivered to the Purchasers prior to the closing date are satisfactory to the Purchasers. So long as the Company continues its present format and level of specificity with respect to future financial statements, then such future financial statements shall be deemed to comply with the detail and form requirements of this paragraph 5A. 5B. INSPECTION OF PROPERTY. The Company covenants that it will permit any Person (other than an employee of a competitor of the Company or a former employee of the Company) designated by any Significant Holder in writing, at such Significant Holder's expense, to visit and inspect any of the properties of the Company and its Subsidiaries, to examine the corporate books and financial records of the Company and its Subsidiaries and make copies thereof or extracts therefrom and to discuss the affairs, finances and accounts of any of such corporations with the principal officers of the Company and its independent public accountants, all at such reasonable times and as often as such Significant Holder may reasonably request. 5C. COVENANT TO SECURE NOTE EQUALLY. The Company covenants that, if it or any Subsidiary shall create or assume any Lien upon any of its property or assets, whether now owned or hereafter acquired, other than Liens permitted by the provisions of paragraph 6B hereof (unless prior written consent to the creation or assumption thereof shall have been obtained pursuant to paragraph 11C), it will make or cause to be made effective provision whereby the Notes will be secured by such Lien equally and ratably with any and all other Debt thereby secured so long as any such other Debt shall be so secured. 5D. MAINTENANCE OF INSURANCE. The Company covenants that it and each Subsidiary will maintain, with financially sound and reputable insurers, insurance in such amounts and against such liabilities and hazards as customarily maintained by the Company in accordance with its practices, policies, and procedures prior to the closing date. Together with each delivery of financial statements under clause (ii) of paragraph 5A, the Company will, upon the request of any Significant Holder, deliver an Officer's Certificate specifying the details of such insurance in effect. 5E. COOPERATIVE STATUS. The Company covenants that it will at all times maintain its status as a cooperative for purposes of Subchapter T of the Code; provided, however, in the event that the Code or other applicable law is modified after the date hereof and as a result of such modification the Company is unable to satisfy its obligations under this paragraph, then the Required Holders and the Company shall agree, or in good faith negotiate to agree, to amend the covenants contained in this Agreement so that the application of such covenants (following such modification of the Code or other applicable law and the effect thereof on the Company) will be substantially the same as prior thereto. 5F. COMPLIANCE WITH LAWS. The Company covenants that it shall, and shall cause each Subsidiary to, comply with all applicable laws, rules, regulations, decrees and orders of all federal, state, local or foreign courts or governmental agencies, authorities, instrumentalities or regulatory bodies the noncompliance with which could be reasonably expected to result in a material adverse effect on the business, assets, operations or condition (financial or otherwise) of the Company and its Subsidiaries taken as a whole. 10 6. NEGATIVE COVENANTS. 6A. [INTENTIONALLY OMITTED.] 6B. LIEN, DEBT AND OTHER RESTRICTIONS. The Company covenants that it will not and will not permit any Subsidiary to: 6B(1). LIENS. Create, assume or suffer to exist any Lien upon any of its property or assets, whether now owned or hereafter acquired (whether or not provision is made for the equal and ratable securing of the Note in accordance with the provisions of paragraph 5C), except: (i) Liens for taxes, assessments, governmental charges or levies, statutory Liens of landlords and Liens of carriers, warehousemen, mechanics and materialmen incurred in the ordinary course of business for sums not yet due or which are being actively contested in good faith by appropriate proceedings; (ii) Liens arising out of judgments or awards against the Company or any Subsidiary which are being actively contested in good faith by appropriate proceedings; (iii) Liens incidental to the conduct of its business or the ownership of its properties and assets (including attorneys' Liens and Liens in connection with worker's compensation, unemployment insurance and other like laws, but excluding any Lien imposed by ERISA) and Liens to secure the performance of bids, tenders or trade contracts, or to secure statutory obligations, surety or appeal bonds or other Liens of like general nature, all of which were not incurred in connection with the borrowing of money or the obtaining of advances or credit; provided in each case, the obligation secured is not overdue, or, if overdue, is being actively contested in good faith by appropriate proceedings; (iv) minor survey exceptions or minor encumbrances, easements or reservations, or rights of others for rights-of-way, utilities and other similar purposes, or zoning or other restrictions as to the use of real property that are necessary for the conduct of the operations of the Company and its Subsidiaries or that customarily exist on properties of corporations engaged in similar businesses and are similarly situated and that do not in any event materially impair their use in the operations of the Company and its Subsidiaries; (v) Liens on property or assets of a Subsidiary to secure obligations of such Subsidiary to the Company or another Subsidiary; 11 (vi) Liens in existence on the date hereof described on Schedule 6B; (vii) after the date hereof, Liens (A) consisting of Capitalized Lease Obligations, or (B) existing prior to the time of acquisition upon any property acquired by the Company or any Subsidiary through purchase, merger or consolidation or otherwise, whether or not expressly assumed by the Company or such Subsidiary, or (C) placed on property at the time of acquisition by the Company or any Subsidiary to secure all or a portion of (or to secure Debt incurred to pay all or a portion of) the purchase price thereof, provided that (1) in the case of (B), any such Lien shall not have been created, incurred or assumed in contemplation of such purchase, merger, consolidation or other event in (B), (2) all of such property is not or shall not thereby become encumbered in any amount in excess of the lesser of 100% of the cost thereof or fair market value thereof (as determined in good faith by the board of directors of the Company), (3) in the case of (B) and (C), any such Lien shall be confined solely to the item(s) of property so acquired, (4) in the case of (C), any such Lien shall have been created or incurred concurrently with the acquisition of such property, and (5) such Lien is permitted by the provisions of paragraph 6B(2). Notwithstanding the terms of this clause (vii) of paragraph 6(B)(1), the Company or any Subsidiary may not dispose of assets to a third party and repurchase them with Debt secured in whole or in part by Liens placed on such assets; however, this subparagraph is not intended to limit the Company's ability to sell assets and lease such assets back under operating leases; (viii) Liens renewing or extending any Lien permitted by clauses (vi) and (vii) of this paragraph 6(B)(1), provided that (A) such Lien is not extended to other property of the Company or any Subsidiary, (B) the principal amount of Debt secured by such Lien does not exceed the principal amount outstanding at the time of such renewal or extension, and (C) no Default or Event of Default shall exist or result therefrom; (ix) Liens securing non-recourse Debt of Subsidiaries relating to accounts receivable securitization transactions, provided that the total amount of accounts receivable subject to accounts receivable securitization transactions does not exceed at any time more than fifteen percent (15%) of gross receivables of the Company and its Subsidiaries, and further provided that any such Debt shall have no claim against any other asset of the Company or its Subsidiaries; and (x) other Liens securing Funded Debt (other than Funded Debt that constitutes Subordinated Debt); provided, however, that (a) such Funded Debt is permitted 12 by the provisions of paragraph 6B(2) and (b) the aggregate amount of all Secured Funded Debt outstanding together with all Funded Debt of any Subsidiary (other than as permitted by clause (i) of paragraph 6B(2)) does not at any time exceed an amount equal to ten percent (10%) of consolidated total assets of the Company. 6B(2). DEBT. Create, incur, assume or suffer to exist any Debt, except: (i) Funded Debt of any Subsidiary to the Company or any other Subsidiary; (ii) Subordinated Debt; (iii) Senior Funded Debt of the Company and its Subsidiaries, so long as (a) the aggregate principal amount of consolidated Senior Funded Debt does not exceed at any time an amount equal to fifty percent (50%) of Consolidated Capitalization and (b) the aggregate amount of all Funded Debt of Subsidiaries (excluding that permitted by clause (i) of this paragraph 6B(2)), together with all Secured Funded Debt does not exceed 10% of consolidated total assets of the Company; (iv) non-recourse Debt of Subsidiaries relating to accounts receivable securitization transactions, provided that the total amount of accounts receivable subject to accounts receivable securitization transactions does not exceed at any time more than fifteen percent (15%) of gross receivables outstanding for the Company and its Subsidiaries and, further provided that any such Debt shall have no claim against any other asset of the Company or its Subsidiaries; and (v) Current Debt of the Company provided that commencing on May 31, 1997 and at all times thereafter there shall have been a period of at least thirty (30) consecutive days within the twelve month period immediately preceding the date of determination during which the aggregate principal amount of Current Debt of the Company outstanding as of the close of business on any day during such twelve month period did not exceed an amount equal to the amount of Funded Debt which would have been permitted as additional Funded Debt under clause (iii) of this paragraph 6B(2) as of the close of business on such day. 6B(3). [INTENTIONALLY OMITTED.] 6B(4)(i). SALE OF ASSETS. Sell, lease, transfer or otherwise dispose of any assets of the Company or any Subsidiary (such sale, lease, transfer or other disposition shall include (A) the sale and/or issuance of stock of any Subsidiary to Persons other than the Company or any wholly-owned Subsidiary and (B) any dilution of ownership arising from a merger or consolidation of 13 Subsidiaries as permitted by paragraph 6B(4)(ii)), other than in the ordinary course of business, unless all such assets sold, leased or otherwise disposed of outside of the ordinary course of business during the most recent 36-month rolling period when added together, without duplication, with any assets then proposed to be sold outside of the ordinary course of business, do not constitute more than 10% of the consolidated total assets of the Company. Excluded from the foregoing limitation are the disposition of assets (x) relating to accounts receivable securitization transactions, provided that the total amount of accounts receivable subject to accounts receivable securitization transactions does not exceed at any time more than fifteen percent (15%) of gross receivables of the Company and its Subsidiaries and, further provided that the transferee of such assets shall have no claim against any other asset of the Company or its Subsidiaries relating to such transfer, and finally provided that such assets have been transferred for fair market value, (y) the proceeds of which are, within 180 days of such disposition, either (i) reinvested in property or assets for use in the existing business of the Company and its Subsidiaries, or (ii) applied on a pro rata basis to prepay Senior Funded Debt, including, without limitation, the Notes pursuant to paragraph 4B hereof, including the Yield-Maintenance Amount provided for in said paragraph 4B and (z) consisting of Designated Permitted Asset Sales. 6B(4)(ii). MERGER. Merge or consolidate with any other Person, except that (a) Subsidiaries may be merged into the Company or any other Subsidiary, (b) the Company may merge with another Person, provided that the Company is the surviving corporation, and no Event of Default or Default shall exist either immediately before or after such merger and (c) any Subsidiary may merge with another Person (other than the Company unless permitted by clause (a) above) so long as no Event of Default or Default shall exist either immediately before or after such merger. 6B(5). RESTRICTIONS ON TRANSACTIONS WITH AFFILIATES AND STOCKHOLDERS. Directly or indirectly, purchase, acquire or lease any property from, or sell, transfer or lease any property (other than shares of stock of Company) to, or otherwise deal with (i) any Affiliate or Substantial Stockholder, or (ii) any corporation in which an Affiliate, Substantial Stockholder or the Company (either directly or through Subsidiaries) owns 5% or more of the outstanding voting stock, except that (a) any such Affiliate or Substantial Stockholder may be a director, officer or employee of the Company or any Subsidiary and may be paid reasonable compensation in connection therewith (b) the Company and its Subsidiaries may perform or engage in any of the foregoing in the ordinary course of business upon terms no less favorable to the Company or such Subsidiary (as the case may be) than if no such relationship described in clauses (i) and (ii) above existed and (c) the Company may sell to or purchase from any such Person shares of the Company's stock subject to the provisions of paragraph 6G. 6C. [INTENTIONALLY OMITTED.] 6D. COMPLIANCE WITH ERISA. Engage in any transaction in connection with which the Company or any Subsidiary could be subject to either a civil penalty assessed pursuant to section 502(i) of ERISA or a tax imposed by section 4975 of the Code, terminate or withdraw from any Plan (other than a Multiemployer Plan) in a manner, or take any other action with respect to any such Plan (including, without limitation, a substantial cessation of operations within the meaning of section 4062(f) of ERISA), which could result in any liability of the Company or any Subsidiary to the PBGC, to a trust established pursuant to section 4041(c)(3)(B)(ii) or (iii) or 4042(i) of ERISA, or to a trustee appointed under section 4042(b) or (c) of ERISA, incur any liability to the PBGC on account of a termination of a Plan under section 14 4064 of ERISA, fail to make full payment when due of all amounts which, under the provisions of any Plan, the Company or any Subsidiary is required to pay as contributions thereto, or permit to exist any accumulated funding deficiency, whether or not waived, with respect to any Plan (other than a Multiemployer Plan), if, in any such case, such penalty or tax or such liability, or the failure to make such payment, or the existence of such deficiency, as the case may be, could be reasonably expected to have a material adverse effect on the Company and its Subsidiaries taken as a whole. 6E. NO CHANGE IN SUBORDINATION TERMS, ETC. Amend, alter or otherwise change any provision of any of the subordinated promissory notes now or hereafter issued by the Company or take any other action (or refrain from taking an action) which would have the effect of eliminating or altering in any way the effect of the subordination language appearing in such subordinated promissory notes or the rights of the holders of the Notes arising as a result thereof. 6F. NATURE OF BUSINESS. Engage in the business of underwriting risks for insurance purposes, or in any other aspect of insurance related business other than in the ordinary course of business in accordance with its practices as of the closing date; or purchase and sell real estate (other than on an agency basis) for purposes other than those relating directly to its principal business except for purchases and sales of store locations in the ordinary course of business. 6G. [INTENTIONALLY OMITTED.] 6H. [INTENTIONALLY OMITTED.] 7. EVENTS OF DEFAULT. 7A. ACCELERATION. If any of the following events shall occur and be continuing for any reason whatsoever (and whether such occurrence shall be voluntary or involuntary or come about or be effected by operation of law or otherwise): (i) the Company defaults in the payment of any principal of or Yield-Maintenance Amount payable with respect to any Note when the same shall become due, either by the terms thereof or otherwise as herein provided; or (ii) the Company defaults in the payment of any interest on any Note for more than 10 days after the date due; or (iii) the Company or any Subsidiary defaults (whether as primary obligor or as guarantor or other surety) in any payment of principal of or interest on any other obligation for money borrowed (or any Capitalized Lease Obligation, any obligation under a conditional sale or other title retention agreement, any obligation issued or assumed as full or partial payment for property whether or not secured by a purchase money mortgage or any obligation under notes payable or drafts accepted representing extensions of credit) beyond any period of grace provided with respect thereto, or the Company or any Subsidiary fails to perform or observe any other agreement, term or condition contained in any agreement under which any such obligation is created (or if any other event thereunder or under any such agreement shall occur and be continuing) and the effect of such failure or other event is to cause such obligation to become due (or 15 to be repurchased by the Company or any Subsidiary) prior to any stated maturity, provided that the aggregate amount of all obligations as to which such a payment default shall occur and be continuing or such a failure or other event causing or permitting acceleration (or resale to the Company or any Subsidiary) shall occur and be continuing exceeds $7,000,000; or (iv) any representation or warranty made by the Company herein or by the Company or any of its officers in any writing furnished in connection with or pursuant to this Agreement shall be false in any material respect on the date as of which made; or (v) the Company fails to perform or observe any agreement contained in paragraph 6; or (vi) the Company fails to perform or observe any other agreement, term or condition contained herein and such failure shall not be remedied within 30 days after any Responsible Officer obtains actual knowledge thereof; or (vii) the Company or any Subsidiary makes an assignment for the benefit of creditors or is generally not paying its debts as such debts become due; or (viii) any decree or order for relief in respect of the Company or any Subsidiary is entered under any bankruptcy, reorganization, compromise, arrangement, insolvency, readjustment of debt, dissolution or liquidation or similar law, whether now or hereafter in effect (herein called the "BANKRUPTCY LAW"), of any jurisdiction; or (ix) the Company or any Subsidiary petitions or applies to any tribunal for, or consents to, the appointment of, or taking possession by, a trustee, receiver, custodian, liquidator or similar official of the Company or any Subsidiary, or of any substantial part of the assets of the Company or any Subsidiary, or commences a voluntary case under the Bankruptcy Law of the United States or any proceedings (other than proceedings for the voluntary liquidation and dissolution of a Subsidiary) relating to the Company or any Subsidiary under the Bankruptcy Law of any other jurisdiction; or (x) any such petition or application is filed, or any such proceedings are commenced, against the Company or any Subsidiary and the Company or such Subsidiary by any act indicates its approval thereof, consent thereto or acquiescence therein, or an order, judgment or decree is entered appointing any such trustee, receiver, custodian, liquidator or similar official, or approving the petition in any such proceedings, and such order, judgment or decree remains unstayed and in effect for more than 30 days; or (xi) any order, judgment or decree is entered in any proceedings against the Company decreeing the dissolution of the Company and such order, judgment or decree remains unstayed and in effect for more than 60 days; or (xii) any order, judgment or decree is entered in any proceedings against the Company or any Subsidiary decreeing a split-up of the 16 Company or such Subsidiary which requires the divestiture of assets representing a substantial part, or the divestiture of the stock of a Subsidiary whose assets represent a substantial part, of the consolidated assets of the Company and its Subsidiaries (determined in accordance with generally accepted accounting principles) or which requires the divestiture of assets, or stock of a Subsidiary, which shall have contributed a substantial part of the consolidated net income of the Company and its Subsidiaries (determined in accordance with generally accepted accounting principles) for any of the three fiscal years then most recently ended, and such order, judgment or decree remains unstayed and in effect for more than 60 days; or (xiii) a final judgment in an amount in excess of $7,000,000 is rendered against the Company or any Subsidiary and, within 60 days after entry thereof, such judgment is not discharged or execution thereof stayed pending appeal, or within 60 days after the expiration of any such stay, such judgment is not discharged; then (a) if such event is an Event of Default specified in clause (i) or (ii) of this paragraph 7A, any holder of any Note may at its option during the continuance of such Event of Default, by notice in writing to the Company, declare all of the Notes held by such holder to be, and all of the Notes held by such holder shall thereupon be and become, immediately due and payable at par together with interest accrued thereon, without presentment, demand, protest or notice of any kind, all of which are hereby waived by the Company, (b) if such event is an Event of Default specified in clause (viii), (ix) or (x) of this paragraph 7A with respect to the Company, all of the Notes at the time outstanding shall automatically become immediately due and payable together with interest accrued thereon and together with the Yield-Maintenance Amount, if any, with respect to each Note, without presentment, demand, protest or notice of any kind, all of which are hereby waived by the Company, and (c) with respect to any event constituting an Event of Default, the Required Holder(s) of the Notes of any Series may at its or their option during the continuance of such Event of Default, by notice in writing to the Company, declare all of the Notes of such Series to be, and all of the Notes of such Series shall thereupon be and become, immediately due and payable together with interest accrued thereon and together with the Yield-Maintenance Amount, if any, with respect to each Note of such Series, without presentment, demand, protest or notice of any kind, all of which are hereby waived by the Company. 7B. RESCISSION OF ACCELERATION. At any time after any or all of the Notes of any Series shall have been declared immediately due and payable pursuant to paragraph 7A, the Required Holder(s) of the Notes of such Series may, by notice in writing to the Company, rescind and annul such declaration and its consequences if (i) the Company shall have paid all overdue interest on the Notes of such Series, the principal of and Yield-Maintenance Amount, if any, payable with respect to any Notes of such Series which have become due otherwise than by reason of such declaration, and interest on such overdue interest and overdue principal and Yield-Maintenance Amount at the rate specified in the Notes of such Series, (ii) the Company shall not have paid any amounts which have become due solely by reason of such declaration, (iii) all Events of Default and Defaults, other than non-payment of amounts which have become due solely by reason of such declaration, shall have been cured or waived pursuant to paragraph 11C, and (iv) no judgment or decree shall have been entered for the payment of any amounts due pursuant to the Notes of such Series or this Agreement. No such rescission or annulment shall extend to or affect any subsequent Event of Default or Default or impair any right arising therefrom. 17 7C. NOTICE OF ACCELERATION OR RESCISSION. Whenever any Note shall be declared immediately due and payable pursuant to paragraph 7A or any such declaration shall be rescinded and annulled pursuant to paragraph 7B, the Company shall forthwith give written notice thereof to the holder of each Note of each Series at the time outstanding. 7D. OTHER REMEDIES. If any Event of Default or Default shall occur and be continuing, the holder of any Note may proceed to protect and enforce its rights under this Agreement and such Note by exercising such remedies as are available to such holder in respect thereof under applicable law, either by suit in equity or by action at law, or both, whether for specific performance of any covenant or other agreement contained in this Agreement or in aid of the exercise of any power granted in this Agreement. No remedy conferred in this Agreement upon the holder of any Note is intended to be exclusive of any other remedy, and each and every such remedy shall be cumulative and shall be in addition to every other remedy conferred herein or now or hereafter existing at law or in equity or by statute or otherwise. 8. REPRESENTATIONS, COVENANTS AND WARRANTIES. The Company represents, covenants and warrants as follows (all references to "Subsidiary" and "Subsidiaries" in this paragraph 8 shall be deemed omitted if the Company has no Subsidiaries at the time the representations herein are made or repeated): 8A. ORGANIZATION; SUBSIDIARY PREFERRED STOCK. The Company is a corporation duly organized and existing in good standing under the laws of the State of Delaware, each Subsidiary is duly organized and existing in good standing under the laws of the jurisdiction in which it is incorporated, and the Company has and each Subsidiary has the corporate power to own its respective property and to carry on its respective business as now being conducted. No subsidiary has outstanding any shares of stock of a class which has priority over any other class as to dividends or in liquidation. 8B. FINANCIAL STATEMENTS. The Company has furnished each Purchaser of any Note with the following financial statements, identified by a principal financial officer of the Company: (i) a consolidated balance sheet of the Company and its Subsidiaries as at fiscal year end in each of the three fiscal years of the Company most recently completed prior to the date as of which this representation is made or repeated to such Purchaser (other than fiscal years completed within 90 days prior to such date for which audited financial statements have not been released) and consolidated statements of operations and cash flows and a consolidated statement of capital stock and retained earnings of the Company and its Subsidiaries for each such year, all reported on by Ernst & Young (or any independent public accounting firm of recognized national standing) and (ii) a consolidated balance sheet of the Company and its Subsidiaries as at the end of the quarterly period (if any) most recently completed prior to such date and after the end of such fiscal year (other than quarterly periods completed within 60 days prior to such date for which financial statements have not been released) and the comparable quarterly period in the preceding fiscal year and consolidated statements of operations and cash flows and a consolidated statement of capital stock and retained earnings for the periods from the beginning of the fiscal years in which such quarterly periods are included to the end of such quarterly periods, prepared by the Company. Such financial statements (including any related schedules and/or notes) are true and correct in all material respects (subject, as to interim statements, to changes resulting from audits and year-end adjustments), have been prepared in accordance with generally accepted accounting principles consistently followed throughout the periods involved and show all liabilities, direct and contingent, of the Company and its Subsidiaries required to be shown in accordance with such principles. The balance sheets fairly present the condition of the Company and its Subsidiaries as at the dates thereof, and the statements of operations, capital stock and retained earnings and cash flows fairly present the results of the operations of the Company and its Subsidiaries and their cash flows for the periods indicated. There has been no material adverse change in the business, property or assets, 18 condition (financial or otherwise), operations or prospects of the Company and its Subsidiaries taken as a whole since the end of the most recent fiscal year for which such audited financial statements have been furnished. 8C. ACTIONS PENDING. There is no action, suit, investigation or proceeding pending or, to the knowledge of the Company, threatened against the Company or any of its Subsidiaries, or any properties or rights of the Company or any of its Subsidiaries, by or before any court, arbitrator or administrative or governmental body which could be reasonably expected to result in any material adverse change in the business, property or assets, condition (financial or otherwise) or operations of the Company and its Subsidiaries taken as a whole or the ability of the Company to perform its obligations under this Agreement. 8D. OUTSTANDING DEBT. Neither the Company nor any of its Subsidiaries has outstanding any Debt except as permitted by paragraph 6B(2). There exists no default under the provisions of any instrument evidencing Debt or the Company or any of its Subsidiaries in an amount greater than $250,000 or of any agreement relating thereto. 8E. TITLE TO PROPERTIES. The Company has and each of its Subsidiaries has good and indefeasible title to its respective real properties (other than properties which it leases) and good title to all of its other respective properties and assets, including the properties and assets reflected in the most recent audited balance sheet referred to in paragraph 8B (other than properties and assets disposed of in the ordinary course of business), subject to no Lien of any kind except Liens permitted by paragraph 6B(1). All leases necessary in any material respect for the conduct of the respective businesses of the Company and its Subsidiaries are valid and subsisting and are in full force and effect. 8F. TAXES. The Company has and each of its Subsidiaries has filed all federal, state and other income tax returns which, to the best knowledge of the officers of the Company and its Subsidiaries, are required to be filed, and each has paid all taxes as shown on such returns and on all assessments received by it to the extent that such taxes have become due, except such taxes (i) as are being contested in good faith by appropriate proceedings for which adequate reserves have been established in accordance with generally accepted accounting principles or (ii) the non-payment of which (a) could not be reasonably expected to have a material adverse effect on the business, condition (financial or otherwise) or operations of the Company and its Subsidiaries taken as a whole and (b) does not result in the creation of any Lien other than Liens permitted by paragraph 6B(i). 8G. CONFLICTING AGREEMENTS AND OTHER MATTERS. Neither the Company nor any of its Subsidiaries is a party to any contract or agreement or subject to any charter or other corporate restriction which materially and adversely affects its business, property or assets, condition (financial or otherwise) or operations. Neither the execution nor delivery of this Agreement or the Notes, nor the offering, issuance and sale of the Notes, nor fulfillment of nor compliance with the terms and provisions hereof and of the Notes will conflict with, or result in a breach of the terms, conditions or provisions of, or constitute a default under, or result in any violation of, or result in the creation of any Lien upon any of the properties or assets of the Company or any of its Subsidiaries pursuant to, the charter or by-laws of the Company or any of its Subsidiaries, any award of any arbitrator or any agreement (including any agreement with stockholders), instrument, order, judgment, decree, statute, law, rule or regulation to which the Company or any of its Subsidiaries is subject. Neither the Company nor any of its Subsidiaries is a party to, or otherwise subject to any provision contained in, any instrument evidencing Indebtedness of the Company or such Subsidiary, any agreement relating thereto or any other contract or agreement (including its charter) which limits the amount of, or otherwise imposes restrictions on the incurring of, Debt of the Company of the type to be evidenced by the Notes except as set forth in the agreements listed in Schedule 8G attached hereto (as such Schedule 8G 19 may have been modified from time to time by written supplements thereto delivered by the Company and accepted in writing by Prudential). 8H. OFFERING OF NOTES. Neither the Company nor any agent acting on its behalf has, directly or indirectly, offered the Notes or any similar security of the Company for sale to, or solicited any offers to buy the Notes or any similar security of the Company from, or otherwise approached or negotiated with respect thereto with, any Person other than institutional investors, and neither the Company nor any agent acting on its behalf has taken or will take any action which would subject the issuance or sale of the Notes to the provisions of Section 5 of the Securities Act or to the provisions of any securities or Blue Sky law of any applicable jurisdiction. 8I. USE OF PROCEEDS. None of the proceeds of the sale of any Notes will be used, directly or indirectly, for the purpose, whether immediate, incidental or ultimate, of purchasing or carrying any "margin stock" as defined in Regulation G (12 CFR Part 207) of the Board of Governors of the Federal Reserve System (herein called "MARGIN STOCK") or for the purpose of maintaining, reducing or retiring any Indebtedness which was originally incurred to purchase or carry any stock that is then currently a margin stock or for any other purpose which might constitute the purchase of such Notes a "purpose credit" within the meaning of such Regulation G, unless the Company shall have delivered to the Purchaser which is purchasing such Notes, on the Closing Day for such Notes, an opinion of counsel satisfactory to such Purchaser stating that the purchase of such Notes does not constitute a violation of such Regulation G. Neither the Company nor any agent acting on its behalf has taken or will take any action which might cause this Agreement or the Notes to violate Regulation G, Regulation T or any other regulation of the Board of Governors of the Federal Reserve System or to violate the Exchange Act, in each case as in effect now or as the same may hereafter be in effect. 8J. ERISA. No accumulated funding deficiency (as defined in section 302 of ERISA and section 412 of the Code), whether or not waived, exists with respect to any Plan (other than a Multiemployer Plan). No liability to the PBGC has been or is expected by the Company or any ERISA Affiliate to be incurred with respect to any Plan (other than a Multiemployer Plan) by the Company, any Subsidiary or any ERISA Affiliate which is or would be materially adverse to the business, property or assets, condition (financial or otherwise) or operations of the Company and its Subsidiaries taken as a whole. Neither the Company, any Subsidiary nor any ERISA Affiliate has incurred or presently expects to incur any withdrawal liability under Title IV of ERISA with respect to any Multiemployer Plan which is or would be materially adverse to the business, property or assets, condition (financial or otherwise) or operations of the Company and its Subsidiaries taken as a whole. The execution and delivery of this Agreement and the issuance and sale of the Notes will be exempt from or will not involve any transaction which is subject to the prohibitions of section 406 of ERISA and will not involve any transaction in connection with which a penalty could be imposed under section 502(i) of ERISA or a tax could be imposed pursuant to section 4975 of the Code. The representation by the Company in the next preceding sentence is made in reliance upon and subject to the accuracy of the representation of each Purchaser in paragraph 9B as to the source of funds to be used by it to purchase any Notes. 8K. GOVERNMENTAL CONSENT. Neither the nature of the Company or of any Subsidiary, nor any of their respective businesses or properties, nor any relationship between the Company or any Subsidiary and any other Person, nor any circumstance in connection with the offering, issuance, sale or delivery of the Notes is such as to require any authorization, consent, approval, exemption or any action by or notice to or filing with any court or administrative or governmental body (other than routine filings after the Closing Day for any Notes with the Securities and Exchange Commission and/or state Blue Sky authorities) in connection with the execution and delivery of this Agreement, the offering, issuance, sale or 20 delivery of the Notes or fulfillment of or compliance with the terms and provisions hereof or of the Notes. 8L. ENVIRONMENTAL COMPLIANCE. The Company and its Subsidiaries and all of their respective properties and facilities have complied at all times and in all respects with all applicable foreign, federal, state, local and regional statutes, laws, ordinances and judicial or administrative orders, judgments, rulings and regulations relating to protection of the environment except, in any such case, where failure to so comply could not reasonably be expected to result in a material adverse effect on the business, condition (financial or otherwise) or operations of the Company and its Subsidiaries taken as a whole or the ability of the Company to perform its obligations under this Agreement. 8M. SECTION 144A. The Notes are not of the same class as securities, if any, of the Company listed on a national securities exchange registered under Section 6 of the Exchange Act or quoted in a U.S. automated inter-dealer quotation system. 8N. DISCLOSURE. Neither this Agreement nor any other document, certificate or statement furnished to any Purchaser by or on behalf of the Company in connection herewith contains any untrue statement of a material fact or omits to state a material fact necessary in order to make the statements contained herein and therein not misleading. There is no fact peculiar to the Company or any of its Subsidiaries which materially adversely affects or in the future may (so far as the Company can now foresee) materially adversely affect the business, property or assets, condition (financial or otherwise) or operations of the Company or any of its Subsidiaries and which has not been set forth in this Agreement. 8O. HOSTILE TENDER OFFERS. None of the proceeds of the sale of any Notes will be used to finance a Hostile Tender Offer. 8P. PRIORITY OF NOTES. The Notes constitute "Superior Indebtedness" as such term is defined in the Company's Promissory (subordinated) Notes, the form of which is attached hereto as Exhibit E and the Subordinated Debt is subordinated to the Indebtedness owing from time to time by the Company to the holders of the Notes in connection with this Agreement and the Existing Agreement. 9. REPRESENTATIONS AND WARRANTIES OF THE PURCHASERS. Each Purchaser represents and warrants as follows: 9A. NATURE OF PURCHASE. Each Purchaser represents that it is purchasing the Note purchased by it for its own account or for one or more separate accounts maintained by it, in each case for investment and not with a view to the distribution thereof within the meaning of the Securities Act or with any present intention of distributing or selling any of the Notes, provided that the disposition of such Purchaser's property shall at all times be and remain within its control. 9B. SOURCE OF FUNDS. The source of the funds being used by such Purchaser to pay the purchase price of the Notes being purchased by such Purchaser hereunder constitutes assets allocated to: (i) the "insurance company general account" of such Purchaser (as such term is defined under Section V of the United States Department of Labor's Prohibited Transaction Class Exemption ("PTCE") 95-60), and as of the date of the purchase of the Notes such Purchaser satisfies all of the applicable requirements for relief under Sections I and IV of PTCE 95-60, (ii) a separate account maintained by such Purchaser in which no employee benefit 21 plan, other than employee benefit plans identified on a list which has been furnished by such Purchaser to the Company, participates to the extent of 10% or more, or (iii) an investment fund, the assets of which do not include any assets of any employee benefit plan. For the purpose of this paragraph 9B, the terms "SEPARATE ACCOUNT" and "EMPLOYEE BENEFIT PLAN" shall have the respective meanings specified in section 3 of ERISA. 9C. COMPANY REPRESENTATIONS. Each Purchaser acknowledges that it has not received any representation or warranty (written or oral) from or by the Company or any Subsidiary other than the representations and warranties contained in this Agreement and in any document or certificate required to be delivered pursuant to this Agreement, or from or by any Person purporting to act on behalf of the Company or any Subsidiary. Each Purchaser acknowledges and agrees that any representation or warranty not contained in this Agreement or in any certificate, notice or other document required to be delivered by the Company or any Subsidiary on or after the date of this Agreement and executed by an authorized officer thereof shall not be deemed made by or on behalf of the Company or any Subsidiary and shall not be relied on by such Purchaser, any Transferee or any Person to which a participation in any Note may be sold. In furtherance of, and not in limitation of, the foregoing, each Purchaser acknowledges and agrees that no oral representation or warranty from or by any director, officer or employee of the Company or any Subsidiary (other than the President, Chief Executive Officer, Executive Vice President, Senior Vice President, Vice President-Finance, Controller or Finance Manager of the Company), or from or by any other Person, shall be deemed made by or on behalf of the Company or any Subsidiary and that any such purported representations or warranties are not authorized by the Company or any Subsidiary. 9D. PURCHASER INSPECTION. All documents, records and books of the Company and each Subsidiary have been made available for inspection by each Purchaser, their attorneys, accountants, other advisers and agents and each such Purchaser and such other Persons have made such inspection thereof and of the Company's and its Subsidiaries' facilities as such Persons have deemed necessary or advisable in connection with the transactions to be effected by this Agreement. Each Purchaser, its attorneys, accountants, other advisers and agents have had the opportunity to confer with the directors, officers, employees and members of the Company and its Subsidiaries and to ask questions of, and receive answers from, such Persons concerning the affairs of the Company and its Subsidiaries and the terms of the transactions to be effected by this Agreement. All such questions asked have been answered to each Purchaser's satisfaction. All information requested was furnished to such Purchaser, its attorneys, accountants, other advisers and agents. At the Purchasers' request the Company has not prepared an offering memorandum, circular or similar offering document concerning the offer and the sale of the Notes. 9E. APPLICABLE STATE. All actions, communications, correspondence, negotiations, meetings and other transactions between the Company (or any Subsidiary) and the Purchasers, and any of the Company's or the Purchasers' respective advisers and agents, which have taken place on or before the date hereof with respect to the offer and sale of the Notes have taken place in the State of Illinois, and the Notes will be purchased, sold and delivered in said state. 9F. NO REGISTRATION. Each Purchaser understands that the Notes are not being registered under the Securities Act on the ground that the issuance thereof is exempt under Sections 4(2) and 4(6) thereof or Regulation D thereunder. Each Purchaser understands that the Company's reliance on such exemptions is predicated in part on the Purchasers' representations and warranties in this Agreement. Each Purchaser acknowledges that the Company has no obligation or present intention to register the resale of the Notes or to permit their sale or transfer other than in strict compliance with the Securities Act and the rules and 22 regulations promulgated thereunder and, further, that there is not now and may never be a public market for the Notes. 9G. TRANSFER RESTRICTIONS. No Purchaser shall sell or otherwise transfer the Notes, or grant any participations therein, unless they are registered under the Securities Act and applicable state securities laws or unless an exemption from such registration is available. Each Purchaser acknowledges and agrees that all Notes shall bear a legend referencing the foregoing transfer restriction. 9H. ACCREDITED STATUS. Each Purchaser is an "accredited investor" within the meaning of Rule 501(a) under the Securities Act. 9I. ORGANIZATION; ENFORCEABILITY. The Prudential Insurance Company of America is a corporation validly existing under the laws of the State of New Jersey. This Agreement and the purchase of the Notes by The Prudential Insurance Company of America have been duly authorized by all requisite corporate action. This Agreement is enforceable against the Purchasers in accordance with its terms, except as the enforceability thereof may be limited by (a) bankruptcy, insolvency, reorganization or other similar laws affecting the enforcement of creditors' rights generally and (b) general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law). 10. DEFINITIONS; ACCOUNTING MATTERS. For the purpose of this Agreement, the terms defined in paragraphs 10A and 10B (or within the text of any other paragraph) shall have the respective meanings specified therein and all accounting matters shall be subject to determination as provided in paragraph 10C. 10A. YIELD-MAINTENANCE TERMS. "CALLED PRINCIPAL" shall mean, with respect to any Note, the principal of such Note that is to be prepaid pursuant to paragraph 4B or is declared to be immediately due and payable pursuant to paragraph 7A, as the context requires. "DISCOUNTED VALUE" shall mean, with respect to the Called Principal of any Note, the amount obtained by discounting all Remaining Scheduled Payments with respect to such Called Principal from their respective scheduled due dates to the Settlement Date with respect to such Called Principal, in accordance with accepted financial practice and at a discount factor (as converted to reflect the periodic basis on which interest on such Note is payable, if payable other than on a semi-annual basis) equal to the Reinvestment Yield with respect to such Called Principal. "REINVESTMENT YIELD" shall mean, with respect to the Called Principal of any Note, 0.50% over the yield to maturity implied by (i) the yields reported, as of 10:00 A.M. (New York City local time) on the Business Day next preceding the Settlement Date with respect to such Called Principal, on the display designated as "Page 678" on the Telerate Service (or such other display as may replace page 678 on the Telerate Service) for actively traded U.S. Treasury securities having a maturity equal to the Remaining Average Life of such Called Principal as of such Settlement Date, or if such yields shall not be reported as of such time or the yields reported as of such time shall not be ascertainable, (ii) the Treasury Constant Maturity Series yields reported, for the latest day for which such yields shall have been so reported as of the Business Day next preceding the Settlement Date with respect to such Called Principal, in Federal Reserve Statistical Release H.15 (519) (or any comparable successor publication) for actively traded U.S. Treasury securities having a constant maturity equal to the Remaining Average Life of such Called Principal as of such Settlement Date. Such implied yield shall be determined, if necessary, by (a) converting U.S. Treasury bill quotations to bond- 23 equivalent yields in accordance with accepted financial practice and (b) interpolating linearly between yields reported for various maturities. "REMAINING AVERAGE LIFE" shall mean, with respect to the Called Principal of any Note, the number of years (calculated to the nearest one-twelfth year) obtained by dividing (i) such Called Principal into (ii) the sum of the products obtained by multiplying (a) each Remaining Scheduled Payment of such Called Principal (but not of interest thereon) by (b) the number of years (calculated to the nearest one-twelfth year) which will elapse between the Settlement Date with respect to such Called Principal and the scheduled due date of such Remaining Scheduled Payment. "REMAINING SCHEDULED PAYMENTS" shall mean, with respect to the Called Principal of any Note, all payments of such Called Principal and interest thereon that would be due on or after the Settlement Date with respect to such Called Principal if no payment of such Called Principal were made prior to its scheduled due date. "SETTLEMENT DATE" shall mean, with respect to the Called Principal of any Note, the date on which such Called Principal is to be prepaid pursuant to paragraph 4B or is declared to be immediately due and payable pursuant to paragraph 7A, as the context requires. "YIELD-MAINTENANCE AMOUNT" shall mean, with respect to any Note, an amount equal to the excess, if any, of the Discounted Value of the Called Principal of such Note over the sum of (i) such Called Principal plus (ii) interest accrued thereon as of (including interest due on) the Settlement Date with respect to such Called Principal. The Yield-Maintenance Amount shall in no event be less than zero. 10B. OTHER TERMS. "ACCEPTANCE" shall have the meaning specified in paragraph 2B(5). "ACCEPTANCE DAY" shall have the meaning specified in paragraph 2B(5). "ACCEPTANCE WINDOW" shall mean, with respect to any interest rate quote made by Prudential pursuant to paragraph 2B(4), the time period designated by Prudential during which the Company may elect to accept such interest rate quote as to not less than $5,000,000 in aggregate principal amount of Shelf Notes specified in the related Request for Purchase. "ACCEPTED NOTE" shall have the meaning specified in paragraph 2B(5). "AFFILIATE" shall mean any Person directly or indirectly controlling, controlled by, or under direct or indirect common control with, the Company, except a Subsidiary. A Person shall be deemed to control a corporation if such Person possesses, directly or indirectly, the power to direct or cause the direction of the management and policies of such corporation, whether through the ownership of voting securities, by contract or otherwise. "AUTHORIZED OFFICER" shall mean (i) in the case of the Company, its chief executive officer, its chief financial officer, its chief operating officer or any other 24 officer of the Company designated as an "Authorized Officer" of the Company for the purpose of this Agreement in an Officer's Certificate executed by the Company's chief executive officer or chief financial officer and delivered to Prudential, and (ii) in the case of Prudential, any of the following officers of Prudential Capital Group (an affiliate of Prudential), any managing director, senior vice president or vice president or any officer of Prudential designated as its "Authorized Officer" for the purpose of this Agreement in a certificate executed by one of its Authorized Officers. Any action taken under this Agreement on behalf of the Company by any individual who on or after the date of this Agreement shall have been an Authorized Officer of the Company and whom Prudential in good faith believes to be an Authorized Officer of the Company at the time of such action shall be binding on the Company even though such individual shall have ceased to be an Authorized Officer of the Company, and any action taken under this Agreement on behalf of Prudential by any individual who on or after the date of this Agreement shall have been an Authorized Officer of Prudential and whom the Company in good faith believes to be an Authorized Officer of Prudential at the time of such action shall be binding on Prudential even though such individual shall have ceased to be an Authorized Officer of Prudential. "AVAILABLE FACILITY AMOUNT" shall have the meaning specified in paragraph 2B(1). "BANKRUPTCY LAW" shall have the meaning specified in clause (viii) of paragraph 7A. "BUSINESS DAY" shall mean any day other than (i) a Saturday or a Sunday, (ii) a day on which commercial banks in New York City are required or authorized to be closed and (iii) for purposes of paragraph 2B(3) hereof only, a day on which The Prudential Insurance Company of America is not open for business. "CANCELLATION DATE" shall have the meaning specified in paragraph 2B(8)(iv). "CANCELLATION FEE" shall have the meaning specified in paragraph 2B(8)(iv). "CAPITALIZED LEASE OBLIGATION" shall mean any rental obligation which, under generally accepted accounting principles, is or will be required to be capitalized on the books of the Company or any Subsidiary, taken at the amount thereof accounted for as indebtedness (net of interest expenses) in accordance with such principles. "CLOSING DAY" shall mean, with respect to any Accepted Note, the Business Day specified for the closing of the purchase and sale of such Accepted Note in the Request for Purchase of such Accepted Note, provided that (i) if the Company and the Purchaser which is obligated to purchase such Accepted Note agree on an earlier Business Day for such closing, the "CLOSING DAY" for such Accepted Note shall be such earlier Business Day, and (ii) if the closing of the purchase and sale of such Accepted Note is rescheduled pursuant to paragraph 2B(7), the Closing Day for such Accepted Note, for all purposes of this Agreement except references to "original Closing Day" in paragraph 2B(8)(iii), shall mean the Rescheduled Closing Day with respect to such Accepted Note. "CODE" shall mean the Internal Revenue Code of 1986, as amended. 25 "CONFIDENTIAL INFORMATION" shall mean any written information delivered or made available by or on behalf of the Company or any Subsidiary to a Purchaser or a Transferee (as the case may be), including without limitation any non-public information obtained pursuant to paragraph 5A or 5B, in connection with or pursuant to this Agreement which is proprietary in nature and clearly marked or labeled as being confidential information, but in no event shall include information (i) which was publicly known or otherwise known to such Purchaser or Transferee (as the case may be) at the time of disclosure (except pursuant to disclosure in connection with this Agreement), (ii) which subsequently becomes publicly known through no act or omission by such Purchaser or Transferee (as the case may be), or (iii) which otherwise becomes known to such Purchaser or Transferee, other than through disclosure by the Company or from a Person obligated not to disclose under this Agreement. "CONSOLIDATED CAPITALIZATION" shall mean, as of the time of any determination, the sum of (i) Consolidated Net Worth and (ii) Funded Debt. "CONSOLIDATED NET EARNINGS" shall mean with respect to any period: (i) consolidated gross revenues of the Company and its Subsidiaries, minus (ii) all operating and non-operating expenses of the Company and its Subsidiaries including all charges of a proper character (including current and deferred taxes on income, provision for taxes on unremitted foreign earnings which are included in gross revenues, and current additions to reserves), but not including in gross revenues: (a) any gains (net of expenses and taxes applicable thereto) in excess of losses resulting from the sale, conversion or other disposition of capital assets (i.e., assets other than current assets); (b) any gains resulting from the appraised write-up of assets; (c) any equity of the Company or any Subsidiary in the unremitted earnings of any corporation which is not a Subsidiary; (d) any earnings of any Person acquired by the Company or any Subsidiary through purchase, merger or consolidation or otherwise for any year prior to the year of acquisition; or (e) any deferred credit representing the excess of equity in any Subsidiary at the date of acquisition over the cost of the investment in such Subsidiary; all determined in accordance with generally accepted accounting principles. "CONSOLIDATED NET EARNINGS AVAILABLE FOR RESTRICTED PAYMENTS" shall mean an amount equal to (1) $25,000,000 plus 50% (or minus 100% in the case of a deficit) of Consolidated Net Earnings for the period (taken as one accounting period) commencing on December 29, 1991 and terminating at the end of the last fiscal quarter preceding the date of any proposed Restricted Payment, minus (2) the sum of (a) the aggregate 26 amount of all cash dividends and other distributions paid or declared by the Company on any class of its stock after December 28, 1991, (b) 50% of the excess of the aggregate amount expended, directly or indirectly, after December 28, 1991, for the redemption, purchase or other acquisition of any shares of its stock, over the aggregate amount received after December 28, 1991 as the net cash proceeds of the sale of any shares of its stock until the year in which the Company subordinates succeeding years' installment notes to the indebtedness evidenced by the Notes and this Agreement and as a result thereof such installment notes constitute Subordinated Debt hereunder, (c) the aggregate amount of all miscellaneous deductions incurred by members and applied against declared patronage dividends, and (d) the excess of the aggregate amount expended (at original cost), directly or indirectly, after December 28, 1991 for Restricted Investments, over the aggregate amount received after December 28, 1991 as the net cash proceeds from the sale, liquidation or other return of capital (excluding any interest, dividends or like payments) of, any such Restricted Investment. For purposes of this definition, there shall not be included in Restricted Payments or in any computation of Consolidated Net Earnings Available For Restricted Payments: (x) dividends paid, or distributions made, in stock or notes of the Company; (y) exchanges of stock of one or more classes of the Company, except to the extent that cash or other value is involved in such exchange or (z) so long as no Event of Default shall then be continuing or would result from the making thereof, cash distributions made by the Company from gains arising from the Company's disposition of capital assets. "CONSOLIDATED NET WORTH" shall mean, as of any date of determination, the sum of (i) the par value (or value stated on the books of the Company) of the capital stock of all classes of the Company, plus (or minus in the case of a surplus deficit) (ii) the amount of the consolidated surplus, whether capital or earned, of the Company and its Subsidiaries, all determined in accordance with generally accepted accounting principles. "CONFIRMATION OF ACCEPTANCE" shall have the meaning specified in paragraph 2B(5). "CURRENT DEBT" shall mean, with respect to any Person, all Indebtedness of such Person for borrowed money which by its terms or by the terms of any instrument or agreement relating thereto matures on demand or within one year from the date of the creation thereof and is not directly or indirectly renewable or extendible at the option of the debtor to a date more than one year from the date of the creation thereof, provided that (i) borrowings under the Company's Credit Agreement dated as of July 1, 1997 (and any successor revolving bank credit agreement) shall constitute Current Debt and (ii) Guarantees of Indebtedness of Company members in an aggregate amount not to exceed $20,000,000 shall not constitute Current Debt, so long as no event has occurred the result of which would be to cause or permit such Indebtedness to become due prior to any stated maturity. "DEBT" shall mean Current Debt and Funded Debt. "DELAYED DELIVERY FEE" shall have the meaning specified in paragraph 2B(8)(iii). "DESIGNATED PERMITTED ASSET SALE" shall mean the sale or other disposition of up to ten warehouses and/or facilities selected by the Company for sale or other disposition. "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended. 27 "ENVIRONMENTAL LAWS" shall mean all federal, state, local and foreign laws relating to pollution or protection of the environment, including laws relating to emissions, discharges, releases or threatened releases of pollutants, contaminants, chemicals, or industrial, toxic or hazardous substances or wastes into the environment (including without limitation ambient air, surface water, ground water, or land), or otherwise relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport, or handling of pollutants, contaminants, chemicals, or industrial, toxic or hazardous substances or wastes, and any and all regulations, codes, plans, orders, decrees, judgments, injunctions, notices or demand letters issued, entered, promulgated or approved thereunder. "ERISA AFFILIATE" shall mean any corporation which is a member of the same controlled group of corporations as the Company within the meaning of section 414(b) of the Code, or any trade or business which is under common control with the Company within the meaning of section 414(c) of the Code. "EVENT OF DEFAULT" shall mean any of the events specified in paragraph 7A, provided that there has been satisfied any requirement in connection with such event for the giving of notice, or the lapse of time, or the happening of any further condition, event or act, and "DEFAULT" shall mean any of such events, whether or not any such requirement has been satisfied. "EXCHANGE ACT" shall mean the Securities Exchange Act of 1934, as amended. "EXISTING 1992 AGREEMENT" shall mean that certain Note Agreement dated as of April 13, 1992 between the Company and Prudential pursuant to which the Company sold and Prudential purchased the Company's 8.60% senior note in the original principal amount of $50,000,000 due April 1, 2007. "EXISTING 1995 AGREEMENT" shall have the meaning specified in paragraph 1A. "FACILITY" shall have the meaning specified in paragraph 2B(1). "FUNDED DEBT" shall mean and include, (i) any obligation payable more than one year from the date of creation thereof which under generally accepted accounting principles is shown on a balance sheet as a liability (including Capitalized Lease Obligations but excluding reserves for deferred income taxes and other reserves to the extent that such reserves do not constitute an obligation); (ii) indebtedness payable more than one year from the date of creation thereof which is secured by any lien on property owned by the Company or any Subsidiary; and (iii) Guarantees, provided that, Guarantees of Indebtedness of Company members in an aggregate amount not to exceed $20,000,000 shall not constitute Funded Debt, so long as no event has occurred the result of which would be to cause or permit such Indebtedness to become due prior to any stated maturity. "GUARANTEE" shall mean, with respect to any Person, any direct or indirect liability, contingent or otherwise, of such Person with respect to any indebtedness, lease, dividend or other obligation of another, including, without limitation, any such obligation directly or indirectly guaranteed, endorsed (other than for collection or deposit in the ordinary course of business) or discounted or sold with recourse by such Person, or in respect of which such Person is otherwise directly or indirectly liable, including, without limitation, any such obligation in effect guaranteed by such Person through any agreement (contingent or otherwise) 28 to purchase, repurchase or otherwise acquire such obligation or any security therefor, or to provide funds for the payment or discharge of such obligation (whether in the form of loans, advances, stock purchases, capital contributions or otherwise), or to maintain the solvency or any balance sheet or other financial condition of the obligor of such obligation, or to make payment for any products, materials or supplies or for any transportation or services regardless of the non-delivery or non-furnishing thereof, in any such case if the purpose or intent of such agreement is to provide assurance that such obligation will be paid or discharged, or that any agreements relating thereto will be complied with, or that the holders of such obligation will be protected against loss in respect thereof. The amount of any Guarantee shall be equal to the outstanding principal amount of the obligation guaranteed or such lesser amount to which the maximum exposure of the guarantor shall have been specifically limited. "HEDGE TREASURY NOTE(S)" shall mean, with respect to any Accepted Note, the United States Treasury Note or Notes whose duration (as reasonably determined by Prudential) most closely matches the duration of such Accepted Note. "HOSTILE TENDER OFFER" shall mean, with respect to the use of proceeds of any Note, any offer to purchase, or any purchase of, shares of capital stock of any corporation or equity interests in any other entity, or securities convertible into or representing the beneficial ownership of, or rights to acquire, any such shares or equity interests, if such shares, equity interests, securities or rights are of a class which is publicly traded on any securities exchange or in any over-the-counter market, other than purchases of such shares, equity interests, securities or rights representing less than 5% of the equity interests or beneficial ownership of such corporation or other entity for portfolio investment purposes, and such offer or purchase has not been duly approved by the board of directors of such corporation or the equivalent governing body of such other entity prior to the date on which the Company makes the Request for Purchase of such Note. "INCLUDING" shall mean, unless the context clearly requires otherwise, "including without limitation". "INDEBTEDNESS" shall mean, with respect to any Person, without duplication, (i) all items (excluding items of contingency reserves or of reserves for deferred income taxes) which in accordance with generally accepted accounting principles would be included in determining total liabilities as shown on the liability side of a balance sheet of such Person as of the date on which Indebtedness is to be determined, (ii) all indebtedness secured by any Lien on any property or asset owned or held by such Person subject thereto, whether or not the indebtedness secured thereby shall have been assumed, and (iii) all indebtedness of others with respect to which such Person has become liable by way of Guarantee. "INITIAL SHELF NOTES" shall mean the Series B Notes and the Series C Notes. "INSTITUTIONAL INVESTOR" shall mean any insurance company, pension fund, mutual fund, investment company, bank, savings bank, savings and loan association, investment banking company, trust company, or any finance or credit company, any portfolio or any investment fund managed by any of the foregoing, or any other institutional investor, and any nominee of the foregoing. The term "Institutional Investor" shall not include any competitor of the Company or its Subsidiaries or any labor union with which the Company then has a collective bargaining agreement. "INVESTMENTS" shall mean any loan or advance to, or ownership, purchase or acquisition of any security (including stock) or obligations of, or any other interest in, or any capital contribution made to, any Person. 29 "ISSUANCE PERIOD" shall have the meaning specified in paragraph 2B(2). "LIEN" shall mean any mortgage, pledge, security interest, encumbrance, lien (statutory or otherwise) or charge of any kind (including any agreement to give any of the foregoing, any conditional sale or other title retention agreement, any lease in the nature thereof, and the filing of or agreement to give any financing statement under the Uniform Commercial Code of any jurisdiction) or any other type of preferential arrangement for the purpose, or having the effect, of protecting a creditor against loss or securing the payment or performance of an obligation. "MULTIEMPLOYER PLAN" shall mean any Plan which is a "multiemployer plan" (as such term is defined in section 4001(a)(3) of ERISA. "NOTES" shall have the meaning specified in paragraph 1. "OFFICER'S CERTIFICATE" shall mean a certificate signed in the name of the Company by an Authorized Officer of the Company. "PERSON" shall mean and include an individual, a partnership, a joint venture, a corporation, a trust, an unincorporated organization and a government or any department or agency thereof. "PLAN" shall mean any employee pension benefit plan (as such term is defined in section 3 of ERISA) which is or has been established or maintained, or to which contributions are or have been made, by the Company or any ERISA Affiliate. "PRUDENTIAL" shall mean The Prudential Insurance Company of America. "PRUDENTIAL AFFILIATE" shall mean any corporation or other entity all of the Voting Stock (or equivalent voting securities or interests) of which is owned by Prudential either directly or through Prudential Affiliates. "PURCHASERS" shall mean with respect to any Accepted Notes, Prudential and/or the Prudential Affiliate(s), which are purchasing such Accepted Notes. "REQUEST FOR PURCHASE" shall have the meaning specified in paragraph 2B(3). "REQUIRED HOLDER(S)" shall mean the holder or holders of at least 50.1% of the aggregate principal amount of the Notes or of a Series of Notes, as the context may require, from time to time outstanding. "RESCHEDULED CLOSING DAY" shall have the meaning specified in paragraph 2B(7). "RESPONSIBLE OFFICER" shall mean the chief executive officer, chief operating officer, chief financial officer or chief accounting officer of the Company, general counsel of the Company or any other officer of the Company involved principally in its financial administration or its controllership function. 30 "RESTRICTED INVESTMENTS" shall mean any Investment prohibited by paragraph 6G. "RESTRICTED PAYMENT" shall mean any payment or transaction which would be prohibited by paragraph 6H if Consolidated Net Earnings Available for Restricted Payments equalled zero. "SECURED FUNDED DEBT" shall mean Funded Debt which is secured by any Lien. "SECURITIES ACT" shall mean the Securities Act of 1933, as amended. "SENIOR FUNDED DEBT" shall mean Funded Debt of the Company which is not Subordinated Debt. "SERIES" shall have the meaning specified in paragraph 1. "SERIES A NOTES" shall mean the 7.38% $50,000,000 Series A Note executed by the Company dated July 1, 1997 and due July 1, 2012, and any Note delivered in exchange or substitution therefor pursuant to this Agreement. "SERIES B NOTES" shall mean the 6.91% $25,000,000 Series B Note(s) executed by the Company dated November 13, 1997 and due November 13, 2007, and any Note delivered in exchange or substitution therefor pursuant to this Agreement. "SERIES C NOTES" shall mean the 6.73% $25,000,000 Series C Notes executed by the Company dated November 13, 1997 and due November 13, 2002, and any Note delivered in exchange or substitution therefor pursuant to this Agreement. "SHELF NOTES" shall have the meaning specified in paragraph 1. "SIGNIFICANT HOLDER" shall mean (i) Prudential, so long as Prudential or any Prudential Affiliate shall hold (or be committed under this Agreement to purchase) any Note, and (ii) any other holder of at least 10% of the aggregate principal amount of the Notes from time to time outstanding. "SUBORDINATED DEBT" shall mean any Indebtedness of the Company which contains terms of subordination identical to or, in the reasonable determination of the holders of the Notes no less favorable to such holders of the Notes than, the terms of subordination set forth in Exhibit E hereto and, which by virtue of such language and any necessary action of the Board of Directors of the Company, is subordinated to the Indebtedness owing from time to time by the Company to the holders of any Note issued in connection with this Agreement (including, without limitation, the Series A Notes and Series B Notes) or the Existing 1992 Agreement. "SUBSIDIARY" shall mean any corporation eighty percent (80%) or more of the stock of every class of which, except directors' qualifying shares, shall, at the time as of which any determination is being made, be owned by the Company either directly or through Subsidiaries. Notwithstanding the foregoing, for purposes of calculating the financial covenants, Cotter Canada Hardware and Variety Cooperative, Inc. will be 31 deemed a Subsidiary of the Company if, in accordance with GAAP, it is consolidated in the financial statements of the Company required to be delivered pursuant to clauses (i) and (ii) of paragraph 5A hereof. "SUBSTANTIAL STOCKHOLDER" shall mean (i) any Person owning, beneficially or of record, directly or indirectly, either individually or together with all other Persons to whom such Person is related by blood, adoption or marriage, stock of the Company (of any class having ordinary voting power for the election of directors) aggregating five percent (5%) or more of such voting power or (ii) any Person related by blood, adoption or marriage to any Person described or coming within the provisions of clause (i) of this definition. "STRUCTURING FEE" shall have the meaning specified in paragraph 2B(8)(i). "TRANSFEREE" shall mean any direct or indirect transferee of all or any part of any Note purchased by any Purchaser under this Agreement. "VOTING STOCK" shall mean, with respect to any corporation, any shares of stock of such corporation whose holders are entitled under ordinary circumstances to vote for the election of directors of such corporation (irrespective of whether at the time stock of any other class or classes shall have or might have voting power by reason of the happening of any contingency). 10C. ACCOUNTING PRINCIPLES, TERMS AND DETERMINATIONS. All references in this Agreement to "generally accepted accounting principles" shall be deemed to refer to generally accepted accounting principles in effect in the United States at the time of application thereof. Unless otherwise specified herein, all accounting terms used herein shall be interpreted, all determinations with respect to accounting matters hereunder shall be made, and all unaudited financial statements and certificates and reports as to financial matters required to be furnished hereunder shall be prepared, in accordance with generally accepted accounting principles applied on a basis consistent with the most recent audited financial statements delivered pursuant to clause (ii) of paragraph 5A or, if no such statements have been so delivered, the most recent audited financial statements referred to in clause (i) of paragraph 8B. 11. MISCELLANEOUS. 11A. NOTE PAYMENTS. The Company agrees that, so long as any Purchaser shall hold any Note, it will make payments of principal of, interest on, and any Yield-Maintenance Amount payable with respect to, such Note, which comply with the terms of this Agreement, by wire transfer of immediately available funds for credit (not later than 12:00 noon, New York City local time, on the date due) (i) the account or accounts of such Purchaser specified in the Confirmation of Acceptance with respect to such Note in the case of any Shelf Note or (ii) such other account or accounts in the United States as such Purchaser may from time to time designate in writing, notwithstanding any contrary provision herein or in any Note with respect to the place of payment. Each Purchaser agrees that, before disposing of any Note, it will make a notation thereon (or on a schedule attached thereto) of all principal payments previously made thereon and of the date to which interest thereon has been paid. The Company agrees to afford the benefits of this paragraph 11A to any Transferee which shall have made the same agreement as the Purchasers have made in this paragraph 11A. 11B. EXPENSES. The Company agrees, whether or not the transactions contemplated hereby shall be consummated, to pay, and save Prudential, each Purchaser and any Transferee harmless against liability for the payment of, all out-of-pocket expenses arising in connection with such transactions, including (i) all document production and duplication charges 32 and the fees and expenses of any special counsel engaged by the Purchasers or any Transferee in connection with this Agreement (other than in connection with the preparation of this Agreement and the documents related hereto in connection with the original closing hereunder and the closing of any draw under the Facility), the transactions contemplated hereby and any subsequent proposed modification of, or proposed consent under, this Agreement, whether or not such proposed modification shall be effected or proposed consent granted, and (ii) the costs and expenses, including attorneys' fees, incurred by any Purchaser or any Transferee in enforcing (or determining how to enforce) any rights under this Agreement or the Notes or in responding to any subpoena or other legal process or informal investigative demand issued in connection with this Agreement or the transactions contemplated hereby or by reason of any Purchaser's or any Transferee's having acquired any Note, including without limitation costs and expenses incurred in any bankruptcy case. The obligations of the Company under this paragraph 11B shall survive the transfer of any Note or portion thereof or interest therein by any Purchaser or any Transferee and the payment of any Note. 11C. CONSENT TO AMENDMENTS. This Agreement may be amended, and the Company may take any action herein prohibited, or omit to perform any act herein required to be performed by it, if the Company shall obtain the written consent to such amendment, action or omission to act, of the Required Holder(s) of the Notes of each Series except that, (i) with the written consent of the holders of all Notes of a particular Series, and if an Event of Default shall have occurred and be continuing, of the holders of all Notes of all Series, at the time outstanding (and such written consents), the Notes of such Series may be amended or the provisions thereof waived to change the maturity thereof, to change or affect the principal thereof, or to change or affect the rate or time of payment of interest on or any Yield-Maintenance Amount payable with respect to the Notes of such Series, (ii) without the written consent of the holder or holders of all Notes at the time outstanding, no amendment to or waiver of the provisions of this Agreement shall change or affect the provisions of paragraph 7A or this paragraph 11C insofar as such provisions relate to proportions of the principal amount of the Notes of any Series, or the rights of any individual holder of Notes, required with respect to any declaration of Notes to be due and payable or with respect to any consent, amendment, waiver or declaration, (iii) with the written consent of Prudential (and without the consent of any other holder of the Notes) the provisions of paragraph 2B may be amended or waived (except insofar as any such amendment or waiver would affect any rights or obligations with respect to the purchase and sale of Notes which shall have become Accepted Notes prior to such amendment or waiver), and (iv) with the written consent of all of the Purchasers which shall have become obligated to purchase Accepted Notes of any Series (and not without the written consent of all such Purchasers), any of the provisions of paragraphs 2B and 3 may be amended or waived insofar as such amendment or waiver would affect only rights or obligations with respect to the purchase and sale of the Accepted Notes of such Series or the terms and provisions of such Accepted Notes. Each holder of any Note at the time or thereafter outstanding shall be bound by any consent authorized by this paragraph 11C, whether or not such Note shall have been marked to indicate such consent, but any Notes issued thereafter may bear a notation referring to any such consent. No course of dealing between the Company and the holder of any Note nor any delay in exercising any rights hereunder or under any Note shall operate as a waiver of any rights of any holder of such Note. As used herein and in the Notes, the term "THIS AGREEMENT" and references thereto shall mean this Agreement as it may from time to time be amended or supplemented. 11D. FORM, REGISTRATION, TRANSFER AND EXCHANGE OF NOTES; LOST NOTES. The Notes are issuable as registered notes without coupons in denominations of at least $100,000, except as may be necessary to reflect any principal amount not evenly divisible by $100,000. The Company shall keep at its principal office a register in which the Company shall provide for the registration of Notes and of transfers of Notes. Upon surrender for registration of transfer of any Note at the principal office of the Company, the Company shall, at its expense, execute and deliver one or more new Notes of like tenor and of a like aggregate principal amount, registered in the name of such transferee or transferees. At the option of the holder of 33 any Note, such Note may be exchanged for other Notes of like tenor and of any authorized denominations, of a like aggregate principal amount, upon surrender of the Note to be exchanged at the principal office of the Company. Whenever any Notes are so surrendered for exchange, the Company shall, at its expense, execute and deliver the Notes which the holder making the exchange is entitled to receive. Each prepayment of principal payable on each prepayment date upon each new Note issued upon any such transfer or exchange shall be in the same proportion to the unpaid principal amount of such new Note as the prepayment of principal payable on such date on the Note surrendered for registration of transfer or exchange bore to the unpaid principal amount of such Note. No reference need be made in any such new Note to any prepayment or prepayments of principal previously due and paid upon the Note surrendered for registration of transfer or exchange. Every Note surrendered for registration of transfer or exchange shall be duly endorsed, or be accompanied by a written instrument of transfer duly executed, by the holder of such Note or such holder's attorney duly authorized in writing. Any Note or Notes issued in exchange for any Note or upon transfer thereof shall carry the rights to unpaid interest and interest to accrue which were carried by the Note so exchanged or transferred, so that neither gain nor loss of interest shall result from any such transfer or exchange. Upon receipt of written notice from the holder of any Note of the loss, theft, destruction or mutilation of such Note and, in the case of any such loss, theft or destruction, upon receipt of such holder's unsecured indemnity agreement, or in the case of any such mutilation upon surrender and cancellation of such Note, the Company will make and deliver a new Note, of like tenor, in lieu of the lost, stolen, destroyed or mutilated Note. 11E. PERSONS DEEMED OWNERS; PARTICIPATIONS. Prior to due presentment for registration of transfer, the Company may treat the Person in whose name any Note is registered as the owner and holder of such Note for the purpose of receiving payment of principal of and interest on, and any Yield-Maintenance Amount payable with respect to, such Note and for all other purposes whatsoever, whether or not such Note shall be overdue, and the Company shall not be affected by notice to the contrary. Subject to the preceding sentence, the holder of any Note may from time to time grant participations in all or any part of such Note to any Person on such terms and conditions as may be determined by such holder in its sole and absolute discretion, provided that any such participations shall be in a principal amount of at least $100,000. 11F. SURVIVAL OF REPRESENTATIONS AND WARRANTIES; ENTIRE AGREEMENT. All representations and warranties contained herein or made in writing by or on behalf of the Company in connection herewith shall survive the execution and delivery of this Agreement and the Notes, the transfer by any Purchaser of any Note or portion thereof or interest therein and the payment of any Note, and may be relied upon by any Transferee, regardless of any investigation made at any time by or on behalf of any Purchaser or any Transferee. Subject to the preceding sentence, this Agreement and the Notes embody the entire agreement and understanding between the parties hereto with respect to the subject matter hereof and supersede all prior agreements and understandings relating to such subject matter. 11G. SUCCESSORS AND ASSIGNS. All covenants and other agreements in this Agreement contained by or on behalf of any of the parties hereto shall bind and inure to the benefit of the respective successors and assigns of the parties hereto (including, without limitation, any Transferee) whether so expressed or not. 11H. DISCLOSURE TO OTHER PERSONS. Each Purchaser (and each Transferee by its acceptance of an interest in any Note) agrees to use its best efforts to hold in confidence and not disclose any Confidential Information without the prior written consent of the Company which consent shall not be unreasonably denied; provided, however, that nothing contained herein shall prevent the holder of any Note from delivering copies of any financial statements and other documents delivered to such holder, and disclosing any other information 34 disclosed to such holder, by the Company or any Subsidiary in connection with or pursuant to this Agreement to (i) such holder's directors, officers, employees, agents and professional consultants, (ii) any other holder of any Note, (iii) any Institutional Investor to which such holder offers to sell such Note or any part thereof, (iv) any Institutional Investor to which such holder sells or offers to sell a participation in all or any part of such Note, (v) any Institutional Investor from which such holder offers to purchase any security of the Company, (vi) any federal or state regulatory authority having jurisdiction over such holder, (vii) the National Association of Insurance Commissioners or any similar organization or (viii) any other Person to which such delivery or disclosure may be necessary or appropriate (a) in compliance with any law, rule, regulation or order applicable to such holder, (b) in response to any subpoena or other legal process or informal investigative demand, (c) in connection with any litigation to which such holder is a party or (d) in order to protect such holder's investment; and provided further that after notice to the Company the holders of the Notes shall be free to correct any false or misleading information which may become public concerning their relationship to the Company or any of its Subsidiaries. 11I. NOTICES. All written communications provided for hereunder (other than communications provided for under paragraph 2) shall be sent by first class mail or nationwide overnight delivery service (with charges prepaid) and (i) if to any Purchaser, addressed as specified for such communications in the Purchaser Schedule attached to the applicable Confirmation of Acceptance or at such other address as any such Purchaser shall have specified to the Company in writing, (ii) if to any other holder of any Note, addressed to it at such address as it shall have specified in writing to the Company or, if any such holder shall not have so specified an address, then addressed to such holder in care of the last holder of such Note which shall have so specified an address to the Company and (iii) if to the Company, addressed to it at 8600 West Bryn Mawr Avenue, Chicago, Illinois, 60631, Attention: Chief Financial Officer and Controller (with duplicate copies to each), or at such other address in the United States as the Company shall have specified to the holder of each Note in writing, provided, however, that any such communication to the Company may also, at the option of the Person sending such communication, be delivered by any other means either to the Company at its address specified above or to any Authorized Officer of the Company. Any communication to Prudential pursuant to paragraph 2 shall be made by the method specified for such communication in paragraph 2, and shall be effective to create any rights or obligations under this Agreement only if, in the case of a telephone communication, an Authorized Officer of the party conveying the information and of the party receiving the information are parties to the telephone call, and in the case of a telecopier communication, the communication is signed by an Authorized Officer of the party conveying the information, addressed to the attention of an Authorized Officer of the party receiving the information, and in fact received at the telecopier terminal the number of which the party receiving the communication shall have specified in writing to the party sending such information. 11J. PAYMENTS DUE ON NON-BUSINESS DAYS. Anything in this Agreement or the Notes to the contrary notwithstanding, any payment of principal of or interest on, or Yield-Maintenance Amount payable with respect to, any Note that is due on a date other than a Business Day shall be made on the next succeeding Business Day. If the date for any payment is extended to the next succeeding Business Day by reason of the preceding sentence, the period of such extension shall not be included in the computation of the interest payable on such Business Day. 11K. SEVERABILITY. Any provision of this Agreement which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. 35 11L. DESCRIPTIVE HEADINGS. The descriptive headings of the several paragraphs of this Agreement are inserted for convenience only and do not constitute a part of this Agreement. 11M. SATISFACTION REQUIREMENT. If any agreement, certificate or other writing, or any action taken or to be taken, is by the terms of this Agreement required to be satisfactory to any Purchaser, to any holder of Notes or to the Required Holder(s), the determination of such satisfaction shall be made by such Purchaser, such holder or the Required Holder(s), as the case may be, in the sole and exclusive judgment (exercised in good faith) of the Person or Persons making such determination. 11N. GOVERNING LAW. THIS AGREEMENT SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH, AND THE RIGHTS OF THE PARTIES SHALL BE GOVERNED BY, THE INTERNAL LAW OF THE STATE OF ILLINOIS. 11O. SEVERALTY OF OBLIGATIONS. The sales of Notes to the Purchasers are to be several sales, and the obligations of Prudential and the Purchasers under this Agreement are several obligations. No failure by Prudential or any Purchaser to perform its obligations under this Agreement shall relieve any other Purchaser or the Company of any of its obligations hereunder, and neither Prudential nor any Purchaser shall be responsible for the obligations of, or any action taken or omitted by, any other such Person hereunder. 11P. COUNTERPARTS. This Agreement may be executed in any number of counterparts, each of which shall be an original, but all of which together shall constitute one instrument. 11Q. INDEPENDENCE OF COVENANTS. All covenants hereunder shall be given independent effect so that if a particular action or condition is prohibited by any one of such covenants, the fact that it would be permitted by an exception to, or otherwise be in compliance within the limitations of, another covenant shall not avoid (i) the occurrence of a Default or Event of Default if such action is taken or such condition exists or (ii) in any way prejudice an attempt by the holder of any Note to prohibit through equitable action or otherwise the taking of any action by the Company or any Subsidiary which would result in a Default or Event of Default. 11R. BINDING AGREEMENT. When this Agreement is executed and delivered by the Company, and Prudential, it shall become a binding agreement between the Company, and Prudential. This Agreement shall also inure to and each such Purchaser shall be bound by this Agreement to the extent provided in such Confirmation of Acceptance. [REMAINDER OF PAGE LEFT INTENTIONALLY BLANK] 36 11S. AMENDMENT OF EXISTING 1992 AGREEMENT. Upon the execution of this Agreement by Prudential, paragraphs 5 and 6 of the Existing 1992 Agreement are hereby amended in their entirety so as to read as set forth, respectively, in paragraphs 5 and 6 of this Agreement and defined terms and cross references used in paragraphs 5 and 6 of the Existing 1992 Agreement, as amended hereby, shall be deemed to have the respective meanings ascribed thereto in, and to refer to paragraphs in, this Agreement; provided, however, that any reference to a "Note" or "Notes" in the Existing 1992 Agreement, as amended hereby, shall mean the notes issued under and pursuant to the Existing 1992 Agreement. No termination of this Agreement in whole or in part or any modification hereof, shall affect the continued applicability of this paragraph and the covenants referred to herein to the Existing 1992 Agreement. Very truly yours, TRUSERV CORPORATION By:_________________________________ Kerry J. Kirby Executive Vice President and Chief Financial Officer The foregoing Agreement is hereby accepted as of the date first above written. THE PRUDENTIAL INSURANCE COMPANY OF AMERICA By:__________________________________ Vice President EX-5 4 OPINION OF ARNSTEIN & LEHR 1 EXHIBIT 5 [ANSTEIN & LEHR LETTERHEAD] March 30, 1998 TruServ Corporation 8600 West Bryn Mawr Avenue Chicago, Illinois 60631-3505 Re: Post Effective Amendment No. 5 on Form S-2 to Registration Statement on Form S-4 (No. 333-18397) Gentlemen: We refer to the Post Effective Amendment No. 5 on Form S-2 to Registration Statement on Form S-4 (No. 333-18397) being filed by TruServ Corporation, 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 160,557 shares of Class A Common Stock, $100 par value. The Class A Common Stock will be issued and sold directly by the Company in 60 share units at the par value thereof, for an aggregate cash purchase price of $6,000 per unit. Sales shall be made to retailers and renters of hardware, lumber and related merchandise, in connection with becoming Members 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 160,557 shares of Class A Common Stock, $100 par value, of the Company has been duly authorized and when sold as contemplated will be legally issued and fully paid and non-assessable. 2 March 30, 1998 Page 2 We hereby consent to the use of this opinion as an exhibit to the foregoing 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 hereunder. Sincerely, Arnstein & Lehr -----END PRIVACY-ENHANCED MESSAGE-----