-----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, OvGGE8MaDaMoobHZM3/T6xnJqUHxNmdyspeFES7nowlr5Mn2FIPz9OcwnGuzQ45e UF2KaIoUYTOWq7vS3npajQ== 0000950137-96-000312.txt : 19960322 0000950137-96-000312.hdr.sgml : 19960322 ACCESSION NUMBER: 0000950137-96-000312 CONFORMED SUBMISSION TYPE: S-2/A PUBLIC DOCUMENT COUNT: 8 FILED AS OF DATE: 19960321 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: COTTER & CO CENTRAL INDEX KEY: 0000025095 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-HARDWARE [5072] IRS NUMBER: 362099896 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-2/A SEC ACT: 1933 Act SEC FILE NUMBER: 033-39477 FILM NUMBER: 96536710 BUSINESS ADDRESS: STREET 1: 2740 N CLYBOURN AVE CITY: CHICAGO STATE: IL ZIP: 60614 BUSINESS PHONE: 3129752700 MAIL ADDRESS: STREET 1: 2740 N CLYBOURN AVE CITY: CHICAGO STATE: IL ZIP: 60614 S-2/A 1 FORM S-2 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 21, 1996 REGISTRATION NO. 33-39477 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ------------------ POST-EFFECTIVE AMENDMENT NO. 5 to FORM S-2 REGISTRATION STATEMENT Under THE SECURITIES ACT OF 1933 ------------------ COTTER & COMPANY (Exact name of Registrant as specified in its charter) Delaware 36-2099896 (State of Incorporation) (IRS Employer Identification No.)
8600 West Bryn Mawr Avenue Chicago, Illinois 60631-3505 (312) 695-5000 (address, including zip code, and telephone number, including area code, of Registrant's principal executive offices) Kerry J. Kirby, Vice President and Chief Financial Officer Cotter & Company 8600 West Bryn Mawr Avenue Chicago, Illinois 60631-3505 (312) 695-5000 (Name, address, including zip code, and telephone number, including area code, of agent for service) Copies to: Daniel T. Burns, Vice President and Secretary William K. Blomquist, Esq. Cotter & Company Arnstein & Lehr 8600 West Bryn Mawr Avenue Suite 1200 Chicago, Illinois 60631-3505 120 S. Riverside Plaza (312) 695-5000 Chicago, Illinois 60606
------------------ Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this Post-Effective Amendment to the Registration Statement. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. /X/ If the Registrant elects to deliver its latest annual report to security holders, or a complete and legible facsimile thereof, pursuant to Item 11(a)(1) of this Form, check the following box. / / - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 COTTER & COMPANY ------------------ CROSS REFERENCE SHEET
CAPTION IN ITEM IN FORM S-2 PROSPECTUS ------------------------------------------------- ------------------------------------- 1. Forepart of the Registration Statement and Outside Front Cover Page of Prospectus........... Forepart of Registration Statement and Outside Front Cover Page of Prospectus 2. Inside Front and Outside Back Cover Pages of Prospectus....................................... Available Information; Reports to Securities Holders; Documents Incorporated by Reference 3. Summary Information, Risk Factors and Ratio of Earnings to Fixed Charges........................ Summary; The Company; Description of Common Stock 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; The Company; Dividends; Se- lected Financial Data; Management's Discussion and Analysis of Financial Condition and Results of Operations; Business; Distribution of Patronage Dividends; Description of Common Stock; Index to Consolidated Financial Statements 12. Incorporation of Certain Information by Reference........................................ Documents Incorporated By Reference 13. Disclosure of Commission Position on Indemnification for Securities Act Liabilities... Not Applicable
3 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 21, 1996 PROSPECTUS COTTER & COMPANY 10,660 SHARES CLASS A COMMON STOCK, $100 PAR VALUE (IN UNITS OF TEN SHARES) THE COMMON STOCK OFFERED HEREUNDER IS OFFERED EXCLUSIVELY TO RETAILERS OF HARDWARE 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. ------------------ 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 10 SHARES OF PRICE TO DISCOUNTS AND PROCEEDS TO CLASS A COMMON STOCK PUBLIC COMMISSIONS COMPANY - -------------------------------------------------------------------------------------------------- Per Unit(1)........................ $1,000 See (2) Below $1,000(3) Total.............................. $1,066,000 See (2) Below $1,066,000(3)
- -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- (1) The shares will be offered only in units of 10 shares and no shareholder may purchase more than one such unit. (2) There will be no underwriters. The subject stock will be sold directly by the Company at par value. (3) There is no firm commitment for the sale of the securities offered hereunder; they will be sold from time to time by the Company. However, assuming the sale of all securities offered hereunder, and before deduction of approximately $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 , 1996. 4 AVAILABLE INFORMATION The Company is subject to the informational requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance therewith files reports and other information with the Securities and Exchange Commission (the "Commission"). Such reports and other information filed by the Company with the Commission can be inspected and copied at the public reference facilities maintained by the Commission at its principal office at 450 Fifth Street, N.W., Washington, D.C. 20549 as well as the Regional Offices of the Commission at Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511 and 7 World Trade Center, Suite 1300, New York, New York 10048. Copies of such material can be obtained from the Public Reference Section of the Commission, Washington, D.C., 20549 at prescribed rates. REPORTS TO SECURITY HOLDERS Each year the Company distributes to its stockholder-Members an annual report containing consolidated financial statements reported upon by a firm of independent auditors. The Company may, from time to time, also furnish to its stockholder-Members interim reports, as determined by management. DOCUMENTS INCORPORATED BY REFERENCE The Company's Annual Report on Form 10-K for the fiscal year ended December 30, 1995 filed pursuant to Section 15(d) of the Exchange Act is incorporated herein by reference. All documents filed by the Company pursuant to Section 15(d) of the Exchange Act after the date of this Prospectus and prior to the termination of the offer shall be deemed to be incorporated by reference into this Prospectus and to be a part hereof from the date of filing such documents. The Company will provide without charge to each person to whom a Prospectus is delivered, upon written or oral request of such person, a copy of any and all of the documents incorporated by reference in the Registration Statement (other than exhibits to such documents unless such exhibits are specifically incorporated by reference into the documents that the Registration Statement incorporates). Requests for such copies should be directed to Kerry J. Kirby, Vice President and Chief Financial Officer, Cotter & Company, 8600 West Bryn Mawr Avenue, Chicago, IL 60631-3505, (312) 695-5000. 2 5 SUMMARY This Summary is qualified in its entirety by the detailed information and the Company's consolidated financial statements (including the notes thereto) appearing elsewhere in this Prospectus and in the documents incorporated herein by reference. Cotter & Company (the "Company"), located at 8600 West Bryn Mawr Avenue, Chicago, Illinois, 60631-3505, telephone number (312) 695-5000, is a Member-owned wholesaler of hardware and related merchandise. It is the largest wholesaler of hardware and related merchandise in the United States. The Company also manufactures paint and paint applicators. For reporting purposes, the Company operates in a single industry as a Member-owned wholesaler cooperative. The Company's Class A common stock being offered hereby is offered exclusively to retailers of hardware and related merchandise, in connection with becoming Members of the Company. The Class A common stock (which is the sole voting stock) is offered only in ten (10) share units, and no party may acquire more than one unit; thus control of the Company is equally distributed among the stockholder-Members. Sales of Class A common stock are made for cash. Membership entitles a Member to use certain Company trademarks and trade names, including the federally registered collective membership trademark indicating membership in "True Value(R) Hardware Stores". Membership also entitles the Member to receive annual patronage dividends based upon the Member's purchases from the Company. In accordance with the Company's By-Laws and Retail Member Agreement (the "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. The Class A common stock being offered hereby is limited as to transferability in that the Company has a ninety (90) day right of first refusal to repurchase, at book value, a Member's stock before such stock can otherwise be disposed of. Additionally, the Company retains an automatic lien on the Class A common stock, and dividends accruing thereon, for any indebtedness due the Company. The Company is obligated to repurchase a Member's Class A common stock and the Member is obligated to sell such stock, at book value, in accordance with the terms and conditions set forth in the Company's By-Laws upon termination of the Agreement. The Agreement may be terminated by either the Company or the Member upon sixty (60) days written notice. Termination by the Company requires approval by a two-thirds vote of the Board of Directors, except in the following circumstances where the Company 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 the Company. There is no existing market for the Class A common stock offered hereunder and there is no expectation that any market will develop. The Company intends to use the proceeds of this offering primarily for general working capital purposes, including the purchase of merchandise for resale to Members. 3 6 THE COMPANY The Company was organized as a Delaware corporation in 1953. Upon its organization, it succeeded to the business of Cotter & Company, an Illinois corporation organized in 1948. The Company's principal executive offices are located at 8600 West Bryn Mawr Avenue, Chicago, Illinois, 60631-3505. Its telephone number is (312) 695-5000. The Company is a Member-owned wholesaler of hardware and related merchandise. It is the largest wholesaler of hardware and related merchandise in the United States. The Company also manufactures paint and paint applicators. For reporting purposes, the Company operates in a single industry as a Member-owned wholesaler cooperative. The Company serves approximately 5,600 True Value(R) Hardware Stores throughout the United States. Primary concentrations of Members exist in California (approximately 8%), Illinois and New York (approximately 6% each), Pennsylvania and Texas (approximately 5% each) and Michigan, Ohio and Wisconsin (approximately 4% each). USE OF PROCEEDS The proceeds to be received from this offering will be used by the Company 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. The Company 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, the Company may not receive the entire amount of estimated proceeds from the sale of said Class A common stock. PLAN OF DISTRIBUTION The Company's Class A common stock being offered hereby is offered exclusively to retailers of hardware and related merchandise, in connection with becoming Members of the Company. Each independent retailer who applies to become a stockholder-Member must subscribe for ten (10) shares of the Company's Class A common stock, $100 par value, having a total purchase price of $1,000. All sales of the Class A common stock will be made for cash. Sales of Class A common stock are primarily made through the Company's registered securities agent(s) but only after the executive officers of the Company approve the admission of a new Member. Neither the Company's 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 the Company's retail support representatives frequently are the Company's initial contact with potential new Members, they do not, and are not empowered to, admit new Members to the Company. 4 7 DIVIDENDS Other than the payment of patronage dividends, including the redemption of some nonqualified written notices of allocation, the Company has not paid dividends on its Class A common stock or Class B common stock. The Board of Directors does not plan to pay dividends on either class of stock. Dividends (other than patronage dividends) on the Class A common stock (which is being registered herein) and Class B common stock, subject to the provisions of the Company's Certificate of Incorporation, may be declared out of gross margins of the Company, other than gross margins from operations with or for Members and other patronage source income, after deduction for expenses, reserves and provisions authorized by the Board of Directors. Dividends may be paid in cash, in property, or in shares of the common stock, subject to the provisions of the Certificate of Incorporation. See "Distribution of Patronage Dividends" and "Description of Common Stock". SELECTED FINANCIAL DATA
FOR THE FISCAL YEARS -------------------------------------------------------------- 1995 1994 1993 1992 1991 ---------- ---------- ---------- ---------- ---------- (IN THOUSANDS EXCEPT PER SHARE DATA) Revenues.............................. $2,437,002 $2,574,445 $2,420,727 $2,356,468 $2,139,887 Gross margins......................... $ 202,068 $ 223,331 $ 217,921 $ 216,608 $ 197,745 Net margins........................... $ 59,037 $ 60,318 $ 57,023 $ 60,629 $ 59,425 Patronage dividends................... $ 60,140 $ 60,421 $ 54,440 $ 60,901 $ 60,339 Total assets.......................... $ 819,576 $ 868,785 $ 803,528 $ 833,372 $ 763,109 Long-term debt and obligations under capital leases...................... $ 79,213 $ 75,756 $ 69,201 $ 72,749 $ 13,335 Promissory (subordinated) and instalment notes payable............ $ 186,335 $ 199,099 $ 217,996 $ 235,695 $ 235,289 Redeemable Class A common stock....... $ 5,294 $ 6,370 $ 6,633 $ 6,857 $ 7,077 Redeemable Class B common stock....... $ 113,062 $ 116,663 $ 110,773 $ 108,982 $ 104,151 Book value per share of Class A common stock and Class B common stock(a)... $ 102.68 $ 103.57 $ 103.85 $ 101.42 $ 102.50
- --------------- (a) The book value per share of the Company's Class A common stock and Class B common stock is the value, determined in accordance with generally accepted accounting principles, of such shares as shown by the respective year-end consolidated balance sheets of the Company, included elsewhere herein as reported on by the Company's independent auditors, after eliminating therefrom all value for goodwill, and other intangible assets and any retained earnings specifically appropriated by the Company's Board of Directors. 5 8 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS FISCAL YEAR 1995 COMPARED TO FISCAL YEAR 1994 In fiscal year 1995, Cotter & Company revenues were $2,437,002,000, a decrease of 5.3% from fiscal year 1994. This decrease was attributable to the phase-out of the V&S(R) Variety division and the sale of the General Power Equipment manufacturing division. Comparable sales categories were flat with the prior year due to the soft economy and unusual weather in the United States, combined with the declining sales in Mexico. In addition, the Company expanded the Pinpoint Pricing program which reduced the selling price of many core hardware and related products. Overall merchandise gross margins, as a percentage of revenues, decreased for the fourth year in a row. This reduction in gross margin percentage was the result of an expanded Pinpoint Pricing program and the withdrawal from the resigned businesses of V&S(R) Variety division and General Power Equipment manufacturing division. Warehouse, general and administrative expenses decreased by $18,652,000 or 14.0% compared to the prior year. As a percentage of revenue, these expenses were 4.7% in 1995 compared to 5.2% in 1994. The decrease in operating expenses was attributable to continued efforts to reduce operating costs, an expense recovery associated with prior years' favorable risk loss experience and efficiencies derived from the resigned businesses. Interest paid to Members decreased by $2,267,000 or 9.9% primarily due to a lower average principal balance and a decrease in the average interest rate. Other interest increased due to the increase in the Cotter & Company term note program. Net margins were $59,037,000 for the year ended December 30, 1995 compared to $60,318,000 for the year ended December 31, 1994. FISCAL YEAR 1994 COMPARED TO FISCAL YEAR 1993 In fiscal year 1994, the Company's revenues increased $153,718,000 from last year. Total revenues grew to $2,574,445,000, an increase of 6.4%. The improvement resulted from increased merchandise shipments to existing Members. Classes of merchandise with the strongest percentage increases in fiscal year 1994 were Lumber and Building Materials, up 11.9%; Farm and Garden Supplies, up 8.9%; Hardware Goods, up 7.3%; Appliances and Housewares, up 7.0%; and Variety and Related Goods, up 6.4%. The South Central region of the United States showed the largest growth at 9.4%. Other regions showing strong growth were the Southeast at 8.1%; the Northeast at 7.2%; and North Central at 7.1%. Consolidated gross margins increased by $5,410,000 or 2.5% but as a percentage of revenues decreased to 8.7% from 9.0% reflecting a change in the Company's sales mix from warehouse to direct shipments, combined with the new Pinpoint Pricing program and more promotionally oriented merchandising programs. 6 9 Warehouse, general and administrative expenses remained comparable with the previous year but expressed as a percentage of revenues decreased to 5.2% from 5.5% due to the Company's continuing efforts to reduce operating costs. Interest paid to Members decreased by $1,564,000 or 6.4% primarily due to a lower average interest rate. Net margins were $60,318,000 for the year ended December 31, 1994 compared to $57,023,000 for the year ended January 1, 1994. The fiscal year 1993 net margins include a one-time gain on the sale of properties of $5,985,000 offset by the related income tax of $2,162,000. LIQUIDITY AND CAPITAL RESOURCES Cash and cash equivalents in fiscal year 1995 increased $20,642,000 to $22,473,000. This improvement was primarily due to improved cash flow from operating activities, which was $106,640,000 for the year ended December 30, 1995 compared to $88,663,000 for the year ended December 31, 1994. This improvement in cash flow from operating activities was the result of better management of current assets. Inventories decreased by $69,436,000 during fiscal year 1995. Much of this reduction can be attributed to the sale of the V&S(R) Variety and General Power Equipment Manufacturing divisions. This was accomplished with no reduction in the Company's ability to provide merchandise to Members. This decrease in inventory was offset partially by a corresponding decrease in accounts payable of $36,584,000 and short-term borrowings of $6,672,000 from fiscal year 1994 to fiscal year 1995. Cash flows of $19,265,000 used for investing activities were comparable to the previous year. Financing activities required $66,733,000 for the year ended December 30, 1995 compared to $70,025,000 a year earlier. At December 30, 1995, net working capital decreased to $202,999,000 from $221,054,000 at December 31, 1994. The current ratio of 1.47 for December 30, 1995 is comparable to last year. The Company has various short-term lines of credit available under informal agreements with lending banks, cancelable by either party under specific circumstances, which amount to $63,000,000 at December 30, 1995. The Company pays commitment fees for these lines. The borrowings under these agreements were $2,657,000 at December 30, 1995 and $9,329,000 at December 31, 1994. The Company's capital is primarily derived from redeemable Class A common stock and retained earnings, together with promissory (subordinated) notes and redeemable nonvoting Class B common stock issued in connection with the company's annual patronage dividend. Funds derived from these capital resources are usually sufficient to satisfy long-term capital needs. Total capital expenditures, including those made under capital leases, were $28,912,000 in fiscal year 1995 compared to $21,427,000 in fiscal year 1994 and $13,382,000 in fiscal year 1993. These capital expenditures were principally related to additional equipment and technological improvements at the regional distribution centers and National Headquarters. Funding of capital expenditures in fiscal year 1996 is anticipated to come from operations and external sources, if necessary. On December 29, 1995, the Company finalized a private shelf agreement for available borrowings of up to $50,000,000. 7 10 BUSINESS The Company is a Member-owned wholesaler of hardware and related merchandise. It is the largest wholesaler of hardware and related merchandise in the United States. The Company also manufactures paint and paint applicators. For reporting purposes, the Company operates in a single industry as a Member-owned wholesaler cooperative. Membership entitles a Member to use certain Company trademarks and trade names, including the federally registered collective membership trademark indicating membership in "True Value(R) Hardware Stores". The "True Value(R)" collective membership mark has a present expiration date of January 2, 2003. The Company serves approximately 5,600 True Value(R) Hardware Stores throughout the United States. Primary concentrations of Members exist in California (approximately 8%), Illinois and New York (approximately 6% each), Pennsylvania and Texas (approximately 5% each) and Michigan, Ohio and Wisconsin (approximately 4% each). The Company's total sales of merchandise to its U.S. Members were divided among the following general classes of merchandise:
FOR THE FISCAL YEARS --------------------- 1995 1994 1993 ----- ----- ----- Hardware Goods..................................... 22.3% 20.1% 20.0% Electrical and Plumbing............................ 17.7% 15.8% 16.3% Painting and Cleaning.............................. 13.3% 14.4% 14.9% Farm and Garden.................................... 13.3% 12.5% 12.3% Lumber and Building Materials...................... 12.7% 12.9% 12.3% Appliances and Housewares.......................... 11.7% 10.4% 10.3% Sporting Goods and Toys............................ 9.0% 13.9% 13.9%
The Company serves its Members by purchasing products in quantity lots and selling them to Members in smaller lots, passing along any savings to Members in the form of lower prices and/or patronage dividends. The Company holds conventions and meetings for its Members in order to keep them better informed as to industry trends and the availability of new merchandise. The Company also provides each of its Members with an illustrated price catalog showing the products available from the Company. The Company's sales to its Members are divided into three categories, as follows: (1) warehouse shipment sales (approximately 48% of total sales); (2) direct shipment sales (approximately 42% of total sales); and (3) relay sales (approximately 10% of total sales). Warehouse shipment sales are sales of products purchased, warehoused, and resold by the Company upon orders from the Members. Direct shipment sales are sales of products purchased by the Company but delivered directly to Members from manufacturers. Relay sales are sales of products purchased by the Company in response to the requests of several Members for a product which is not normally held in inventory and is not susceptible to direct shipment. Generally, the Company will give notice to all Members of its intention to purchase products for relay shipment and then purchases only so many of such products as the Members order. When the product shipment arrives at the Company, it is not warehoused; rather, the Company breaks up the shipment and "relays" the appropriate quantities to the Members who placed orders. The Company also manufactures paint and paint applicators. The principal raw materials used by the Company are chemicals. All raw materials are purchased from outside sources. The Company has been able to obtain adequate sources of raw materials and other items used in production and no shortages of such materials which will materially impact operations are currently anticipated. 8 11 The Company annually sponsors two "markets" (one in the Spring and one in the Fall). In fiscal year 1996, these markets will be held in St. Louis, Missouri. Members are invited to the markets and generally place substantial orders for delivery during the period prior to the next market. During such markets, new merchandise and seasonal merchandise for the coming season is displayed to attending Members. As of February 24, 1996 and February 25, 1995, the Company had a backlog of firm orders (including relay orders) of approximately $23,000,000 and $21,000,000, respectively. It is anticipated that the entire backlog existing at February 24, 1996 will be filled by April 30, 1996. The Company's backlog at any given time is made up of two principal components: (i) normal resupply orders and (ii) market orders for future delivery. Resupply orders are orders from Members for merchandise to keep inventories at normal levels. Generally, such orders are filled the day following receipt, except that relay orders for future delivery (which are in the nature of resupply orders) are not intended to be filled for several months. Market orders for future delivery are Member orders for new or seasonal merchandise given at the Company's two markets, for delivery during the several months subsequent to the markets. Thus, the Company will have a relatively high backlog at the end of each market which will diminish in subsequent months until the next market. The retail hardware industry is characterized by intense competition. Independent retail hardware businesses served by the Company continue to face intense competition from chain stores, discount stores, home centers, and warehouse operations. Increased operating expenses for the retail stores, including increased costs due to longer open-store hours and higher rental costs of retail space, have cut into operating margins and brought pressures for lower merchandise costs, to which the Company has been responsive through a retail oriented competitive pricing strategy on high turnover, price sensitive items (Pinpoint Pricing program). The trueAdvantage program was introduced in 1995 to promote higher retail standards in order to build consumer goodwill and create a positive image for all True Value stores. The Company competes with other Member-owned and non-member-owned wholesalers as a source of supply and merchandising support for independent retailers. Competitive factors considered by independent retailers in choosing a source of supply include pricing, servicing capabilities, promotional support and merchandise selection and quality. Increased operating expenses and decreased margins have resulted in several non-member-owned wholesalers withdrawing from business. The Company, through a Canadian subsidiary, owns a majority equity interest in Cotter Canada Hardware and Variety Cooperative, Inc., a Canadian wholesaler of hardware, variety and related merchandise. This cooperative serves approximately 430 True Value(R) and V&S(R) Stores, all located in Canada. The cooperative has approximately 340 employees and generated less than 5% of the Company's consolidated revenue in fiscal year 1995. The Company operates several other subsidiaries, most of which are engaged in businesses providing additional services to the Company's Members. In the aggregate, these subsidiaries are not significant to the Company's results of operations. The Company employs approximately 3,500 persons in the United States on a full-time basis. Due to the widespread geographical distribution of the Company's operations, employee relations are governed by the practices prevailing in the particular area and are generally dealt with locally. Approximately 34% of the Company's hourly-wage employees are covered by collective bargaining agreements which are generally effective for periods of three or four years. In general, the Company considers its relationship with its employees to be good. 9 12 DISTRIBUTION OF PATRONAGE DIVIDENDS The Company operates on a cooperative basis with respect to business done with or for Members. All Members are entitled to receive patronage dividend distributions from the Company on the basis of gross margins of merchandise and/or services purchased by each Member. In accordance with the Company's By-Laws and Retail Member Agreement; the annual patronage dividend is paid to Members out of the gross margins from operations and other patronage source income, after deduction for expenses, reserves and provisions authorized by the Board of Directors. Patronage dividends are usually paid to Members within 60 days after the close of the Company's fiscal year; however, the Internal Revenue Code (the "Code") permits distribution of patronage dividends as late as the 15th day of the ninth month after the close of the Company's fiscal year, and the Company may elect to distribute the annual patronage dividend at a later time than usual in accordance with the provisions of the Code. The Company's By-Laws provide for the payment of year-end patronage dividends, after payment of at least 20% of such patronage dividends in cash, in qualified written notices of allocation including (i) Class B nonvoting common stock based on book value thereof, to a maximum of 2% of the Member's net purchases of merchandise from the Company for the year (except in unusual circumstances of individual hardships, in which case the Board of Directors reserves the right to make payments in cash), (ii) promissory (subordinated) notes, or (iii) other property. The Company may also issue nonqualified written notices of allocation to its Members as part of its annual patronage dividend. In determining the form of the annual patronage dividend, a Member's required investment in Class B common stock of the Company had been limited by the Board of Directors to an amount in the aggregate not exceeding an amount (computed on the basis of par value thereof and to the nearest multiple of $100) equal to (i) two percent (2%) of a Member's net purchases of direct shipment sales from the Company and purchases of direct shipment sales of "Competitive Edge Program Lumber" materials computed separately at one percent (1%), (ii) four percent (4%) of a Member's net purchases of relay sales from the Company and (iii) eight percent (8%) of a Member's net warehouse purchases from the Company in the year of the highest total net purchases of the three preceding years. In 1995, the Board of Directors adopted a plan to continue to adequately capitalize the Company, as a result, effective with the 1996 patronage dividend, these percentages may be changed. In that each Member has equal voting power (voting rights being limited to Class A common stock), acquisition of Class B common stock as patronage dividends generally results in the larger-volume Members having greater common stock equity in the Company but a lesser proportionate voting power per dollar of common stock owned than smaller-volume Members. PAYMENT OF PATRONAGE DIVIDENDS IN ACCORDANCE WITH THE INTERNAL REVENUE CODE The Code specifically provides for the taxation of cooperatives (such as the Company) and their patrons (such as the Company's Members) so as to ensure that the business earnings of cooperatives are currently taxable either to the cooperatives or to the patrons. The shares of Class B common stock and the promissory (subordinated) notes distributed by the Company to its Members as partial payment of the patronage dividend are "written notices of allocation" within the meaning of that phrase as used in the Code. In order that such written notices of allocation shall be deducted from earnings in determining taxable income of the Company, it is necessary that the Company 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 10 13 income. These conditions being met, the shares of Class B common stock and the promissory (subordinated) notes distributed in payment of patronage dividends become "qualified written notices of allocation" as that phrase is used in the Code. Section 1385(a) of the Code provides, in substance, that the amount of any patronage dividend which is paid in money or in qualified written notices of allocation shall be included in the gross income of the patron (Member) for the taxable year in which it receives such money or such qualified written notices of allocation. Thus, every year each Member may receive, as part of the Member's patronage dividend, non-cash "qualified written notices of allocation", which may include Class B common stock or promissory (subordinated) notes, the stated dollar amount of which must be recognized as gross income for the taxable year in which received. The portion of the patronage dividend paid in cash (at least 20%) may be insufficient, depending on the tax bracket in each Member's case, to provide funds for the payment of income taxes for which the Member will be liable as a result of the receipt of the entire patronage dividend, including cash, Class B common stock and promissory (subordinated) notes. In response to the provisions of the Code, the Company's By-Laws provide for the treatment of the shares of Class B common stock, promissory (subordinated) notes and such other notices as the Board of Directors may determine, distributed in payment of patronage dividends as "qualified written notices of allocation." The By-Laws provide in effect: (i) for payment of patronage dividends partly in cash, partly in qualified written notices of allocation (including the Class B common stock and promissory (subordinated) notes as described above), other property or in nonqualified written notices of allocation, and (ii) that membership in the organization (i.e. the status of being a Member of the Company) shall constitute consent by the Member to take the qualified written notices of allocation or other property into account in the Member's gross income as provided in Section 1385(a) of the Code. Under the provisions of the Code, persons who become or became Members of the Company or who retained their status as Members after adoption of the By-Laws providing that membership in the organization constitutes consent, and after receiving written notification and a copy of the By-Laws are deemed to have consented to the tax treatment of the cash and the qualified written notices of allocation in which the patronage dividends are paid, in accordance with Section 1385(a) of the Code. Written notification of the adoption of the By-Laws and its significance, and a copy of the By-Laws, were sent to each then existing Member and have been, and will continue to be, delivered to each party that became, or becomes a Member thereafter. Such consent is then effective except as to patronage occurring after the distributee ceases to be a Member of the organization or after the By-Laws of the organization cease to contain the provision with respect to the above described consent. Each year since 1978, the Company has paid its Members 30% of the annual patronage dividend in cash in respect to patronage (excluding nonqualified written notices of allocation) occurring in the preceding year. It is the judgment of management that the payment of 30% or more of patronage dividends in cash will not have a material adverse effect on the operations of the Company or its ability to maintain adequate working capital for the normal requirements of its business. However, the Company is obligated to distribute only 20% of the annual patronage dividend (excluding nonqualified written notices of allocation) in cash and it may distribute this lesser percentage in future years. In order to avoid the administrative inconvenience and expense of issuing separate certificates representing shares of Class B common stock and separate promissory (subordinated) notes to each Member, the 11 14 Company deposits a bulk certificate and a bulk promissory (subordinated) note with Harris Trust and Savings Bank, Chicago, Illinois for safekeeping for and on behalf of its Members and sends a written notice to each Member of these deposits and the allocation thereof to such Member. Each Member is, and is shown on the books of the Company as, the registered owner of his allocation of Class B common stock and promissory (subordinated) notes. Upon written request to the Company, a Member can obtain a certificate for all or any portion of his Class B common stock and a note or notes for all or any portion of the amount allocated to his account. MANAGEMENT The directors and principal executive officers of the Company are as follows:
NAME (AGE) OFFICE ---------- ------ Karen M. Agnew (53)............................... Vice President and Assistant Secretary Joe W. Blagg (46)................................. Director Daniel T. Burns (45).............................. Vice President and Secretary Danny R. Burton (49).............................. Vice President David W. Christmas (47)........................... Vice President William M. Claypool, III (73)..................... Director Samuel D. Costa, Jr. (54)......................... Director Daniel A. Cotter (61)............................. President, Chief Executive Officer and Director Leonard C. Farr (74).............................. Director William M. Halterman (48)......................... Director Robert F. Johnson (52)............................ Vice President Jerrald T. Kabelin (58)........................... Director Kerry J. Kirby (49)............................... Vice President, Chief Financial Officer and Treasurer Charles L. Kremers (45)........................... Vice President Robert J. Ladner (49)............................. Chairman of the Board and Director John F. Lottes III (55)........................... Director Lewis W. Moore (83)............................... Director Kenneth M. Noble (38)............................. Director Steven J. Porter (43)............................. Executive Vice President and Chief Operating Officer Richard L. Schaefer (66).......................... Director John P. Semkus (49)............................... Vice President George V. Sheffer (43)............................ Director Dennis A. Swanson (56)............................ Director John M. West, Jr. (43)............................ Director
During the past five years, the principal occupation of each director of the Company, other than Daniel A. Cotter, was the operation of retail hardware stores. 12 15 DESCRIPTION OF COMMON STOCK DIVIDEND RIGHTS. Dividends (other than patronage dividends) upon the Class A common stock (which is being registered herein) and Class B common stock, subject to the provisions of the Company's Certificate of Incorporation, may be declared out of gross margins of the Company, other than gross margins from operations with or for Members and other patronage source income, after deduction for expenses, reserves and provisions authorized by the Board of Directors. Dividends may be paid in cash, in property, or in shares of the common stock, subject to the provisions of the Certificate of Incorporation (See "Dividends"). VOTING RIGHTS. The Class A common stock, which is the sole voting stock, is offered only in ten (10) share units, and no party may acquire more than one unit; thus control of the Company is equally distributed among all stockholder-Members. The holders of Class A common stock have the exclusive voting power upon all questions submitted to shareholders, being entitled to one vote per share, with the right of "cumulative voting" in the election of directors. Pursuant to the Certificate of Incorporation and By-Laws of the Company, 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 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 shareholder-Member, ten (10) shares of Class A common stock. No shares of Class A common stock shall be issued or sold except in such units and under such circumstances as will assure that every holder of Class A common stock shall own an identical number of said shares. No shares of Class B common stock shall be issued or sold except to parties who are, at the time of issuance, a holder of shares of Class A common stock. REDEMPTION PROVISIONS. The Retail Member Agreement (the "Agreement") may be terminated by either the Company or the Member on sixty (60) days' written notice. Termination by the Company requires approval by a two-thirds vote of the Board of Directors, except in the following circumstances where the Company 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 the Company. In the event the Agreement is terminated, the Company undertakes to purchase and the Member is required to sell all of his Class A common stock and Class B common stock at a price equal to the book value thereof. Payment for the Class A common stock will be in cash. Payment for the Class B common stock will be a note payable in five equal annual installments which bears interest at the same rate per annum as the Promissory (subordinated) notes most recently issued as part of the Company's annual patronage dividend. SHAREHOLDERS. As of February 24, 1996, there were 5,222 shareholders of Class A common stock and 5,197 shareholders of Class B common stock. OTHER RESTRICTIONS AND RIGHTS. (a) There are no conversion rights, sinking fund provisions, or liability to further calls or assessment by the Company in regard to the Class A common stock. (b) The Company is given an automatic lien to secure the payment of any indebtedness due the Company from any shareholder of record upon the Class A common stock and Class B common stock shares of such shareholder and upon any declared and unpaid dividends thereon. 13 16 (c) There is no existing market for the Class A common stock being offered. Whenever any shareholder 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 shareholder 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, the Company is given the option, exercisable within ninety (90) days following the date upon which it receives written notice from the shareholder, 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 shareholder 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 book value thereof, as of the date of the most recently audited consolidated financial statements of the Company. Any disposition or attempted disposition or transfer, voluntary or involuntary, of common stock of the Company is null and void and confers no rights upon the transferee unless and until the Company 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 shareholder 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 common stock disposition to a person who prior thereto is the owner of shares of Class A common stock of the Company. LEGAL MATTERS The legality of the issuance of the Class A common stock offered hereby will be passed upon for the Company by Messrs. Arnstein & Lehr, Suite 1200, 120 South Riverside Plaza, Chicago, Illinois 60606. 14 17 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS COVERED BY REPORT OF INDEPENDENT AUDITORS
PAGE(S) ------- Report of Independent Auditors...................................................... 17 Consolidated Balance Sheet at December 30, 1995 and December 31, 1994............... 18-19 Consolidated Statement of Operations for each of the three years in the period ended December 30, 1995................................................................. 20 Consolidated Statement of Cash Flows for each of the three years in the period ended December 30, 1995................................................................. 21 Consolidated Statement of Capital Stock and Retained Earnings for each of the three years in the period ended December 30, 1995....................................... 22 Notes to Consolidated Financial Statements.......................................... 23-31
15 18 ------------------------------------- THIS PAGE INTENTIONALLY LEFT BLANK ------------------------------------- 16 19 REPORT OF INDEPENDENT AUDITORS To the Members and the Board of Directors Cotter & Company We have audited the accompanying consolidated balance sheets of Cotter & Company as of December 30, 1995 and December 31, 1994, 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 30, 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Cotter & Company at December 30, 1995 and December 31, 1994, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 30, 1995 in conformity with generally accepted accounting principles. ERNST & YOUNG LLP Chicago, Illinois February 12, 1996 17 20 COTTER & COMPANY ------------------ CONSOLIDATED BALANCE SHEET ASSETS
DECEMBER 30, DECEMBER 31, 1995 1994 ------------ ------------ (000'S OMITTED) Current assets: Cash and cash equivalents..................................... $ 22,473 $ 1,831 Accounts and notes receivable................................. 287,888 294,663 Inventories................................................... 315,311 384,747 Prepaid expenses.............................................. 11,180 7,861 ------------ ------------ Total current assets............................. 636,852 689,102 Properties owned, less accumulated depreciation................. 165,683 164,261 Properties under capital leases, less accumulated amortization.................................................. 5,393 4,691 Other assets.................................................... 11,648 10,731 ------------ ------------ Total assets..................................... $819,576 $868,785 ========== ==========
See Notes to Consolidated Financial Statements. 18 21 COTTER & COMPANY ------------------ CONSOLIDATED BALANCE SHEET LIABILITIES AND CAPITALIZATION
DECEMBER 30, DECEMBER 31, 1995 1994 ------------ ------------ (000'S OMITTED) Current liabilities: Accounts payable.............................................. $297,884 $334,468 Accrued expenses.............................................. 53,363 45,304 Short-term borrowings......................................... 2,657 9,329 Current maturities of notes, long-term debt and lease obligations................................................ 61,634 60,564 Patronage dividend payable in cash............................ 18,315 18,383 ------------ ------------ Total current liabilities........................ 433,853 468,048 Long-term debt.................................................. 75,449 72,163 Obligations under capital leases................................ 3,764 3,593 Capitalization: Promissory (subordinated) and instalment notes................ 186,335 199,099 Redeemable Class A common stock and partially paid subscriptions (Authorized 100,000 shares; issued and fully paid 52,710 and 63,350 shares)............................................. 5,294 6,370 Redeemable Class B nonvoting common stock and paid-in capital (Authorized 2,000,000 shares; issued and fully paid 1,055,700 and 1,047,756 shares; issuable as partial payment of patronage dividends, 62,005 and 104,275 shares)......... 113,062 116,663 Retained earnings............................................. 2,661 3,764 ------------ ------------ 307,352 325,896 Foreign currency translation adjustment....................... (842) (915) ------------ ------------ Total capitalization............................. 306,510 324,981 ------------ ------------ Total liabilities and capitalization............. $819,576 $868,785 ========== ==========
See Notes to Consolidated Financial Statements. 19 22 COTTER & COMPANY ------------------ CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEARS ENDED ---------------------------------------------- DECEMBER 30, DECEMBER 31, JANUARY 1, 1995 1994 1994 ------------ ------------ ---------- (000'S OMITTED) Revenues........................................... $2,437,002 $2,574,445 $2,420,727 ------------ ------------ ---------- Cost and expenses: Cost of revenues................................. 2,234,934 2,351,114 2,202,806 Warehouse, general and administrative............ 114,107 132,759 132,674 Interest paid to Members......................... 20,627 22,894 24,458 Other interest expense........................... 9,298 7,493 7,429 Gain on sale of properties owned................. -- (692) (5,985) Other income, net................................ (1,177) (604) (260) Income tax expense............................... 176 1,163 2,582 ------------ ------------ ---------- 2,377,965 2,514,127 2,363,704 ------------ ------------ ---------- Net margins........................................ $ 59,037 $ 60,318 $ 57,023 ========== ========== =========
See Notes to Consolidated Financial Statements. 20 23 COTTER & COMPANY ------------------ CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED ------------------------------------------------ DECEMBER 30, DECEMBER 31, JANUARY 1, 1995 1994 1994 ------------ ------------ ---------- (000'S OMITTED) Operating activities: Net margins....................................... $ 59,037 $ 60,318 $ 57,023 Adjustments to reconcile net margins to cash and cash equivalents from operating activities: Depreciation and amortization.................. 20,706 21,613 21,566 Provision for losses on accounts and notes receivable................................... 3,741 4,233 4,057 Changes in operating assets and liabilities: Accounts and notes receivable.................. (13,921) (33,112) (38,605) Inventories.................................... 69,436 (49,145) 183 Accounts payable............................... (36,584) 79,957 (45,070) Accrued expenses............................... 7,552 6,022 (1,143) Other adjustments, net......................... (3,327) (1,223) (2,679) ------------ ------------ ---------- Net cash and cash equivalents provided by (used for) operating activities......................... 106,640 88,663 (4,668) ------------ ------------ ---------- Investing activities: Additions to properties owned..................... (24,904) (21,427) (13,382) Proceeds from sale of properties owned............ 5,022 2,174 13,999 Changes in other assets........................... 617 1,132 (3,850) ------------ ------------ ---------- Net cash and cash equivalents (used for) investing activities.......... (19,265) (18,121) (3,233) ------------ ------------ ---------- Financing activities: Payment of annual patronage dividend.............. (18,383) (16,614) (18,570) Payment of notes, long-term debt and lease obligations.................................... (43,106) (39,632) (32,730) Proceeds from long-term borrowings................ 3,000 -- -- Increase (decrease) in short-term borrowings...... (6,672) (13,851) 23,059 Purchase of common stock.......................... (1,740) (216) (470) Proceeds from sale of Class A common stock........ 168 288 323 ------------ ------------ ---------- Net cash and cash equivalents (used for) financing activities.......... (66,733) (70,025) (28,388) ------------ ------------ ---------- Net increase (decrease) in cash and cash equivalents....................................... 20,642 517 (36,289) ------------ ------------ ---------- Cash and cash equivalents at beginning of year...... 1,831 1,314 37,603 ------------ ------------ ---------- Cash and cash equivalents at end of year............ $ 22,473 $ 1,831 $ 1,314 ========== ========== ========
See Notes to Consolidated Financial Statements. 21 24 COTTER & COMPANY ------------------ CONSOLIDATED STATEMENT OF CAPITAL STOCK AND RETAINED EARNINGS FOR THE THREE YEARS ENDED DECEMBER 30, 1995
COMMON STOCK, $100 PAR VALUE -------------------------------------- CLASS B FOREIGN CLASS A ---------------- CURRENCY ------------------- ISSUED AND RETAINED TRANSLATION ISSUED SUBSCRIBED TO BE ISSUED EARNINGS ADJUSTMENT ------ ---------- ---------------- -------- ----------- (000'S OMITTED) Balances at January 2, 1993............. $6,808 $ 49 $108,982 $ 1,284 $(932) Net margins........................... 57,023 Foreign currency translation adjustment......................... 262 Patronage dividend.................... 7,686 (54,440) Stock issued for paid-up subscriptions...................... 312 (312) Stock subscriptions................... 308 Stock purchased and retired........... (532) (5,895) ------ ------ -------- ------ ------ Balances at January 1, 1994............. 6,588 45 110,773 3,867 (670) Net margins........................... 60,318 Foreign currency translation adjustment......................... (245) Patronage dividend.................... 10,829 (60,421) Stock issued for paid-up subscriptions...................... 275 (275) Stock subscriptions................... 265 Stock purchased and retired........... (528) (4,939) ------ ------ -------- ------ ------ Balances at December 31, 1994........... 6,335 35 116,663 3,764 (915) Net margins........................... 59,037 Foreign currency translation adjustment......................... 73 Patronage dividend.................... 6,422 (60,140) Stock issued for paid-up subscriptions...................... 168 (168) Stock subscriptions................... 156 Stock purchased and retired........... (1,232) (10,023) ------ ------ -------- ------ ------ Balances at December 30, 1995........... $5,271 $ 23 $113,062 $ 2,661 $(842) ====== ====== ======== ====== ======
- --------------- Subscribed Class A common stock amounts are net of unpaid amounts of $1,000 at December 30, 1995 and December 31, 1994, $14,000 at January 1, 1994 and $27,000 at January 2, 1993 (for 240, 360, 590, and 760 shares subscribed, respectively). See Notes to Consolidated Financial Statements. 22 25 COTTER & COMPANY ------------------ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. DESCRIPTION OF BUSINESS AND ACCOUNTING POLICIES Cotter & Company (the Company) is a Member-owned wholesaler of hardware and related merchandise. The Company also manufactures paint and paint applicators. The Company's goods and services are sold predominantly within the United States, primarily to retailers of hardware and related lines, each of whom has purchased ten shares of the Company's Class A common stock upon becoming a Member. The Company operates in a single industry as a Member-owned wholesaler cooperative. 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. The significant accounting policies of the Company are summarized below. Consolidation. The consolidated financial statements include the accounts of the Company and all wholly-owned subsidiaries. The consolidated financial statements also include the accounts of Cotter Canada Hardware and Variety Cooperative, Inc., a Canadian Member-owned wholesaler of hardware, variety and related merchandise, in which the Company has a majority equity interest. On January 13, 1995, the Company agreed to the sale of certain inventory of its V&S(R) Variety division to a national wholesaler who has also agreed to supply the majority of the V&S(R) Stores. Also, on January 31, 1995, the Company sold certain assets of its outdoor power equipment manufacturing division to a nationally recognized company and secured a favorable supply agreement for such equipment. These transactions did not have a material impact on the Company's results of operation or financial position. Capitalization. The Company's capital (Capitalization) is derived from redeemable Class A voting common stock and retained earnings, together with promissory (subordinated) notes and redeemable Class B nonvoting common stock issued in connection with the Company's annual patronage dividend. The By-laws provide for partially meeting the Company's capital requirements by payment of the year-end patronage dividend, of which at least twenty percent must be paid in cash, and the balance in five-year promissory (subordinated) notes and redeemable $100 par value Class B common stock. Membership may be terminated without cause by either the Company or the Member upon sixty days' written notice. In the event membership is terminated, the Company undertakes to purchase, and the Member is required to sell to the Company, all of the Member's Class A common stock and Class B common stock at book value. Payment for the Class A common stock will be in cash. Payment for the Class B common stock will be a note payable in five equal annual instalments bearing interest at the same rate per annum as the promissory (subordinated) notes most recently issued as part of the Company's patronage dividend. Cash equivalents. The Company classifies its temporary investments in highly liquid debt instruments, with an original maturity of three months or less, as cash equivalents. Inventories. Inventories are stated at the lower of cost, determined on the "first-in, first-out" basis, or market. Properties. Properties are recorded at cost. Depreciation and amortization are computed by using the straight-line method over the following estimated useful lives: buildings and improvements--10 to 40 years; 23 26 COTTER & COMPANY ------------------ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 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. Retirement plans. The Company sponsors two noncontributory defined benefit retirement plans covering substantially all of its employees. Company contributions to union-sponsored defined contribution plans are based on collectively bargained rates times hours worked. The Company's policy is to fund annually all tax-qualified plans to the extent deductible for income tax purposes. Use of estimates. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Reporting year. The Company's reporting year-end is the Saturday closest to December 31. 2. INVENTORIES Inventories consisted of:
DECEMBER 30, 1995 DECEMBER 31, 1994 ----------------- ----------------- (000'S OMITTED) Manufacturing inventories: Raw materials......................... $ 2,139 $ 12,986 Work-in-process and finished goods.... 19,407 60,094 -------- -------- 21,546 73,080 Merchandise inventories................. 293,765 311,667 -------- -------- $ 315,311 $ 384,747 ======== ========
3. PROPERTIES Properties owned or leased under capital leases consisted of:
DECEMBER 30, 1995 DECEMBER 31, 1994 -------------------- -------------------- OWNED LEASED OWNED LEASED -------- ------- -------- ------- (000'S OMITTED) Buildings and improvements.................... $173,568 $ -- $168,311 $ -- Machinery and warehouse equipment............. 60,197 -- 79,953 -- Office and computer equipment................. 77,340 -- 62,868 -- Transportation equipment...................... 21,076 11,454 22,757 14,556 -------- -------- -------- -------- 332,181 11,454 333,889 14,556 Less accumulated depreciation and amortization................................ 178,793 6,061 181,920 9,865 -------- -------- -------- -------- 153,388 5,393 151,969 4,691 Land.......................................... 12,295 -- 12,292 -- -------- -------- -------- -------- $165,683 $ 5,393 $164,261 $ 4,691 ======== ======== ======== ========
24 27 COTTER & COMPANY ------------------ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 4. LONG-TERM DEBT AND BORROWING ARRANGEMENTS Long-term debt consisted of:
DECEMBER 30, 1995 DECEMBER 31, 1994 ----------------- ----------------- (000'S OMITTED) Senior note at 8.60%..................... $49,000 $50,000 Term loans: 5.97%.................................. 3,000 -- Canadian prime (7.50% and 8.00%, respectively)....................... 3,665 3,565 Variable (7.60% and 7.20%, respectively)....................... 6,200 6,200 Redeemable (subordinated) term notes: 6.85%.................................. 3,328 -- 6.97%.................................. 1,131 -- 7.00%.................................. 4,363 4,346 7.05%.................................. 3,054 -- 7.37%.................................. 1,491 1,512 7.61%.................................. 3,330 3,540 Industrial Revenue Bonds (5.28%):........ 4,000 4,000 ----------------- ----------------- 82,562 73,163 Less amounts due within one year......... 7,113 1,000 ----------------- ----------------- $75,449 $72,163 ============= =============
Principal payments for the 8.60% senior note are due in incrementally increasing amounts through maturity in 2007. Under the senior note agreement, the Company is required to meet certain financial ratios and covenants. Principal payments for the 5.97% term loan are due quarterly beginning in 1996 through maturity in 1999. Payments for the other two term loans are due in 1997 and 1999, respectively. The redeemable (subordinated) term notes were issued in exchange for promissory (subordinated) notes maturing on December 31, 1995 and 1994, that were held by promissory (subordinated) note holders, who do not own the Company's Class A common stock. The notes are due in 1996, 1997, 1998 and 1999. On October 1, 1997, and every three-year period thereafter, the interest rate on the 5.28% industrial revenue bonds will be adjusted based on a bond index. These bonds may be redeemed at face value at either the option of the Company or the bondholders at each interest reset date through maturity in 2003. Total maturities of long-term debt for fiscal years 1996, 1997, 1998, 1999, 2000 and thereafter are $7,113,000, $12,234,000, $9,211,000, $14,004,000, $4,000,000 and $36,000,000, respectively. 25 28 COTTER & COMPANY ------------------ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) In addition, the Company has various short-term lines of credit available under informal agreements with lending banks, cancellable by either party under specific circumstances, which amount to $63,000,000 at December 30, 1995. The Company pays commitment fees for these lines. The borrowings under these agreements were $2,657,000 at December 30, 1995 and were at a rate of 7.50%. All of these borrowings were for the Canadian subsidiary. At December 31, 1994, the Company had a weighted average interest rate on short-term borrowings of 6.63% and included both U.S. and Canadian borrowings. 5. CAPITAL LEASES AND OTHER LEASE COMMITMENTS The Company rents buildings and warehouse, office, computer and transportation equipment under operating and capital leases. The following is a schedule of future minimum lease payments under capital and operating leases, together with the present value of the net minimum lease payments, as of December 30, 1995:
CAPITAL OPERATING ------- --------- (000'S OMITTED) Fiscal years 1996................................................. $ 1,984 $ 6,832 1997................................................. 1,409 9,067 1998................................................. 1,135 7,102 1999................................................. 800 5,669 2000................................................. 305 5,134 Thereafter........................................... 306 47,599 ------- --------- Net minimum lease payments............................. 5,939 $81,403 ======= Less amount representing interest...................... 314 ------- Present value of net minimum lease payments............ 5,625 Less amounts due within one year....................... 1,861 ------- $ 3,764 ======
Capitalized leases expire at various dates and generally provide for purchase options but not renewals. Purchase options provide for purchase prices at either fair market value or a stated value which is related to the lessor's book value at expiration of the lease term. 26 29 COTTER & COMPANY ------------------ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Rent expense under operating leases was as follows:
FOR THE YEARS ENDED -------------------------------------------- DECEMBER 30, DECEMBER 31, JANUARY 1, 1995 1994 1994 ------------ ------------ ---------- (000'S OMITTED) Minimum rent.................................. $ 9,553 $8,487 $8,174 Contingent rent............................... 510 611 575 ---------- ------- --- ------- - $ 10,063 $9,098 $8,749 ========== ========== ========
6. CAPITALIZATION Promissory (subordinated) and instalment notes consisted of:
DECEMBER 30, DECEMBER 31, 1995 1994 ------------ ------------ (000'S OMITTED) Promissory (subordinated) notes - Due on December 31, 1995--7.50%........................ $ -- $ 20,783 Due on December 31, 1995--10.00%....................... -- 35,355 Due on December 31, 1996--6.00%........................ 23,588 24,888 Due on December 31, 1996--9.50%........................ 27,029 28,436 Due on December 31, 1997--10.00%....................... 16,660 17,579 Due on December 31, 1997--7.87%........................ 15,616 16,793 Due on December 31, 1998--7.47%........................ 16,461 -- Due on December 31, 1998--8.00%........................ 27,048 28,512 Due on December 31, 1999--8.00%........................ 25,470 27,030 Due on December 31, 1999--8.20% (issued in 1995)....... 25,327 27,909 Due on December 31, 2000--6.50%........................ 23,996 25,628 Due on December 31, 2000--7.58% (to be issued)......... 32,047 -- Instalment notes at interest rates of 6.50% to 10.00% with maturities through 1999........................ 5,753 4,010 ---------- ---------- 238,995 256,923 Less amounts due within one year......................... 52,660 57,824 ---------- ---------- $186,335 $199,099 ========== ==========
The promissory notes are issued principally in payment of the annual patronage dividend. Promissory notes are subordinated to indebtedness to banking institutions, trade creditors and other indebtedness of the Company as specified by its Board of Directors. Notes to be issued relate to the patronage dividend which is distributed after the end of the year. Prior experience indicates that the maturities of a significant portion of the notes due within one year are extended, for a three year period, at interest rates substantially equivalent to competitive market rates of comparable instruments. The Company anticipates that this practice will continue. 27 30 COTTER & COMPANY ------------------ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Total maturities of promissory and instalment notes for fiscal years 1996, 1997, 1998, 1999, and 2000 are $52,660,000, $34,007,000, $44,772,000, $51,514,000, and $56,042,000, respectively. 7. FAIR VALUE OF FINANCIAL INSTRUMENTS Due to the uncertainty of the ultimate maturities of the promissory (subordinated) notes, management believes it is impracticable to estimate their fair value. The carrying amounts of the Company's other financial instruments approximate fair value. Fair value was estimated using discounted cash flow analyses, based on the Company's incremental borrowing rate for similar borrowings. 8. INCOME TAXES At December 30, 1995, the Company has alternative minimum tax credit carryforwards of approximately $900,000 which do not expire. The carryforwards are available to offset future federal tax liabilities. Significant components of the Company's deferred tax assets and liabilities as of December 30, 1995 resulted primarily from alternative minimum tax credit carryforwards and temporary differences between income tax and financial reporting for depreciation, vacation pay and contributions to fund retirement plans. Significant components of the provision (benefit) for income taxes are as follows:
FOR THE YEARS ENDED -------------------------------------------- DECEMBER 30, DECEMBER 31, JANUARY 1, 1995 1994 1994 ------------ ------------ ---------- (000'S OMITTED) Current: Federal..................................... $ (363) $ 486 $ 343 State....................................... 379 462 22 Foreign..................................... 273 278 237 ------------ ------------ ---------- Total current............................... 289 1,226 602 ------------ ------------ ---------- Deferred: Federal..................................... (145) (147) 1,582 State....................................... (26) (26) 317 Foreign..................................... 58 110 81 ------------ ------------ ---------- Total deferred.............................. (113) (63) 1,980 ------------ ------------ ---------- $ 176 $1,163 $2,582 ========== ========== ========
28 31 COTTER & COMPANY ------------------ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The Company operates as a nonexempt cooperative and is allowed a deduction in determining its taxable income for amounts paid as patronage dividend based on margins from business done with or for Members. The reconciliation of income tax expense to income tax computed at the U.S. federal statutory tax rate of 35% in fiscal year 1995, 1994 and 1993 is as follows:
FOR THE YEARS ENDED ------------------------------------------ DECEMBER 30, DECEMBER 31, JANUARY 1, 1995 1994 1994 ------------ ------------ ---------- (000'S OMITTED) Tax at U.S. statutory rate.................. $ 20,725 $ 21,518 $ 20,862 Effects of: Patronage dividend........................ (21,049) (21,147) (19,054) State income taxes, net of federal tax benefit................................ 229 283 220 Other, net................................ 271 509 554 -------- -------- --------- $ 176 $ 1,163 $ 2,582 ======== ======== =========
9. CASH FLOW The Company's noncash financing and investing activities in fiscal year 1995 include acquisition of transportation equipment by entering into capital leases and the acquisition of property for resale. These transactions aggregate $4,008,000. In addition, the annual patronage dividend and promissory (subordinated) note renewals relating to noncash operating and financing activities are as follows:
FOR THE YEARS ENDED ------------------------------------------ DECEMBER 30, DECEMBER 31, JANUARY 1, 1995 1994 1994 ------------ ------------ ---------- (000'S OMITTED) Patronage dividend payable in cash......................... $ 18,315 $ 18,383 $ 16,614 Promissory (subordinated) notes............................ 23,536 23,213 20,852 Class B nonvoting common stock............................. (2,592) 5,900 2,086 Instalment notes........................................... 5,972 3,058 2,939 Member indebtedness........................................ 14,909 9,867 11,949 -------- -------- -------- $ 60,140 $ 60,421 $ 54,440 ======== ======== ======== Note renewals.............................................. $ 23,974 $ 26,191 $ 27,187 ======== ======== ========
Cash paid for interest during fiscal years 1995, 1994 and 1993 totaled $29,624,000, $30,583,000 and $32,056,000, respectively. Cash paid for income taxes during fiscal years 1995, 1994 and 1993 totaled $1,012,000, $1,709,000 and $1,387,000, respectively. 29 32 COTTER & COMPANY ------------------ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 10. RETIREMENT PLANS The components of net pension cost for the Company administered pension plans consisted of:
FOR THE YEARS ENDED ---------------------------------------------- DECEMBER 30, DECEMBER 31, JANUARY 1, 1995 1994 1994 ------------ ------------ ---------- (000'S OMITTED) Income: Actual return (loss) on plan assets................. $ 25,564 $ (1,543) $ 7,486 Amortization of excess plan assets.................. 914 920 920 ------------ ------------ ---------- 26,478 (623) 8,406 ------------ ------------ ---------- Expenses: Service cost-benefits earned during year............ 4,152 4,765 4,556 Interest on projected benefit obligation............ 7,242 6,736 6,266 Deferral of excess (deficiency) of actual over estimated return on plan assets.................. 18,021 (8,815) 1,042 ------------ ------------ ---------- 29,415 2,686 11,864 ------------ ------------ ---------- Net pension cost...................................... $ 2,937 $ 3,309 $ 3,458 ========== ========== =======
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 7.25% and 4.50%, respectively, in 1995, 8.50% and 4.50%, respectively, in fiscal year 1994 and 7.50% and 4.50%, respectively, in fiscal year 1993. These changes in actuarial assumptions did not have a material impact on net pension cost for fiscal year 1995 and the Company does not anticipate that these changes will have a material impact on net pension cost in future years. In fiscal years 1995, 1994 and 1993, the expected long-term rate of return on assets was 9.50%. During 1995, the Company amended its pension plan. This amendment had no material impact on the projected benefit obligation. Plan assets are composed primarily of corporate equity and debt securities. Benefits are based on years of service and the employee's compensation during the last ten years of employment, offset by a percentage of 30 33 COTTER & COMPANY ------------------ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Social Security retirement benefits. Trusteed net assets and actuarially computed benefit obligations for the Company administered pension plans are presented below:
DECEMBER 30, DECEMBER 31, 1995 1994 ------------ ------------ (000'S OMITTED) Assets: Total plan assets at fair value................................. $104,396 $ 80,046 ========== ========== Obligations: Accumulated benefit obligations: Vested....................................................... $ 77,435 $ 53,055 Non-vested................................................... 10,830 7,683 Effect of projected compensation increases...................... 21,730 19,924 ------------ ------------ Total projected benefit obligations............................. 109,995 80,662 ------------ ------------ Net excess assets (liabilities): Unrecognized: Unamortized excess assets at original date................... 7,673 8,643 Net actuarial gain (loss).................................... (3,793) 565 Prior service costs.......................................... (4,017) (5,313) Recognized accrued pension cost................................. (5,462) (4,511) ------------ ------------ Total net excess assets (liabilities)........................... (5,599) (616) ------------ ------------ Total obligations and net excess assets (liabilities)............. $104,396 $ 80,046 ========== ==========
The Company also participates in union-sponsored defined contribution plans. Pension costs related to these plans were $720,000, $757,000, and $702,000 for fiscal years 1995, 1994 and 1993, respectively. 31 34 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 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.................... 2 Reports to Security Holders.............. 2 Documents Incorporated by Reference...... 2 Summary.................................. 3 The Company.............................. 4 Use of Proceeds.......................... 4 Plan of Distribution..................... 4 Dividends................................ 5 Selected Financial Data.................. 5 Management's Discussion and Analysis of Financial Condition and Results of Operations............................. 6 Business................................. 8 Distribution of Patronage Dividends...... 10 Management............................... 12 Description of Common Stock.............. 13 Legal Matters............................ 14 Index to Consolidated Financial Statements Covered by Report of Independent Auditors................... 15
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. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- COTTER & COMPANY 10,660 SHARES CLASS A COMMON STOCK $100 PAR VALUE (IN UNITS OF 10 SHARES) ------------------ PROSPECTUS ------------------ DATED APRIL , 1996 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 35 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 Common Stock being registered: Registration Fee.................................................... $ -- Printing of Registration Statement and Prospectus................... 16,000 Accounting Fees and Expenses........................................ 9,000 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 The Company's Certificate of Incorporation, as amended, provides that the Company shall indemnify, in accordance with and to the full extent permitted by the Delaware General Corporation Law, any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (including, without limitation, an action by or in the right of the Company), by reason of the fact that such person is or was a director, officer, employee or agent of the Company, or is or was serving at the request of the Company as a director, officer, employee or agent of another Company, partnership, joint venture, trust or other enterprise, against any liability or expense actually and reasonably incurred by such person in respect thereof. Such indemnification is not exclusive of any other right of such director, officer, or employee to indemnification provided by law or otherwise. Additionally, pursuant to Section 145(a)-(g) of the Delaware General Corporation Law which empowers a corporation to indemnify its directors, officers, employees and agents, the Board of Directors of the Company on July 23, 1973 adopted a By-Law (Article XII, Indemnification of Directors, Officers and Employees--Exhibit 3-A to the Company's Form 10-K Annual Report for the year ended January 1, 1994 and incorporated herein by reference) providing for such indemnification. The following is a summary of the most significant provisions of said By-Law: As against third parties, the Company shall indemnify any director, officer, employee or agent for any expenses (including attorneys' fees, judgments, fines and amounts paid in settlement) actually and reasonably incurred in defending any threatened, pending or completed suit or proceeding, whether civil, criminal, administrative or investigative brought against such person by reason of the fact that he was or is a director, officer, employee or agent, if such person acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interest of the Company, and with respect to any criminal action or proceeding if he had no reasonable cause to believe his conduct unlawful. In any action or suit by or in the right of the Company, the Company shall indemnify any director, officer, employee or agent who is or was a party or threatened to be made a party to such threatened, pending or completed action or suit, for expenses (including attorney's fees and amounts paid in settlement) reasonably and actually incurred in connection with the defense or settlement of such suit or action, if such person acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interest of the Company, except that no indemnification shall be made if such person has been adjudged to be liable for S-1 36 negligence or misconduct in the performance of his duty to the Company unless and only to the extent that the Court of Chancery of Delaware or the court where the suit was brought finds that in view of all the circumstances of the case, such person is entitled to indemnification. Any indemnification, unless ordered by a court, shall be made by the Company only as authorized in the specific case upon a determination that indemnification is proper in the circumstances because the party to be indemnified has met the applicable standard of conduct. Such determination shall be made by the Board of Directors by a majority vote of a quorum, consisting of directors who were not parties of such action, suit or proceeding, or if such a quorum is not obtainable, or even if obtainable, if a quorum of disinterested directors so directs, by independent legal counsel in a written opinion, or by the stockholders. Additionally, the shareholders of the Company have approved an amendment to the Certificate of Incorporation to eliminate personal liability of directors to the Company or its shareholders for monetary damages for breach of fiduciary duty of care. The amendment provides that a director of the Company shall not be liable to the Company or its stockholders for monetary damages for breach of fiduciary duty as a director, except to the extent such exemption from liability or limitation thereof is not permitted under the Delaware General Corporation Law as the same exists or may hereafter be amended. Insofar as indemnification for liabilities arising under the Securities Act of 1933 is concerned, see Item 17 "Undertakings" below. ITEM 16. EXHIBITS.
EXHIBIT NUMBER DESCRIPTION ----- ----------- 4-A Article Fourth of the Certificate of Incorporation of the Company, setting forth the designations and the powers, preferences and rights, and the qualifications, limitations and restrictions of the Class A common stock and Class B common stock of the Company. Article Twelfth of the Certificate of Incorporation of the Company, setting forth certain limitations on the rights of shareholders to bring an action against directors for breach of the duty of care. Incorporated by reference--Exhibit 3-A to the Company's Form 10-K Annual Report for the year ended January 1, 1994. 4-B Articles VI, VII, VIII, IX and XI of the By-Laws of the Company relating to: certain qualifications, limitations and restrictions on the common stock of the Company; the Member agreement between the Company and its shareholders; the payment of patronage dividends; dividends; qualifying shares; and valuation of Class B common stock of the Company issued as part of the annual patronage dividend. Incorporated by reference--Exhibit 3-B to the Company's Form 10-K Annual Report for the year ended January 1, 1994. 4-C Specimen certificate of Class A common stock. Incorporated by reference--Exhibit 4-A to Registration Statement on Form S-2 (No. 2-82836). 4-D Specimen certificate of Class B common stock. Incorporated by reference--Exhibit 4-B to Registration Statement on Form S-2 (No. 2-82836). 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).
S-2 37
EXHIBIT NUMBER DESCRIPTION ----- ----------- 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 securing 8.60% Senior Notes in the principal sum of $50,000,000 with a maturity date of April 1, 2007. 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). 5 Opinion of Messrs. Arnstein & Lehr. 10-A Form of "Retail Member Agreement with Cotter & Company" between the Company and its Members that offer primarily hardware and related items. Incorporated by reference--Exhibit 10-C to Post-Effective Amendment No. 2 to Registration Statement on Form S-2 (No. 33-39477). 10-B Current form of "Subscription to Shares of Cotter & Company". Incorporated by reference--Exhibit 10-H to Registration Statement on Form S-2 (No. 2-82836). 10-C Cotter & Company Defined Lump Sum Pension Plan (As Amended and Restated Effective As Of January 1, 1996). 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 (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). 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).
S-3 38
EXHIBIT NUMBER DESCRIPTION ----- ------------------------------------------------------------------------------- 10-J Contract between Daniel T. Burns and the Company. 10-K Contract between Kerry J. Kirby and the Company. 23-A Consent of Arnstein & Lehr is included in Exhibit 5 to this Registration Statement. 23-B Consent of Independent Auditors (included on page S-6). 27 Financial Data Schedule.
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. S-4 39 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 AMENDMENT TO REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF CHICAGO, STATE OF ILLINOIS, ON THE 19TH DAY OF MARCH 1996. COTTER & COMPANY By: /s/ DANIEL A. COTTER --------------------------------------- Daniel A. Cotter President, Chief Executive Officer and Director PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS AMENDMENT TO REGISTRATION STATEMENT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS IN THE CAPACITIES AND ON THE DATES INDICATED.
SIGNATURE TITLE DATE - --------------------------------------- --------------------------------------------- --------------- /s/ DANIEL A. COTTER President, Chief Executive Officer and March 19, 1996 - --------------------------------------- Director Daniel A. Cotter /s/ STEVEN J. PORTER Executive Vice President and Chief Operating March 19, 1996 - --------------------------------------- Officer Steven J. Porter /s/ KERRY J. KIRBY Vice President, Treasurer and Chief Financial March 19, 1996 - --------------------------------------- Officer Kerry J. Kirby /s/ JERRALD T. KABELIN Chairman of the Board and Director March 19, 1996 - --------------------------------------- Jerrald T. Kabelin /s/ WILLIAM M. CLAYPOOL, III Director March 19, 1996 - --------------------------------------- William M. Claypool, III /s/ SAMUEL D. COSTA, JR. Director March 19, 1996 - --------------------------------------- Samuel D. Costa, Jr. /s/ LEONARD C. FARR Director March 19, 1996 - --------------------------------------- Leonard C. Farr /s/ WILLIAM M. HALTERMAN Director March 19, 1996 - --------------------------------------- William M. Halterman /s/ ROBERT J. LADNER Director March 19, 1996 - --------------------------------------- Robert J. Ladner /s/ LEWIS W. MOORE Director March 19, 1996 - --------------------------------------- Lewis W. Moore /s/ KENNETH M. NOBLE Director March 19, 1996 - --------------------------------------- Kenneth M. Noble /s/ RICHARD L. SCHAEFER Director March 19, 1996 - --------------------------------------- Richard L. Schaefer /s/ GEORGE V. SHEFFER Director March 19, 1996 - --------------------------------------- George V. Sheffer /s/ DENNIS A. SWANSON Director March 19, 1996 - --------------------------------------- Dennis A. Swanson /s/ ROBERT G. WATERS Director March 19, 1996 - --------------------------------------- Robert G. Waters /s/ JOHN M. WEST, JR. Director March 19, 1996 - --------------------------------------- John M. West, Jr. /s/ DONALD E. YEAGER Director March 19, 1996 - --------------------------------------- Donald E. Yeager
S-5 40 CONSENT OF INDEPENDENT AUDITORS We consent to the use of our report dated February 12, 1996, in Post-Effective Amendment No. 5 to the Registration Statement (Form S-2 No. 33-39477) and related Prospectus of Cotter & Company for the registration of 10,660 shares of its Class A common stock. We also consent to the incorporation by reference therein our report with respect to the consolidated financial statements of Cotter & Company for each of the three years in the period ended December 30, 1995 included in the Annual Report (Form 10-K) of Cotter & Company for the year ended December 30, 1995, filed with the Securities and Exchange Commission. ERNST & YOUNG LLP Chicago, Illinois March 19, 1996 S-6 41 INDEX TO EXHIBITS FILED TO POST-EFFECTIVE AMENDMENT NO. 5 TO REGISTRATION STATEMENT ON FORM S-2 OF COTTER & COMPANY
EXHIBIT NUMBER EXHIBIT - ------ ---------------------------------------------------------------------------------- 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 securing 8.60% Senior Notes in the principal sum of $50,000,000 with a maturity date of April 1, 2007. 5 Opinion of Messrs. Arnstein & Lehr. 10-C Cotter & Company Defined Lump Sum Pension Plan (As Amended and Restated Effective as of January 1, 1996). 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). 10-J Contract between Daniel T. Burns and the Company. 10-K Contract between Kerry J. Kirby and the Company. 23-B Consent of Independent Auditors (included on page S-6). 27 Financial Data Schedule
Exhibits incorporated by reference are listed on Pages S-2 through S-4 of Post-Effective Amendment No. 5 to Registration Statement on Form S-2 of Cotter & Company. S-7 EX-4.H 2 PRIVATE SHELF AGREEMENTS 1 EXHIBIT 4.H - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- COTTER & COMPANY $50,000,000 PRIVATE SHELF AGREEMENT DATED AS OF DECEMBER 29, 1995 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 COTTER & COMPANY 8600 West Bryn Mawr Avenue Chicago, Illinois 60631 As of December 29, 1995 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, COTTER & COMPANY, a Delaware corporation (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. 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 $50,000,000, to be dated the date 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", "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] 3 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. 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". 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"). Each Request for Purchase shall be made to Prudential by telecopier or overnight delivery service, and shall (i) specify the aggregate principal amount of Shelf Notes covered thereby, which shall not be less than $5,000,000 and not be greater than the Available Facility Amount at the time such Request for Purchase is made, (ii) specify the principal amounts, final maturities, principal prepayment dates and amounts of the Shelf Notes covered thereby, (iii) specify the use of proceeds of such Shelf Notes, (iv) specify the proposed day for the closing of the purchase and sale of such Shelf Notes, which shall be a Business Day during the Issuance Period not less than 10 days and not more than 25 days after the making of such Request for Purchase, (v) specify the number of the account and the name and address of the depository institution to which the purchase prices of such Shelf Notes are to be transferred on the Closing Day for such purchase and sale, (vi) certify that the representations and warranties contained in paragraph 8 are true on and as of the date of such Request for Purchase and that there exists on the date of such Request for Purchase no Event of Default or Default, and (vii) be substantially in the form of Exhibit B attached hereto. Each Request for Purchase shall be in writing and shall be deemed made when received by Prudential. 2B(4) RATE QUOTES. Not later than five Business Days after the Company shall have given Prudential a Request for Purchase pursuant to paragraph 2B(3), Prudential may, 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 2 4 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. 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 3 5 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 and the amendment of the Existing 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 $25,000. 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 first $25,000,000 in aggregate principal amount of Notes issued under the Facility. 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 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 4 6 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 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 attached hereto and as to such other matters as such Purchaser may 5 7 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. 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 shall be subject to required prepayments, if any, set forth in the Notes of such Series. 6 8 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 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: (a) 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 7 9 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; provided, however, that, in addition and not in limitation of the foregoing, in the event that during any fiscal quarter of the Company, the Company's sales or earnings constitute less than ninety percent (90%) of the Company's sales or earnings on a consolidated basis, the Company shall also deliver at the times specified above unaudited quarterly and annual (as appropriate for the applicable period) consolidating financial statements of the Company and its Subsidiaries for the applicable period, 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 and what action the Company proposes to take with respect thereto. Together with each delivery of financial statements required by clause (ii) above, the Company will deliver to each Significant Holder a certificate of such accountants stating that, in making the audit necessary for the certification of such financial statements, other than any consolidating financial statements required to be delivered by such clause (ii), they have obtained no knowledge of any Event of Default or Default, or, if they have obtained knowledge of any Event of Default or Default, specifying the nature and period of existence thereof. The Company also covenants that 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 8 10 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. 6. NEGATIVE COVENANTS. 6A. FIXED CHARGE COVERAGE. The Company will not permit the ratio of (a) the sum of Consolidated Net Earnings, operating lease expense and interest expense, to (b) the sum of interest expense and 9 11 operating lease expense, to fall below 1.75 to 1.00, in each case determined at the end of the most recently ended rolling four fiscal quarter period. 6B. LIEN, DEBT AND OTHER RESTRICTIONS. The Company covenants that it will not and will not permit any Subsidiary to: 6B(1). LIENS. Create, assume or suffer to exist any Lien upon any of its property or assets, whether now owned or hereafter acquired (whether or not provision is made for the equal and ratable securing of the Note in accordance with the provisions of paragraph 5C), except: (i) Liens for taxes not yet due or which are being actively contested in good faith by appropriate proceedings, (ii) 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, (iii) Liens on property or assets of a Subsidiary to secure obligations of such Subsidiary to the Company or another Subsidiary, (iv) Liens in existence on April 13, 1992 described on Schedule 6B, and (v) other Liens (including Liens consisting of capitalized leases) securing Funded Debt (other than Funded Debt that constitutes Subordinated Debt); provided, however, that (a) such Funded Debt is permitted by the provisions of paragraph 6B(2) and (b) the aggregate amount of all Secured Funded Debt outstanding does not at any time exceed an amount equal to fifteen percent (15%) of Consolidated Net Worth; 6B(2). DEBT. Create, incur, assume or suffer to exist any Debt, except: (i) Senior Funded Debt in existence as of the date of the Existing Agreement in such amounts outstanding as of the date of the Existing Agreement, and a $10,000,000 unsecured line of credit available to Cotter Canada Hardware and Variety Company, Inc., (ii) Funded Debt represented by the Notes, (iii) Funded Debt of any Subsidiary to the Company or any other Subsidiary, (iv) Subordinated Debt; (v) additional Senior Funded Debt of the Company, so long as the aggregate principal amount of consolidated Senior Funded Debt does not exceed at any time an amount equal to thirty-five percent (35%) of Consolidated Capitalization; and 10 12 (vi) Current Debt of the Company provided that commencing on December 29, 1991 and at all times thereafter there shall have been a period of at least forty-five (45) 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 (v) of this paragraph 6B(2) as of the close of business on such day. 6B(3). SALE OF STOCK AND DEBT OF SUBSIDIARIES. Sell or otherwise dispose of, or part with control of, any shares of stock or Debt of any Subsidiary, except to the Company or another Subsidiary, and except that all shares of stock and Debt of any Subsidiary at the time owned by or owed to the Company and all Subsidiaries may be sold as an entirety for such consideration which represents the fair value (as determined in good faith by the Board of Directors of the Company) at the time of sale of the shares of stock and Debt so sold, so long as: (a) the sum of the following shall not constitute more than 10% of the consolidated assets of the Company and its Subsidiaries: the assets of the applicable Subsidiary when added together, without duplication, with (x) the assets of any other Subsidiaries sold or otherwise disposed of outside of the ordinary course of business during the most recent 36-month rolling period, plus (y) the assets of the Company and its Subsidiaries sold, leased or otherwise disposed of outside of the ordinary course of business during the most recent 36-month rolling period (together with any assets then proposed to be sold); or (b) the following shall not have in the aggregate contributed more than 15% of Consolidated Net Earnings for any of the three fiscal years then most recently ended: the applicable Subsidiary when added together, without duplication, with (x) any other Subsidiaries sold or otherwise disposed of outside of the ordinary course of business during the most recent 36-month rolling period, plus (y) the assets of the Company and its Subsidiaries sold, leased or otherwise disposed of outside of the ordinary course of business during the most recent 36-month rolling period (together with any assets then proposed to be sold); and provided that, at the time of such sale, such Subsidiary shall not own, directly or indirectly, any shares of stock or Debt of any other Subsidiary (unless all of the shares of stock and Debt of such other Subsidiary owned, directly or indirectly, by the Company and its Subsidiary are simultaneously being sold as permitted by this paragraph 6B(3)); 6B(4)(i) SALE OF ASSETS. Sell, lease or transfer or otherwise dispose of any assets of the Company or any Subsidiary 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 (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 the most recent 36-month rolling period or (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 and have not contributed more than 15% of Consolidated Net Earnings for any of the three fiscal years then most recently ended; 11 13 6B(4)(ii) MERGER. 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 provided that the Company is the surviving corporation and 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. ISSUANCE OF STOCK BY SUBSIDIARIES. Permit any Subsidiary (either directly, or indirectly by the issuance of rights or options for, or securities convertible into, such shares) to issue, sell or otherwise dispose of any shares of any class of its stock (other than directors' qualifying shares) except to the Company or another Subsidiary; provided, however, Cotter Canada Hardware and Variety Cooperative, Inc. may issue and sell shares of its stock in the ordinary course of business consistent with its practices as of April 13, 1992. 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 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 12 14 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. 6G. RESTRICTED INVESTMENTS. Make or permit a Subsidiary to make any Investment except the Company and any Subsidiary may: (i) make or permit to remain outstanding loans or advances to any Subsidiary, (ii) 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, (iii) 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, (iv) 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, (v) make or permit to remain outstanding travel and other similar advances to officers and employees in the ordinary course of business, (vi) permit to remain outstanding Investments existing on April 13, 1992 described on Schedule 6G, and (vii) to the extent applicable, make Investments permitted under paragraph 6H below. 6H. RESTRICTED PAYMENTS. 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 except out of Consolidated Net Earnings Available for Restricted Payments. 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 13 15 (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, 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 $3,000,000; 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 14 16 (x) any such petition or application is filed, or any such proceedings are commenced, against the Company or any Subsidiary and the Company or such Subsidiary by any act indicates its approval thereof, consent thereto or acquiescence therein, or an order, judgment or decree is entered appointing any such trustee, receiver, custodian, liquidator or similar official, or approving the petition in any such proceedings, and such order, judgment or decree remains unstayed and in effect for more than 30 days; or (xi) any order, judgment or decree is entered in any proceedings against the Company decreeing the dissolution of the Company and such order, judgment or decree remains unstayed and in effect for more than 60 days; or (xii) any order, judgment or decree is entered in any proceedings against the Company or any Subsidiary decreeing a split-up of the Company or such Subsidiary which requires the divestiture of assets representing a substantial part, or the divestiture of the stock of a Subsidiary whose assets represent a substantial part, of the consolidated assets of the Company and its Subsidiaries (determined in accordance with generally accepted accounting principles) or which requires the divestiture of assets, or stock of a Subsidiary, which shall have contributed a substantial part of the consolidated net income of the Company and its Subsidiaries (determined in accordance with generally accepted accounting principles) for any of the three fiscal years then most recently ended, and such order, judgment or decree remains unstayed and in effect for more than 60 days; or (xiii) a final judgment in an amount in excess of $1,000,000 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 15 17 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. 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 16 18 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, 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). 17 19 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 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 18 20 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 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. 19 21 9. REPRESENTATIONS AND OF WARRANTIES 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 or (ii) a separate account maintained by such Purchaser in which no employee benefit plan, other than employee benefit plans identified on a list which has been furnished by such Purchaser to the Company, participates to the extent of 10% or more. 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 20 22 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 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. 21 23 "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, 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-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. 22 24 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 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). 23 25 "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. "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; 24 26 (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 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 Indebtedness for borrowed money outstanding under a revolving credit or similar agreement which obligates the 25 27 lender or lenders to extend credit over a period of more than one year shall constitute Funded Debt and not Current Debt, even though such Indebtedness by its terms matures on demand or within one year from the date of the creation thereof. "DEBT" shall mean Current Debt and Funded Debt. "DELAYED DELIVERY FEE" shall have the meaning specified in paragraph 2B(8)(iii). "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended. "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 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. "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. 26 28 "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) 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. "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 27 29 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. "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. 28 30 "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. "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. "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 or the Existing Agreement. "SUBSIDIARY" shall mean any corporation all of the stock of every class of which, except directors' qualifying shares, shall, at the time as of which any determination is being made, be owned by the Company either directly or through Subsidiaries. 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 29 31 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. 30 32 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 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 31 33 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 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 32 34 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 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 hereto (in the case of the Series A Notes) or the Purchaser Schedule attached to the applicable Confirmation of Acceptance (in the case of any Shelf Notes) 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 Bawr 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 33 35 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 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. 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. 34 36 11S. AMENDMENT OF EXISTING AGREEMENT. Upon the execution of this Agreement by Prudential, paragraphs 5 and 6 of the Existing 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 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 Agreement, as amended hereby, shall mean the notes issued under and pursuant to the Existing 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 Agreement. Very truly yours, COTTER & COMPANY By:____________________________ Kerry J. Kirby Treasurer and Vice President - Finance The foregoing Agreement is hereby accepted as of the date first above written. THE PRUDENTIAL INSURANCE COMPANY OF AMERICA By:_______________________ Vice President 35 37 PURCHASER SCHEDULE COTTER & COMPANY THE PRUDENTIAL INSURANCE COMPANY OF AMERICA (1) Address for all notices relating to payments: The Prudential Insurance Company of America c/o Prudential Capital Group Gateway Center Three 100 Mulberry Street Newark, New Jersey 07102 Attention: Manager, Investment Operations Group Telephone: (201) 802-5260 Telecopy: (201) 802-8055 (2) Address for all other communications and notices: The Prudential Insurance Company of America c/o Prudential Capital Group Two Prudential Plaza 180 North Stetson Street Suite 5600 Chicago, Illinois 60601-6716 Attention: Team X Telecopy: (312) 540-4222 (3) Recipient of telephonic prepayment notices: Manager, Investment Structure and Pricing Telephone: (201) 802-6660 Telecopy: (201) 802-9425 (4) Tax identification No.: 22-1211670 1 38 EXHIBIT A [FORM OF SHELF NOTE] THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933. THE SALE OR TRANSFER OF THIS NOTE IS SUBJECT TO CERTAIN RESTRICTIONS CONTAINED IN PARAGRAPH 9G OF THE PRIVATE SHELF AGREEMENT DATED AS OF DECEMBER 29, 1995 BETWEEN COTTER & COMPANY AND THE PRUDENTIAL INSURANCE COMPANY OF AMERICA. COTTER & COMPANY SENIOR SERIES NOTE No. ____ ORIGINAL PRINCIPAL AMOUNT: ORIGINAL ISSUE DATE: INTEREST RATE: INTEREST PAYMENT DATES: FINAL MATURITY DATE: PRINCIPAL PREPAYMENT DATES AND AMOUNTS: FOR VALUE RECEIVED, the undersigned, Cotter & Company (herein called the "Company"), a corporation organized and existing under the laws of the State of Delaware, hereby promises to pay to ___________________________, or registered assigns, the principal sum of ___________________________ DOLLARS [on the Final Maturity Date specified above] [, payable on the Principal Prepayment Dates and in the amounts specified above, and on the Final Maturity Date specified above in an amount equal to the unpaid balance of the principal hereof,] with interest (computed on the basis of a 360-day year--30-day month) (a) on the unpaid balance thereof at the Interest Rate per annum specified above, payable on each Interest Payment Date specified above and on the Final Maturity Date specified above, commencing with the Interest Payment Date next succeeding the date hereof, until the principal hereof shall have become due and payable, and (b) on any overdue payment (including any overdue prepayment) of principal, any overdue payment of Yield Maintenance Amount and any overdue payment of interest, payable on each Interest Payment Date as aforesaid (or, at the option of the registered holder hereof, on demand), at a rate per annum from time to time equal to the greater of (i) 2% over the Interest Rate specified above or (ii) 2% over the rate of interest publicly announced by Morgan Guaranty Trust Company of New York from time to time in New York City as its Prime Rate. Payments of principal, Yield Maintenance Amount, if any, and interest are to be made at the main office of Morgan Guaranty Trust Company of New York in New York City or at such other place as the holder hereof shall designate to the Company in writing, in lawful money of the United States of America. A-1 39 This Note is one of a series of Senior Notes (herein called the "Notes") issued pursuant to a Private Shelf Agreement, dated as of December 29, 1995 (herein called the "Agreement"), between the Company, on the one hand, and The Prudential Insurance Company of America and each Prudential Affiliate (as defined in the Agreement) which becomes party thereto, on the other hand, and is entitled to the benefits thereof. This Note is subject to optional prepayment, in whole or from time to time in part, on the terms specified in the Agreement. This Note is a registered Note and, as provided in the Agreement, upon surrender of this Note for registration of transfer, duly endorsed, or accompanied by a written instrument of transfer duly executed, by the registered holder hereof or such holder's attorney duly authorized in writing, a new Note for the then outstanding principal amount will be issued to, and registered in the name of, the transferee. Prior to due presentment for registration of transfer, the Company may treat the person in whose name this Note is registered as the owner hereof for the purpose of receiving payment and for all other purposes, and the Company shall not be affected by any notice to the contrary. In case an Event of Default shall occur and be continuing, the principal of this Note may be declared or otherwise become due and payable in the manner and with the effect provided in the Agreement. Capitalized terms used and not otherwise defined herein shall have the meanings (if any) provided in the Agreement. This Note is intended to be performed in the State of Illinois and shall be construed and enforced in accordance with the internal laws and decisions (as opposed to the conflicts of law provisions) of such State. COTTER & COMPANY By: _____________________________ Title: __________________________ A-2 40 EXHIBIT B [FORM OF REQUEST FOR PURCHASE] COTTER & COMPANY Reference is made to the Private Shelf Agreement (the "Agreement"), dated as of December 29, 1995 between Cotter & Company (the "Company"), on the one hand, and The Prudential Insurance Company of America ("Prudential") and each Prudential Affiliate which becomes party thereto, on the other hand. Capitalized terms used and not otherwise defined herein shall have the respective meanings specified in the Agreement. Pursuant to Paragraph 2B(3) of the Agreement, the Company hereby makes the following Request for Purchase: 1. Aggregate principal amount of the Notes covered hereby (the "Notes") . . . . . . . . . . $ ------------ 2. Individual specifications of the Notes:
Principal Final Prepayment Interest Principal Maturity Dates and Payment Amount(1) Date Amounts Period - --------- -------- ---------- -------- Quarterly
3. Use of proceeds of the Notes: 4. Proposed day for the closing of the purchase and sale of the Notes: - -------------------- (1) Minimum principal amount of $5,000,000. B-1 41 5. The purchase price of the Notes is to be transferred to: Name, Address and ABA Routing Number of Number of Bank Account --------------- --------- 6. The Company certifies (a) that the representations and warranties contained in paragraph 8 of the Agreement are true on and as of the date of this Request for Purchase except to the extent of changes caused by the transactions contemplated in the Agreement and (b) that there exists on the date of this Request for Purchase no Event of Default or Default. Dated: COTTER & COMPANY By: ------------------ Authorized Officer B-2 42 EXHIBIT C [FORM OF CONFIRMATION OF ACCEPTANCE] COTTER & COMPANY Reference is made to the Private Shelf Agreement (the "Agreement"), dated as of December 29, 1995 between Cotter & Company (the "Company"), on the one hand, and The Prudential Insurance Company of America ("Prudential") and each Prudential Affiliate which becomes party thereto, on the other hand. All terms used herein that are defined in the Agreement have the respective meanings specified in the Agreement. Prudential or the Prudential Affiliate which is named below as a Purchaser of Notes hereby confirms the representations as to such Notes set forth in paragraph 9 of the Agreement, and agrees to be bound by the provisions of paragraphs 2B(5) and 2B(7) of the Agreement relating to the purchase and sale of such Notes and by the provisions of the penultimate sentence of paragraph 11A of the Agreement. Pursuant to paragraph 2B(5) of the Agreement, an Acceptance with respect to the following Accepted Notes is hereby confirmed: I. Accepted Notes: Aggregate principal amount $_______________ (A) (a) Name of Purchaser: (b) Principal amount: (c) Final maturity date: (d) Principal prepayment dates and amounts: (e) Interest rate: (f) Interest payment period: Quarterly (g) Payment and notice instructions: As set forth on attached Purchaser Schedule (B) (a) Name of Purchaser: (b) Principal amount: (c) Final maturity date: (d) Principal prepayment dates and amounts: (e) Interest rate: (f) Interest payment period: Quarterly (g) Payment and notice instructions: As set forth on attached Purchaser Schedule [(C), (D)..... same information as above.] C-1 43 II. Closing Day: Dated: COTTER & COMPANY By: _________________________ Title: ______________________ [THE PRUDENTIAL INSURANCE COMPANY OF AMERICA] By: _________________________ Vice President [PRUDENTIAL AFFILIATE] By: _________________________ Vice President C-2 44 EXHIBIT D [FORM OF OPINION OF COMPANY'S COUNSEL] [Letterhead of Cotter & Company] [Date of Closing] [Name(s) and address(es) of purchaser(s)] Ladies and Gentlemen: As Vice President and General Counsel of Cotter & Company (the "Company"), I am familiar with the Private Shelf Agreement, dated as of December 29, 1995 (the "Agreement") between the Company, on the one hand, and The Prudential Insurance Company of America and each Prudential Affiliate which becomes a party thereto, on the other hand, pursuant to which the Company has issued to you today Senior Series ___ Notes of the Company in the aggregate principal amount of $________ (the "Notes"). Capitalized terms used and not otherwise defined herein shall have the meanings provided in the Agreement. This letter is being delivered to you in satisfaction of the condition set forth in paragraph 3A(v) of the Agreement and with the understanding that you are purchasing the Notes in reliance on the opinions expressed herein. In this connection, I have examined such certificates of public officials, certificates of officers of the Company and copies certified to my satisfaction of corporate documents and records of the Company and of other papers, and have made such other investigations, as I have deemed relevant and necessary as a basis for my opinion hereinafter set forth. I have relied upon such certificates of public officials and of officers of the Company with respect to the accuracy of material factual matters contained therein which were not independently established. With respect to the opinion expressed in paragraph 3 below, I have also relied upon the representation made by [each of] you in paragraph 9A of the Agreement. Based on the foregoing, it is my opinion that: 1. The Company is a corporation duly organized and validly existing in good standing under the laws of the State of Delaware. 2. The Agreement and the Notes have been duly authorized by all requisite corporate action and duly executed and delivered by authorized officers of the Company, and are valid obligations of the Company, legally binding upon and enforceable against the Company in accordance with their respective terms, except as such enforceability may be limited by (a) bankruptcy, insolvency, reorganization or other similar laws affecting the enforcement of creditors' rights generally and (b) general principles of equity (regardless of whether such D-1 45 enforceability is considered in a proceeding in equity or at law). 3. It is not necessary in connection with the offering, issuance, sale and delivery of the Notes under the circumstances contemplated by the Agreement to register the Notes under the Securities Act or to qualify an indenture in respect of the Notes under the Trust Indenture Act of 1939, as amended. 4. The extension, arranging and obtaining of the credit represented by the Notes do not result in any violation of regulation G, T or X of the Board of Governors of the Federal Reserve System. 5. The execution and delivery of the Agreement and the Notes, the offering, issuance and sale of the Notes and fulfillment of and compliance with the respective provisions of the Agreement and the Notes do not conflict with, or result in a breach of the terms, conditions or provisions of, or constitute a default under, or result in any violation of, or result in the creation of any Lien upon any of the properties or assets of the Company or any of its Subsidiaries pursuant to, or require any authorization, consent, approval, exemption, or other action by or notice to or filing with any court, administrative or governmental body or other Person (other than routine filings after the date hereof with the Securities and Exchange Commission and/or state Blue Sky authorities) pursuant to, the charter or by-laws of the Company or any of its Subsidiaries, any applicable law (including any securities or Blue Sky law), statute, rule or regulation or (insofar as is known to me after having made due inquiry with respect thereto) any agreement (including, without limitation, any agreement listed in Schedule 8G to the Agreement), instrument, order, judgment or decree to which the Company or any of its Subsidiaries is a party or otherwise subject. 6. The Notes constitute "Superior Indebtedness" to the Company's Promissory (subordinated) Notes, the form of which Promissory (subordinated) Notes is attached to the Agreement as Exhibit E, and the indebtedness of the Company's Promissory (subordinated) Notes is subordinate to the Notes. I am qualified to practice law in the State of Illinois and do not purport to express any opinion herein concerning any law other than the laws of the State of Illinois of federal law of the United States. Very truly yours, D-2 46 EXHIBIT E FORM OF PROMISSORY (SUBORDINATED) NOTE See Attached 47 COTTER & COMPANY ____% PROMISSORY (SUBORDINATED) NOTE VOID 48 SCHEDULE 6G EXISTING INVESTMENTS None. 1 49 SCHEDULE 8G The Revolving Credit Facility Agreement between Cotter & Company and Bank of America dated ________________, 1996, which contains identical terms as set forth in Sections 6 and 8 hereof. EX-5 3 OPINION OF MSSRS. ARNSTEIN & LEHR 1 Exhibit 5 [ARNSTEIN & LEHR LETTERHEAD] March 19, 1996 Cotter & Company 8600 West Bryn Mawr Avenue Chicago, Illinois 60631-3505 Re: Post Effective Amendment No. 5 to Registration Statement on Form S-2 (No. 33-39477) Gentlemen: We refer to the Post Effective Amendment No. 5 to Registration Statement on Form S-2 (No. 33-39477) being filed by Cotter & Company, a Delaware corporation (hereinafter referred to as the "Company"), with the Securities and Exchange Commission under the Securities Act of 1933, as amended, pertaining to the registration of 10,660 shares of Class A Common Stock, $100 par value. The Class A Common Stock will be issued and sold directly by the Company in 10 share units at the par value thereof, for an aggregate purchase price of $1,000 per unit. Sales shall be made to retailers of hardware 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 Company has an authorized capital consisting of 100,000 shares of Class A Common Stock, $100 par value and 2,000,000 shares of Class B Common Stock, $100 par value. As of February 24, 1996, there were 52,220 Class A Common shares issued and outstanding and 1,111,143 Class B Common shares issued and outstanding. All of said shares were legally issued, fully paid and non-assessable as of said date. 3. The proposed offering of 10,660 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 Cotter & Company March 19, 1996 Page 2 We hereby consent to the use of this opinion as an exhibit to the Registration Statement and the related Prospectus as counsel for the Company who have passed upon the legalities of the securities registered hereunder. Sincerely, Arnstein & Lehr EX-10.C 4 DEFINED LUMP SUM PENSION PLAN 1 EXHIBIT 10-C C E R T I F I C A T E I, Daniel T. Burns, Secretary of COTTER & COMPANY, hereby certify that the attached is a full, true and complete copy of the COTTER & COMPANY DEFINED LUMP SUM PENSION PLAN, as in effect on the date hereof. Dated this 12th day of March, 1996. /s/ Daniel T. Burns ------------------------ Secretary as Aforesaid (Corporate Seal) 2 COTTER & COMPANY DEFINED LUMP SUM PENSION PLAN McDermott, Will & Emery Chicago, Illinois 3 COTTER & COMPANY DEFINED LUMP SUM PENSION PLAN TABLE OF CONTENTS
PAGE ---- ARTICLE I 1 ESTABLISHMENT OF THE PLAN 1 Purpose 1 Superseded Plans 1 ARTICLE II 2 DEFINITIONS 2 ARTICLE III 10 PARTICIPATION 10 Eligibility -- Employees Who Were Participants on December 31, 1995 10 Eligibility -- Employees Who Were Not Participants on December 31, 1995 10 Reemployment of Participants 10 Leased Employees 11 ARTICLE IV 13 ELIGIBILITY FOR RETIREMENT AND AMOUNT OF PENSIONS 13 Normal Retirement Date and Minimum Vesting Requirements 13 Termination or Retirement Prior to January 1, 1996 13 Accrued Benefit and Normal Retirement Pension 14 Payment of Benefits Before Normal Retirement Date 16 Survivor Benefit 17 Minimum Benefits 19 ARTICLE V 21 PAYMENT OF RETIREMENT PENSIONS 21 Payment in the Form of Joint and Survivor Annuity 21 Election to Waive Joint and Survivor Annuity 21 Optional Forms of Payment 23 Designation of Beneficiary 24 Small Benefits Provision 25 One-Year Marriage Requirement 26 Method of Payment of Retirement Pensions 26 Minority, Disability, or Incompetency 27 Reemployment 27 Maximum Annual Benefit 29
-i- 4 Combined Limitation 32 Restrictions on Distributions 34 Other Distribution Restrictions 35 Written Explanation Regarding Rollovers 36 Distribution to Alternate Payees 36 ARTICLE VI 38 FUNDING 38 Employer Contributions 38 Qualification of Plan 38 Recovery of Contributions 38 Forfeitures 39 ARTICLE VII 40 THE COMMITTEE 40 Membership 40 Committee's General Powers, Rights and Duties 40 Manner of Action 41 Interested Committee Member 42 Resignation or Removal of Committee Members 42 Committee Expenses 43 Information Required by Committee 43 Uniform Rules 43 Review of Benefit Determinations 43 Committee's Decision Final 44 ARTICLE VIII 45 TRUST FUND AND TRUSTEE 45 Trust Fund 45 Trust Fund Applicable Only to Payment of Benefits 45 Trustee Capacity 45 Resignation and Removal of Trustee 46 Taxes, Expenses and Compensation of Trustee 46 ARTICLE IX 48 TOP-HEAVY RESTRICTIONS 48 General 48 Definitions 48 Top-Heavy Determination 51 Vesting 51 Minimum Accrual 52 Limitation on Benefits 52 ARTICLE X 54 AMENDMENT AND TERMINATION OF THE PLAN 54 Amendment 54 Termination 54 Allocation and Distribution of Assets on Termination 55
-ii- 5
PAGE ---- Limitations on Termination 55 Merger and Consolidation 55 ARTICLE XI 57 GENERAL PROVISIONS 57 Employment with Related Companies 57 Litigation by Participants 57 Absence of Guaranty 58 Non-Assignability 58 No Enlargement of Employment Rights 58 Applicable Law 58 Uniform Administration 59 Text to Control 59 Gender and Number 59 SUPPLEMENT A - MERGER OF NORTHERN WHOLESALE HARDWARE CO. RETIREMENT PLAN WITH AND INTO PRIOR PLAN A-1 SUPPLEMENT B - ACTUARIAL ASSUMPTIONS B-1 SUPPLEMENT C - ACCRUAL PERCENTAGES C-1
-iii- 6 COTTER & COMPANY DEFINED LUMP SUM PENSION PLAN ARTICLE I ESTABLISHMENT OF THE PLAN Section 1.1. Purpose. This Plan (previously known as "Cotter & Company Pension Plan") was established effective as of January 1, 1958, for the purpose of providing retirement income ("pension" or "pension benefits") and certain other benefits to those employees of Cotter & Company, a Delaware corporation, who become eligible to participate in the Plan. The retirement income payable under the Plan is intended to supplement the benefits that may be afforded to Participants under the Federal Social Security Act and similar legislation. Section 1.2. Superseded Plans. The provisions of the Plan, as adopted with an effective date of January 1, 1958, have been amended and restated from time to time. The Plan, as amended and restated in the form of this instrument, has been adopted effective as of January 1, 1996 and is hereinafter sometimes referred to as the "Plan" or "this Plan." The Plan is intended to be a continuation in an amended and restated form of the Plan as it existed on December 31, 1995, and, as set forth in this instrument, supersedes the Plan in effect as of that date as to all persons who retire or otherwise separate from service on or after January 1, 1996. 7 ARTICLE II DEFINITIONS The terms defined in this ARTICLE II (except as in this Plan otherwise expressly provided or unless the context otherwise requires) shall, for all purposes of this Plan, have the respective meanings specified in this ARTICLE II. 1. "Actuarial Equivalent" or "Actuarially Equivalent" means an amount of equal value when computed on the basis of the actuarial assumptions set forth in Supplement B of the Plan. Application of such assumptions to the computation of benefits under the Plan shall be made uniformly and consistently with respect to all Participants in similar circumstances. 2. "Administrator" for purposes of the Employee Retirement Income Security Act of 1974, as from time to time amended, means the Committee. 3. The term "Age" means the number of anniversaries of his birth which a person has attained. 4. "Annuity Starting Date" means the first day of the first period for which an amount is payable as an annuity or in the case of a lump sum payment the first date on which all events have occurred which entitle a Participant to such benefit. 5. "Average Compensation" means the annual average of the Compensation of an Employee during the three consecutive calendar years within the ten calendar years immediately -2- 8 preceding the date of such Employee's termination of employment which yield the highest average. For purposes of computing an Employee's Average Compensation, if the date of such Employee's termination of employment shall occur within (rather than at the end of) a Plan Year (a "terminal Plan Year"), such terminal Plan Year shall be included as one of the aforementioned ten calendar years, and the Employee shall be deemed to have received Compensation during such terminal Plan Year equal to the annual rate of his Compensation during the terminal Plan Year. 6. "Committee" means those individuals appointed by Cotter & Company to be the Administrator of the Plan. 7. A Participant's "Compensation" for any calendar year means the total cash compensation (including commissions, bonuses [other than sign-on bonuses], overtime pay, sick pay, vacation pay and holiday pay) paid to him by an Employer during that calendar year for personal services rendered to an Employer as an Employee, plus elective deferrals under Code Sections 125 and 401(k) for that calendar year, but excluding severance pay, moving or relocation allowances or bonuses, tuition reimbursements, auto or travel expense allowances or bonuses, or any other extraordinary remuneration. During the period of any Leave of Absence, an Employee shall be deemed to receive Compensation at the annual rate of Compensation actually received by him during such period, or, if no compensation is paid, the annual rate of Compensation immediately prior to the commencement of such Leave of Absence. -3- 9 For each calendar year, the Compensation taken into account for all purposes of the Plan shall not exceed $150,000, or such other amount as may be permitted pursuant to Section 401(a)(17) of the Internal Revenue Code (the "Code") for such calendar year. 8. The term "Disability Insurance Plan" shall mean any plan from time to time in force, which provides for the payment of income benefits to Employees of an Employer by reason of disability resulting from accident or sickness. 9. "Employee" means a person in the employ of an Employer who is not: (A) in a job classification covered by a collective bargaining agreement to which one of the following listed unions, or its successors, is a party: Local No. 135, Miscellaneous Warehousemen's Union, International Brotherhood of Teamsters; Local No. 206 Warehousemen's Union, International Brotherhood of Teamsters; Local No. 223, Drivers and Clerical Employees Union, International Brotherhood of Teamsters; Local No. 541, Building, Material, Excavating, Heavy Haulers, Drivers, Helpers and Warehouse Union; or (B) a participant, or eligible to become a participant, in any other retirement or pension plan (except the Cotter & Company Employees' Savings and Compensation Deferral Plan) intended to qualify under Section 401(a) of the Code and which is established by an Employer or to which an Employer makes any contribution. A "Highly Compensated Employee" means an Employee who meets the definition of a highly compensated employee under Section 414(q) of the Code and the regulations thereunder. 10. "Employer" means Cotter & Company, a Delaware corporation ("Cotter"), and any subsidiary or affiliated corpo- -4- 10 ration of Cotter that adopts this Plan by resolution of its Board of Directors with the consent of Cotter. 11. "Employment Continuity" means the period commencing with the date on which an Employee first performs an Hour of Service for an Employer and ending on the first day of the twelve-month period in which the Employee incurs a One-Year Break in Service; provided, however, that if an Employee leaves the employ of an Employer other than pursuant to a Leave of Absence and does not return until after a One-Year Break in Service, his Employment Continuity upon return to employment by an Employer shall be determined on the basis of the date on which the Employee first performs an Hour of Service subsequent to his return to the employ of an Employer. A former employee who terminates employment and is reemployed by an Employer before incurring a One-Year Break in Service will not be deemed to have terminated employment with an Employer. An "Employment Year" means 365 days of Employment Continuity under this paragraph. 12. The term "Hour of Service" means: (A) each hour for which an Employee is directly or indirectly paid, or entitled to payment, by an Employer for the performance of the duties of his employment, which hours of service shall be credited to the Employee during the Employment Year or Plan Year in which the duties are performed; and (B) each hour up to a maximum of 501 hours for which an Employee is directly or indirectly paid or entitled to payment by an Employer for reasons other than the performance of the duties of his employment (such as vacation, sickness or disability), which hours of service shall be credited to the Employee -5- 11 during the Employment Year or Plan Year in which payment is made or amounts payable to the Employee become due; and (C) each hour for which back pay, irrespective of mitigation of damages, has been either awarded or agreed to by an Employer, which hours of service shall be credited to the Employee for the Employment Year or Plan Year to which the award or agreement pertains rather than the period in which the award, agreement or payment was made. Hours of Service will be computed under the Plan in accordance with the provisions of Sections 2530.200b-2(b) and 2530.200b-2(c) of the U.S. Department of Labor regulations promulgated pursuant to the Employee Retirement Income Security Act of 1974. For purposes of this definition only, the term "Employee" shall be deemed to include any person who is in the employ of the Employer so that Employees may be credited under the Plan with Hours of Service for participation purposes for periods of employment during which they are not "Employees" as that term is defined in paragraph 9 of this ARTICLE II. 13. "Leave of Absence" means a temporary absence from active service with an Employer that, in the discretion of the Employer, may be granted to an Employee because of temporary incapacity or other good cause. If an Employee on a Leave of Absence does not return to employment with the Employer within the period authorized by the Employer, the Employee's employment shall be deemed to have terminated as of the first day following the period of the Leave of Absence. A Participant shall automatically be entitled to a Leave of Absence during any period of time for which he is eligible to receive a -6- 12 benefit under a Disability Insurance Plan (as that term is defined in paragraph 8 of this ARTICLE II). An Employee shall automatically be entitled to a Leave of Absence during any period of time he is in the Armed Forces of the United States, provided that he returns to employment within the period within which his right to reemployment is protected by the Selective Service Act or any similar law applicable to him. 14. "Named Fiduciary" for purposes of the Employee Retirement Income Security Act of 1974, as from time to time amended, means the Committee appointed pursuant to the provisions of ARTICLE VII. 15. "One-Year Break in Service" for an Employee means a twelve-month period commencing on the date of an Employee's termination of employment and on each anniversary thereof during which such Employee is not employed (i.e., does not complete an Hour of Service) with an Employer. In the case of a Maternity or Paternity Leave of Absence (as defined below), the twelve-month periods beginning on the first day of such absence and on the first anniversary of such absence shall not constitute One-Year Breaks in Service. For purposes of this paragraph 15, "Maternity or Paternity Leave of Absence" means an absence from work by reason of the Employee's pregnancy, birth of the Employee's child, or placement of a child with the Employee in connection with the adoption of such child, or an absence for the purpose of caring for such child for a period immediately following such birth or placement. -7- 13 16. "Participant" means an Employee who meets the requirements for participation in the Plan in the manner provided in ARTICLE III. A former Employee entitled to receive a Pension under the Plan continues to be a "Participant" until the date of his death. 17. "Plan" means the Plan as herein set forth and as it may from time to time be amended. 18. "Plan Year" means the twelve-consecutive month period ending December 31. 19. "Qualified Joint and Survivor Annuity" means: (A) in the case of a 50% Qualified Joint and Survivor Annuity, an annuity for the life of the Participant with a survivor annuity for the life of his spouse which is one-half of the amount of the annuity payable during the joint lives of the Participant and his spouse, and which is the Actuarial Equivalent of a single annuity for the life of the Participant in the amount specified by the relevant provision of ARTICLE IV; and (B) in the case of a 100% Qualified Joint and Survivor Annuity, an annuity for the life of the Participant with a survivor annuity for the life of his spouse which is equal to the amount of the annuity payable during the joint lives of the Participant and his spouse, and which is the Actuarial Equivalent of a single annuity for the life of the Participant in the amount specified by the relevant provision of ARTICLE IV. 20. The term "Retirement" when applied to a Participant means the termination of the Participant's employment under circumstances that entitle him to receive a retirement pension under this Plan. -8- 14 21. The term "Retirement Pension" in whatever form such retirement pension may be paid shall mean the benefit payable to a Participant or his beneficiary under this Plan as a consequence of the retirement of the Participant. 22. "Trust" means the trust by means of which the Plan is funded as described in ARTICLE VIII hereof. 23. A "Vested Interest" means an interest to which an Employee has a nonforfeitable right. 24. A Participant shall be credited with a "Year of Service" (or fraction thereof) for each year (as defined below) during his period of Employment Continuity; provided, however, that: (A) A Participant in the Plan as of December 31, 1995 shall be credited with Years of Service earned before December 31, 1995 in accordance with the provisions of the Plan then in effect; (B) If a former Participant with no Vested Interest in the Plan again becomes a Participant in this Plan, his Years of Service prior to any One-Year Break in Service shall be taken into account only if the number of consecutive One-Year Breaks in Service is less than the greater of: (i) five, or (ii) the aggregate number of prior Years of Service, and then only if the former Participant has completed a Year of Service after such Break; and (C) Years of Service prior to a One-Year Break in Service shall not be taken into account unless the Participant completes one Year of Service after such Break. For purposes of this paragraph a "year" shall be calculated as the number of days during a Participant's Employment Continuity divided by 365.25, rounded to the nearest one-tenth of a year. -9- 15 ARTICLE III PARTICIPATION Section 3.1. Eligibility -- Employees Who Were Participants on December 31, 1995. All Employees who were Participants in the Plan immediately prior to January 1, 1996 shall automatically be Participants in this Plan. Section 3.2. Eligibility -- Employees Who Were Not Participants on December 31, 1995. Each Employee not covered under Section 3.1 shall become a Participant in this Plan on the January 1 or July 1 coincident with or next following the date the Employee has satisfied both of the following requirements: (A) The Employee has attained age 21; and (B) The Employee has completed an Employment Year. Section 3.3. Reemployment of Participants. In the case of a Participant who is reemployed after a One-Year Break in Service without credit for any Years of Service completed prior to the Employee's One-Year Break in Service, his participation in the Plan shall be deemed to have terminated at the beginning of the One-Year Break in Service, and he shall again become a Participant on the date he completes an Employment Year with the Employer following the date of his reemployment; -10- 16 provided, however, that in the case of an Employee who is credited with Years of Service with respect to employment prior to his One-Year Break in Service in accordance with the provisions of paragraph 24 of ARTICLE II, such an Employee shall become a Participant on the date of his reemployment. Section 3.4. Leased Employees. A leased employee (as defined below) shall not be eligible to participate in the Plan. A leased employee means any person who is not an Employee of an Employer but who has provided services to an Employer of the type that have historically (within the business field of the Employers) been provided by Employees on a substantially full-time basis for a period of at least one year pursuant to an agreement between an Employer and a leasing organization. The period during which a leased employee performs services for an Employer shall be taken into account for purposes of determining Employment Years under paragraph 11 of ARTICLE II and for purposes of determining Years of Service under paragraph 24 of ARTICLE II of the Plan unless (i) such leased employee is a participant in a money purchase pension plan maintained by the leasing organization which provides a nonintegrated employer contribution rate of at least ten percent (10%) of compensation, immediate participation for all employees and full and immediate vesting and (ii) leased employees do not constitute more than twenty percent (20%) of the Employer's nonhighly compensated work force. No such period of employment shall be -11- 17 included in Years of Service for purposes of calculating the amount of a Participant's benefits under the Plan. -12- 18 ARTICLE IV ELIGIBILITY FOR RETIREMENT AND AMOUNT OF PENSIONS Section 4.1. Normal Retirement Date and Minimum Vesting Requirements. (A) The Normal Retirement Date for a Participant shall be the date on which he attains age 65. A Participant may continue in employment after his Normal Retirement Date. The Participant's right to his Accrued Benefit shall become fully vested and nonforfeitable at his Normal Retirement Date. (B) In the event that a Participant's employment is terminated for any reason prior to reaching his Normal Retirement Date, the Participant shall not be entitled to any pension benefit under this Plan unless he has completed five Years of Service; but a Participant who has at least five Years of Service is fully vested with respect to his Accrued Benefit under the Plan. Section 4.2. Termination or Retirement Prior to January 1, 1996. Any pension benefit that a Participant who terminated his employment or retired prior to January 1, 1996 may be entitled to receive shall be governed by the provisions of the Plan as in effect on the date of his termination of employment or retirement. Any Participant who terminated employment or retired prior to January 1, 1996 and who is reemployed on or after January 1, 1996 shall have his benefits -13- 19 calculated in accordance with the Plan as in effect on the date of his subsequent retirement or termination of employment but the amount of any retirement benefit or termination benefit payable at such later date shall be actuarially reduced by the amount of any retirement or termination benefits paid previously under the Plan. Section 4.3. Accrued Benefit and Normal Retirement Pension. (A) Except as otherwise provided in paragraph (E), a Participant's "Accrued Benefit" as of any date shall be calculated by: (1) First, determining the Participant's "Defined Lump Sum", which shall equal the sum of: (a) The Participant's Average Compensation multiplied by his Aggregate Lump Sum Percentage. The Participant's "Aggregate Lump Sum Percentage" shall equal the sum of the Applicable Percentages as specified in Supplement C of the Plan that are earned by the Participant for each Year of Service (and fraction thereof) and, in the case of a Participant who has attained age 50 and completed 15 Years of Service as of January 1, 1996, increased by adding twenty-five (25) percentage points to such amount; and (b) 50% of the Participant's Aggregate Lump Sum Percentage, determined under (a) above, multiplied by the excess of the Participant's Average Compensation over the Integration Level. For this purpose, the "Integration Level" shall be 2/3 of the contribution and benefit base under Section 230 of the Social Security Act (42 U.S.C. Section 430), as amended, as in effect on the first day of the Plan Year for which a determination is made for purposes of a -14- 20 retirement or other termination of employment occurring during such year. (2) Next, converting the Participant's Defined Lump Sum, calculated under Paragraph (1) above, into an Actuarially Equivalent single life annuity payable at the Participant's Normal Retirement Date or, if the Participant retires after his Normal Retirement Date, the age he retires after his Normal Retirement Date. (B) A Participant's Normal Retirement Pension shall equal his Accrued Benefit, as determined above, and shall be payable to the Participant on a monthly basis for his lifetime, commencing on the first day of the month coinciding with or immediately following his Normal Retirement Date or the date his employment terminates, if later. (C) A Participant shall not accrue benefits under this Plan with respect to any period of employment while a participant, or eligible to become a participant, in any plan described in subparagraph 9(B) of ARTICLE II. (D) A Participant's Accrued Benefit payable on or after his Normal Retirement Date shall be paid in the form, and subject to the conditions, provided in ARTICLE V hereof. (E) With respect to any Participant specified by the Chief Executive Officer of Cotter pursuant to a supplement to the Plan, such Participant's Defined Lump Sum shall not be less than an amount which is equal to the sum of 22 percent of the Participant's Average Compensation for each Year of Service up to age 55 and 28 percent of the Participant's Average Compensation for each Year of Service after age 55, up to a -15- 21 maximum of 20 years of Service, limited to 500 percent, reduced by ninety-six times the Participant's "Primary Social Security Benefit". The Participant's Primary Social Security Benefit means the estimated monthly primary old-age Social Security insurance benefit to which the Participant is or would be entitled at his Normal Retirement Date or at his later retirement date based on the provisions of the Social Security Act in effect on the date of retirement, before any offsets for earned income. For purposes of estimating the Primary Social Security Benefit, it shall be assumed that the Participant has no wages covered by Social Security after retirement. Section 4.4. Payment of Benefits Before Normal Retirement Date. (A) A Participant whose employment has terminated after completing five or more Years of Service shall be entitled to receive a retirement pension (hereinafter called an "Immediate Pension"). A Participant's Immediate Pension shall be calculated by converting the Participant's Defined Lump Sum, determined in accordance with subparagraph 4.3(A)(1) above, into an Actuarially Equivalent single life annuity payable immediately and, with the written consent of the Participant, shall be payable to the Participant in accordance with ARTICLE V of the Plan commencing on the first day of the month coinciding with or immediately following the Participant's termination of employment. -16- 22 (B) A Participant may elect to defer receipt of his Immediate Pension to a date not earlier than age 55, but not later than the first day of the month coinciding with or immediately following the Participant's Normal Retirement Date ("Early Retirement Pension"). If a Participant elects such a deferral, the amount of his Early Retirement Pension, shall be equal to his Normal Retirement Benefit reduced by 2/3 of one percent for each of the first 60 months and by 1/3 of one percent for each of the next 60 months by which payment of his Early Retirement Pension precedes his Normal Retirement Date. In no event, however, shall a Participant's Early Retirement Pension be less than his Immediate Pension. (C) An Immediate Pension or an Early Retirement Pension to which a Participant is entitled shall be paid in the form, and subject to the conditions, provided in ARTICLE V hereof. Section 4.5. Survivor Benefit. (A) Death while actively employed - (1) In the case of a Participant with a Vested Interest who dies while actively employed by the Employer and who has a surviving spouse, a Survivor Benefit shall be provided to the surviving spouse in accordance with the following provisions. The Survivor Benefit shall be equal to the Actuarial Equivalent of 55% of the Participant's Defined Lump Sum (determined in accordance with the provisions of subparagraph 4.3(A)(1) above). (2) The Survivor Benefit shall be paid commencing as of the first day of the month -17- 23 coinciding with or immediately following the Participant's death. In lieu of immediate monthly payments for life, the surviving spouse may elect to receive the benefit immediately as a lump sum. Alternatively, the surviving spouse may elect to defer commencement of the Survivor Benefit until the first day of any month coinciding with or immediately following the date the Participant would have attained age 55 (or age at death, if older), but not later than the first day of the month coinciding with or next following the date that would have been the Participant's Normal Retirement Date (or age at death, if older.) If a surviving spouse elects to defer commencement of the Survivor Benefit, the benefit shall be converted to an Actuarially Equivalent monthly annuity for the life of the surviving spouse commencing on the date that would have been the Participant's Normal Retirement Date. This benefit will be reduced by 2/3 of one percent for each of the first sixty months and 1/3 of one percent for each of the next sixty months by which the benefit commencement date precedes the date that would have been the Participant's Normal Retirement Date. In no event, however, shall this benefit be less than the benefit the surviving spouse could have received as a monthly annuity for life commencing on the first of the month coinciding with or immediately following the Participant's death. (B) Death after termination of employment but before commencement of benefits - (1) In the case of a Participant with a Vested Interest who dies after having terminated employment with the Employer but prior to the receipt of any payments under the Plan and who has a surviving spouse, a Survivor Benefit shall be provided to the surviving spouse in accordance with the following provisions. The Survivor Benefit shall be equal to 55% of the benefit the Participant would have received if the Participant had -18- 24 survived to age 55 (or age at date of death, if older) and elected a 50% Joint and Survivor Annuity. (2) The surviving spouse may elect to defer receipt of the Survivor Benefit to any date that is not later than the date that would have been the Participant's Normal Retirement Date. In this case, the benefit shall be equal to 55% of the benefit the Participant would have received if the Participant had survived to the date at which the surviving spouse elects to commence the Survivor Benefit and elected a 50% Joint and Survivor Annuity. Section 4.6. Minimum Benefits. Notwithstanding any provision of this Plan to the contrary, a Participant's Accrued Benefit determined under Section 4.3 above will be no less than the Participant's Accrued Benefit as of December 31, 1995, determined under the terms of the Plan as then in effect (the "Prior Plan"). The Participant's benefit payable at any age prior to his Normal Retirement Date will be no less than the benefit the Participant could have received under the Prior Plan, taking into account his Accrued Benefit under the Prior Plan as of December 31, 1995, but considering Years of Service (for purposes of vesting and early retirement reductions) earned subsequent to such date and the Participant's age as of the commencement of benefits. Any lump sum payment a Participant is entitled to receive pursuant to Section 5.3 shall be no less than the Actuarial Equivalent of the Participant's Accrued Benefit as of December 31, 1995. Further, for Participants eligible for immediate benefits under the Prior Plan, the lump -19- 25 sum shall be no less than the Actuarial Equivalent of the immediate benefit payable to the Participant based on the Prior Plan's terms. -20- 26 ARTICLE V PAYMENT OF RETIREMENT PENSIONS Section 5.1. Payment in the Form of Joint and Survivor Annuity. Subject to the provisions of Sections 5.2 and 5.6, if a Participant has a spouse at the time such Participant becomes entitled under the Plan to receive a Normal Retirement Pension, an Immediate Pension or an Early Retirement Pension, such pension benefit shall be paid from the Annuity Starting Date in the form of a 50% Qualified Joint and Survivor Annuity, which is the Actuarial Equivalent of a single annuity for the life of the Participant. The Participant may elect, without having to comply with the provisions of Section 5.2 below, to receive his pension benefit in the form of a 100% Qualified Joint and Survivor Annuity, which is the Actuarial Equivalent of a single annuity for the life of the Participant. A Participant who has no spouse and who is entitled to receive a pension under the Plan shall have it paid to him in the form of a single annuity for the life of the Participant, unless he otherwise elects an optional form in writing pursuant to Sections 5.2 and 5.3 below. Section 5.2. Election to Waive Joint and Survivor Annuity. (A) A Participant shall have the right, by written notice in accordance with the procedures outlined in this Section, to waive the 50% Qualified Joint and Survivor Annuity and -21- 27 receive his pension benefit as a single annuity for the life of the Participant or in an optional form indicated in Section 5.3 below. Any election to waive the 50% Qualified Joint and Survivor Annuity must be made by the Participant in writing during the election period (described in (B) below) and be consented to by the Participant's spouse. Such spouse's consent must be in writing and must acknowledge the effect of such election and be witnessed by a Plan representative or a notary public. Such consent shall not be required if it is established to the satisfaction of the Committee that the required consent cannot be obtained because there is no spouse, the spouse cannot be located, or because of other circumstances that may be prescribed by Treasury regulations. The Participant may revoke this election in writing without the consent of the spouse at any time during the election period. Any new election must comply with the requirements of this paragraph. A former spouse's waiver shall not be binding on a new spouse. (B) The election period to waive the joint and survivor annuity shall be the 90-day period ending on the Annuity Starting Date. (C) With regard to the election, the Committee shall provide the Participant within a reasonable period of time before the Annuity Starting Date (and consistent with Treasury regulations), a written explanation in nontechnical terms of: (1) the terms and conditions of the 50% Qualified Joint and Survivor Annuity, and -22- 28 (2) the Participant's right to make an election to waive the 50% Qualified Joint and Survivor Annuity, and (3) the right of the Participant's spouse to consent to any election to waive the 50% Qualified Joint and Survivor Annuity, and (4) the right of the Participant to revoke such election, and the effect of such revocation. Section 5.3. Optional Forms of Payment. (A) In the event a Participant duly elects pursuant to Section 5.2 above to waive the 50% Qualified Joint and Survivor Annuity, or if a Participant is not married, the Participant shall have the right to elect to receive payment in one of the following optional forms: (1) A monthly pension payable in equal installments for the life of the Participant; provided, however, that in the event the Participant dies within the ten-year period following his Annuity Starting Date, monthly payments equal to those payable during the life of the Participant shall be made to the Beneficiary or spouse of the deceased Participant designated to receive such payments for the remainder of said ten-year period. (2) A lump sum payment equal to the Participant's Defined Lump Sum, as determined under subparagraph 4.3(A)(1) above, which payment shall be made as of the first day of the month following the date an election to receive such lump sum payment is made pursuant to this Section. (3) A monthly pension payable in equal installments for the life of a Participant. (B) A Participant electing a lump sum payment under subparagraph (A)(2) above must do so within the applicable election period, which shall be the 90-day period following the date of such Participant's retirement or other termination of -23- 29 employment. If a Participant fails to elect a lump sum payment within the applicable election period, with his spouse's consent if required by Section 5.2, the Participant shall receive payment in accordance with the provisions of this ARTICLE V without regard to subparagraph 5.3(A)(2) thereof. (C) Each of the optional forms of payment shown in (A) above shall be the Actuarial Equivalent of a single annuity for the life of the Participant in the amount specified by the relevant provisions of ARTICLE IV. Section 5.4. Designation of Beneficiary. (A) The Beneficiary of a Participant's pension benefits payable under the terms of this Plan shall be the Participant's spouse; provided, however, that the Participant may designate a Beneficiary other than his spouse for any benefits payable on account of the death of a Participant if: (i) the spouse has waived the right to be the Participant's Beneficiary in accordance with the waiver procedure outlined in Section 5.2(A) above, (ii) the Participant has no spouse, or (iii) the spouse cannot be located. (B) Such designation shall be made in the form prescribed by and delivered to the Committee. The Participant shall have the right to change or revoke any such designation from time to time by filing a new designation or notice of revocation with the Committee; provided, however, that if the Participant is a married person, the Participant's spouse shall -24- 30 be required to consent to any designation that designates a Beneficiary other than the spouse (unless the consent of the spouse expressly permits designations by the Participant without any requirement of further consent by the spouse). (C) The term "Beneficiary" or "Beneficiaries" as used in this Plan refers to the person or persons to whom the deceased Participant's interest becomes distributable, as provided in the Plan. Section 5.5. Small Benefits Provision. If the present value of a Participant's Accrued Benefit does not exceed $3,500 as of the date of the Participant's retirement or other termination of employment, the Trustee shall pay such Actuarially Equivalent lump sum value to the Participant (or in the event of his death, to his surviving spouse) in a lump sum. For purposes of this Section 5.5, if the Actuarially Equivalent value of a Participant's entire nonforfeitable Accrued Benefit under the Plan is zero, the Participant shall be deemed to have received distribution of such nonforfeitable Accrued Benefit. However, no such lump sum distribution may be made after the 90-day period following the date of such Participant's retirement or other termination of employment, unless the Participant and his spouse (or his surviving spouse) consent in writing to such distribution. Payment of any lump sum shall be in full satisfaction of all rights of the Participant or his Beneficiary under the Plan. -25- 31 Section 5.6. One-Year Marriage Requirement. (A) Notwithstanding any contrary provision hereof, the Plan shall not provide a 50% Qualified Joint and Survivor Annuity, a 100% Qualified Joint and survivor Annuity, or a Survivor Benefit unless the Participant and his spouse have been married throughout the one (1) year period ending on the earlier of: (1) the Participant's Annuity Starting Date, or (2) the date of the Participant's death. (B) For purposes of Paragraph (A) above, if: (1) a Participant marries within one (1) year before his Annuity Starting Date, and (2) the Participant and his spouse in such marriage have been married for at least a one (1) year period ending on or before the date of the Participant's death, then the Participant and his spouse shall be treated as having been married throughout the one (1) year period ending on the Participant's Annuity Starting Date. (C) For purposes of this Plan, the term "spouse" shall in general mean the individual to whom the Participant is married as of the relevant date in question, or the individual designated as the Participant's spouse in a "qualified domestic relations order," as defined in Section 11.4 of ARTICLE XI. Section 5.7. Method of Payment of Retirement Pensions. Retirement payments shall be paid monthly and, in the case of a single life annuity (as distinguished from a joint -26- 32 and survivor annuity), the last payment shall be made as of the first day of the month in which the death of the Participant occurs. In the case of a joint and survivor annuity, the last payment shall be made as of the first day of the month in which the death of the Participant or his spouse (whichever is the later to die) occurs. Section 5.8. Minority, Disability, or Incompetency. If any amount becomes payable under this Plan to a minor or to a person under legal disability or to a person not adjudicated incompetent but who, by reason of illness or mental or physical disability, is in the opinion of the Committee unable properly to manage his affairs, then such amount shall be paid by the Trustee in such of the following ways as the Committee may deem best: (A) To the legally appointed guardian or conservator of such minor or other person; or (B) To some relative or friend of such minor or other person; without responsibility of the Committee or the Trustee to see to the application of such payments. Section 5.9. Reemployment. (A) If a Participant either continues in employment after his Normal Retirement Date or is reemployed by the Employer after his Normal Retirement Date, the Participant's status as an Employee shall be deemed to have terminated for the purposes of qualifying for a Normal Retirement Pension with -27- 33 respect to any calendar month including or following his Normal Retirement Date during which the Participant receives payment from the Employer for any Hours of Service performed on fewer than eight (8) or more days (or separate work shifts) in such month. (B) Subject to the provisions of Paragraph (A) of this Section 5.9, if a Participant who began receiving or became entitled to a retirement pension on or before January 1, 1996 shall be reemployed by the Employer for any period of time, his retirement pension shall be suspended beginning with the first payment due on or after the date of such reemployment; provided, however, that the amount of a Participant's Normal Retirement Pension which shall be suspended in accordance with this Paragraph (B) shall not exceed a Participant's "suspendible amount." The retirement pension payable upon subsequent retirement to such reemployed Participant shall be determined in accordance with the provisions of the Plan (but not less than the retirement pension to which he was entitled immediately prior to his reemployment) as in effect at that date, reduced by the Actuarial Equivalent of the retirement pension payments previously received by him before his Normal Retirement Date. Notwithstanding the foregoing, any Normal Retirement Pension to which a reemployed Participant shall subsequently become entitled shall not be reduced in accordance with the foregoing sentence. A -28- 34 Participant's "suspendible amount" is an amount per month equal to the monthly pension payment. (C) Subject to the provisions of Paragraph (A) of this Section 5.9, if a Participant who terminated his employment and began receiving a retirement pension after January 1, 1996 shall be reemployed by the Employer, his retirement pension shall not be suspended. Upon the Participant's subsequent retirement, the retirement pension earned during his period of reemployment shall be added to the retirement pension attributable to his prior period of service. (D) If a Participant incurs a One-Year Break in Service after December 31, 1995 and is later reemployed by the Employer, the Participant's Accrued Benefit upon his subsequent retirement or termination of employment shall be the sum of the Accrued Benefits he earned during each of his separate periods of employment with the Employer. Section 5.10. Maximum Annual Benefit. (A) Notwithstanding any other provisions of the Plan, in no event shall a Participant with at least ten (10) years of participation hereunder whose benefits begin at the Participant's Social Security Retirement Age receive an Annual Retirement Benefit exceeding the lesser of: (i) 100% of the Participant's Average Annual Compensation; or (ii) Ninety Thousand Dollars ($90,000). -29- 35 (B) A Participant's "Social Security Retirement Age" shall mean the age used as the retirement age for the Participant under Section 216(1) of the Social Security Act, except that such section shall be applied without regard to the age increase factor, and as if the early retirement age under Section 216(1)(2) of such Act were sixty-two (62). "Annual Retirement Benefit" shall mean a benefit payable annually in the form of a straight life annuity (with no ancillary benefits), excluding any benefits attributable to Employee contributions or rollover contributions, or the assets transferred from a qualified plan that was not maintained by the Employer. Where a Participant's retirement benefit is payable in another form, or if the Employees contribute to the Plan or make rollover contributions (as defined in Sections 402(c), 403(a)(4), and 408(d)(3) of the Code), then the limitations described in Paragraph (A) above shall be adjusted in accordance with regulations prescribed by the Secretary of the Treasury pursuant to Section 415(b)(2)(B) of the Code. For purposes of this Paragraph (B), any ancillary benefits that are not directly related to retirement income benefits shall not be taken into account; and that portion of any joint and survivor annuity that constitutes a qualified joint and survivor annuity (as defined in Section 417(b) of the Code) shall not be taken into account. (C) Notwithstanding the foregoing limitations (except as otherwise provided by subparagraph (D)(5) hereof), if a Participant herein has not at any time participated in a de- -30- 36 fined contribution plan maintained by the Employer, there shall be no limitation on the annual benefit of a Participant herein if the total annual retirement benefits payable to the Participant by all defined benefit plans of the Employer do not exceed ten thousand ($10,000) dollars. (D) The limitations of this Section 5.10 shall be subject to the following adjustments where applicable: (1) The Ninety Thousand Dollar ($90,000) limitation stated above shall be increased to the maximum amount permitted under regulations promulgated by the Secretary of the Treasury pursuant to Section 415(d) of the Code. Any adjustments will be effective as of January 1 of the calendar year and will be applicable to the limitation year coincident with or ending within that calendar year. (2) Where a Participant's benefits commence before the Participant's Social Security Retirement Age, the Ninety Thousand Dollar ($90,000) limitation, as adjusted under the provisions of (1) above, shall be further adjusted to the Actuarial Equivalent (determined in accordance with paragraph B-1 of Supplement B) of an annual benefit of $90,000 beginning at the Social Security Retirement Age. The adjustment provided for in the preceding sentence shall be made in such manner as the Secretary of the Treasury may prescribe that is consistent with the reduction for old age insurance benefits commencing before the Social Security Retirement Age under the Social Security Act. (3) Where a Participant begins to receive his benefits after the Participant's Social Security Retirement Age, the Ninety Thousand Dollar ($90,000) limitation, as adjusted under the provisions of (1) above, shall be increased to the Actuarial Equivalent (determined in accordance with paragraph B-1 of Supplement B) of an annual benefit of $90,000 beginning at the Social Security Retirement Age. (4) Where a Participant retires with less than ten (10) years of participation hereunder, the Ninety Thousand Dollar ($90,000) limitation, as adjusted under the provisions of (1) above, shall be reduced -31- 37 by a fraction, the numerator of which is the Participant's number of years (or parts thereof) of participation in the Plan, and the denominator of which is ten (10). In no event, however, shall this limitation be reduced to an amount less than one-tenth (1/10) of the applicable limitation determined without regard to this subparagraph (D)(4). (5) Where a Participant retires with less than ten (10) Years of Service, the limitations described in Sections 415(b)(1)(B) and 415(b)(4) of the Code shall be adjusted by multiplying such amounts by a fraction, the numerator of which is the Participant's number of Years of Service (or part thereof), and the denominator of which is ten (10). In no event, however, shall this limitation be reduced to an amount less than one-tenth (1/10) of the applicable limitation determined without regard to this subparagraph (D)(5). Section 5.11. Combined Limitation. (A) Notwithstanding any other provision of this Plan, and as required by the Code, if any Participant is, or was, covered under a defined benefit plan and a defined contribution plan maintained by the Employer, the sum of the Participant's defined benefit plan fraction and defined contribution plan fraction may not exceed 1.0 in any Plan Year. (B) The defined benefit plan fraction is a fraction, the numerator of which is the sum of the Participant's projected annual benefits under all defined benefit plans (whether or not terminated) maintained by the Employer and the denominator of which is the lesser of (i) 1.25 times the dollar limitation of Section 415(b)(1)(A) of the Code in effect for the Plan Year or (ii) 1.4 times the Participant's average compensation for the three (3) consecutive years that produces the highest aver- -32- 38 age. "Projected annual benefit" means the annual benefit to which the Participant would be entitled under the terms of the Plan if the Participant continued employment until normal retirement age (or actual age, if later) and the Participant's compensation for the Plan Year and all other relevant factors used to determine such benefit remained constant until normal retirement age (or actual age, if later). (C) The defined contribution plan fraction is a fraction, the numerator of which is the sum of the annual additions to the Participant's accounts under all defined contribution plans maintained by the Employer (whether or not terminated) for the current and all prior Plan Years, and the denominator of which is the sum of the lesser of the following amounts determined for such year and for each prior year of service with the Employer: (i) 1.25 times the dollar limitation in effect under Section 415(c)(1)(A) of the Code for such year, or (ii) 1.4 times the amount which may be taken into account under Section 415(c)(1)(B) of the Code. (D) If the sum of the defined benefit plan fraction and the defined contribution plan fraction shall exceed 1.0 in any Plan Year for any Participant in this Plan, the Employer shall adjust the numerator of the defined benefit plan fraction as set forth in the defined benefit plan so that the sum of both fractions shall not exceed 1.0. -33- 39 Section 5.12. Restrictions on Distributions. Notwithstanding any provisions of the Plan to the contrary, the annual benefit payable to any highly compensated Participant (or former Participant) who is in the top 25 Highly Compensated Employees (or former Employees) with the greatest Compensation for the current or any prior Plan Year will be limited to the amount that would be paid as a life annuity that is the Actuarial Equivalent of the accrued benefit and any other benefits that such individual is entitled to receive under the Plan and any payments that are considered a Social Security supplement; provided that, the foregoing limitations shall not apply to such Highly Compensated Employee (or former Employee) if (A) After payment of all the benefits payable to such Participant (or former Participant) under the Plan, the value of Plan assets equals or exceeds 110 percent of the value of current liabilities (as defined in Section 412(1)(7) of the Code and modified by Section 1.401(a)(4)-5(b)(3)(iv) of the Income Tax Regulations) determined as of the same date; (B) The value of the benefits payable to such Participant (or former Participant) is less than one (1) percent of the value of current liabilities before the date of distribution; (C) The value of the benefits payable to such Participant (or former Participant) is determined under Section 5.5 of the Plan; (D) The Plan terminates and the benefit received by such Participant is nondiscriminatory under Section 401(a)(4) of the Code; or (E) Such Participant has agreed to repay to the Plan amounts distributed therefrom that are in excess of the foregoing restrictions and that are necessary for the distribution of assets upon Plan termination to satisfy Section 401(a)(4) of the Code, provided that such agreement has been secured or collateral- -34- 40 ized in accordance with applicable governmental requirements. Section 5.13. Other Distribution Restrictions. Notwithstanding any contrary provisions of this Plan: (A) The entire interest in the Plan of any Participant shall be distributed to him over a period not extending beyond the life expectancy of such Participant, or the life expectancies of such Participant and his Beneficiary, commencing not later than April 1 of the calendar year following the taxable year in which the Participant attains age 70-1/2. (B) If a Participant dies before distribution of his interest in the Plan has commenced, any benefits payable to a Beneficiary on account of the Participant's death shall be distributed within five years after his death unless: (i) any portion of the Participant's interest is payable to (or for the benefit of) his Beneficiary, (ii) such portion is distributed over a period not extending beyond the life expectancy of the Beneficiary, and (iii) such distribution begins not later than one (1) year after the date of the Participant's death or such later date as may be prescribed by regulation. If the Beneficiary referred to in clause (B)(i) above is the surviving spouse of the Participant, the date such distribution must commence shall be no later than the date on which the Participant would have attained age 70-1/2. (C) If a Participant dies after distribution of his interest in the Plan has commenced, but before his entire interest has been distributed to him, the remaining portion of his interest shall be distributed to his Beneficiary at least as rapidly as the method of distribution used for the Participant. (D) Notwithstanding any contrary provisions of this Plan, the foregoing provisions of Paragraphs (A) through (C) of this Section 5.13 shall apply to any distribution hereunder, and all distributions hereunder shall be made in accordance with the regulations under Section 401(a)(9) of the Code, including Section 1.401(a)(9)-2 of the regulations. Any distribution required under the "incidental death benefit requirements" of Section 401(a) of the Code shall be treated as a distribution required by the foregoing -35- 41 provisions of Paragraphs (A) through (B) of this Section 5.13. Life expectancy and joint and last survivor expectancy shall be computed using the return multiples of Treasury Regulation Section 1.72-9. Section 5.14. Written Explanation Regarding Rollovers. In the event a Participant, Beneficiary or spouse is to receive a lump sum distribution under the Plan, the Committee shall provide to the recipient a written explanation of the provisions under which such distribution will not be subject to tax if transferred to an eligible retirement plan within 60 days after the date on which the recipient received the distribution, and, if applicable, the provisions regarding capital gains treatment and ten-year income averaging for lump sum distributions. For purposes of this Section 5.14, the term "eligible retirement plan" shall have the same meaning as ascribed to that term by Section 402(c)(8)(B) of the Code. If payment of a Participant's benefits constitutes an eligible rollover distribution under Section 402(c)(4) of the Code, then the Participant may elect to have such distribution paid directly to an eligible retirement plan. Each election by a Participant under this Section 5.14 shall be made at such time and in such manner as the Committee shall determine, and shall be effective only in accordance with such rules as shall be established from time to time by the Committee. Section 5.15. Distribution to Alternate Payees. The Committee may direct that benefits be distributed to an alter- -36- 42 nate payee on the earliest date specified in a qualified domestic relations order (as defined in Section 11.4), without regard to whether such distribution is made or commences prior to the Participant's earliest retirement age (as defined in Section 414(p)(4)(B) of the Code) or the earliest date that the Participant could commence receiving benefits under the Plan. -37- 43 ARTICLE VI FUNDING Section 6.1. Employer Contributions. It is the intention of this Plan that the Employer shall make contributions during each year to the Trust in such amounts, computed at the rate of interest and on the basis of the mortality and other tables then in use by the Committee, as an enrolled actuary selected by the Committee shall determine to be necessary to provide the benefits specified in the Plan under the funding method then in effect, which contributions shall not be less than the minimum contributions required by the Employee Retirement Income Security Act of 1974. Contributions by Participants are neither required nor permitted. Section 6.2. Qualification of Plan. All contributions made by an Employer shall be deemed to be conditioned on qualification of the Plan under Section 401 of the Internal Revenue Code of 1986 (the "Code") and upon the deductibility of the contributions under Section 404 of the Code. Section 6.3. Recovery of Contributions. Except as otherwise provided in this ARTICLE VI, the assets of the Plan shall never inure to the benefit of any Employer and shall be held for the exclusive purpose of providing benefits under the Plan and defraying reasonable expenses of the Plan. Notwithstanding the foregoing: -38- 44 (A) Any contribution that is disallowed as a deduction under Section 404 of the Code shall upon written request of the Employer be returned to the Employer within one year after the date the deduction is disallowed; (B) If a contribution or any portion thereof is made by the Employer by a mistake of fact, the Trustee shall, upon written request of the Employer, return the contribution or such portion to the Employer within one year after the date of payment to the Trustee; and (C) Earnings attributable to amounts to be returned to the Employer pursuant to Paragraph (A) or (B) above shall not be returned, and losses attributable to amounts to be returned pursuant to Paragraph (A) or (B) shall reduce the amount to be so returned. Section 6.4. Forfeitures. Any forfeitures of benefits or benefits that are suspended under Plan shall be used to reduce the cost of the Plan rather than to increase benefits thereunder. -39- 45 ARTICLE VII THE COMMITTEE Section 7.1. Membership. A Committee consisting of three or more persons (who may but need not be employees of the employers) shall be appointed by Cotter. The Secretary of Cotter shall certify to the Trustee under the Trust from time to time the appointment to (and termination of) office of each member of the Committee and the person who is selected as secretary of the Committee. Section 7.2. Committee's General Powers, Rights and Duties. Except as otherwise specifically provided and in addition to the powers, rights and duties specifically given to the Committee elsewhere in the Plan and the Trust agreement, the Committee shall have the following discretionary powers, rights and duties: (A) To select a secretary, if it believes it advisable, who may but need not be a Committee member. (B) To construe and interpret the provisions of the Plan and make factual determinations thereunder, including the power to determine the rights or eligibility of Employees or Participants and any other persons, and the amounts of their benefits under the Plan, and to remedy ambiguities, inconsistencies or omissions, and such determinations shall be binding on all parties. (C) To adopt such rules or procedures and regulations as in its opinion may be necessary for the proper and efficient administration of the Plan and as are consistent with the Plan and Trust agreement. -40- 46 (D) To enforce the Plan in accordance with the terms of the Plan and the Trust agreement and the rules and regulations adopted by the Committee. (E) To direct the Trustee as respects payments or distributions from the Trust fund in accordance with the provisions of the Plan. (F) To furnish the Employers with such information as may be required by them for tax or other purposes in connection with the Plan. (G) To employ agents, attorneys, accountants or other persons (who also may be employed by the Employers) and to allocate or delegate to them such powers, rights and duties as the Committee may consider necessary or advisable to properly carry out administration of the Plan, provided that such allocation or delegation, and the acceptance thereof by such agents, attorneys, accountants or other persons, shall be in writing. Section 7.3. Manner of Action. During a period in which two or more Committee members are acting, the following provisions apply where the context admits: (A) A Committee member by writing may delegate any or all of his rights, powers, duties and discretions to any other member, with the consent of the latter. (B) The Committee members may act by meeting or by writing signed without meeting, and may sign any document by signing one document or concurrent documents. (C) An action or a decision of a majority of the members of the Committee as to a matter shall be as effective as if taken or made by all members of the Committee. (D) If, because of the number qualified to act, there is an even division of opinion among the Committee members as to a matter, a disinterested party selected by the Committee shall decide the matter and his decision shall control. -41- 47 (E) Except as otherwise provided by law, no member of the Committee shall be liable or responsible for an act or omission of the other Committee members in which the former has not concurred. (F) The certificate of the secretary of the Committee or of a majority of the Committee members that the Committee has taken or authorized any action shall be conclusive in favor of any person relying on the certificate. Section 7.4. Interested Committee Member. If a member of the Committee is also a Participant in the Plan, he may not decide or determine any matter or question concerning distributions of any kind to be made to him or the nature or mode of settlement of his benefits unless such decision or determination could be made by him under the Plan if he were not serving on the Committee. Section 7.5. Resignation or Removal of Committee Members. A member of the Committee may be removed by Cotter at any time by 10 days' prior written notice to him and the other members of the Committee. A member of the Committee may resign at any time by giving 10 days' prior written notice to Cotter and the other members of the Committee. Cotter may fill any vacancy in the membership of the Committee; provided, however, that if a vacancy reduces the membership of the Committee to less than three, such vacancy shall be filled as soon as practicable. Cotter shall give prompt written notice thereof to the other members of the Committee. Until any such vacancy is -42- 48 filled, the remaining members may exercise all of the powers, rights and duties conferred on the Committee. Section 7.6. Committee Expenses. All costs, charges and expenses reasonably incurred by the Committee will be paid by the Employers in such proportions as Cotter may direct. No compensation will be paid to a Committee member as such. Section 7.7. Information Required by Committee. Each person entitled to benefits under the Plan shall furnish the Committee with such documents, evidence, data or information as the Committee considers necessary or desirable for the purpose of administering the Plan. The Employers shall furnish the Committee with such data and information as the Committee may deem necessary or desirable to administer the Plan. The records of the Employers as to an Employee's or Participant's period of employment, termination of employment and the reason therefor, leave of absence, reemployment, and compensation will be conclusive on all persons unless determined to the Commit- tee's satisfaction to be incorrect. Section 7.8. Uniform Rules. The Committee shall administer the Plan on a reasonable and nondiscriminatory basis and shall apply uniform rules to all persons similarly situated. Section 7.9. Review of Benefit Determinations. The Committee will provide notice in writing to any Participant or -43- 49 Beneficiary whose claim for benefits under the Plan is denied and the Committee shall afford such Participant or Beneficiary a full and fair review of its decision if so requested. Section 7.10. Committee's Decision Final. Subject to applicable law, any interpretation of the provisions of the Plan and any decisions on any matter within the discretion of the Committee made in good faith shall be binding on all persons. A misstatement or other mistake of fact shall be corrected when it becomes known and the Committee shall make such adjustment on account thereof as it considers equitable and practicable. -44- 50 ARTICLE VIII TRUST FUND AND TRUSTEE Section 8.1. Trust Fund. The Employers have heretofore established a fund, herein referred to as the "Trust fund", which comprises all of the assets of the Plan and into which future contributions to finance this Plan shall be made. The Trust fund shall be used to pay benefits as provided in this Plan pursuant to authorization by the Committee; and such benefits shall be payable only from the Trust fund. Section 8.2. Trust Fund Applicable Only to Payment of Benefits. The Trust fund will be used and applied only in accordance with the provisions of the Plan and the Trust agreement entered into by the Employers and the Trustee to provide the benefits thereof, and no part of the corpus or income of the Trust fund will be used for, or diverted to, purposes other than for the exclusive benefit of Participants under the Plan and other persons thereunder entitled to benefits except to the extent provided in Sections 6.3 and 10.3 or to pay reasonable expenses in the administration of the Plan. Section 8.3. Trustee Capacity. The Trustee of the Trust fund may be a bank, trust company or other corporation possessing trust powers under applicable state and Federal law, or one or more individuals or any combination thereof. When there are two or more Trustees, they are authorized to allocate -45- 51 specific responsibilities, obligations or duties among themselves by their written agreement. An executed copy of such written agreement is to be delivered to and retained by the Committee. In the event of more than one Trustee, any action shall be taken at the direction of a majority of such Trustees. Section 8.4. Resignation and Removal of Trustee. Any Trustee may resign at any time by delivering to the Board of Directors of Cotter (the "Board of Directors") a written notice of resignation, which notice may be waived by the Board of Directors, to take effect at a date specified therein, which shall not be less than thirty (30) days after the delivery thereof. The Trustee may be removed by the Board of Directors with or without cause, by tendering to the Trustee a written notice of removal to take effect at a date specified therein. Upon such removal or resignation of a Trustee, the Board of Directors shall either appoint a successor Trustee who shall have the same powers and duties as those conferred upon the resigning or discharged Trustee, or, if more than one Trustee is acting, determine that a successor shall not be appointed and the number of Trustees shall be reduced by one. Section 8.5. Taxes, Expenses and Compensation of Trustee. The Trustee shall deduct from and charge against the Trust any taxes paid by it which may be imposed upon the Trust, or the income thereof, or which the Trustee is required to pay with respect to the interest of any Participant or Bene- -46- 52 ficiary therein. The Employers may pay the Trustee's reasonable expenses in administering the Plan and a reasonable compensation for its services as Trustee hereunder, at a rate to be agreed upon from time to time; provided, however, that no full-time Employee shall receive any compensation for acting as Trustee hereunder. -47- 53 ARTICLE IX TOP-HEAVY RESTRICTIONS Section 9.1. General. For any Plan Year with respect to which the Plan is a "top-heavy plan," and for all subsequent Plan Years, the provisions of this ARTICLE IX shall apply notwithstanding any contrary provisions of the Plan. Section 9.2. Definitions. (A) For purposes of this ARTICLE IX, the Plan will be a "top-heavy plan" with respect to any Plan Year if the aggregate of the present value of accrued benefits of "key employees" under the Plan exceeds sixty percent (60%) of the aggregate of the present value of accrued benefits of all employees under the Plan as of the relevant "determination date." The actuarial assumptions specified in Paragraph 1 of ARTICLE II of the Plan shall be applied to all benefits provided by the Plan in order to determine the present value of accrued benefits under the Plan. (B) "Affiliated Company" means (i) a member of a controlled group of corporations of which the Employer is a member, or (ii) an unincorporated trade or business that is under common control with the Employer, or (iii) a member of an affiliated service group of which the Employer is a member, as defined in Section 414(b), 414(c), and 414(m) of the Code, respectively. For purposes hereof, a "controlled group of corporations" shall mean a controlled group of corporations as -48- 54 defined in Section 1563(a) of the Code, determined without reference to Sections 1563(a)(4) and (e)(3)(C) of the Code, except that, with respect to the maximum limitations on Plan benefits set forth in ARTICLE IV of the Plan, the phrase "more than fifty (50%) percent" shall be substituted for the phrase "eighty (80%) percent" wherever such phrase appears in Section 1563(a)(1) of the Code. (C) "Key employee," for purposes of this ARTICLE IX, shall have the same meaning as ascribed to that term by Section 416(i) of the Code and the regulations promulgated pursuant thereto. Generally, this term shall include any employee or former employee (and his beneficiaries) who, at any time during the Plan Year or any of the preceding four (4) Plan Years, is: (1) an officer of the Employer having Section 415 Compensation greater than 50 percent of the dollar limitation in effect under Code Section 415(b)(1)(A) for the calendar year in which the Plan Year ends (including only the greater of three Employees or ten percent of the total Employees of the Employer but not exceeding 50); (2) one of the ten Employees who owns (or is considered as owning within the meaning of Code Section 318) both more than a 1/2 percent interest and the largest interests in the Employer and who has Section 415 Compensation in excess of the limitation in effect under Section 415(c)(1)(A) of the Code for the calendar year in which the Plan Year ends; (3) a "five percent owner" of the Employer; or (4) a "one percent owner" of the Employer having Section 415 Compensation of more than $150,000. (D) For purposes of this Section 9.2: (1) "five percent owner" means any person who owns (or is considered as -49- 55 owning within the meaning of Code Section 318) more than five percent (5%) of the outstanding stock of the Employer or stock possessing more than five percent (5%) of the total combined voting power of all stock of the Employer; (2) "one percent owner" means any person who owns (or is considered as owning within the meaning of Code Section 318) more than one percent (1%) of the outstanding stock of the Employer or stock possessing more than one percent (1%) of the total combined voting power of all stock of the Employer; and (3) "Section 415 Compensation" means annual compensation as defined by Treasury Regulation Section 1.415-2(d). (E) The term "determination date" means, with respect to any Plan Year, the last day of the preceding Plan Year. (F) "Required Aggregation Group" means each plan of the Employer or an Affiliated Company in which a key employee is a Participant, and each such plan of the Employer or an Affiliated Company that enables any plan of the Employer or an Affiliated Company in which a key employee is a Participant to meet the nondiscrimination and participation requirements of Sections 401(a)(4) and 410 of the Code, respectively. (G) "Permissive Aggregation Group" means all plans of an Employer or an Affiliated Company included in the Required Aggregation Group and any other plan or plans of an Employer or an Affiliated Company designated by the Employer as a part of the group but only if such plans, when considered as a -50- 56 group, would continue to satisfy the nondiscrimination and participation requirements of Sections 401(a)(4) and 410 of the Code, respectively. Section 9.3. Top-Heavy Determination. (A) The determination of whether the Plan is a top- heavy plan with respect to any Plan Year, and the computation of the top-heavy ratio, shall be made in accordance with the provisions of Section 416(g) of the Code and the regulations promulgated pursuant thereto. All qualified plans that are, along with this Plan, members of either a Required Aggregation Group or a Permissive Aggregation Group shall be aggregated with the Plan in testing whether the Plan is top-heavy. (B) The present value of an Employee's accrued benefit as of any determination date shall be determined as if the Employee had terminated service as of the valuation date used for computing Plan costs for minimum funding purposes which is the most recent valuation date within a twelve-month period ending on the determination date in question. Section 9.4. Vesting. Commencing with the first Plan Year with respect to which the Plan is a top-heavy plan, a Participant's accrued benefit shall vest at the rate not less than the rate specified in the following schedule: -51- 57
If His Completed Years of The Vested Percentage of His Service in the Plan Are Accrued Benefit Shall Be - ------------------------- ---------------------------- Less than 2 years 00% 2 years but less than 3 years 20% 3 years but less than 4 years 40% 4 years but less than 5 years 60% 5 or more years 100%
Section 9.5. Minimum Accrual. Commencing with the first Plan Year with respect to which the Plan is a top-heavy plan, Participants shall accrue benefits that shall not be less than the "Minimum Accrual." The Minimum Accrual, expressed as a single life annuity commencing at the Participant's Normal Retirement Date, is the product of the Participant's average compensation for the five consecutive years when the Participant had the highest aggregate compensation from the Employer and the lesser of (A) two percent (2%) for each Year of Service completed when the Plan is a top-heavy plan, or (B) twenty percent (20%). All benefits accrued under the Plan, whether or not attributable to years for which the Plan is a top-heavy plan, shall be used to satisfy the minimum accrual required by this Section 9.5. Section 9.6. Limitation on Benefits. Commencing with the first Plan Year with respect to which the Plan is a top-heavy plan, Section 5.11 of ARTICLE V shall be read by substituting the number "1.00" for the number "1.25" whenever it appears therein; provided, however, that such substitution -52- 58 shall not reduce any benefit accrued under the Plan prior to the Plan Year in which this provision becomes applicable. Notwithstanding the foregoing, the above paragraph shall not apply in any Plan Year in which the Plan is not "super top-heavy" and in which non-key employees receive an "extra minimum benefit." For purposes of this Section: (1) the Plan will be "super top-heavy" with respect to any Plan Year if the aggregate of the present value of accrued benefits of key employees under the Plan exceeds ninety percent (90%) of the aggregate of the present value of accrued benefits of all Employees under the plan as of the relevant determination date; and (2) the "extra minimum benefit" is one percentage point so that Section 9.5 hereof will be read by substituting "three percent (3%)" for "two percent (2%)" and "thirty percent (30%)" for "twenty percent (20%)" whenever they appear therein. -53- 59 ARTICLE X AMENDMENT AND TERMINATION OF THE PLAN Section 10.1. Amendment. Cotter shall have the right at any time to amend the Plan or Trust in any respect, except that no such amendment shall have the effect of reducing any accrued benefit (as defined in Section 411(d)(6) of the Code) earned prior thereto or, except as otherwise provided in Section 6.3, make it possible for any portion of the assets of the Plan to be diverted to purposes other than for the exclusive benefit of Participants or their beneficiaries at any time prior to the satisfaction of all liabilities under the Plan with respect to such Participants and their beneficiaries. Any action by Cotter to amend the Plan or Trust shall be by resolution of its Board of Directors, by resolution of a duly authorized committee of its Board of Directors, or by a person or persons authorized by resolution of its Board of Directors or such committee. Section 10.2. Termination. This Plan is adopted in the expectation that it will be continued indefinitely but the continuance of this Plan and the payment of any contribution hereunder is not assumed as a contractual obligation. Cotter, as authorized by its Board of Directors, reserves the right to terminate this Plan at any time. In the event of a termination or partial termination of this Plan, the rights of all affected Participants to the benefits accrued to the date of such termi- -54- 60 nation or partial termination, to the extent funded as of such date, shall become immediately and fully vested. Section 10.3. Allocation and Distribution of Assets on Termination. On termination of the Plan as respects all Employers, the Committee will direct the allocation and distribution of the Trust fund to Participants, retired or terminated Participants, and other persons entitled to benefits under the Plan. After payment of any expenses of administration and liquidation, the assets remaining in the Trust fund shall be allocated and distributed to such Participants and other persons, to the extent of the sufficiency of such assets, in accordance with the provisions of Section 4044 of ERISA. Distribution may be made in cash or property or partly in each, provided property is distributed at its fair market value as of the date of distribution as determined by the Trustee. Section 10.4. Limitations on Termination. In the event the Plan is terminated, the benefit of any highly compensated Participant (or former Participant) as defined in Section 414(q) of the Code shall be limited to a benefit which is non-discriminatory under Section 401(a)(4) of the Code. Section 10.5. Merger and Consolidation. If this Plan is merged or consolidated with, or its liabilities transferred to any other retirement plan, a Participant hereunder shall (if the Plan then terminates) receive a benefit immedi- -55- 61 ately after the merger, consolidation, or transfer that is at least equal to the benefit he would have been entitled to receive immediately before the merger, consolidation, or transfer (if the Plan had then terminated). -56- 62 ARTICLE XI GENERAL PROVISIONS Section 11.1. Employment with Related Companies. A period of any employee's employment with a controlled group member that is not an Employer will be considered a period of employment for purposes of determining Employment Years and Years of Service but no employee of a controlled group member shall be eligible to participate in the Plan unless such controlled group member becomes an Employer under the Plan and no period of such employee's employment with such controlled group member shall be included in Years of Service for purposes of calculating the amount of a Participant's benefits under the Plan. A "controlled group member" means any corporation or other trade or business that is under common control with an Employer within the meaning of Sections 414(b), 414(c) and 414(m) of the Code. Section 11.2. Litigation by Participants. If a legal action begun against the Employers, the Committee or the Trustee by or on behalf of any person results adversely to that person or if a legal action arises because of conflicting claims to a Participant's or other person's benefits, the cost to the Trustee, the Employer or the Committee of defending the action will be charged to the extent permitted by law to the sums, if any, that were involved in the action or were payable to the person concerned. -57- 63 Section 11.3. Absence of Guaranty. Neither the Committee nor the Employer in any way guarantees the Trust fund from loss or depreciation. The liability of the Trustee or the Committee to make any payment under the Plan will be limited to the assets held by the Trustee that are available for that purpose. Section 11.4. Non-Assignability. Pension benefits may not be assigned or hypothecated, and to the extent permitted by law no such income shall be subject to legal process or attachment for the payment of any claim against any person entitled to receive the same; provided, however, that this Section 11.4 shall not apply to a "qualified domestic relations order" as defined in Section 414(p) of the Code. The Committee shall establish a written procedure to determine the qualified status of domestic relations orders and to administer distributions under such qualified order. Furthermore, to the extent provided in a qualified domestic relations order, a former spouse of a Participant shall be treated as the spouse or surviving spouse for all purposes under the Plan. Section 11.5. No Enlargement of Employment Rights. An Employer's rights to discipline or discharge Employees shall not be affected by any of the provisions of the Plan. Section 11.6. Applicable Law. This Plan shall be construed and enforced in accordance with the laws of the State -58- 64 of Illinois and all provisions of the Plan shall be administered in accordance with the laws of said state, to the extent such state laws are not preempted by the Employee Retirement Income Security Act of 1974, as amended. Section 11.7. Uniform Administration. Whenever, in the administration of the Plan, any action by the Board of Directors of Cotter, the Committee, or any Employer is required with respect to eligibility or classification of Employees, contributions or benefits or any other matters under this Plan, such action shall be uniform in nature as applied to all persons similarly situated, and no such action shall be taken that will discriminate in favor of Employees who are officers, shareholders, persons whose principal duties consist in supervising the work of other Employees, or Highly Compensated Employees. Section 11.8. Text to Control. The headings of ARTICLES and Sections hereof are included solely for convenience of reference and if there by any conflict between such headings and the text of this Plan, the text shall control. Section 11.9. Gender and Number. Where the context admits, words in the masculine include the feminine and neuter genders, words in the neuter include the masculine and feminine genders, the singular includes the plural and the plural includes the singular. -59- 65 IN WITNESS WHEREOF, Cotter & Company has caused the foregoing Plan to be executed and its corporate seal to be affixed and attested this ______ day of ____________, 19__. COTTER & COMPANY By:_________________________________ President ATTEST: ______________________________ Secretary -60- 66 SUPPLEMENT A MERGER OF NORTHERN WHOLESALE HARDWARE CO. RETIREMENT PLAN WITH AND INTO PRIOR PLAN A-1. Merger. Effective as of January 1, 1990, the Northern Wholesale Hardware Co. Retirement Plan ("Northern Plan") was amended, continued and merged with the Cotter & Compa- ny Pension Plan (the "Prior Plan"). A-2. Participation. On January 1, 1990, each former participant in the Northern Plan (a "Northern Participant") became a Participant in the Prior Plan and will have benefits determined and paid in accordance with this Plan. A-3. Preservation of Accrued Benefit. Notwithstanding any provisions of the Plan to the contrary, in no event shall a Northern Participant's accrued benefit under the Prior Plan as in effect on January 1, 1990 be less than the accrued benefit earned by such Northern Participant under the Northern Plan as at December 31, 1989. A-4. Years of Service. Each Northern Participant will be credited with the Years of Service before January 1, 1990 that such Northern Participant had earned under the Northern Plan as in effect on December 31, 1989 for participation, vesting and accrued benefit purposes. A-5. Records. The Committee shall maintain such records as it deems necessary and desirable to demonstrate the amount of each Northern Participant's benefits and Years of Service under paragraphs A-3 and A-4 above pursuant to applicable Internal Revenue Service regulations. A-6. Effective Date. The effective date of this Supplement A is January 1, 1990. A-1 67 SUPPLEMENT B ACTUARIAL ASSUMPTIONS B-1. Lump Sum Distributions: For purposes of determining "Actuarially Equivalent" lump sum distributions under the Plan, the following actuarial assumptions are used: a. Rate of Interest: The rate in use during a Plan Year shall be the annual rate of interest on 30-year Treasury securities for the month of November immediately preceding such Plan Year as specified by the Commissioner for such month in the Internal Revenue Bulletin but not greater than 8.0%. b. Mortality: The mortality table prescribed by the Secretary of the Treasury, in revenue rulings, notices, or other guidance pursuant to Section 807(d)(5)(A) of the Code that has been published in the Internal Revenue Bulletin as of the date such lump sum distribution is being determined. B-2. Type of Annuity: For purposes of determining "Actuarially Equivalent" benefits under the Plan, the following factors shall be used in determining benefits that are actuarially equivalent to the normal single annuity for the life of the Participant form of benefit provided under the Plan: a. 50 Percent Qualified Joint and Survivor Annuity. Ninety percent, plus (or minus) four-tenths of one percent for each full year that the Participant is younger (or older) than the Participant's spouse; except that, if the Participant's age at the Annuity Starting Date is less than 55 years, "ninety-four percent" shall be substituted for "ninety percent" in the next preceding clause. b. 100 Percent Qualified Joint and Survivor Annuity. Eighty-one percent, plus (or minus) seven- tenths of one percent for each full year that the Participant is younger (or older) than the Participant's spouse; except that, if the Participant's age at the Annuity Starting Date is less than 55 years, "eighty nine percent" shall B-1 68 be substituted for "eighty one percent" in the next preceding clause. c. Life and 10 Year Certain Annuity. Ninety-four percent; except that, if the Participant's age at the Annuity Starting Date is less than 55 years, the applicable percentage shall be nine- ty-eight percent. B-2 69 SUPPLEMENT C ACCRUAL PERCENTAGES
Accrual Accrual Age Percentage Age Percentage --- ---------- --- ---------- 15 2.0% 40 5.5% 16 2.0% 41 5.5% 17 2.0% 42 6.0% 18 2.0% 43 6.0% 19 2.0% 44 6.5% 20 2.0% 45 6.5% 21 2.0% 46 7.0% 22 2.0% 47 7.5% 23 2.0% 48 8.0% 24 2.0% 49 8.5% 25 2.0% 50 9.0% 26 2.5% 51 9.5% 27 2.5% 52 10.0% 28 2.5% 53 10.5% 29 3.0% 54 11.0% 30 3.0% 55 11.5% 31 3.0% 56 11.5% 32 3.5% 57 11.5% 33 3.5% 58 11.5% 34 4.0% 59 11.5% 35 4.0% 60 11.5% 36 4.5% 61 12.0% 37 4.5% 62 12.0% 38 5.0% 63 12.0% 39 5.0% 64 12.0% 65+ 12.0%
C-1 EX-10.E 5 SUPPLEMENTAL RETIREMENT PLAN 1 EXHIBIT 10-E COTTER & COMPANY SUPPLEMENTAL RETIREMENT PLAN (Amended Effective January 1, 1996) 2 SUPPLEMENTAL RETIREMENT PLAN AMENDED EFFECTIVE JANUARY 1, 1996 SECTION 1. ESTABLISHMENT AND PURPOSE 1.1 ESTABLISHMENT OF THE PLAN. Cotter & Company (the "Company") has heretofore established an unfunded supplemental retirement plan, which is known as the "COTTER & COMPANY SUPPLEMENTAL RETIREMENT PLAN" (the "Plan") and which was originally effective January 1, 1988. This Amendment restates the substantive provisions of the Plan effective January 1, 1996. 1.2 PURPOSE. The purpose of this Plan is to supplement the benefits from the Company's Qualified Retirement Plan for selected executives of the Company and its subsidiaries. SECTION 2. DEFINITIONS 2.1 DEFINITIONS. Whenever used in this Plan, it is intended that the following terms have the meanings set forth below: (a) "ACTUARIAL EQUIVALENT" means the term as defined in the Qualified Retirement Plan. (b) "ADMINISTRATOR" means an individual or committee appointed by the Chief Executive Officer and so identified to Participants. (c) "BOARD" means the Board of Directors of the Company. (d) "CHIEF EXECUTIVE OFFICER" means the Chief Executive Officer of the Company. (e) "COMPANY" means Cotter & Company, a Delaware corporation. 3 (f) "FINAL AVERAGE COMPENSATION" means the highest annual calendar year average of the sum of Participant's base salary, bonus and any commissions earned (including any reduction therein related to a Participant-elected deferral of such base salary, commissions, or bonus to a later payment date, but excluding the payment of any such deferred base salary or bonus in the year received) paid during the three (3) consecutive calendar years in the ten (10) calendar years of continuous employment immediately preceding the date on which occurs the earliest of the Participant's retirement (at Normal Retirement or on or after age 55 with 10 Years of Service), total and permanent disability, or death. (g) "NORMAL RETIREMENT DATE" means the date on which a Participant has both attained age 62 and completed 10 years of Service. (h) "OFFICER" means an employee holding one or more of the following positions: President, Executive Vice President, Vice President, Treasurer, or Secretary. (i) "PARTICIPANT" means an Officer or a management employee of the Company or any subsidiary thereof who has been selected by the Chief Executive Officer, as provided in Section 3.1 hereof. (j) "PRIMARY SOCIAL SECURITY BENEFIT" means the estimated monthly primary old-age Social Security insurance benefit to which the Participant is or would be entitled at his Normal Retirement Date or at his retirement if later, based on the provisions of the Social Security Act in effect on the date of retirement, before any offsets for earned income. For purposes of estimating the Primary Social -2- 4 Security Benefit, it shall be assumed that the Participant has no wages covered by Social Security after retirement or disability. (k) "PRIOR EMPLOYMENT (AND FULL-TIME MILITARY SERVICE) RETIREMENT BENEFITS" means any retirement benefits from previous employers of the Participant (including previous full-time U.S. Military Service) funded by other than the Participant's contributions which the Participant has received or will be eligible to receive at any future time. Any such benefits must be reported to the Administrator in a form satisfactory to the Administrator. The amount of such benefits shall be determined on an actuarially equivalent lump sum basis in accordance with such retirement plan. (l) "QUALIFIED RETIREMENT PLAN" means any retirement plan which is maintained by the Company and/or any subsidiary thereof and which is a qualified plan under Section 401(a) of the Internal Revenue Code, excluding the Cotter & Company Employee Savings and Compensation Deferral Plan. The amount of the benefits payable from such Qualified Retirement Plan shall be determined on an actuarially equivalent lump sum basis in accordance with such retirement plan. (m) "SERVICE" shall have the same meaning in this Plan as "Years of Service" in the Qualified Retirement Plan under which the Participant is covered. (n) "SURVIVING SPOUSE" means the spouse to whom a deceased Participant has been lawfully married: (1) for a period of at least one year ending on the date of the Participant's death; or, (2) where such death occurs after benefit -3- 5 payments have commenced under the Plan, as of the commencement date of those payments to the Participant. 2.2 GENDER AND NUMBER. Except when otherwise indicated by the context, any masculine term used herein shall include the feminine, and the singular shall include the plural. SECTION 3. PARTICIPATION 3.1 SELECTION OF PARTICIPANTS. The Chief Executive Officer, in his discretion, shall select persons to be Participants in the Plan from among those Officers and management employees of the Company and its subsidiaries who are Participants in a Qualified Retirement Plan. SECTION 4. RETIREMENT BENEFITS 4.1 NORMAL RETIREMENT BENEFIT. (a) ELIGIBILITY. A Participant shall be eligible to receive a normal retirement benefit under the provisions of this Plan upon termination of Service on or after his Normal Retirement Date. (b) AMOUNT. A "Defined Lump Sum" which shall be an amount which is equal to the sum of twenty-two (22) percent of the Participant's Final Average Compensation for each Year of Service up to age fifty-five (55) and twenty-eight (28) percent of the Participant's Final Average Compensation for each Year of Service after age 55, up to a maximum of twenty (20) Years, limited to five hundred (500) percent, reduced by the lump sum amounts that the Participant is eligible to receive from the Qualified Retirement Plan and from his Prior Employment (and Full-Time Military Service) Retirement Benefits and the lump sum equivalent of the Participant's Primary Social Security Benefit to which the -4- 6 Participant is entitled, whether or not received. For purposes of calculating the lump sum equivalent of a Participant's Primary Social Security Benefit, such lump sum equivalent will be considered to be ninety-six (96) times the Primary Social Security Benefit. (c) PAYMENT AND DURATION. Such Participant's Defined Lump Sum calculated in (b) above shall be converted into an Actuarial Equivalent single life annuity unless, with the consent of the Administrator, such amount is to be paid in a Defined Lump Sum. Payment of monthly normal retirement benefits provided under this Plan shall commence as of the first day of the calendar month beginning on or after the date the Participant's Service terminates pursuant to this Subsection 4.1 and shall continue to be paid as of the first day of each month for the remainder of the Participant's life. However, if such Participant is married, except as provided in Section 6.1, such amount shall be paid in the form of an Actuarial Equivalent joint and survivor annuity with fifty (50) percent of such Participant's reduced monthly lifetime amounts being payable to such Participant's Surviving Spouse for the remainder of such Spouse's life. 4.2 EARLY RETIREMENT BENEFITS. (a) ELIGIBILITY. A Participant shall be eligible to receive vested early retirement benefits under the provisions of this Plan upon termination of his Service prior to his Normal Retirement Date but on or after his attaining age fifty-five (55) and completing at least ten (10) Years of Service. (b) AMOUNT. Upon termination of the Participant's Service, pursuant to (a) above, the Participant shall be entitled to receive a vested early retirement benefit. Such benefit -5- 7 shall be computed in the same manner as a normal retirement benefit under Subsection 4.1(b), based on the Participant's Final Average Compensation and Years of Service as of the date his Service terminates. (c) PAYMENT AND DURATION. Such Participant's Defined Lump Sum calculated in 4.1(b) above shall be converted into an Actuarial Equivalent single life annuity unless, with the consent of the Administrator, such amount is to be paid in a Defined Lump Sum. Payment of monthly vested benefits provided under this Plan shall commence as of the first day of the calendar month beginning on or after the date the Participant's Service terminates pursuant to this Section 4.2 and shall continue to be paid as of the first day of each month for the remainder of the Participant's life. However, if such Participant is married, except as provided in Section 6.1, such amount shall be paid in the form of an Actuarial Equivalent joint and survivor annuity with fifty (50) percent of such Participant's reduced monthly lifetime amounts being payable to such Participant's Surviving Spouse for the remainder of such Spouse's life. 4.3 DISABILITY INCOME BENEFIT. (a) ELIGIBILITY. A Participant shall be eligible to receive a disability income benefit under the provisions of this Plan if the Participant is eligible to receive monthly long-term disability benefits under the Company's long-term disability plan. (b) AMOUNT. The Participant shall be entitled to receive a monthly disability income benefit equal to fifty (50) percent of the Participant's Base Compensation (as defined in the Company's long-term disability plan, as amended, but disregarding any earnings limitations contained therein), -6- 8 reduced by (i) the amount of the monthly disability income benefit payable under the Company's long-term disability plan and (ii) the amount of any disability benefits payable under the Social Security Act. (c) COMMENCEMENT AND DURATION. Payment of monthly disability income benefits under this Plan shall commence as of the first date of the Participant's eligibility to receive benefits as determined in 4.3(a) and shall continue to be paid as of the first day of each month thereafter unless and until long-term disability benefits are discontinued under the terms of the Company's long-term disability plan. 4.4 DISABILITY RETIREMENT BENEFIT. (a) ELIGIBILITY. A Participant shall be eligible to receive a disability retirement benefit under the provisions of this Plan if a total and permanent physical or mental incapacity deprives the Participant of the ability to perform his duties as an executive of the Company, provided the Participant has completed at least fifteen (15) Years of Service. Determination of a disability shall be at the Chief Executive Officer's sole discretion, based on a review of medical documents and evaluations which he deems appropriate. (b) AMOUNT. Upon termination of the Participant's Service pursuant to (a) above, the Participant shall be entitled to receive a disability retirement benefit. Such benefit shall be computed in the same manner as a normal retirement benefit under Subsection 4.1(b), based on the Participant's Final Average Compensation and Years of Service as of the date his Service terminates but reduced further by the lump sum equivalent amount of benefits, if any, payable under -7- 9 the Company's long term disability insurance program and under Subsection 4.3(b) above. (c) PAYMENT AND DURATION. Such Participant's Defined Lump Sum calculated in (b) above shall be converted into an Actuarially Equivalent single life annuity. Payment of monthly disability retirement benefits provided under this Plan shall commence as of the first date of the Participant's eligibility to receive benefits as determined in 4.4(a) above and shall continue to be paid as of the first day of each month for the remainder of the Participant's life. SECTION 5. DEATH BENEFIT 5.1 PAYMENTS TO SURVIVING SPOUSE. (a) ELIGIBILITY. A Surviving Spouse shall be eligible to receive a monthly death benefit under the provisions of this Plan, upon the death, prior to the commencement of payments of benefits, of a Participant eligible to receive a retirement benefit under Subsection 4.1 or 4.2 hereof. (b) AMOUNT. The monthly death benefit payable to an eligible Surviving Spouse shall be equal to the Actuarial Equivalent of fifty-five (55) percent of the Participant's Defined Lump Sum determined in accordance with Subsection 4.1(b) or 4.2(b), whichever is applicable. (c) PAYMENT AND DURATION. Such Surviving Spouse's death benefits shall be converted into an Actuarial Equivalent single life annuity or, with the consent of the Administrator, in a single lump sum. Payment of monthly death benefits provided under this Plan shall commence as of the first day of the calendar month beginning after the date of -8- 10 the Participant's death and shall continue to be paid monthly thereafter as of the first day of each month for the remainder of the Surviving Spouse's life unless paid in a single lump sum. SECTION 6. OPTIONAL PAYMENT METHOD 6.1 MARRIED PARTICIPANT'S PAYMENT FORM ELECTION. A married Participant who is eligible to receive any benefits provided under Section 4 hereof may, prior to terminating Service, elect to have those benefits paid in the alternative form of a joint and survivor annuity which will continue monthly payments for life to his spouse equal to one hundred (100) percent of the actuarially reduced monthly amount paid to him during his lifetime. The benefits payable to the Participant and his spouse under this alternative form shall be the Actuarial Equivalent to the value of the benefits that would have otherwise been payable to him under Section 4 hereof. A Participant's election under this Section 6 must be filed in writing with the Administrator at least thirty (30) days prior to the date his monthly benefit payments are to commence under Section 4. SECTION 7. FINANCING OF BENEFITS 7.1 CONTRACTUAL OBLIGATION. Subject to the provisions of Section 8.4 hereof, it is intended that the Company is under a contractual obligation to make the payments under this Plan while it is in effect. Benefits shall be paid out of the general funds of the Company. 7.2 UNSECURED GENERAL CREDITOR. Neither the Participant nor the Surviving Spouse shall have any interest whatsoever in any specific asset of the Company and its subsidiaries on account of any benefits provided under this Plan. The Participant's (or Surviving Spouse's) right to receive benefit payments under this Plan shall be no greater -9- 11 than the right of any unsecured general creditor of the Company and its subsidiaries. 7.3 FORFEITURE OF BENEFITS BECAUSE OF COMPETITION. Notwithstanding any provisions in this Plan to the contrary, any Plan retirement benefits which are otherwise due or payable to a Participant under this Section 4 will be forfeited and discontinued if such Participant upon or after retirement enters into, or becomes associated with, any business, as a shareholder, employee, director, proprietor, consultant, partner or joint venturer, which is in direct competition with the business of the Company and it subsidiaries, unless such relationship is disclosed to, and approved by, the Chief Executive Officer of the Company. SECTION 8. MUTUAL AGREEMENTS 8.1 NO VESTING. There shall be no vesting of any amount under this Plan and no obligations shall be owing or payable by the Company and its subsidiaries under this Plan, except as provided in Sections 4, 5, 6 and 9 hereof, as applicable. 8.2 NO GUARANTEE. Nothing herein shall be construed as conferring upon the Participant any greater rights to employment by the Company and its subsidiaries than he would otherwise have. 8.3 LIABILITY. Neither the Company and any subsidiary thereof nor any shareholder, director, Officer or other employee of the Company or any other person shall be liable for any act or failure to act under the Plan, except for gross negligence or fraud. 8.4 AMENDMENT OR TERMINATION OF THE PLAN. The Company reserves the right to amend, modify, terminate, or discontinue the Plan at any time; and such action shall be final, binding, and conclusive as to all -10- 12 parties, including any Participant, any Surviving Spouse thereof and all other Company or subsidiary employees and persons; provided, however, that any such Company action to terminate or discontinue the Plan or to change the monthly payment amount or the time and manner of payment thereof as then provided in the Plan shall not be effective and operative with respect to any Participant or Surviving Spouse who already is vested or has commenced receipt of benefit payments under Sections 4, 5, 6 or 9 hereof, as applicable, on the date of such Company action or with respect to any Spouse to whom benefits under Section 6 hereof, as applicable, would be payable due to the subsequent death of any such Participant then receiving benefit payments. Any action by the Company to amend or terminate the Plan shall be by resolution of its Board of Directors, by resolution of a duly authorized committee of its Board of Directors, or by a person or persons authorized by resolution of its Board of Directors or such committee. 8.5 ASSIGNMENT OF RIGHTS. In no event shall the Company make any payment under this Plan to any assignee or creditor of the Participant or his Surviving Spouse. Prior to the time of a payment hereunder, the Participant or Surviving Spouse shall have no rights by way of anticipation or otherwise to assign or otherwise dispose of any interest under this Plan. 8.6 APPLICABLE LAW. This Plan is intended to constitute a plan which is unfunded and is maintained by the Company primarily for the purpose of providing deferred compensation for a select group of management or highly compensated employees and that except to the extent that ERISA applies to such plan, the laws of Illinois will apply. 8.7 WITHHOLDING OF TAXES. The Company may withhold from any monthly retirement benefit or monthly death benefit such sum as the Company may reasonably estimate is necessary to cover any taxes for which the Company may be liable and which may be assessed with regard -11- 13 to such monthly retirement or monthly death benefit payment. Upon discharge or settlement of such tax liability, the Company shall distribute the balance of any monthly retirement benefit or death benefit withheld, if any, to the Participant from whom the amount was withheld. If such Participant is deceased such amount shall be distributed to the beneficiary of the Participant from who it was withheld. 8.8 OVERPAYMENT. If any monthly retirement payment shall be determined by the Company to have been excessive or improper and the Participant or his Surviving Spouse shall fail, upon Company request, to make repayment to the Company of such overpayment, the Company shall deduct the amount of such overpayment from future monthly retirement payments. 8.9 FACILITY OF PAYMENT. Whenever a Participant or a Surviving Spouse entitled to a monthly retirement benefit or death benefit hereunder shall be determined to be under a legal disability or otherwise incapacitated in any way as so to be unable to manage his or her financial affairs, the following provisions shall apply. The Company may direct that all or any portion of the monthly retirement payments or death benefits to be made to such Participant or Surviving Spouse shall be made to such person's spouse or any other person, in any manner that the Company considers advisable, to be expended for his benefit. The decision of the Company shall, in each case, be final and binding upon all persons, and any payment made pursuant to this provision shall operate as a complete discharge of the obligations of the Company under the Plan. 8.10 ACTION CONCLUSIVE. The Administrator has sole discretion administering and interpreting all provisions of this Plan. Any action or decision made by the Administrator with respect to eligibility for and payment of supplemental retirement income benefits or death benefits to be made under the Plan made by the Administrator in good -12- 14 faith will be binding and conclusive on the Participant, his or her Spouse or his or her beneficiary. 8.11 SUCCESSORS. The plan shall be binding upon and inure to the benefit of the Participant and the Company and any successor company of the Company by way of merger, reorganization, acquisition, or sale by the Company of substantially all of its assets. SECTION 9. CHANGE IN CORPORATE STRUCTURE In the event of the dissolution, merger, consolidation or reorganization of the Company or the sale by the Company of all or substantially all of its assets ("corporate reorganization") each Participant who is not already vested under the Plan shall be vested and have a right to receive the benefit accrued to the date of such corporate reorganization, calculated in accordance with Subsection 4.1(b) based on such Participant's Final Average Compensation and Years of Service as of the date of such corporate reorganization. Unless such successor employer or purchaser of all or substantially all of the Company's assets agrees to continue the Plan in accordance with its existing terms, the benefits of all Participants in the Plan shall be payable in a Defined Lump Sum at the time of such corporate reorganization. Executed on this 2nd day of January, 1996. Attest: By: Daniel T. Burns By: Daniel Cotter -------------------------------- --------------------------- Title: Vice President Title: President ----------------------------- ------------------------ -13- EX-10.J 6 CONTRACT BETWEEN DANIEL T. BURNS & THE COMPANY 1 EXHIBIT 10-J EMPLOYMENT AGREEMENT This Agreement is made and entered into between Cotter & Company ("Cotter") and Daniel T. Burns ("Employee") as of the 14 day of Nov, 1995. 1. POSITION Cotter hereby employs Employee as an employee and officer during the term of this Agreement and Employee hereby accepts such employment upon the terms and conditions hereinafter set forth and agrees to devote his full time, energy and talents exclusively to the benefit of Cotter in connection therewith. 2. DUTIES The duties and responsibilities of the Employee shall include all of those duties and responsibilities assigned to the position held by him, together with such additional duties as may be assigned to him from time to time by the Chief Executive Officer ("CEO") or the Board of Directors of Cotter. 3. TERM The initial term of this Agreement shall begin on December 1, 1995 and shall terminate on December 1, 1997, unless terminated earlier by reason of the Employee's resignation, death, retirement or termination for cause pursuant to Section 5.3 hereof. Provided the Employee is attending to and performing his duties on a regular daily basis as of the last day of any term hereof, the Agreement shall automatically be extended for an additional term of two (2) years following the expiration of the term, unless either Cotter or the Employee shall have delivered written notice to the other party hereto, not less than sixty (60) days prior to such expiration, of its or his intention to terminate the Agreement at the end of any term, in which case the Agreement shall not be extended beyond December 1, 1997 or any two year term thereafter. 4. COMPENSATION 4.1 CASH AND BONUS. Employee shall receive at a minimum such annual salary in effect with respect to Employee as of the date hereof. Such salary shall be paid to Employee in accordance with Cotter's customary payroll practices. Cotter shall cause Employee's salary hereunder to be reviewed once during each of the calendar years this Agreement is in effect with respect to the amount of such salary to be paid to Employee in each of those years. Employee shall also continue to participate in Cotter's Management Incentive Program ("MIP") and Long Term Incentive Compensation Program for Executive Management ("LTICP"), or any substitute bonus program, designated by the CEO, for so long as such programs are 2 in effect during any term of this Agreement. In no event shall Employee's salary, MIP, or LTICP eligibility percentages be reduced during the term of this Agreement. Notwithstanding anything herein to the contrary, the payment of salary hereunder shall be suspended during any period Employee is not working and is receiving short or long-term disability, or any other income continuation benefits under any Cotter benefit plan, and MIP and LTICP bonuses shall only accrue during the first six months of any such period. 4.2 BENEFITS. During any term hereof, employee shall be entitled to participate in Cotter's health, life insurance, disability, pension, supplemental retirement, vacation and other benefit programs, whether financial or quality of life in nature, to the same extent as other employees of Cotter in comparable executive positions. 5. TERMINATION 5.1 VOLUNTARY. Employee may at any time terminate this Agreement upon sixty (60) days written notice. In that event, the payment to Employee of salary through the period of delivery of the notice and termination, together with any accrued vacation pay, shall constitute payment in full for all compensation, including MIP and LTICP payments Employee may have accrued and which might otherwise be entitled to be paid for the calendar year in which Employee terminates, due to Employee. 5.2 BY COMPANY, FOR DISABILITY (INCLUDING SUBSTANCE ABUSE). Cotter, at its option, may dismiss Employee from its employment and terminate this Agreement at any time after it shall have been determined by competent medical authority that Employee has become physically or mentally incapacitated or has become addicted to the use of alcohol or narcotics to such an extent that (s)he is prevented by reason of such incapacity or addiction from properly performing duties hereunder. The foregoing sentence shall not be construed to relieve Cotter of any obligations it would otherwise have under the Americans with Disabilities Act of 1990 or applicable state statutes. In the event of any such termination of this Agreement, Employee shall be paid whatever portion of salary, vacation and bonuses, if any, under the terms of the Agreement, as shall have accrued to him to the date of termination, and the payment to Employee of any such salary, vacation pay, and bonus pay shall constitute payment in full for all compensation due to Employee. 5.3 BY COMPANY, FOR CAUSE, INCLUDING MISCONDUCT, FRAUD OR OTHER DISHONESTY. Cotter, at its option, may dismiss Employee from its employment and terminate this Agreement and all obligations hereunder at any time for "Cause," which shall consist of the following: (i) theft, fraud, or embezzlement, or conviction of any felony; or -2- 3 (ii) Employee's breach of any provision of this Agreement; or (iii) Employee's breach of any fiduciary or other duty of loyalty to Cotter (including divulging any information or business material property of Cotter described in Section 6.2), as determined by Cotter's CEO (after Employee has been given the opportunity to explain to the CEO his actions (or failure to act) concerning such alleged breach). In the event of a dismissal of Employee and termination of this Agreement for Cause, payment to Employee of whatever portion of Employee's salary and vacation which shall have accrued to the date of such termination shall constitute payment in full for all compensation, including MIP and LTICP payments Employee may have accrued and which might otherwise be entitled to be paid for the calendar year in which Employee terminates, due to Employee. 5.4 BY COMPANY, WITHOUT CAUSE. In the event that Cotter determines to terminate Employee's employment for other than the reasons specified in Sections 5.2 and 5.3 hereof, the same shall not constitute a breach of this Agreement. In such event, Cotter shall continue to pay to the Employee on regular semi-monthly dates the salary which he would have earned under this Agreement if his employment had continued for thirty (30) months from the date of such termination. It is the intention of the parties that, by reason of the foregoing provisions, Employee shall in all events receive his salary for a period of two and one-half (2-1/2) years from the date of such termination, in the event of termination of his employment by Cotter during the term of this Agreement for any reason not specified in Sections 5.2 and 5.3. Such payment shall be made to Employee, or his estate, subsequent to termination, regardless of Employee's death of disability. In addition to the foregoing, Cotter shall pay to Employee an amount equal to the Employee's target level MIP bonus for the year in which such termination occurs, and any amount payable under the terms of the LTICP. Upon mutual agreement between Cotter and Employee, all amounts payable to Employee under this section may be paid in a lump sum, discounted to the net present value thereof at the date of payment, which agreement and payment shall be made within 60 days of Employee's termination. In addition to the foregoing, Employee shall continue to have available and accrue health and life insurance benefits available in Section 4.2, through the original or any renewal term of this Agreement, and Cotter shall provide and pay such benefits as if Employee were continuously employed until the expiration of the term. 5.5 OUTPLACEMENT SERVICES. In the event that Cotter terminates Employee's employment for other than the reasons specified in Section 5.2 and 5.3 hereof, Cotter shall make available at its expense the services of a recognized outplacement agency -3- 4 selected by Cotter for the purpose of aiding Employee in seeking other employment, in an amount equal to that of the customary executive outplacement service package offered by such agency to executives with salaries and positions comparable to Employee's. 6. NON-COMPETE COVENANT AND CONFIDENTIAL INFORMATION 6.1 NON-COMPETITION WITH COTTER UPON VOLUNTARY TERMINATION OF EMPLOYMENT. As a further specific condition of his employment by Cotter hereunder and in further consideration of such employment, the Employee agrees that, for a period of one (1) year following any voluntary termination by the Employee of his employment (and, with respect only to clause (c) below, in the event of involuntary termination of such employment), he will not, in any State or territory of the United States of America, the District of Columbia, Puerto Rico or any foreign country in which Cotter has a member store at the time of such termination of the Employee's employment (a) become associated, by way of employment or any other type of arrangement, in any business activities of any franchise, cooperative, or wholesale company with a core business in the hardware industry, (b) become engaged in the conduct of a consulting or advisory service for any business activity described in clause (a) above carried on by any other person, firm or corporation, or (c) hire or engage the services of any person who is or has been a salaried employee of Cotter at any time during the two (2) years immediately preceding the date of such termination. 6.2 NONDISCLOSURE. It is understood and agreed that the method and system of business used and developed by Cotter involves manufacturing processes, research and development, marketing programs, pricing procedures, operational procedures, training procedures, long-range strategic plans, retailers and customer information, lists of vendors to Cotter, and other secret and confidential information and/or trade secrets of Cotter, and that Employee, by virtue of his employment hereunder, necessarily has and will become acquainted with all such information and trade secrets. Accordingly, during the term of this Agreement and for a period of four years following the expiration or early termination hereof for any reason Employee shall keep all secret information and trade secrets strictly confidential and shall not (i) disclose to a third party any such information or trade secrets or any facts related thereto, (ii) permit any third party to have access to any such information or trade secrets; or (iii) use any such information or trade secrets for any purpose other than performing his duties hereunder. 6.3 REMEDIES. In the event of a breach or threatened breach of the provisions of Section 6.2, Cotter shall be entitled to terminate this Agreement and all obligations to Employee hereunder or in connection herewith pursuant to Section 5.3 and to an injunction restraining Employee from so disclosing any such trade secrets or confidential information. Nothing contained herein shall be construed as prohibiting -4- 5 Cotter from pursuing any other remedies available to Cotter for such breach or threatened breach, including the recovery of damages from Employee. 6.4 LIMITATION ON OUTSIDE BUSINESS ACTIVITIES. During any term hereof, Employee shall devote his entire business time, attention and energies in normal and, as required, extended work hours, to the business of Cotter and shall not engage in any other business activity, whether or not such business activity is pursued for gain or profit, except that Employee may devote a reasonable portion of time during business hours to professional, civic, community or charitable activities, and, with the approval of Cotter's CEO, to other activities not expressly mentioned herein. 7. MISCELLANEOUS 7.1 AMENDMENTS. Any amendments or modifications to this Agreement shall be in writing and shall be signed by both parties. Any increase in salary granted to Employee by Cotter pursuant to the salary review provisions of Section 4 shall not require the signatures of both parties, however, and this Agreement shall be deemed to have been amended with respect to any such salary increase by the CEO authorizing such increase and by Employee's continuing thereafter to perform the services required hereunder. 7.2 ASSIGNMENT. This Agreement shall not be assignable by either party, but will be binding upon any successor company or organization to Cotter, including any company which Cotter merges with, or forms a business combination with. Employee acknowledges that in the event of such an assignment Cotter shall have no further obligations hereunder, but the Purchaser shall assume all such obligations. 7.3 ENTIRE AGREEMENT. This Agreement constitutes the entire agreement between the parties with reference to the employment of Employee by Cotter and the compensation to be paid to Employee for or with respect to such employment. All agreements, contracts, understanding or arrangements which may have been heretofore made or had with reference to the employment of Employee by Cotter are hereby wholly abrogated, discharged and annulled, with the exception of any existing rights of Employee under Cotter's employee benefit plans now maintained by Cotter and in which Employee is a participant. Cotter further agrees that any new or improved benefits provided generally to or made generally available to Cotter's Employee employees will be provided or made available on the same basis to Employee. 7.4 SURVIVAL. The parties' respective rights and obligations under Section 4, 5, and 6 shall survive the expiration or early termination of this Agreement. 7.5 SEVERABILITY. Cotter and the Employee recognize that the laws and public policies of the various States of the United States and its territories, the District -5- 6 of Columbia, Puerto Rico or any foreign country may differ as to the validity and enforceability of certain provisions contained in agreements similar to this Agreement. It is the intention of Cotter and the Employee that the provisions of this Agreement shall be enforced to the fullest extent permissible under the laws and public policies of the State of Illinois, but that the unenforceability (or the modification to conform with such laws or public policies) of any provision or provisions hereof shall not render unenforceable or impair the validity of the remainder of this Agreement. Accordingly, if any provision of this Agreement shall be determined by a court of competent jurisdiction to be invalid or unenforceable, either in whole or in part, this Agreement shall be deemed amended to delete or modify, as necessary, the offending provisions and to alter the balance of this Agreement in order to render the same valid and enforceable to the fullest extent permissible as aforesaid. 7.6 ARBITRATION. Any dispute over the provisions of this Agreement shall be resolved through Arbitration at the American Arbitration Association office in Chicago, or the office nearest to Employee's residence at the time a claim is filed, pursuant to the applicable rules for arbitration of the Association. The foregoing to the contrary notwithstanding, nothing contained herein shall limit or restrict Cotter's right to seek equitable relief from any court of competent jurisdiction in the event of any breach or threatened breach of Sections 6.1 or 6.2 hereof 7.7 ADVICE OF COUNSEL. Employee has been advised to consult with his own counsel with respect to this Agreement and acknowledges that he has done so, is entering into this Agreement of his own free will, intending to be legally bound hereby. IN WITNESS WHEREOF, Cotter and Employee have executed this Agreement as of the date first above written. COTTER: EMPLOYEE Cotter & Company /s/ Daniel T. Burns By /s/ Daniel A. Cotter ------------------- --------------------- Its President & CEO ------------------- -6- EX-10.K 7 CONTRACT BETWEEN KERRY J. KIRBY AND THE COMPANY 1 EXHIBIT 10-K EMPLOYMENT AGREEMENT This Agreement is made and entered into between Cotter & Company ("Cotter") and Kerry J. Kirby ("Employee") as of the 16th day of November, 1995. 1. POSITION Cotter hereby employs Employee as an employee and officer during the term of this Agreement and Employee hereby accepts such employment upon the terms and conditions hereinafter set forth and agrees to devote his full time, energy and talents exclusively to the benefit of Cotter in connection therewith. 2. DUTIES The duties and responsibilities of the Employee shall include all of those duties and responsibilities assigned to the position held by him, together with such additional duties as may be assigned to him from time to time by the Chief Executive Officer ("CEO") or the Board of Directors of Cotter. 3. TERM The initial term of this Agreement shall begin on December 1, 1995 and shall terminate on December 1, 1997, unless terminated earlier by reason of the Employee's resignation, death, retirement or termination for cause pursuant to Section 5.3 hereof. Provided the Employee is attending to and performing his duties on a regular daily basis as of the last day of any term hereof, the Agreement shall automatically be extended for an additional term of two (2) years following the expiration of the term, unless either Cotter or the Employee shall have delivered written notice to the other party hereto, not less than sixty (60) days prior to such expiration, of its or his intention to terminate the Agreement at the end of any term, in which case the Agreement shall not be extended beyond December 1, 1997 or any two year term thereafter. 4. COMPENSATION 4.1 CASH AND BONUS. Employee shall receive at a minimum such annual salary in effect with respect to Employee as of the date hereof. Such salary shall be paid to Employee in accordance with Cotter's customary payroll practices. Cotter shall cause Employee's salary hereunder to be reviewed once during each of the calendar years this Agreement is in effect with respect to the amount of such salary to be paid to Employee in each of those years. Employee shall also continue to participate in Cotter's Management Incentive Program ("MIP") and Long Term Incentive Compensation Program for Executive Management ("LTICP"), or any substitute bonus program, designated by the CEO, for so long as such programs are 2 in effect during any term of this Agreement. In no event shall Employee's salary, MIP, or LTICP eligibility percentages be reduced during the term of this Agreement. Notwithstanding anything herein to the contrary, the payment of salary hereunder shall be suspended during any period Employee is not working and is receiving short or long-term disability, or any other income continuation benefits under any Cotter benefit plan, and MIP and LTICP bonuses shall only accrue during the first six months of any such period. 4.2 BENEFITS. During any term hereof, employee shall be entitled to participate in Cotter's health, life insurance, disability, pension, supplemental retirement, vacation and other benefit programs, whether financial or quality of life in nature, to the same extent as other employees of Cotter in comparable executive positions. 5. TERMINATION 5.1 VOLUNTARY. Employee may at any time terminate this Agreement upon sixty (60) days written notice. In that event, the payment to Employee of salary through the period of delivery of the notice and termination, together with any accrued vacation pay, shall constitute payment in full for all compensation, including MIP and LTICP payments Employee may have accrued and which might otherwise be entitled to be paid for the calendar year in which Employee terminates, due to Employee. 5.2 BY COMPANY, FOR DISABILITY (INCLUDING SUBSTANCE ABUSE). Cotter, at its option, may dismiss Employee from its employment and terminate this Agreement at any time after it shall have been determined by competent medical authority that Employee has become physically or mentally incapacitated or has become addicted to the use of alcohol or narcotics to such an extent that (s)he is prevented by reason of such incapacity or addiction from properly performing duties hereunder. The foregoing sentence shall not be construed to relieve Cotter of any obligations it would otherwise have under the Americans with Disabilities Act of 1990 or applicable state statutes. In the event of any such termination of this Agreement, Employee shall be paid whatever portion of salary, vacation and bonuses, if any, under the terms of the Agreement, as shall have accrued to him to the date of termination, and the payment to Employee of any such salary, vacation pay, and bonus pay shall constitute payment in full for all compensation due to Employee. 5.3 BY COMPANY, FOR CAUSE, INCLUDING MISCONDUCT, FRAUD OR OTHER DISHONESTY. Cotter, at its option, may dismiss Employee from its employment and terminate this Agreement and all obligations hereunder at any time for "Cause," which shall consist of the following: (i) theft, fraud, or embezzlement, or conviction of any felony; or - 2 - 3 (ii) Employee's breach of any provision of this Agreement; or (iii) Employee's breach of any fiduciary or other duty of loyalty to Cotter (including divulging any information or business material property of Cotter described in Section 6.2), as determined by Cotter's CEO (after Employee has been given the opportunity to explain to the CEO his actions (or failure to act) concerning such alleged breach). In the event of a dismissal of Employee and termination of this Agreement for Cause, payment to Employee of whatever portion of Employee's salary and vacation which shall have accrued to the date of such termination shall constitute payment in full for all compensation, including MIP and LTICP payments Employee may have accrued and which might otherwise be entitled to be paid for the calendar year in which Employee terminates, due to Employee. 5.4 BY COMPANY, WITHOUT CAUSE. In the event that Cotter determines to terminate the Employee's employment for other than the reasons specified in Sections 5.2 and 5.3 hereof, the same shall not constitute a breach of this Agreement. In such event, Cotter shall continue to pay to the Employee on the regular dates for payment thereof the salary which he would have earned under this Agreement if his employment had continued for twenty-four (24) months from the date of such termination. It is the intention of the parties that, by reason of the foregoing provisions, the Employee shall in all events receive payments for a period of two (2) years from the date of such termination in the event of termination of his employment by Cotter during the term of this Agreement for any reason not specified in Sections 5.2 and 5.3. Such payment shall be made to Employee, or his estate, subsequent to termination, regardless of Employee's death or disability. In addition to the foregoing, Cotter shall pay to Employee an amount equal to the Employee's target level MIP bonus for the year in which such termination occurs, and any amount payable under the terms of the LTICP. Upon mutual agreement between Cotter and Employee, all amounts payable to Employee under this section may be paid in a lump sum, discounted to the net present value thereof at the date of payment, which agreement and payment shall be made within 60 days of Employee's termination. In addition to the foregoing, Employee shall continue to have available and accrue health and life insurance benefits available in Section 4.2, through the original or any renewal term of this Agreement, and Cotter shall provide and pay such benefits as if Employee were continuously employed until the expiration of the term. 5.5 OUTPLACEMENT SERVICES. In the event that Cotter terminates Employee's employment for other than the reasons specified in Section 5.2 and 5.3 hereof, Cotter shall make available at its expense the services of a recognized outplacement agency -3- 4 selected by Cotter for the purpose of aiding Employee in seeking other employment, in an amount equal to that of the customary executive outplacement service package offered by such agency to executives with salaries and positions comparable to Employee's. 6. NON-COMPETE COVENANT AND CONFIDENTIAL INFORMATION 6.1 NON-COMPETITION WITH COTTER UPON VOLUNTARY TERMINATION OF EMPLOYMENT. As a further specific condition of his employment by Cotter hereunder and in further consideration of such employment, the Employee agrees that, for a period of one (1) year following any voluntary termination by the Employee of his employment (and, with respect only to clause (c) below, in the event of involuntary termination of such employment), he will not, in any State or territory of the United States of America, the District of Columbia, Puerto Rico or any foreign country in which Cotter has a member store at the time of such termination of the Employee's employment (a) become associated, by way of employment or any other type of arrangement, in any business activities of any franchise, cooperative, or wholesale company with a core business in the hardware industry, (b) become engaged in the conduct of a consulting or advisory service for any business activity described in clause (a) above carried on by any other person, firm or corporation, or (c) hire or engage the services of any person who is or has been a salaried employee of Cotter at any time during the two (2) years immediately preceding the date of such termination. 6.2 NONDISCLOSURE. It is understood and agreed that the method and system of business used and developed by Cotter involves manufacturing processes, research and development, marketing programs, pricing procedures, operational procedures, training procedures, long-range strategic plans, retailers and customer information, lists of vendors to Cotter, and other secret and confidential information and/or trade secrets of Cotter, and that Employee, by virtue of his employment hereunder, necessarily has and will become acquainted with all such information and trade secrets. Accordingly, during the terms of this Agreement and for a period of four years following the expiration or early termination hereof for any reason Employee shall keep all secret information and trade secrets strictly confidential and shall not (i) disclose to a third party any such information or trade secrets or any facts related thereto, (ii) permit any third party to have access to any such information or trade secrets; or (iii) use any such information or trade secrets for any purpose other than performing his duties hereunder. 6.3 REMEDIES. In the event of a breach or threatened breach of the provisions of Section 6.2, Cotter shall be entitled to terminate this Agreement and all obligations to Employee hereunder or in connection herewith pursuant to Section 5.3 and to an injunction restraining Employee from so disclosing any such trade secrets or confidential information. Nothing contained herein shall be construed as prohibiting -4- 5 Cotter from pursuing any other remedies available to Cotter for such breach or threatened breach, including the recovery of damages from Employee. 6.4 LIMITATION ON OUTSIDE BUSINESS ACTIVITIES. During any term hereof, Employee shall devote his entire business time, attention and energies in normal and, as required, extended work hours, to the business of Cotter and shall not engage in any other business activity, whether or not such business activity is pursued for gain or profit, except that Employee may devote a reasonable portion of time during business hours to professional, civic, community or charitable activities, and, with the approval of Cotter's CEO, to other activities not expressly mentioned herein. 7. MISCELLANEOUS 7.1 AMENDMENTS. Any amendments or modifications to this Agreement shall be in writing and shall be signed by both parties. Any increase in salary granted to Employee by Cotter pursuant to the salary review provisions of Section 4 shall not require the signatures of both parties, however, and this Agreement shall be deemed to have been amended with respect to any such salary increase by the CEO authorizing such increase and by Employee's continuing thereafter to perform the services hereunder. 7.2 ASSIGNMENT. This Agreement shall not be assignable by either party, but will be binding upon any successor company or organization to Cotter, including any company which Cotter merges with, or forms a business combination with. Employee acknowledges that in the event of such an assignment Cotter shall have no further obligations hereunder, but the Purchaser shall assume all such obligations. 7.3 ENTIRE AGREEMENT. This Agreement constitutes the entire agreement between the parties with reference to the employment of Employee by Cotter and the compensation to be paid to Employee for or with respect to such employment. All agreements, contracts, understanding or arrangements which may have been heretofore made or had with reference to the employment of Employee by Cotter are hereby wholly abrogated, discharged and annulled, with the exception of any existing rights of Employee under Cotter's employee benefit plans now maintained by Cotter and in which Employee is a participant. Cotter further agrees that any new or improved benefits provided generally to or made generally available to Cotter's Employee employees will be provided or made available on the same basis to Employee. 7.4 SURVIVAL. The parties' respective rights and obligations under Section 4.5 and 6 shall survive the expiration or early termination of this Agreement. 7.5 SEVERABILITY. Cotter and the Employee recognize that the laws and public policies of the various States of the United States and its territories, the District - 5 - 6 of Columbia, Puerto Rico or any foreign country may differ as to the validity and enforceability of certain provisions contained in agreements similar to this Agreement. It is the intention of Cotter and the Employee that the provisions of this Agreement shall be enforced to the fullest extent permissible under the laws and public policies of the State of Illinois, but that the unenforceability (or the modification to conform with such laws or public policies) of any provision or provisions hereof shall not render unenforceable or impair the validity of the remainder of this Agreement. Accordingly, if any provision of this Agreement shall be determined by a court of competent jurisdiction to be invalid or unenforceable, either in whole or in part, this Agreement shall be deemed amended to delete or modify, as necessary, the offending provisions and to alter the balance of this Agreement in order to render the same valid and enforceable to the fullest extent permissible as aforesaid. 7.6 ARBITRATION. Any dispute over the provisions of this Agreement shall be resolved through Arbitration at the American Arbitration Association office in Chicago, or the office nearest to Employee's residence at the time a claim is filed, pursuant to the applicable rules for arbitration of the Association. The foregoing to the contrary notwithstanding, nothing contained herein shall limit or restrict Cotter's right to seek equitable relief from any court of competent jurisdiction in the event of any breach or threatened breach of Sections 6.1 or 6.2 hereof. 7.7 ADVICE OF COUNSEL. Employee has been advised to consult with his own counsel with respect to this Agreement and acknowledges that he has done so, is entering into this Agreement of his own free will, intending to be legally bound hereby. IN WITNESS WHEREOF, Cotter and Employee have executed this Agreement as of the date first above written. COTTER: EMPLOYEE Cotter & Company /s/ KERRY J. KIRBY ---------------------- By /s/ Daniel A. Cotter Kerry J. Kirby ---------------------- Daniel A. Cotter Its President & CEO ----------------- - 6 - EX-27 8 FINANCIAL DATA SCHEDULE
5 1,000 12-MOS DEC-30-1995 JAN-01-1995 DEC-30-1995 22,473 0 287,888 0 315,311 636,852 355,930 184,854 819,576 433,853 79,213 0 0 118,356 188,154 819,576 2,437,002 2,437,002 2,234,934 2,234,934 112,930 0 29,925 59,213 176 59,037 0 0 0 59,037 0 0
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