-----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, C1jPxqu+BHbWOBBCITM2yIMKqI6dF24mKO8HBN0AvbxuCSJGD291hGMaNG+OyrHn R758lRw5GVrU9S9ShNaUTQ== 0000950137-01-502636.txt : 20010802 0000950137-01-502636.hdr.sgml : 20010802 ACCESSION NUMBER: 0000950137-01-502636 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20010801 FILER: COMPANY DATA: COMPANY CONFORMED NAME: TRUSERV CORP CENTRAL INDEX KEY: 0000025095 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-LUMBER, PLYWOOD, MILLWORK & WOOD PANELS [5031] IRS NUMBER: 362099896 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 333-18397 FILM NUMBER: 1694752 BUSINESS ADDRESS: STREET 1: 8600 WEST BRYN MAWR AVE CITY: CHICAGO STATE: IL ZIP: 60631-3505 BUSINESS PHONE: 7736955000 MAIL ADDRESS: STREET 1: 8600 W. BRYN MAWR AVENUE CITY: CHICAGO STATE: IL ZIP: 60631-3505 FORMER COMPANY: FORMER CONFORMED NAME: COTTER & CO DATE OF NAME CHANGE: 19920703 10-K405 1 c63737e10-k405.txt FORM 10-K FOR FISCAL YEAR END DECEMBER 31, 2000 1 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-K (MARK ONE) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED) FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED) FOR THE TRANSITION PERIOD FROM TO ------------------------ COMMISSION FILE NUMBER 2-20910 TRUSERV CORPORATION (Exact name of Registrant as specified in its charter) DELAWARE 36-2099896 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.)
8600 WEST BRYN MAWR AVENUE, CHICAGO, ILLINOIS 60631-3505 (Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (773) 695-5000 Securities registered pursuant to Section 12(b) of the Act: NONE Securities registered pursuant to Section 12(g) of the Act: NONE INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES __. NO X . INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM 405 OF REGULATION S-K (SEC.229.405 OF THIS CHAPTER) IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION STATEMENTS INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY AMENDMENT TO THIS FORM 10-K. [X] STATE THE AGGREGATE MARKET VALUE OF THE VOTING STOCK HELD BY NON-AFFILIATES OF THE REGISTRANT. There is no public market for Registrant's Class A common stock. The Registrant's Class A common stock is offered by the Registrant in units of sixty (60) shares each, exclusively to retailers of hardware and related merchandise, in connection with their becoming members of the Registrant. The terms of the Class A common stock limit its transferability. The Class B common has no voting rights. INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE REGISTRANT'S CLASSES OF COMMON STOCK, AS OF THE LATEST PRACTICABLE DATE.
Outstanding at Class June 30, 2001 ----- -------------- Class A common stock, $100 Par Value................ 448,320 Class B common stock, $100 Par Value................ 1,731,490
- -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 PART I THIS ANNUAL REPORT AND THE DOCUMENTS INCORPORATED HEREIN BY REFERENCE CONTAIN FORWARD-LOOKING STATEMENTS THAT ARE BASED ON MANAGEMENT'S EXPECTATIONS, ESTIMATES AND ASSUMPTIONS. THE FORWARD-LOOKING STATEMENTS ARE MADE PURSUANT TO THE SAFE HARBOR PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. THESE STATEMENTS ARE NOT GUARANTIES OF FUTURE PERFORMANCE AND INVOLVE CERTAIN RISKS AND UNCERTAINTIES THAT ARE DIFFICULT TO PREDICT. THEREFORE, ACTUAL FUTURE RESULTS AND TRENDS MAY DIFFER MATERIALLY FROM WHAT WE FORECAST DUE TO A VARIETY OF FACTORS, INCLUDING WITHOUT LIMITATION, OUR ASSUMPTIONS ABOUT FINANCING REQUIREMENTS AND TERMS, INTEREST RATE FUNCTIONS, CAPITAL REQUIREMENTS OF THE COMPANY AND TRENDS IN OUR INDUSTRY. ITEM 1. BUSINESS. THE COMPANY TruServ Corporation was organized as Cotter & Company, a Delaware corporation, in 1953. Upon its organization, it succeeded to the business of Cotter & Company, an Illinois corporation organized in 1948. On July 1, 1997 Cotter & Company merged with ServiStar Coast to Coast Corporation ("SCC"). SCC was a hardware wholesaler organized in 1935 with a strong presence in retail lumber and building materials. Following the merger, the company was renamed TruServ Corporation. The company's main executive offices are located at 8600 West Bryn Mawr Avenue, Chicago, Illinois, 60631-3505. Its main telephone number is (773) 695-5000. The merger united two similar organizations under the name of TruServ Corporation, creating one of the largest hardware/home center cooperatives in the United States. The goals were to: (i) lower pricing for the members by increasing buying power, (ii) increase potential for rebates by combining vendor purchases and (iii) better leverage operating expenses by consolidating distribution centers and reducing duplicate corporate overhead costs. In fiscal year 2000, the company sold its Lumber and Building Materials division, consisting primarily of inventory, to Builder Marts of America, Inc ("BMA"). The company concluded that BMA would be able to provide lumber and building materials to TruServ members at lower cost. The Lumber and Building Materials division had been a low-margin business for TruServ. In connection with the sale of the lumber and building materials business to BMA, the company entered into non-compete, cooperation, trademark and license, and lease agreements with BMA. These agreement terms range from two to ten years. DEBT COVENANT VIOLATION Under the senior notes and the revolving credit facility the company is required to meet certain restrictive financial ratios and covenants relating to minimum EBITDA, minimum fixed charge coverage, minimum borrowing base to debt ratio, maximum capital expenditures and maximum asset sales, as well as other customary covenants, representations and warranties, funding conditions and events of default. As of December 31, 2000, the company was in compliance with the covenant requirements. However, as of February 24, 2001, the company failed to comply with a covenant under the revolving credit facility and the senior note agreements which requires the company to achieve a minimum monthly borrowing base ratio. As a result, either the senior note holders or the participants in the revolving credit facility could declare this failure to comply with the covenant as an "event of default," in which case the senior notes and the amounts outstanding under the credit facility would become callable as immediately payable. On March 30, 2001 the participants in the revolving credit facility issued to the company a "reservation of rights" letter under which the participants effectively stated their intention to not call as immediately payable the company's outstanding debt obligations until May 1, 2001, although they were not precluded from doing so. All other rights of the participants were preserved. Additional letters were issued on April 30, 2001 and on July 3, 2001, which extended the reservation of rights until July 30, 2001 and September 30, 2001, 1 3 respectively. The senior note holders also issued letters reserving their right to accelerate the maturity of the notes although agreeing not to do so at this time. The reservation of rights letters provided by the participants in the revolving credit facility required that the upper limit of the total amount that may be borrowed under the Credit Agreement at any time prior to September 30, 2001 be lowered from $275,000,000 to $225,000,000. The credit limit under this facility was reduced on May 11, 2001 from $275,000,000 to $250,000,000. Additionally, the interest rate on the amounts outstanding under the revolving credit facility was increased by approximately 2%; this increased interest rate also applies to the outstanding senior notes. As a result of this increased interest rate, the company will incur additional interest expense in fiscal year 2001. If this increased interest rate continues through December 31, 2001, the additional interest expense would aggregate approximately $6.0 million. The company is in discussions with the current lenders and with potential lenders regarding refinancing the senior note agreements and the revolving credit facility and, if successful, will replace the current senior note agreements and the revolving credit facility with an asset-based lending agreement with a new lending group in the fourth quarter of 2001. An alternative may be to amend the existing agreements with the existing lenders. However, no assurances can be given as to the outcome. The company's failure to successfully refinance or amend its current borrowing arrangements could cause the current lending group to call as immediately payable the company's currently outstanding debt obligations. The company's resulting inability to satisfy its debt obligations would force the company to pursue other alternatives to improve liquidity, possibly including among other things, restructuring actions, sales of assets and seeking additional sources of funds or liquidity. In particular, the company has engaged an investment banking firm to assist us in exploring the sale of the paint business. No assurances can be given that the company would be successful in pursuing such possible alternatives or, even if successful, that such undertakings would not have a material adverse impact on the company. Accordingly, the balances outstanding under the senior note agreements and the revolving credit facility have been classified as current liabilities as of December 31, 2000. However, the financial statements do not include any other adjustments that might result from the outcome of this uncertainty. GENERAL DESCRIPTION OF THE BUSINESS The company, organized as a cooperative, is one of the largest member-owned wholesalers of hardware and related merchandise in the United States, serving approximately 7,600 members. The company also manufactures paint and paint applicators. The company sells its products to hardware retailers who have entered into Retail Member Agreements with it. The company serves its members by functioning as a low cost distributor of goods and maximizing its volume purchasing abilities, primarily through vendor rebates and discount programs, for the benefit of its members. These benefits are passed along to its members in the form of lower prices and/or patronage dividends Generally, members are entitled to use one of certain TruServ trademarks and trade names, including the federally registered True Value(R), Grand Rental Station(R), Taylor Rental(R), Home & Garden Showplace(R) and Induserve Supply(R) trademarks, service marks and collective membership marks. See "Trademarks, Service Marks and Collective Membership Marks" below. Members have access to certain TruServ private label products and are entitled to receive annual patronage dividends based upon their purchases from TruServ. In accordance with TruServ's By-Laws and the Retail Member Agreements, 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 other provisions as may be authorized by the Board of Directors. See "Distribution of Patronage Dividend" below. The company serves approximately 7,600 True Value(R) hardware store members throughout the United States. Primary concentrations of members exist in New York (approximately 8%), Pennsylvania (approximately 7%), California and Texas (approximately 5% each) and Illinois and Michigan (approximately 4% each). 2 4 SALES AND SUPPLIERS The company provides each of its members with an illustrated price catalog showing the products available from the company. The members can access this catalog through the newly developed internet site for members. At their request, a member will receive a printed version of the catalog. These products, comprised of more than 61,000 stockkeeping units ("SKUs"), are divided into seven classes of merchandise which represent the products sold within the Company's operating segments. Those seven categories are set forth in the table below, along with the corresponding percentage of total revenues for each category during the last three fiscal years:
FOR THE FISCAL YEARS ENDED DECEMBER 31 --------------------------- 2000 1999 1998 ------- ------- ------- Lumber and Building Materials.................... 30.4% 33.2% 30.2% Hardware Goods................................... 16.8% 16.2% 17.8% Farm and Garden.................................. 15.5% 14.8% 14.5% Electrical and Plumbing.......................... 13.3% 12.7% 13.4% Painting and Cleaning............................ 10.6% 10.0% 10.8% Appliances and Housewares........................ 8.6% 8.6% 8.4% Sporting Goods and Toys.......................... 4.8% 4.5% 4.9%
The company's sales to its members are divided into three categories, as follows: (i) warehouse shipment sales (approximately 41% of total sales); (ii) direct shipment sales (approximately 56% of total sales); and (iii) relay sales (approximately 3% of total sales). Warehouse shipment sales are sales of products that are purchased, warehoused and resold by the company in response to orders from the members. Direct shipment sales are sales of products that are purchased through the company by the members but delivered directly to members from manufacturers. Relay sales are sales of products that are purchased through the company in response to the requests of several members for a product which is (i) included in future promotions, (ii) not normally held in inventory and (iii) not conducive to direct shipment. Generally, the company will give notice to all members of its intention to purchase products for relay shipment and will then purchase only as many items 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 has numerous individual agreements with or commitments from its suppliers, most of which are terminable by such suppliers or the company without cause. These termination provisions, either individually or in the aggregate, have not had any material adverse effect on the company's ability to conduct its business. The goods and services purchased by the company from these suppliers are generally available from a wide variety of sources. The company is not dependent upon any one supplier or group of suppliers and in the past has not experienced a problem in obtaining necessary goods. The company also manufactures paint and paint applicators. The principal raw materials used by the company in its manufacturing activities are chemicals. All raw materials are purchased from outside sources. In the past, the company has been able to obtain adequate sources of raw materials and other items used in production and no shortages of such materials are currently anticipated that will materially impact its manufacturing operations. OTHER SERVICES The company annually sponsors two "markets" (one in the spring and one in the fall) for its members in order to keep them better informed as to industry trends and the availability of new merchandise. In the year 2001, these markets will be held in Atlanta, Georgia, and Las Vegas, Nevada. Members are invited to the markets and generally place substantial orders for delivery during the period between markets. During such markets, new merchandise and seasonal merchandise are displayed to attending members. 3 5 BACKLOG As of June 30, 2001 and July 1, 2000, respectively, the company had a backlog of firm orders (including relay orders) of approximately $36,136,000 and $35,626,000. 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 made at one of the company's two markets for new or seasonal merchandise, to be delivered during the subsequent period between markets. Thus, the company generally has a relatively high backlog at the end of each market, which decreases in subsequent months until the next market occurs. COMPETITION The retail hardware industry is characterized by intense competition. Independent retail hardware businesses, including those served by the company, face intense competition from chain stores, discount stores, home centers and warehouse operations such as Wal-Mart, Home Depot, Menard, Sears and Lowe's. 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 for company members and brought pressure on the company to achieve lower merchandise costs for its members. In response, the company has developed a retail-oriented competitive pricing strategy on high-turnover, price-sensitive items. The trueAdvantage(R) program was introduced in 1995 and upgraded in 1997 to promote higher retail standards in order to build consumer goodwill and create a positive image for all member stores. Competitive conditions in the wholesale hardware industry are similarly intense and increasing, particularly as a result of the intense pressure on hardware retailers to obtain low-cost wholesale supply sources for merchandise acquisition. 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 the failure of several non-member-owned wholesalers. In several markets in the United States, TruServ competes directly with other member-owned wholesalers such as Ace Hardware Corp, Do it Best Corporation and United Hardware Distributing Co. TRADEMARKS, SERVICE MARKS, AND COLLECTIVE MEMBERSHIP MARKS The company's trademarks, service marks and collective membership marks (the "Marks") are of prime importance to the company. Many of the Marks are highly recognized and utilized in extensive advertising and marketing campaigns, and the company vigorously defends its Marks. There are approximately 7,600 members that operate as retail hardware stores throughout the United States, most of which sell merchandise and services under the Marks. The Marks include the True Value(R) collective membership mark, the ServiStar(R) mark, the Coast to Coast(R) mark, the InduServe Supply(R) mark, the Grand Rental Station(R) mark, the Taylor Rental(R) mark, the Home & Garden Showplace(R) mark and the Commercial Sales(R) mark. All of the Marks are currently used in commerce and the company intends to use the Marks in commerce in the future. Each of the marks is renewable at the company's option; the company intends to renew them upon expiration. Members have continued to conduct their businesses under the same retail banners as before the merger of Cotter and SCC; however, beginning in year 2000, many members with the retail banners of Coast to Coast(R) and ServiStar(R) started to conduct their business under the single retail banner of True Value(R). SUBSIDIARIES The company, through a Canadian subsidiary, owns a majority equity interest in TruServ Canada Cooperative, Inc., a Canadian wholesaler of hardware, variety and related merchandise. The Canadian cooperative serves approximately 630 True Value(R) and V&S(R) stores, all located in Canada. The cooperative 4 6 has approximately 325 employees. The cooperative generated less than 3% of the company's consolidated revenue in fiscal year 2000. 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. EMPLOYEES The company employs approximately 4,300 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 where the employees are located and are generally implemented locally. Approximately 23% 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. RETAIL MEMBER AGREEMENT; FRANCHISE AND LICENSE AGREEMENTS The TruServ Retail Member Agreement provides, among other things, that each member: (i) will be required to purchase 60 shares of Class A common stock at a purchase price of $100 per share for each store owned by the member, up to a maximum of three hundred shares for five stores or more that are owned by a member; (ii) will conduct its businesses subject to the terms of the Retail Member Agreement; (iii) will conduct a retail hardware, home or garden center, rental or industrial/commercial operation at a designated location; (iv) will comply with TruServ's By-Laws, as may be amended from time to time; (v) will accept patronage dividends in a form complying with the requirement of the Internal Revenue Code for deduction from gross income by TruServ; (vi) may receive different services or charges based upon the amount of merchandise purchased by the member; (vii) agrees to have its Retail Member Agreement terminated in certain circumstances by unilateral action by TruServ's Board of Directors; (viii) agrees to have its Retail Member Agreement automatically modified upon notice from the company to the member of any relevant change in the Certificate of Incorporation and/or By-Laws of the company, or by resolution of the Board of Directors; (ix) agrees to have its Retail Member Agreement governed by Illinois law, enforced or interpreted only in courts located in Cook County or any Illinois county contiguous to Cook County, Illinois, and only interpreted in accordance with the substantive laws of Illinois without giving effect to its conflict of laws principles; and (x) may terminate the Retail Member Agreement upon 60 days written notice mailed to any executive officer of the company at TruServ's principal office. CAPITAL STOCK In general, members of TruServ own shares of Class A and Class B common stock. Each of the two classes of stock has a par value of $100 per share. The Class A common stock is sold in units of 60 shares. Each TruServ member is required to purchase one unit of Class A common stock. No TruServ member is permitted to acquire more than five units of Class A common stock. The Class B common stock is issued only to holders (or former holders) of the Class A common stock in connection with the patronage dividend distributed to the members, as discussed below. 5 7 Neither class of TruServ stock accrues dividends and each has limited transferability, by virtue of TruServ's right of first refusal to repurchase at par value a member's stock before it can be transferred. Historically, TruServ has always exercised this right. TruServ also retains an automatic lien on both classes of stock for any indebtedness due to TruServ by a member. There is no existing market for either class of TruServ stock. Participation in the earnings of a cooperative is based on member patronage purchasing and reflected by the payment of patronage dividends. In general, these patronage dividends are based on a member's purchasing volume and margins applicable to merchandise or services purchased by the member, less any expenses related to such business and less certain cooperative reserves. Patronage dividends are determined on a yearly basis for activity conducted the prior year, and are allocated no later than the 15th day of the ninth month following the end of the calendar year. TruServ has been paying patronage dividends in a combination of cash, notes and Class B common stock. For the 2000 taxable year, TruServ will pay approximately $35 million in patronage dividends to its members. See "Distribution of Patronage Dividends" below. MORATORIUM ON REDEMPTIONS OF CAPITAL STOCK In March, 2000, the board of directors of TruServ declared a moratorium on redemptions of the capital stock. In reaching its decision to declare the moratorium, the board of directors of TruServ reviewed the financial condition of the company. The board also considered its fiduciary obligations and corporate law principles under Delaware law. The board of directors concluded that it should not redeem any of the capital stock while its net asset value was substantially less than par value, as that would likely violate legal prohibitions against "impairment of capital." In addition, the board of directors concluded that it would be a violation of its fiduciary duties to all members and that it would constitute a fundamental unfairness to members if some members were allowed to have their shares redeemed before the impact of the 1999 loss were allocated to them. Members who did not request redemption would be saddled with the losses of those members who requested redemption. Moreover, the board considered the company's debt agreements, and, in particular, the financial covenants thereunder, which prohibit redemptions when the company, among other things, does not attain certain profit margins. In determining whether the moratorium should be lifted, the board of directors will consider the financial condition of the company, and will not lift the moratorium unless it can conclude that effecting redemptions of the company's capital stock will not "impair the capital" of the company, unfairly advantage some members to the disadvantage of others, or violate the financial covenants under its debt agreements. The board of directors is monitoring the financial performance of the company monthly. DISTRIBUTION OF PATRONAGE DIVIDENDS TruServ operates on a cooperative basis with respect to business transacted with or for members. All members are entitled to receive patronage dividend distributions from TruServ, calculated on the basis of gross margins of merchandise and/or services purchased by each member. In accordance with TruServ's By-Laws and Retail Member Agreement, the annual patronage dividend is paid to members out of the gross margins from operations and other patronage source income, after deduction for expenses, reserves and provisions authorized by the board of directors. The patronage dividend paid to members is based on pre-tax net earnings calculated in accordance with accounting principles generally accepted in the United States of America after reducing or increasing net earnings for non-member income/(losses) and deferred patronage amortization. Once the patronage dividend is calculated, it is distributed to members based on relative gross margin participation for each type of purchase made. The dividend is allocated to members based on their purchases of warehouse, direct shipment, paint and lumber products as compared to total member purchases of such products. Patronage dividends are usually paid to members within 90 days after the close of TruServ's fiscal year; however, the Internal Revenue Code (the "Code") permits distribution of patronage dividends as late as the 15th day of the ninth month after the close of TruServ's fiscal year, and TruServ may elect to distribute the annual patronage dividend at a later time than usual in accordance with the provisions of the Code. 6 8 TruServ's By-Laws provide for the payment of annual patronage dividends, after payment of at least 20% of such patronage dividends in cash, in "qualified written notices of allocation" including (i) Class B common stock based on par value thereof, to a maximum of 2% of the member's net purchases of merchandise from TruServ for the year (except in unusual circumstances of individual hardship, in which case the board of directors reserves the right to make payments in cash), (ii) promissory (subordinated) notes or (iii) other property. Such promissory (subordinated) notes are for a five year term and bear interest at a rate fixed from time to time by the board of directors. The notes are subordinated to all other debt of TruServ. TruServ may also issue "nonqualified written notices of allocation" to its members as part of its annual patronage dividend. See "Payment of Patronage Dividends in Accordance with the Internal Revenue Code" below. In determining the form of the annual patronage dividend, a member's required investment in Class B common stock of TruServ had historically been limited by the board of directors to an amount, the cumulative value of which will not exceed two percent (2%) of the member's net purchases of merchandise and services from the company. Commencing in 1996, the board established a minimum Class B common stock ownership requirement (currently $25,000 for hardware stores), which may be varied from time to time. This minimum is calculated as the aggregate of a member's various types of annual purchases multiplied by a specific percentage, that varies from 1% to 14%, decreasing as total dollar purchases by category increase. The amount of such required investment is determined by majority vote of the board of directors, and may be increased or decreased from time to time. The basis for determining the necessity of an increase or decrease is through an evaluation of the financial needs of TruServ and the needs of its membership. ALLOCATION OF PATRONAGE DIVIDENDS AGAINST LOSS ACCOUNT On August 28, 2000, the board of directors of TruServ decided to allocate a substantial portion of its 1999 operating losses among the TruServ members, on a pro rata basis, in proportion to each member's ownership of Class B common stock as of December 31, 1999. A loss allocation account was established for each member during the third quarter of 2000, reflecting that member's allocated loss for the year ended December 31, 1999. The loss account will be satisfied by offsetting future qualified Class B common stock issued as part of the patronage dividend against the amount in the account. In the event of the dissolution of a member or termination of his or its membership and upon release of the moratorium, the redemption proceeds to which that member would have been entitled would also be offset against the amount of the loss allocated to the member that had not yet been satisfied. PAYMENT OF PATRONAGE DIVIDENDS IN ACCORDANCE WITH THE INTERNAL REVENUE CODE The Code specifically provides for the taxation of cooperatives (such as TruServ) and their patrons (such as TruServ's members) so as to ensure that the business earnings of a cooperative are currently taxable either to the cooperative or to its patrons, but not both. The shares of Class B common stock and other written notices distributed by TruServ to its members, which disclose to the recipient the stated amount allocated to him by TruServ and the portion thereof which is a patronage dividend, are "written notices of allocation" as that phrase is used in the Code. For such written notices to be "qualified written notices of allocation" within the meaning of the Code, it is necessary that TruServ pay 20% or more of the annual patronage dividend in cash and that the members consent to having the allocations (at their stated dollar amounts) treated as being constructively received by them and includable in their gross income. Any written notices that do not meet these requirements are "nonqualified written notices of allocation" within the meaning of the Code. TruServ deducts the sum of cash, the face value of qualified written notices and the fair market value of any other property distributed to the members (except nonqualified written notices of allocation) from its earnings in determining its taxable income. Accordingly, all of these items, including such qualified written notices of allocation, are includable in the gross income of the members. Section 1385(a) of the Code provides, in substance, that the amount of any patronage dividend which is paid in cash, qualified written notices of allocation or other property (except nonqualified written notices of allocation) shall be included in the gross income of the patron (member) for the taxable year in which he or it receives such distribution. In 7 9 general, for nonqualified written notices of allocation, no amounts are either deductible by TruServ or includable in a member's gross income until the notices are redeemed by TruServ. TruServ itself therefore includes any earnings reflected in nonqualified written notices of allocation in its own gross income and pays tax on them. 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, the stated dollar amount of which must be recognized as gross income by the member for the taxable year in which received. The portion of the patronage dividend paid in cash (at least 20%) may be insufficient, depending on a member's individual tax bracket, to pay income taxes due from the member on its receipt of the full amount of the patronage dividend, including cash and Class B common stock. TruServ's By-Laws reflecting the Code provision applicable to cooperatives, treat shares of Class B common stock and such other notices as the board of directors may determine, if distributed in payment of patronage dividends, as "qualified written notices of allocation." The By-Laws provide: (i) for payment of patronage dividends in a combination of cash, qualified written notices of allocation (including Class B common stock), other property and nonqualified written notices of allocation, and (ii) that membership in the organization (i.e. the status of being a member of TruServ) constitutes the member's consent to recognize the stated amount of any qualified written notices of allocation or other property distributed to it as includable in the member's gross income as provided in Section 1385(a) of the Code. Under the Code, any person who becomes or became a member of TruServ, or who remains a member after adoption of the By-Laws providing that membership in TruServ constitutes consent to be taxed on receipt of qualified written notices of allocation, is deemed to have consented to be taxed on receipt of patronage dividends in cash and in qualified written notices of allocation, 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 person that became, or becomes a member thereafter. Such consent is then effective as to patronage dividends, except as to patronage dividends paid after the person ceases to be a member of the organization or after the By-Laws of the organization cease to contain the automatic consent provision. Such consent may be revoked by the member only by terminating its membership in TruServ in the manner provided in his or its Retail Member Agreement. TruServ has historically paid its members 30% of the patronage dividend in cash (excluding nonqualified written notices of allocation). However, TruServ is only obligated to distribute 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 to each member, TruServ deposits a certificate, representing all the shares of Class B common stock then being issued with Harris Trust and Savings Bank, Chicago, Illinois, for safekeeping for and on behalf of its members. The company keeps the allocations of Class B common stock in book entry form. The company then sends a written notice to each member of these deposits and the allocation thereof to such member. 8 10 ITEM 2. PROPERTIES. The company's national headquarters is located in Chicago, Illinois. Information with respect to the company's owned and leased warehousing and office facilities is set forth below:
SQUARE FEET OF LEASE WAREHOUSE AND EXPIRATION LOCATION OFFICE AREA INTEREST DATE -------- -------------- -------- ---------- Brookings, South Dakota....................... 518,000 Owned Chicago, Illinois............................. 228,100 Leased December 31, 2010 Corsicana, Texas.............................. 775,000 Owned Denver, Colorado.............................. 360,000 Leased June 30, 2004 East Butler, Pennsylvania..................... 476,200 Owned Fogelsville (Allentown), Pennsylvania......... 600,000 Owned Ft. Smith, Arkansas........................... 206,500 Leased November 30, 2002 Hagerstown, Maryland.......................... 840,000 Leased April 28, 2003 Harvard, Illinois............................. 1,310,000 Leased August 23, 2013 Harvard, Illinois............................. 160,000 Leased August 23, 2005 Henderson, North Carolina..................... 300,000 Leased November 11, 2001 Indianapolis, Indiana......................... 420,000 Owned Jonesboro (Atlanta), Georgia.................. 670,000 Owned Kansas City, Missouri......................... 415,000 Owned Kingman, Arizona.............................. 375,000 Owned Manchester, New Hampshire..................... 730,000 Owned Mankato, Minnesota............................ 320,000 Owned Peachtree City, Georgia....................... 60,500 Leased November 24, 2005 Springfield, Oregon........................... 504,000 Owned Westlake (Cleveland), Ohio.................... 405,000 Owned Winnipeg, Manitoba............................ 432,000 Owned Woodland, California.......................... 350,000 Owned
No location owned by the company is subject to a mortgage. The Ft. Smith, Arkansas and Peachtree City, Georgia properties, which were closed in 1997, are under lease and are currently under a sublease. The Westfield, Massachusetts distribution center was closed and sold in 2000. Also in 2000, the company announced the closing of its Indianapolis, Indiana distribution center. In January 2001, the company announced the closure of its Henderson, North Carolina distribution center. Information with respect to the company's manufacturing facilities is set forth below:
SQUARE FEET OF MANUFACTURING PRINCIPAL LOCATION AREA PRODUCT INTEREST -------- -------------- --------- -------- Chicago, Illinois.......................... 105,000 Paint Owned Cary, Illinois............................. 580,000 Paint and Owned Paint Applicators
The company's facilities are suitable for their respective uses and are, in general, adequate for the company's present needs. The company owns and leases transportation equipment for use at its regional distribution centers for the primary purpose of delivering merchandise from the company's regional distribution centers to its members. 9 11 Additional information concerning these leases can be found in note 5 to the consolidated financial statements included elsewhere herein. ITEM 3. LEGAL PROCEEDINGS. In June, 2000, an action was filed against TruServ by 19 former members of the company in the Circuit Court of the 19th Judicial Circuit (McHenry County, Illinois). (Certain other former TruServ members have filed similar claims.) The plaintiffs in the action each allege that, based upon representations made to them by the company and its predecessors that the Coast to Coast brand name would be maintained, they voted for the merger of Servistar Coast to Coast and Cotter & Company. The plaintiffs allege, however, that after the merger the Coast to Coast brand name was eliminated and that each plaintiff thereafter terminated or had its membership in TruServ terminated. The plaintiffs further claim that TruServ breached its obligations by failing to redeem their stock and by creating loss allocation accounts for the plaintiffs. Based upon this alleged conduct, the plaintiffs have each asserted claims for fraud/misrepresentation, negligent misrepresentation, claims under the state securities laws applicable to each plaintiff, claims under the state franchise/dealership laws applicable to each plaintiff, breach of fiduciary duty, unjust enrichment, estoppel and recoupment. The complaint states that each plaintiff is entitled to in excess of $50,000 in damages; however, the damages being sought are not further specified. Discovery has recently commenced in this action and it is too early to determine the extent of the damages being claimed. In March of 2001, a similar action was brought on behalf of former SCC members in the same court, by the same law firm. The complaint alleges substantially similar cases as those made by the former TruServ members. The lawsuit is in an early stage and the extent of damages being claimed has not yet been determined. In August, 2000, an action was brought in Delaware Chancery Court (New Castle County) by an alleged former TruServ member against certain present and former directors of the company and against the company. The plaintiff in the lawsuit seeks to proceed on a class-action basis. The complaint alleges that the named directors breached their fiduciary duties in connection with the accounting adjustments made by the company in the fourth quarter of 1999 and that TruServ breached, and the named directors caused TruServ to breach, agreements with members by suspending payment of the members' 1999 annual patronage dividend, by declaring a moratorium on the redemption of members' TruServ stock and by imposing minimum annual purchase requirements upon members. The plaintiff seeks monetary and non-monetary relief in connection with the various claims asserted in the complaint. The lawsuit is in an early stage and the extent of the damages being claimed has not yet been determined. In October, 1999, Paul Pentz, the former president of the company, filed a claim in the Circuit Court of the 20th Judicial Circuit (Collier County, Florida) against the company alleging he is due bonus and retirement compensation payments in addition to amounts already paid to him. The company has filed a counterclaim against Mr. Pentz alleging that he breached his fiduciary duties as president of the company. Mr. Pentz's motion to dismiss the counterclaim was denied. The company intends to vigorously defend all of these cases and, accordingly, has recorded no related reserves at December 31, 2000. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. There is no existing market for the common stock of the company and there is no expectation that any market will develop. The company's Class A common stock is owned exclusively by retailers of hardware and related products each of whom is a member or former member of the company and purchased at least sixty shares of the company's Class A common stock (the only class of voting stock) upon becoming a member. 10 12 The company is organized as a Delaware stock corporation and operates as a member-owned wholesaler cooperative corporation. The shares of the company's Class B common stock now outstanding were issued to members in partial payment of the annual patronage dividend that were accrued as a result of patronage business transacted by such members with the company. In accordance with the company's By-Laws, 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 other provisions authorized by the board of directors. The number of holders of record (as of June 30, 2001) of each class of stock of the company is as follows:
NUMBER OF HOLDERS OF RECORD TITLE OF CLASS ---------- Class A voting common stock, $100 Par Value................. 7,619 Class B common stock, $100 Par Value........................ 7,489
Dividends (other than patronage dividends) on the Class A common stock and Class B common stock, subject to the provisions of the company's Certificate of Incorporation, may be declared out of gross margins of the company, other than gross margins from operations with or for members and other patronage source income, after deduction for expenses, reserves and provisions as may be authorized by the board of directors. Dividends may be paid in cash, in property, or in shares of the Class B common stock, subject to the provisions of the Certificate of Incorporation and the By-Laws. Other than the payment of patronage dividends, including the redemption of all 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. See Item 1--"Business--Distribution of Patronage Dividend." ITEM 6. SELECTED FINANCIAL DATA. SELECTED FINANCIAL DATA
FOR THE FISCAL YEARS ---------------------------------------------------------------------------------------- 2000 1999 (RESTATED)(E) 1998 (RESTATED)(E) 1997(B)(RESTATED)(E) 1996(C) ---------- ------------------ ------------------ -------------------- ---------- (IN THOUSANDS) Revenues............... $3,993,642 $4,502,326 $4,328,238 $3,331,686 $2,441,707 Gross margins.......... 277,397 181,465 298,135 241,020 196,636 Net margins/(loss)..... 34,117 (130,803) 12,020 38,086 52,410 Patronage dividends(a)......... 34,705 -- 35,024 43,782 53,320 Total assets........... 1,236,014 1,335,397 1,587,674 1,425,483 853,985 Long-term debt(d)...... 9,091 309,796 316,959 169,209 80,145 Promissory (subordinated) and installment notes payable.............. 65,846 83,804 124,422 172,579 185,366 Redeemable Class A common stock......... 49,084 47,270 49,880 47,423 4,876 Redeemable Class B common stock......... 174,448 177,779 195,643 187,259 114,053
11 13 - --------------- (a) No patronage dividend was issued in 1999 due to the reported net loss of $130,803,000. (b) 1997 financial results are for Cotter & Company from January 1, 1997 through June 30, 1997 and the merged company of TruServ for July 1, 1997 through December 31, 1997. (c) 1996 financial results are for Cotter & Company. (d) As discussed in Note 2 to the consolidated financial statements, all amounts outstanding under the senior note agreements have been classified as current as of December 31, 2000. (e) As discussed in Note 1 to the consolidated financial statements, the fiscal year 1997, 1998 and 1999 results have been restated to reflect the recording as expenses in fiscal 1997 and 1998 of $13.6 million of costs that were previously accrued for as of July 1, 1997 in connection with the SCC merger. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Note: In consultation with the company's prior and current auditors, and as more fully explained in footnote 1, the company has restated the consolidated financial statements as of and for the years ended December 31, 1999, 1998 and 1997. Additionally, the Company has made certain reclassifications to the prior year consolidated financial statements to conform with the current year's presentation. FISCAL YEAR 2000 COMPARED TO FISCAL YEAR 1999 RESULTS OF OPERATIONS Revenues for 2000 totaled $3,993,642,000. This represented a decrease in revenues of $508,684,000 or 11.3% over 1999. This decrease was the result of various factors. The primary contributing factor was lower revenues from the company's sales of lumber and building material products, which declined $272,331,000 or 20.1% over the prior year. Lower commodity pricing in the lumber and building materials industry and a decrease in unit volume contributed to the decrease in hardware sales. A second contributing factor was a decrease in hardware sales, which declined $240,273,000 or 8.7% over the prior year. A reduction in the company's member base contributed to this decline. The member base erosion was partially due to management's decision to eliminate stores that were not profitable to the co-op. Average hardware handled sales per store in 2000 were equivalent to 1999 at approximately $16,000 per month excluding non-profitable members who did not meet minimum purchasing levels. In 2000, the company experienced an increase in gross margins of $95,932,000 or 52.9% over the prior year. Gross margins as a percentage of revenue also increased to 6.9% from 4.0% for 1999. The company's improvement of inventory controls in 2000 and a significant reduction in member claims contributed to the increase in gross margins. In addition, the company conducted a physical inventory count in the fourth quarter of 2000, which resulted in a $22.2 million adjustment that positively impacted gross margins. The company recorded an inventory adjustment in 1999 resulting in a charge of $74.0 million related to the consolidation of the distribution network which was caused by larger than usual employee turnover, less than adequate training procedures and increased member claims. The company's implementation of one common ordering system for all of its members and a reduction in employee turnover resulted in reduced member claims. The reductions in member claims are also the result of the company increasing training procedures for employees in the last year, particularly in the handling of inventory. Logistics and manufacturing expenses decreased $9,338,000 or 9.4%, as compared to the prior year. The company's initiatives in consolidating its distribution network, developed with the merger plan from 1997, led to the reduction in these expenses. As a result of the decreases in sales that the company experienced in early 2000, the company implemented significant cost cutting measures in 2000 that resulted in a decrease in selling, general and administrative ("SG&A") expenses. SG&A expenses decreased $19,274,000 or 13.6% over the prior year. SG&A expenses as a percentage of sales were 3.1%, which is consistent with the prior year. As a result of a reduction in the aggregate principal balance of debt to members of the company, the amount of interest that the company paid to members decreased $3,367,000 or 23.2% in comparison to the prior year. However, other interest expense increased by $10,371,000, representing a 22.4% increase. This 12 14 increase was the result of higher interest rates under the various financing agreements, which was partially offset by decreased borrowing amounts. Gain on sale of assets increased $18,613,000. The gain was due primarily to the company's sale of its lower gross margin lumber and building materials division. Other income increased by $6,179,000, primarily due to a one-time gain resulting from the settlement of certain pension obligations to fully vested employees through the purchase of annuity contracts. In 2000, income tax expense decreased by $16,104,000, primarily due to the company recording in 1999 a valuation allowance on deferred taxes of $16,490,000 existing as of December 31, 1998. The valuation allowance was required under FAS 109, since the company had cumulative losses for the three most recent fiscal years and consequently did not have sufficient evidence to overcome this loss. In 2000, there was no change in the valuation allowance. The company's net margin in 2000 was $34,117,000 compared to a net loss of $130,803,000 in 1999. The company attributes this result to the following: improvement in its gross margins, a reduction in logistics and manufacturing expenses, a decrease in SG&A expenses, the gain from the sale of the lumber and building materials division and the settlement of the pension claims through the purchase of annuity contracts. FISCAL YEAR 1999 COMPARED TO FISCAL YEAR 1998 RESULTS OF OPERATIONS Revenues for 1999 totaled $4,502,326,000. This represented an increase in revenues of $174,088,000 or 4.0% over 1998. The increase was primarily due to an increase of 7.8% in direct shipment sales and 15.1% in lumber and building materials sales. Gross margins decreased by $116,670,000 or 39.1% and, as a percentage of revenues, decreased to 4.0% from 6.9% for the comparable 1998 period. This decrease was primarily attributable to: inventory adjustments related to consolidation of the distribution network leading to increased member claims, a change in sales mix, and the impact of retail competitive pressures. The inventory adjustment of $74,000,000 related to the resolution of certain unreconciled differences arising from the consolidation of the distribution network, integration of one inventory platform, larger than usual employee turnover, less than adequate training procedures and increased member claims. The increased member claims incurred by the company were due to the consolidation of three ordering systems of the various merged entities, containing 130,000 items, into one ordering system containing 60,000 items. Member claims resulted in $20,000,000 of the $74,000,000 inventory adjustments. These claims predominantly arose from a difference between the merchandise the member ordered and the merchandise received by the member (although additional claims arose from damages, overages and allowances). This trend of member claims is not expected to continue because the company has taken measures to improve inventory controls by taking more physical inventory counts, using more extensive cycle count procedures and increasing employee training to improve shipping/receiving accuracy and thereby reducing member returns. The sales mix has continued to shift from the handled and paint sales that generate a higher gross margin to the lower gross margin direct shipments and lumber and building material sales to members. The decrease in handled and paint sales, consolidation of the distribution center network, refinement of estimates for allowances and additional costs associated with inventory capitalization negatively impacted the gross margin by $40.3 million. The company has continued to provide members with lower pricing to deal with the intense competitive pressure that the members are experiencing in the retail marketplace from "Big Box" stores such as Home Depot, Menards and Lowes, as well as the diversified retailers such as Sears and Wal-mart. The negative gross margin impact from the aforementioned inventory adjustments, decrease in handled and paint sales and lower pricing to combat competition was partially offset by the gross margin increase attributable to increased direct shipment sales and lumber and building materials sales. The gross margin 13 15 increased $3,883,000 or 1.6% as a percentage of revenue due to the increase in direct shipment sales and lumber and building materials sales of $248.0 million. Logistics and manufacturing expenses increased $2,953,000 or 3.1% as compared to the prior year. This increase was due to the start-up of a new distribution center in Hagerstown, Maryland, and the shut down of three other distribution centers. In fiscal 1999, SG&A expenses increased $5,449,000 or 4.0% over the prior year. The increase was primarily attributable to depreciation and amortization and bad debt expense. Depreciation and amortization increased $9,019,000 or 28.1% as a result of the amortization of conversion funds provided to members and increased capital expenditures in 1998 being depreciated in 1999. Total interest expense increased in 1999 by $5,602,000 or 10.2% over fiscal 1998. Other interest expense increased by $7,494,000 due to an increase in the company's borrowing rate. This increase was partially offset by a decrease in interest paid to members by $1,892,000 or 11.5% due to a lower average interest rate and lower principal balance. The gain on sale of properties totaled $11,724,000 for fiscal year 1999 and is attributable to the sale of redundant distribution centers and associated property. Income tax expense increased by $16,423,000 because of the uncertainty of the future realization of the tax benefit. The previously recorded tax asset related to the merger was written off due to the extent of the net operating loss that had occurred in 1999. The cumulative effect on prior years of a change in accounting principle of $6,484,000 reflects the start-up costs of converting the information technology/inventory management systems used by SCC distribution centers prior to the merger to those systems currently used by the company. This reduction in net margins is in compliance with SOP 98-5, "Reporting the Costs of Start-up Activities." The combination of decreased gross margins, increased borrowing costs, increased income tax expense and the cumulative effect of a change in accounting principle resulted in a net loss of $130,803,000 compared to a net margin of $12,020,000 for the same period last year. LIQUIDITY AND CAPITAL RESOURCES Cash provided by operating activities for the fiscal year ended December 31, 2000 was $83,573,000, compared to $181,607,000 for the fiscal year ended December 31, 1999. As of December 31, 2000, inventory decreased $38,752,000, as a result of the company consolidating its distribution network to respond to the decline in sales it had experienced. The company also realized benefits from implementing a new inventory forecasting system that improved service levels to the members. In fiscal 2000, the company experienced a decrease of $52,188,000 in accounts and notes receivable due to both a decline in sales and the implementation of improved collection efforts. The company also experienced a decrease in accounts payable of $81,944,000 resulting from reduced inventory purchases in 2000 and the decrease in lumber and direct shipment sales described above. Cash flows provided by investing activities were $871,000 in fiscal 2000 compared to a use of funds of $10,532,000 in 1999. Total capital expenditures, including expenditures under capital leases, were $12,526,000 for the fiscal year ended December 31, 2000, as compared to $44,930,000 for the fiscal year ended December 31, 1999. These capital expenditures are comprised of various building improvements and purchases of additional equipment and technology at the company's regional distribution centers and at its corporate headquarters. In addition, the company benefited from the receipt of proceeds from the sale of properties of $23,113,000. The principal amount of cash was generated from the sale of the lumber and building materials division on December 29, 2000 in the amount of $13,948,000; additionally, this same transaction generated cash in the amount of $5,164,000 received for non-competition, cooperation, lease and other agreements. 14 16 The company generated cash flows from operating and financing activities and used them to reduce the company's debt by $67,943,000. This amount represented a decrease in both long-term and short-term debt. The company anticipates that this trend of lower debt will continue due to the sale of the lumber and building materials division. This sale eliminates the float the company carried on the direct ship sales of this division, since the vendor's invoices were paid before the members pay the company. At July 1, 1997, the company established a $300,000,000 five-year revolving credit facility with a group of banks. The agreements were amended and restated in April 2000 after a default was triggered as a result of the loss in 1999. The amendments include increased interest rates, new financial ratios and covenants, and the collateralization of the company's assets. The company had borrowed under the agreement $127,000,000 and $135,000,000 at December 31, 2000 and 1999, respectively. The company also pays a commitment fee of .05% per annum on the unused portion of the commitments. Also, at December 31, 1999, the company had amounts due under a commercial paper program of $19,000,000, which it paid in 2000. The weighted average interest rate on these borrowings was 8.9% and 6.4% for the years ended December 31, 2000 and 1999, respectively. Under the senior notes and the revolving credit facility the company is required to meet certain restrictive financial ratios and covenants relating to minimum EBITDA, minimum fixed charge coverage, minimum borrowing base to debt ratio, maximum capital expenditures and maximum asset sales, as well as other customary covenants, representations and warranties, funding conditions and events of default. As of December 31, 2000, the company was in compliance with the covenant requirements. However, as of February 24, 2001, the company failed to comply with a covenant under the revolving credit facility and the senior note agreements which requires the company to achieve a minimum monthly borrowing base ratio. As a result, either the senior note holders or the participants in the revolving credit facility could declare this failure to comply with the covenant as an "event of default," in which case the senior notes and the amounts outstanding under the credit facility would become callable as immediately payable. On March 30, 2001 the participants in the revolving credit facility issued to the company a "reservation of rights" letter under which the participants effectively stated their intention to not call as immediately payable the company's outstanding debt obligations until May 1, 2001, although they were not precluded from doing so. All other rights of the participants were preserved. Additional letters were issued on April 30, 2001 and on July 3, 2001, which extended the reservation of rights until July 30, 2001 and September 30, 2001, respectively. The senior note holders also issued letters reserving their right to accelerate the maturity of the notes although agreeing not to do so at this time. The reservation of rights letters provided by the participants in the revolving credit facility required that the upper limit of the total amount that may be borrowed under the Credit Agreement at any time prior to September 30, 2001 be lowered from $275,000,000 to $225,000,000. The credit limit under this facility was reduced on May 11, 2001 from $275,000,000 to $250,000,000. Additionally, the interest rate on the amounts outstanding under the revolving credit facility was increased by approximately 2%; this increased interest rate also applies to the outstanding senior notes. As a result of this increased interest rate, the company will incur additional interest expense in fiscal year 2001. If this increased interest rate continues through December 31, 2001, the additional interest expense would aggregate approximately $6.0 million. The company is in discussions with the current lenders and with potential lenders regarding refinancing the senior note agreements and the revolving credit facility and, if successful, will replace the current senior note agreements and the revolving credit facility with an asset-based lending agreement with a new lending group in the fourth quarter of 2001. An alternative may be to amend the existing agreements with the existing lenders. However, no assurances can be given as to the outcome. The company's failure to successfully finance or amend its current borrowing arrangements could cause the current lending group to call as immediately payable the company's currently outstanding debt obligations. The company's resulting inability to satisfy its debt obligations would force the company to pursue other alternatives to improve liquidity, possibly including among other things, restructuring actions, sales of assets and seeking additional sources of funds or liquidity. In particular, the company has engaged an investment banking firm to assist us in exploring the sale of the paint business. No assurances can be given that the company would be successful in pursuing such possible 15 17 alternatives or, even if successful, that such undertakings would not have a material adverse impact on the company. Accordingly, the balances outstanding under the senior note agreements and the revolving credit facility have been classified as current liabilities as of December 31, 2000. However, the financial statements do not include any other adjustments that might result from the outcome of this uncertainty. At December 31, 2000, the company's working capital was ($188,739,000), as compared to $85,789,000 at December 31, 1999. The current ratio was 0.82 at December 31, 2000, as compared to 1.10 at December 31, 1999. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The company's operations are subject to certain market risks, primarily interest rate risk and credit risk. Interest rate risk pertains to the company's variable rate debt which totals approximately $127 million at December 31, 2000. A 50 basis point movement in interest rates would result in an approximate $635,000 annualized increase or decrease in interest expense and cash flows. For the most part, the company manages interest rate risk through a combination of variable and fixed-rate debt instruments with varying maturities. Credit risk pertains mostly to the company's trade receivables. The company extends credit to its members as part of its day-to-day operations. The company believes that as no specific receivable or group of receivables comprises a significant percentage of total trade accounts, its risk in respect to trade receivables is limited. Additionally, the company believes that its allowance for doubtful accounts is adequate with respect to member credit risks. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. The company's consolidated financial statements and report of independent accountants are listed in the index on page F-1. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. The company dismissed Ernst & Young LLP as its independent accountants, as recommended by its Audit and Finance Committee and approved by its Board of Directors. The reports of Ernst & Young LLP of the financial statements for 1998 and 1999 contained no adverse opinion or disclaimer of opinion. Additionally, their opinion was not qualified or modified as to uncertainty, audit scope or accounting principles, except the opinion on the 1999 financial statements was modified to reflect the company's change in accounting principle for start-up costs. In connection with its audits for 1998 and 1999, there were no disagreements with Ernst & Young LLP on any matters of accounting principles or practices, financial statement disclosure, or audit scope or procedure which, if not resolved to the satisfaction of Ernst & Young LLP, would have caused Ernst & Young LLP to make reference to the matter in their report. Ernst & Young LLP notified the company and its Audit and Finance Committee in a letter dated April 14, 2000 that internal controls necessary for the company to develop reliable financials statements did not exist during the year ended December 31, 1999. The Company's Audit and Finance Committee recommended, and the Board of Directors approved, the appointment of PricewaterhouseCoopers LLP as its new independent accountants on June 29, 2000. 16 18 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. The directors and senior executive officers of the company are:
POSITION(S) HELD AND NAME AGE BUSINESS EXPERIENCE ---- --- -------------------- Bryan R. Ableidinger............... 52 Director since August, 2000. Term expires at the 2002 annual stockholders' meeting. Benjamin J. Andre.................. 64 Director since August, 2000. Term expires at the 2002 annual stockholders' meeting. Joe W. Blagg....................... 51 Chairman since January, 2000. Acting Chief Executive Officer since July 3, 2001. Director since April, 1996. Term expires at the 2002 annual stockholders' meeting. James D. Burnett................... 65 Director since April, 1998. Term expires at the 2002 annual stockholders' meeting. Harold A. Douthitt................. 53 Director since August, 2000. Term expires at the 2002 annual stockholders' meeting. Jay B. Feinsod..................... 57 Director since July, 1997. Term expires at the 2002 annual stockholders' meeting. Formerly Director of SCC since October, 1986. William F. Godwin.................. 46 Senior Vice President, Supply Chain since March, 2001. Prior positions were Vice President of Advertising, Merchandising and Inventory Management with the company. Neil A. Hastie..................... 52 Senior Vice President, Chief Information Officer since December, 1999. Prior position was Director of E-Business since 1998. James D. Howenstine................ 57 Vice-Chairman since January, 2000. Director since July, 1997. Term expires at the 2002 annual stockholders' meeting. Formerly Director of SCC since October, 1995. Peter G. Kelly..................... 57 Director since July, 1997. Term expires at the 2002 annual stockholders' meeting. Formerly Director and Chairman of SCC since January, 1981. Formerly Vice-Chairman of the company. Robert J. Ladner................... 54 Director since April, 1994. Term expires at the 2002 annual stockholders' meeting. Formerly Chairman of Cotter & Company. Formerly Vice-Chairman of the company. Pamela Forbes Lieberman............ 46 Chief Operating Officer since July 3, 2001, Chief Financial Officer since April 18, 2001 and Senior Vice President, Finance since March 12, 2001. Prior positions were Senior Vice President, Finance and Chief Financial Officer of Shoptalk, Inc., Martin-Brower Company and Fel-Pro Incorporated. Robert M. Liebgott................. 50 Senior Vice President, Sales, Marketing & Merchandising since March, 2001. Prior position was Vice President of Merchandising with the company.
17 19
POSITION(S) HELD AND NAME AGE BUSINESS EXPERIENCE ---- --- -------------------- Robert Ostrov...................... 51 Chief Administrative Officer and General Counsel since April, 2000, and Senior Vice President since February, 1997. Prior position was Vice President of Human Resources for a retail company. Michael D. Rosen................... 48 Senior Vice President of Logistics since March, 2001. Prior positions were Vice President of Logistics and Retail Systems, Assistant Vice President of Retailing, Assistant Vice President of Merger Administration, and General Manager of Lumber and Building Materials. George V. Sheffer.................. 48 Director since July, 1994. Term expires at the 2002 annual stockholders' meeting. John M. West, Jr. ................. 48 Director since October, 1991. Term expires at the 2002 annual stockholders' meeting. Barbara B. Wilkerson............... 53 Director since July, 1997. Term expires at the 2002 annual stockholders' meeting. Formerly Director of SCC since October, 1986.
- --------------- During the past five years, the principal occupation of each director of the company was the operation of retail hardware stores or lumber/building materials stores. ITEM 11. EXECUTIVE COMPENSATION. COMPENSATION COMMITTEE The Compensation Committee of the board of directors (the "Committee") consists of four non-employee directors and assists the board of directors in fulfilling its responsibilities for setting and administering the policies which govern annual compensation and monitoring the company's pension and other benefit plans. The Committee, which meets regularly, calls upon outside consultants for assistance in carrying outs its obligations. The philosophy of the Committee is to maintain an executive compensation program to help the company attract, retain and motivate the executive resources needed to maintain industry leadership, provide high levels of service to members, and achieve the financial objectives determined by the board of directors. The Committee sets performance goals, assesses achievement relative to the performance goals, and recommends to the board salary, bonus and long-term incentives for the senior executives of the company. To achieve its goals, the Committee has developed three executive compensation policies for the company: - Salaried compensation should be competitive with the median for executives of companies of a comparable size within the company's industry; - Annual incentive compensation should vary and reflect company performance; and - A long-term (multiple year) incentive program should be available to help the company retain selected executives. The combination of these three compensation policies is intended to provide competitive earning opportunities when performance reaches desired levels. Both the annual and long-term incentive plans may be terminated by the board of directors at any time. The bonus and long-term components of the total compensation package are computed in the year following the year in which they are earned and are paid out to the individual with respect to the prior year. 18 20 The Company provides salary levels that fall within the median (between the 50th to 60th percentile) of the executive marketplace of comparable size in the company's industry. The following types of organizations are considered within the company's industry: member-owned organizations, wholesale distribution firms, mass merchandising firms and general manufacturing organizations. Competitiveness is measured using data from a number of sources, including published information, proxy statements and surveys by consulting firms. The 2000 compensation of Donald Hoye, the company's former chief executive officer, was determined as follows: The salary component of his total compensation was maintained at $500,000, the same level he had in 1999. Mr. Hoye earned a bonus for year 2000 of $417,500 as a result of the company's improved services to the members in 2000 over 1999. Mr. Hoye did not receive a bonus in 1999. In 2000, Mr. Hoye did not receive a long-term incentive award. Harold A. Douthitt Peter G. Kelly Robert J. Ladner John M. West Joe W. Blagg (ex officio) COMPENSATION COMMITTEE EXECUTIVE COMPENSATION The following table sets forth the total annual compensation paid to the company's five most highly compensated executive officers during fiscal year 2000 and the total compensation paid to each such individual for the company's two previous fiscal years: SUMMARY COMPENSATION TABLE
NAME AND OTHER PRINCIPAL POSITION YEAR SALARY BONUS(1) COMPENSATION(2) ------------------ ---- -------- -------- --------------- Donald J. Hoye.................................... 2000 $500,000 $417,500 $ 44,855 Former President and 1999 500,000 -- 38,418 Chief Executive Officer 1998 408,750 -- 58,395 Brian T. Schnabel................................. 2000 384,375 303,400 39,165 Former Executive Vice President and 1999 304,400 195,000 37,372 Chief Operating Officer 1998 75,800 72,000 230,729 Robert Ostrov..................................... 2000 264,080 172,550 30,592 Senior Vice President, Chief Administrative 1999 244,000 36,000 19,302 Officer and General Counsel 1998 234,000 -- 15,020 Leonard G. Kuhr................................... 2000 268,750 137,550 16,697 Former Senior Vice President and 1999 -- -- -- Chief Financial Officer 1998 -- -- -- Robert M. Liebgott................................ 2000 255,000 129,000 27,843 Vice President, 1999 246,000 15,000 10,940 Merchandising 1998 237,000 50,000 11,460
- --------------- (1) Annual bonus amounts are earned and accrued during the fiscal years indicated, and paid subsequent to the end of each fiscal year. In 2000, a special recognition bonus was earned and paid as a result of the company's increased service to members. (2) Other compensation consists of company contributions to the TruServ Corporation Employee's Savings and Compensation Deferral Plan (the "Savings Plan"), life insurance plan, financial planning services and automobile allowances. Under the Savings Plan, each participant may elect to make a contribution in an amount of up to fifteen percent (15%) of his annual compensation, not to exceed $30,000 (including company contributions) per year, of which $10,000 of the executive officer's salary in fiscal year 1999 may be deferred. The company's contribution to the Savings Plan, from January 1 through June 30 of 2000, was equal to seventy-five percent (75%) of the participant's contribution, but not to exceed four 19 21 and one-half percent (4 1/2%) of the participant's annual compensation. Effective July 1, 2000, the Savings Plan was amended to apply only a profit sharing match tied to the company's net earnings. The officers did not received a company match for the second half of fiscal 2000. In 1999, other compensation for Mr. Hoye consisted primarily of a transition bonus of $20,000. For Mr. Schnabel the 1999 other compensation consisted primarily of relocation payments of $23,380. In 1998, other compensation for Mr. Hoye consisted primarily of a transition bonus of $40,000. For Mr. Schnabel the 1998 other compensation consisted primarily of relocation payments of $228,116. The company has a severance policy providing termination benefits based upon annual compensation and years of service. Officers of the company are also offered agreements providing for severance in the event of termination with the imposition of certain restrictions regarding competition and confidentiality. No loans were made by the company to its executive officers or to its directors during the last three fiscal years. BOARD COMPENSATION In 2000, directors of the company (except the chairman and vice chairman) were each paid $2,000 per month. The Chairman of the Board was paid $100,000 and the Vice Chairman of the Board was paid $54,000 for 2000. DEFINED BENEFIT RETIREMENT PLANS The company has a defined benefit pension plan, the TruServ Corporation Defined Lump Sum Pension Plan, which is qualified under the Internal Revenue Code. The plan was amended and restated effective January 1, 1998. The amount of the company's annual contribution to the plan is determined for the total of all participants covered by the plan, and the amount of payment with respect to a specified person is not and cannot readily be separated or individually calculated by the actuaries for the plan. The plan provides fully vested lump sum benefits to eligible employees who have served a minimum of five years of service. Annuities are also available and are the actuarial equivalent of the lump sum payment. Each of the executive officers listed in the foregoing Summary Compensation Table is a participant in the plan. For each year of service, a participant receives a percentage of his or her "average compensation" in the form of a lump sum. The percentages range from two percent of average compensation for years of service performed prior to age 26 to twelve percent of average compensation for years of service performed at or after age 61. Participants with average compensation in excess of two-thirds of the Social Security Taxable Wage Base in the year of termination of employment or retirement receive an additional benefit on this excess compensation equal to half of the percentage applied to their full average compensation. Participants who were age 50 with at least fifteen years of service as of January 1, 1996 receive an additional 25% of their average compensation. The benefits under the plan cannot be less than benefits already earned by the participant under the plan as it existed prior to its amendment. The plan was amended effective January 2, 1998 to include former employees of SCC. These employees received credit under the plan for all years for which they received credit under the SERVISTAR/Coast to Coast Retirement Income Plan ("the SERVISTAR Plan"). In addition, any of these employees who had attained age 50 and completed 15 years of service as of January 1, 1998 received an additional 25% of their average compensation. Also, the benefits under this plan cannot be less than benefits already earned by the participant under the SERVISTAR Plan as of December 31, 1997. "Average compensation" means the average of the compensation paid to an eligible employee during the three highest calendar years within the ten consecutive calendar years immediately preceding the date of termination of employment. Compensation considered in determining benefits includes salary, overtime pay, commissions, bonuses, deferral contributions under the Savings Plan and pre-tax medical premiums. The company amended and restated, effective July 24, 1998, a Supplemental Retirement Plan (the "Supplemental Plan") for certain employees as designated by the company's President and Chief Executive 20 22 Officer. The Supplemental Plan was amended on July 1, 1997 to include certain former SCC employees. For each year of service, participants receive a percentage of their "average compensation" in the form of a lump sum. The percentages are 33 percent of average compensation for years of service performed prior to age 55 and 42 percent of average compensation for years of service performed at or after age 55. Service is limited to 20 years and the maximum aggregate percentage is 66%. This amount is reduced by any benefits payable under the Supplemental Plan and eight times the participant's primary Social Security benefit. "Average Compensation" for the Supplemental Plan is defined the same as for the plan, as discussed above. The benefits under the Supplemental Plan cannot be less than benefits already earned by the participant under the Supplemental Plan as it existed prior to its amendment. The Supplemental Plan is not a qualified plan under the Internal Revenue Code. Benefits payable under the Supplemental Plan are financed through operations. The estimated annual retirement benefits which may be payable pursuant to the Supplemental Plan to the officers named in the Summary Compensation Table is currently limited under Section 401(a)(17) of the Internal Revenue Code, which outlines the maximum earnings amounts which may be considered under the Supplemental Plan in determining retirement benefits. This limit was $170,000 for 2000. Section 415 of the Internal Revenue Code outlines the maximum annual benefit which may be payable from the Supplemental Plan during the year; the dollar limit is $140,000 for 2001 for a participant retiring at age 65, with reduced amounts at younger ages. The actuarial equivalent of the annual amount may be payable as a lump sum. The following table reflects the combined estimated annual retirement benefits which may be payable pursuant to the plan and the Supplemental Plan to the officers named in the Summary Compensation Table at retirement under various assumed conditions, assuming retirement at age 65.
YEARS OF SERVICE AVERAGE ---------------------------------------------------- COMPENSATION 10 15 20 25 30 ------------ -------- -------- -------- -------- -------- $1,000,000.............................. $392,152 $545,467 $613,260 $613,260 $613,260 900,000.............................. 352,242 489,878 550,544 550,544 550,544 800,000.............................. 312,331 434,288 487,827 487,827 487,827 700,000.............................. 272,421 378,699 425,111 425,111 425,111 600,000.............................. 232,511 323,110 362,395 362,395 362,395 500,000.............................. 192,600 267,520 299,679 299,679 299,679 400,000.............................. 152,690 211,931 236,962 236,962 236,962 300,000.............................. 112,780 156,341 174,246 174,246 174,246 200,000.............................. 72,869 100,752 111,530 111,530 111,530 100,000.............................. 32,959 45,163 48,814 48,814 48,814
The present credited years of service for the officers listed in the above table are as follows: Robert Ostrov, 4 years; Robert M. Liebgott, 4 years. PERFORMANCE GRAPH There is no existing market for the company's common stock and there is no expectation that any market will develop. There are no broad market or peer group indices the company believes would render meaningful comparisons. Accordingly, a performance graph of the company's cumulative total stockholder return for the previous five years, with a performance indicator of the overall stock market for the company's peer group, has not been prepared. EMPLOYMENT AGREEMENT SCC entered into an employment agreement with Donald J. Hoye, dated September 1, 1996. TruServ is the successor in interest to the employment agreement. The agreement is for a term of 60 months, with an option to renew. As compensation, Mr. Hoye is to receive a base salary as determined by the company's Board of Directors annually and incentive compensation subject to the terms of the company's Executive Compensation Program (or any successor program). In addition, Mr. Hoye is to receive employee benefits, reimbursement of expenses and benefits payable upon disability commensurate with those received by other 21 23 similarly situated employees of the company. The company reserves the right to terminate the agreement for "cause" upon thirty days notice to Mr. Hoye (and an opportunity to cure). If the employment agreement is terminated for any reason other than cause, Mr. Hoye is entitled, as severance pay or liquidated damages, or both, continuation of certain benefits, including payment of his full salary and then half salary for a period of time. Pursuant to the employment agreement, Mr. Hoye is subject to a two year non-compete provision, and is bound by a confidentiality provision. On July 3, 2001, Mr. Hoye resigned from the position of Chief Executive Officer of the company. Currently, the company is negotiating the terms of his separation from the company. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. As of June 30, 2001, each of the directors of the company was the beneficial owner of at least 60 shares of Class A common stock of the company, consisting of 0.2% of the issued and outstanding shares of Class A Common Stock. No senior officer owns any shares of Class A common stock. The directors own, in the aggregate, approximately 1% of Class B common stock as of June 30, 2001. No senior officer owns any shares of Class B common stock. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. None PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K. (A) 1. FINANCIAL STATEMENTS The consolidated financial statements listed in the index on page F-1 are filed as part of this annual report. 2. FINANCIAL STATEMENT SCHEDULES The schedule listed in the index on page F-27 is filed as part of this annual report. 3. EXHIBITS The exhibits listed in the index to exhibits on pages E-1 and E-2 are filed as part of this annual report. (B) REPORTS ON FORM 8-K Filed January 26, 2001, April 9, 2001, May 3, 2001, May 17, 2001, July 6, 2001, and July 20, 2001. 22 24 SIGNATURES PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS ANNUAL REPORT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED. TRUSERV CORPORATION By: /s/ PAMELA FORBES LIEBERMAN ------------------------------------- Pamela Forbes Lieberman Chief Operating Officer, Chief Financial Officer and Senior Vice President DATED: August 1, 2001 PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS ANNUAL REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED.
SIGNATURE TITLE DATE --------- ----- ---- /s/ JOE W. BLAGG Chairman and Acting Chief August 1, 2001 - ----------------------------------------------------- Executive Officer Joe W. Blagg /s/ PAMELA FORBES LIEBERMAN Chief Operating Officer, August 1, 2001 - ----------------------------------------------------- Chief Financial Officer and Pamela Forbes Lieberman Senior Vice President /s/ DAVID A. SHADDUCK Vice President, Corporate August 1, 2001 - ----------------------------------------------------- Controller David A. Shadduck /s/ BRYAN R. ABLEIDINGER Director August 1, 2001 - ----------------------------------------------------- Bryan R. Ableidinger /s/ BENJAMIN J. ANDRE Director August 1, 2001 - ----------------------------------------------------- Benjamin J. Andre /s/ JAMES D. BURNETT Director August 1, 2001 - ----------------------------------------------------- James D. Burnett /s/ HAROLD A. DOUTHITT Director August 1, 2001 - ----------------------------------------------------- Harold A. Douthitt /s/ JAY B. FEINSOD Director August 1, 2001 - ----------------------------------------------------- Jay B. Feinsod /s/ JAMES D. HOWENSTINE Director August 1, 2001 - ----------------------------------------------------- James D. Howenstine /s/ PETER G. KELLY Director August 1, 2001 - ----------------------------------------------------- Peter G. Kelly /s/ ROBERT J. LADNER Director August 1, 2001 - ----------------------------------------------------- Robert J. Ladner
23 25
SIGNATURE TITLE DATE --------- ----- ---- /s/ GEORGE V. SHEFFER Director August 1, 2001 - ----------------------------------------------------- George V. Sheffer /s/ JOHN M. WEST, JR. Director August 1, 2001 - ----------------------------------------------------- John M. West, Jr. /s/ BARBARA B. WILKERSON Director August 1, 2001 - ----------------------------------------------------- Barbara B. Wilkerson
24 26 ITEM 14(a)(1). INDEX TO CONSOLIDATED FINANCIAL STATEMENTS.
PAGE(S) ------- Report of Independent Accountants........................... F-2 Report of Independent Auditors.............................. F-3 Consolidated Balance Sheet at December 31, 2000 and December 31, 1999.................................................. F-4 Consolidated Statement of Operations for each of the three years in the period ended December 31, 2000............... F-5 Consolidated Statement of Cash Flows for each of the three years in the period ended December 31, 2000............... F-6 Consolidated Statement of Members' Equity for each of the three years in the period ended December 31, 2000......... F-7 Notes to Consolidated Financial Statements.................. F-8 to F-27
F-1 27 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Members of TruServ Corporation In our opinion, the consolidated financial statements of TruServ Corporation as of and for the year ended December 31, 2000 listed in the index appearing under Item (14)(a)(1) on page F-1 present fairly, in all material respects, the financial position of TruServ Corporation and its subsidiaries at December 31, 2000, and the results of their operations and their cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule as of December 31, 2000 and for the year then ended listed in the index appearing under Item 14(a)(2) on page F-27 presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audit. We conducted our audit of these statements in accordance with auditing standards generally accepted in the United States of America, which 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, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. The financial statements and financial statement schedule as of December 31, 1998 and 1999 and for both of the years then ended were audited by other independent accountants whose report dated April 14, 2000 (except as to Note 1 which is as of July 3, 2001) expressed an unqualified opinion on those financial statements and financial statement schedule. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the consolidated financial statements, as of February 24, 2001 the Company was in violation of certain restrictive covenants contained in its lending agreements and, as also discussed in Note 2, is currently in the process of renegotiating such agreements with its lending group. These factors raise substantial doubt about the Company's ability to continue as a going concern. As a result, all of the Company's debt obligations to its lending group have been classified as current liabilities. However, the financial statements do not include any other adjustments that might result from the outcome of this uncertainty. /s/ PricewaterhouseCoopers LLP Chicago, Illinois February 22, 2001, except as to note 2 which is as of July 3, 2001 and note 7 which is as of April 19, 2001 F-2 28 REPORT OF INDEPENDENT AUDITORS To the Members and the Board of Directors TruServ Corporation We have audited the accompanying consolidated balance sheet of TruServ Corporation as of December 31, 1999 (as restated), and the related consolidated statements of operations, cash flows, and members' equity for each of the two years in the period ended December 31, 1999 (as restated). Our audit also included the financial statement schedule listed in the index at Item 14(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of TruServ Corporation at December 31, 1999 (as restated), and the consolidated results of its operations and its cash flows for each of the two years in the period ended December 31, 1999 (as restated), in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respect the information set forth therein. As discussed in Note 1 to the financial statements, the Company has restated the financial statements for the years ended December 31, 1999, 1998 and 1997 to charge to expense as incurred certain costs that had been previously accrued in connection with a 1997 merger. As discussed in Note 1 to the financial statements, in 1999 the Company changed its method of accounting for start-up costs. /s/ ERNST & YOUNG LLP Chicago, Illinois April 14, 2000, except for Note 1, as to which the date is July 3, 2001 F-3 29 TRUSERV CORPORATION CONSOLIDATED BALANCE SHEET ASSETS
DECEMBER 31, DECEMBER 31, 2000 1999 ------------ ------------ (RESTATED) (000'S OMITTED) Current assets: Cash and cash equivalents................................. $ 18,316 $ 1,815 Restricted cash (Note 13)................................. 1,000 -- Accounts and notes receivable, net of allowance for doubtful accounts of $7,170,000 and $5,613,000......... 396,587 460,419 Inventories (Note 3)...................................... 443,663 482,415 Other current assets...................................... 12,274 9,937 ---------- ---------- Total current assets.............................. 871,840 954,586 Properties, net (Note 4).................................... 216,146 244,845 Goodwill, net............................................... 94,051 101,787 Other assets................................................ 53,977 34,179 ---------- ---------- Total assets...................................... $1,236,014 $1,335,397 ========== ========== LIABILITIES AND CAPITALIZATION Current liabilities: Accounts payable.......................................... $ 356,196 $ 442,140 Outstanding checks........................................ 129,490 102,764 Accrued expenses.......................................... 85,161 68,798 Short-term borrowings (Note 5)............................ 138,085 167,007 Current maturities of long-term debt, notes and capital lease obligations (Notes 5, 6 and 8)................... 341,188 88,088 Patronage dividend payable in cash........................ 10,459 -- ---------- ---------- Total current liabilities......................... 1,060,579 868,797 Long-term debt, including capital lease obligations, less current maturities (Notes 5 and 6)........................ 9,091 309,796 Deferred credits (Note 13).................................. 9,821 1,872 ---------- ---------- Total liabilities and deferred credits............ 1,079,491 1,180,465 ---------- ---------- Minority interest........................................... 4,999 4,677 Commitments and contingencies (Note 7)...................... -- -- Members' capitalization: Promissory (subordinated) and installment notes (Note 8)..................................................... 65,846 83,804 Members' equity: Redeemable Class A voting common stock, $100 par value; 750,000 shares authorized; 411,180 and 405,060 shares issued and fully paid; 98,880 and 106,380 shares issued (net of subscriptions receivable of $1,922,000 and $3,874,000)....................................... 49,084 47,270 Redeemable Class B non-voting common stock and paid-in capital, $100 par value; 4,000,000 shares authorized; 1,732,962 and 1,764,797 shares issued and fully paid.................................................. 174,448 177,779 Loss allocation (Note 1)............................... (92,460) -- Deferred patronage (Note 1)............................ (27,288) (27,663) Accumulated deficit.................................... (17,134) (130,089) Accumulated other comprehensive loss................... (972) (846) ---------- ---------- Total Members' equity............................. 85,678 66,451 ---------- ---------- Total Members' capitalization..................... 151,524 150,255 ---------- ---------- Total liabilities and Members' capitalization..... $1,236,014 $1,335,397 ========== ==========
The accompanying notes are an integral part of the Consolidated Financial Statements F-4 30 TRUSERV CORPORATION CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEARS ENDED ------------------------------------------ DECEMBER 31, DECEMBER 31, DECEMBER 31, 2000 1999 1998 ------------ ------------ ------------ (RESTATED) (RESTATED) (000'S OMITTED) Revenues................................................ $3,993,642 $4,502,326 $4,328,238 ---------- ---------- ---------- Cost and expenses: Cost of revenues...................................... 3,716,245 4,320,861 4,030,103 Logistics and manufacturing expenses.................. 89,944 99,282 96,329 Selling, general and administrative expenses.......... 122,860 142,134 136,685 Interest paid to Members.............................. 11,131 14,498 16,390 Other interest expense................................ 56,575 46,204 38,710 Gain on sale of assets (Note 13)...................... (30,337) (11,724) (954) Other income, net..................................... (7,809) (1,630) (1,642) ---------- ---------- ---------- 3,958,609 4,609,625 4,315,621 ---------- ---------- ---------- Net margin/(loss) before income taxes and cumulative effect of a change in accounting principle............ 35,033 (107,299) 12,617 Income tax expense (Note 9)............................. 916 17,020 597 ---------- ---------- ---------- Net margin/(loss) before cumulative effect of a change in accounting principle............................... 34,117 (124,319) 12,020 Cumulative effect on prior years of a change in accounting principle, net of tax...................... -- 6,484 -- ---------- ---------- ---------- Net margin/(loss)....................................... $ 34,117 $ (130,803) $ 12,020 ========== ========== ==========
See Note 1 for restatement of 1999 and 1998 operations. The accompanying notes are an integral part of the Consolidated Financial Statements F-5 31 TRUSERV CORPORATION CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED ------------------------------------------ DECEMBER 31, DECEMBER 31, DECEMBER 31, 2000 1999 1998 ------------ ------------ ------------ (RESTATED) (RESTATED) (000'S OMITTED) Operating activities: Net margin/(loss)..................................... $ 34,117 $(130,803) $ 12,020 Adjustments to reconcile net margin/(loss) to net cash and cash equivalents provided by/(used for) operating activities: Depreciation and amortization...................... 43,033 41,131 32,112 Provision for losses on accounts and notes receivable....................................... 9,147 5,148 2,808 Gain on sale of assets............................. (30,337) (11,724) (954) Changes in operating assets and liabilities: Accounts and notes receivable.................... 52,187 63,059 (69,585) Inventories...................................... 38,752 112,703 (52,572) Other current assets............................. (2,337) 26,110 (19,795) Accounts payable................................. (81,944) 56,087 20,010 Accrued expenses................................. 16,839 2,229 (41,698) Other adjustments, net............................. 4,116 17,667 (1,251) -------- --------- --------- Net cash and cash equivalents provided by/ (used for) operating activities............... 83,573 181,607 (118,905) -------- --------- --------- Investing activities: Additions to properties............................... (12,526) (44,930) (70,733) Proceeds from sale of properties (Note 13)............ 23,113 39,714 32,645 Changes in restricted cash (Note 13).................. (1,000) -- -- Changes in other assets............................... (8,716) (5,316) (5,923) -------- --------- --------- Net cash and cash equivalents provided by/(used for) investing activities.......... 871 (10,532) (44,011) -------- --------- --------- Financing activities: Payment of patronage dividend......................... -- (14,507) (12,142) Payment of notes, long-term debt and lease obligations........................................ (67,355) (57,340) (41,966) Proceeds from long-term borrowings.................... 1,098 731 158,821 Increase/(decrease) in outstanding checks............. 26,726 (3,912) 16,813 Increase/(decrease) in short-term borrowings.......... (28,922) (91,140) 42,680 Purchase of common stock.............................. (599) (5,359) (3,618) Proceeds from sale of Redeemable Class A common stock.............................................. 1,109 617 1,754 -------- --------- --------- Net cash and cash equivalents provided by/(used for) financing activities.......... (67,943) (170,910) 162,342 -------- --------- --------- Net increase/(decrease) in cash and cash equivalents.... 16,501 165 (574) Cash and cash equivalents at beginning of year.......... 1,815 1,650 2,224 -------- --------- --------- Cash and cash equivalents at end of year................ $ 18,316 $ 1,815 $ 1,650 ======== ========= =========
See Note 10 for supplemental cash flow information. The accompanying notes are an integral part of the Consolidated Financial Statements F-6 32 TRUSERV CORPORATION CONSOLIDATED STATEMENT OF MEMBERS' EQUITY
REDEEMABLE COMMON STOCK PAR VALUE ---------------------------------------------- CLASS A CLASS B RETAINED --------------------- ---------------------- LOSS DEFERRED EARNINGS/ # OF SHARES $ # OF SHARES $ ALLOCATION PATRONAGE (DEFICIT) ----------- ------- ----------- -------- ---------- --------- ----------- (000'S OMITTED, EXCLUDING SHARE DATA) Balances at December 31, 1997 as originally reported.............. 537,115 $47,423 1,859,589 $187,259 $ -- $ -- $ 685 Effect of restatement -- Note 1.... (4,800) 170 ------- ------- --------- -------- --------- -------- --------- Balances at December 31, 1997 (Restated)....................... 537,115 47,423 1,859,589 187,259 -- (4,800) 855 Net margin......................... 12,020 Foreign currency translation adjustment....................... Patronage dividend................. 195,135 19,512 (23,238) (11,786) Stock issued for increase in Class A requirements................... 7,810 781 (7,810) (781) Stock issued for paid-up subscriptions.................... 62,385 6,637 Stock purchased and retired........ (49,610) (4,961) (103,470) (10,347) ------- ------- --------- -------- --------- -------- --------- Balances at and for the year ended December 31, 1998 (Restated)..... 557,700 49,880 1,943,444 195,643 -- (28,038) 1,089 Net loss........................... (130,803) Foreign currency translation adjustment....................... Amortization of deferred patronage........................ 375 (375) Stock issued for paid-up subscriptions.................... 8,650 2,881 Stock purchased and retired........ (54,910) (5,491) (178,647) (17,864) ------- ------- --------- -------- --------- -------- --------- Balances at and for the year ended December 31, 1999 (Restated)..... 511,440 47,270 1,764,797 177,779 -- (27,663) (130,089) Net margin......................... 34,117 Foreign currency translation adjustment....................... Amortization of deferred patronage........................ 375 (375) Loss allocation.................... (113,918) 113,918 Patronage dividend................. 30 3 225,510 22,551 (34,705) Class B stock applied against loss allocation....................... (214,580) (21,458) 21,458 Stock issued for paid-up subscriptions.................... 14,550 3,407 Stock purchased and retired........ (15,960) (1,596) (44,245) (4,424) ------- ------- --------- -------- --------- -------- --------- Balances at and for the year ended December 31, 2000................ 510,060 $49,084 1,731,482 $174,448 $ (92,460) $(27,288) $ (17,134) ======= ======= ========= ======== ========= ======== ========= ACCUMULATED OTHER TOTAL TOTAL COMPREHENSIVE MEMBERS' COMPREHENSIVE INCOME/(LOSS) EQUITY INCOME/(LOSS) ------------- ---------- ------------- (000'S OMITTED, EXCLUDING SHARE DATA) Balances at December 31, 1997 as originally reported.............. $(1,056) $234,311 Effect of restatement -- Note 1.... (4,630) ------- -------- Balances at December 31, 1997 (Restated)....................... (1,056) 229,681 Net margin......................... 12,020 12,020 Foreign currency translation adjustment....................... (318) (318) (318) Patronage dividend................. (15,512) Stock issued for increase in Class A requirements................... -- Stock issued for paid-up subscriptions.................... 6,637 Stock purchased and retired........ (15,308) ------- -------- --------- Balances at and for the year ended December 31, 1998 (Restated)..... (1,374) 217,200 $ 11,702 ========= Net loss........................... (130,803) $(130,803) Foreign currency translation adjustment....................... 528 528 528 Amortization of deferred patronage........................ -- Stock issued for paid-up subscriptions.................... 2,881 Stock purchased and retired........ (23,355) ------- -------- --------- Balances at and for the year ended December 31, 1999 (Restated)..... (846) 66,451 $(130,275) ========= Net margin......................... 34,117 $ 34,117 Foreign currency translation adjustment....................... (126) (126) (126) Amortization of deferred patronage........................ -- Loss allocation.................... -- Patronage dividend................. (12,151) Class B stock applied against loss allocation....................... Stock issued for paid-up subscriptions.................... 3,407 Stock purchased and retired........ (6,020) ------- -------- --------- Balances at and for the year ended December 31, 2000................ $ (972) $ 85,678 $ 33,991 ======= ======== =========
Redeemable Class A common stock amounts are net of unpaid subscription amounts of $1,925,000 relating to 98,880 issued shares at December 31, 2000; $3,874,000 relating to 106,380 issued shares at December 31, 1999; $5,890,000 relating to 178,020 issued shares at December 31, 1998; and $6,289,000 relating to 149,875 issued shares at December 31, 1997. The accompanying notes are an integral part of the Consolidated Financial Statements F-7 33 TRUSERV CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. DESCRIPTION OF BUSINESS AND ACCOUNTING POLICIES Principal business activity TruServ Corporation ("TruServ" or 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, lumber/building materials and related lines, each of whom has purchased 60 shares per store (up to a maximum of 5 stores (300 shares)) of the company's Class A common stock upon becoming a member. The Class A stock is redeemable by the company and has voting rights (the "Redeemable Class A voting common stock"). The company operates in a single industry as a member-owned wholesaler cooperative. All members are entitled to receive patronage dividend distributions from the company on the basis of gross margins of merchandise and/or services purchased by each member. In accordance with the company's By-laws, the annual patronage dividend is paid to members out of gross margins from operations and other patronage source income, after deduction for expenses and provisions authorized by the Board of Directors. Business Combination On July 1, 1997, pursuant to an Agreement and Plan of Merger dated December 9, 1996 between Cotter & Company ("Cotter"), a Delaware corporation, and ServiStar Coast to Coast Corporation ("SCC"), SCC merged with and into Cotter (the "Merger), with Cotter being the surviving corporation. Cotter was renamed TruServ Corporation effective with the Merger. Each outstanding share of SCC common stock and SCC Series A stock (excluding those shares canceled pursuant to Article III of the Merger Agreement) were converted into the right to receive one fully paid and non-assessable share of TruServ Redeemable Class A voting common stock and each two outstanding shares of SCC preferred stock were converted into the right to receive one fully paid and non-assessable share of TruServ's Class B common stock, which is redeemable by the company and has no voting rights (the "Redeemable Class B common stock"). A total of 270,500 and 1,170,670 shares of TruServ Redeemable Class A voting common stock and Redeemable Class B common stock, respectively, were issued in connection with the Merger. Also, 231,000 additional shares of TruServ Redeemable Class A voting common stock were issued in exchange for Redeemable Class B common stock to pre-Merger stockholders of Cotter to satisfy the Redeemable Class A voting common stock ownership requirement of 60 shares per store (up to a maximum of 5 stores) applicable to such members as a result of the Merger. In connection with the Merger, the company originally reported an estimated liability of $38,249,000 for costs associated with the Merger plan that was recorded in Accrued expenses. The company's Merger plan, the timing of which did not change significantly subsequent to the adoption of the plan, intended to take the following actions: 1) Optimize the distribution network, including closing five distribution centers, resizing 18 distribution centers to commonize the inventory assortment, reducing inventory levels and reducing freight costs. 2) Consolidate corporate staff, including reducing costs in the areas of advertising, merchandising and general administration, finance, human resources and printing and office services. In combining these various corporate functions, relocation and severance costs were incurred. 3) Consolidate all paint manufacturing. All paint that was manufactured or distributed to SCC would be manufactured out of the company's Cary manufacturing facility. During the remainder of fiscal 1997 and all of fiscal 1998, the company completed the following actions in its Merger plan: 1) In 1997, the company announced the closing of four distribution centers (Ocala, FL; Charleston, IL; Peachtree City, GA and Ft. Smith, AK). The Charleston, IL, and Ocala, FL, distribution centers were sold in 1998. 2) In 1998, the company announced the closing of three distribution centers (Parkesburg, PA; Piedmont, SC; and Portland, OR). 3) The company closed its Butler, PA office building. 4) The company converted to one inventory assortment and began replenishing the RDC inventory. 5) The F-8 34 TRUSERV CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) merger plan specified staff reductions of approximately 1,500 former SCC employees. As of December 31, 1998, 88% of these positions had been terminated. During fiscal year 1999, the Company completed the following actions in its plan: 1) The company sold its Parkesburg, Piedmont and Portland properties. The company announced the closing of its Westfield, MA distribution center. 2) The company consolidated all paint manufacturing at the Cary manufacturing facility. 3) The merger plan specified the elimination of 1,500 SCC employees. As of December 31, 1999 approximately 99% of these employees had been terminated. 4) The company also opened a new distribution center in May 1999. Three of the above mentioned distribution centers (Ocala, Peachtree and Portland) were closed during this timeframe but the related costs were not accrued for as EITF 95-3 charges because they were Cotter & Company (acquiror) locations. Additionally, the Westfield distribution center related costs were not accrued for as EITF 95-3 charges because the closure announcement was beyond the allowed twelve-month time frame. Accordingly, the merger has taken a long time because the Company had to close seven distribution centers, commonize the inventory assortment, consolidate all paint manufacturing, build a new distribution center and, lastly, reduce corporate overhead. The company has restated the estimated liability described above from $38,249,000 to $24,649,000. A description of this restatement of $13,600,000 in goodwill is discussed later in this footnote under the caption "Restatement of financial information." The schedule below shows the restated composition of the estimated liability for costs associated with the plan and the utilization of those reserves during subsequent periods:
RDC MOVING & SHUTDOWN SEVERANCE RELOCATION TOTAL -------- --------- ---------- ------- July 1, 1997 Charge to Goodwill.............. $ 5,645 $14,804 $ 4,200 $24,649 Utilization of Reserves...................... (600) (5,700) (2,000) (8,300) ------- ------- ------- ------- Balance as of December 31, 1997.............. 5,045 9,104 2,200 16,349 Utilization of Reserves...................... (1,500) (6,100) (2,200) (9,800) Adjustments to Goodwill...................... (1,393) (1,156) -- (2,549) ------- ------- ------- ------- Balance as of December 31, 1998.............. 2,152 1,848 -- 4,000 Utilization of Reserves...................... (1,469) (1,848) -- (3,317) ------- ------- ------- ------- Balance as of December 31, 1999.............. 683 -- -- 683 Utilization of Reserves...................... (683) -- -- (683) ------- ------- ------- ------- Balance as of December 31, 2000.............. $ -- $ -- $ -- $ -- ======= ======= ======= =======
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 TruServ Canada Cooperative, Inc., a Canadian member-owned wholesaler of hardware, variety and related merchandise, in which the company has a majority equity interest. Restatement of financial information The company has restated the accompanying consolidated financial statements as of and for the years ended December 31, 1999, 1998 and 1997 to expense as incurred certain costs previously accrued in connection with the SCC merger. The net loss in 1999 was reduced by $340,000 and the net margin in 1998 and 1997 was reduced by $8,460,000 and $4,630,000, respectively. Such costs relate to data center costs and related amortization that represented incremental costs to exit an activity that would not have been incurred by the company had it decided not to close the SCC corporate office at the time of the merger. As a result of F-9 35 TRUSERV CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) the restatement, goodwill was reduced by $13,600,000 at December 31, 1997, net of amortization of $170,000 in 1997 and $340,000 in 1998 and 1999. The impact of these adjustments on the company's financial results as previously reported is summarized as follows:
1999 1998 1997 ------------------------- ------------------------- ------------------------- AS REPORTED AS RESTATED AS REPORTED AS RESTATED AS REPORTED AS RESTATED ----------- ----------- ----------- ----------- ----------- ----------- (000'S OMITTED) Revenues.................. $4,502,326 $4,502,326 $ 4,328,238 $4,328,238 $3,331,686 $3,331,686 Net margin/(loss) before income taxes and cumulative effect of a change in accounting principle............... (107,639) (107,299) 21,077 12,617 44,316 39,686 Net margin/(loss) before cumulative effect of a change in accounting principle............... (124,659) (124,319) 20,480 12,020 42,716 38,086 Net margin/(loss)......... (131,143) (130,803) 20,480 12,020 42,716 38,086 Members' equity........... 79,201 66,451 230,290 217,200 234,311 229,681
Reclassifications Certain reclassifications have been made to the prior year's consolidated financial statements to conform with the current year's presentation, including the reclassification of merger integration costs into logistic and manufacturing expenses and selling, general and administrative expenses. These reclassifications had no effect on Net margin/(loss) for any period or on Total Members' equity at the balance sheet dates. Capitalization The company's capital (Capitalization) is derived from Members' equity and Promissory (subordinated) and installment notes. Members' equity is comprised of Redeemable Class A voting common stock, Redeemable Class B common stock, Accumulated deficit, Loss allocation, Deferred patronage and Accumulated other comprehensive loss. Promissory (subordinated) notes and Redeemable Class B common stock are 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. Patronage dividend Patronage dividends in the amount of $34,705,000 were paid on March 31, 2001, approximately thirty percent of which were paid in cash (TruServ by-laws and the IRS require that the payment of at least twenty percent of patronage dividends be in cash). The remainder was paid through the issuance of the company's Redeemable Class B common stock and, in certain cases, a small portion of the dividend was paid by means of Promissory (Subordinated) Notes of the company. The Redeemable Class B common stock issued for the December 31, 2000 patronage dividend has been designated as qualified notices of allocation. No patronage dividends were declared for the fiscal year ended December 31, 1999. Patronage dividends earned for fiscal year 1998 were declared and were paid to TruServ members in the first quarter of 1999 with at least thirty percent of the patronage dividend paid in cash and the remainder paid through the issuance of the company's Redeemable Class B common stock. The Redeemable Class B common stock issued for the December 31, 1998 patronage dividend has been designated as non-qualified notices of allocation and is not taxable to the member until redeemed at a future date. The non-qualified notices, in addition to not being taxable, will be included as part of a member's required investment in Redeemable Class B common stock. Any further distributions after meeting the Redeemable Class B common stock requirements agreed upon in the Merger F-10 36 TRUSERV CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Agreement will be paid in cash, up to the limits set by financial covenants of the bank debt or in promissory notes. TruServ follows the practice of accounting for deferred patronage charges and credits as a separate component of capitalization. Deferred patronage consists of net charges and expenses primarily related to the merger integration process which are included in the computation of net margin in different periods for financial statement purposes than for patronage purposes. Deferred patronage has been adjusted to include the amounts identified in the note "Restatement of financial information" above. 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 Redeemable Class A voting common stock and Redeemable Class B common stock at par value. Payment for the Redeemable Class A voting common stock will be in cash. Payment for the qualified Redeemable Class B common stock will be in the form of a note payable in five equal annual installments and with interest set at comparable treasury rates plus 2.0%. However, the company has initiated a moratorium, effective March 17, 2000, on the redemption of its stock. The Board of Directors will review this matter from time to time in light of the then current financial condition of the company. Loss allocation to members During the third quarter of fiscal year 2000, company management developed and the Board of Directors approved a plan to equitably allocate to members the loss incurred in 1999. This loss was previously recorded as a reduction of Retained Earnings. The company has allocated the 1999 loss by establishing a Loss allocation account as a contra-equity account in the consolidated balance sheet with the offsetting credit recorded to Retained earnings/(deficit). The Loss allocation account reflects the sum of each member's proportionate share of the 1999 loss, after being reduced by certain amounts that are not allocable to members. The Loss allocation account is not a receivable from members and does not represent an amount currently due from members. Rather, the Loss allocation account will be satisfied, on a member by member basis, by withholding the portion of future patronage dividends that would have been paid in qualified Redeemable Class B common stock, at par value, and applying such amount as a reduction in the Loss allocation account until fully satisfied. The current levels of members' stock investments in the company will not be affected. However, in the event a member should terminate as a stockholder of the company, any unsatisfied portion of that member's Loss allocation account will be satisfied by reducing the redemption amount paid for the member's stock investment in the company. Cash equivalents The company classifies all highly liquid investments 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. The cost of inventory also includes indirect costs (such as logistics, manufacturing and support costs) incurred to bring inventory to its existing location for resale. These costs are initially included in logistics, manufacturing, general and administrative expenses, and are then reclassified to inventory and subsequently recorded as cost of revenues as the inventory is sold (see Note 3). Properties Properties are recorded at cost. Depreciation and amortization are computed by using the straight-line method over the following estimated useful lives: buildings and improvements -- 10 to 40 years; machinery F-11 37 TRUSERV CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) and warehouse, office and computer equipment and software -- 5 to 10 years; transportation equipment -- 3 to 7 years; and leasehold improvements -- the lesser of the life of the lease, without regard to options for renewal, or the useful life of the underlying property. Goodwill Goodwill represents the excess of cost over the fair value of net assets acquired and is amortized using the straight-line method over 40 years. Amortization of goodwill was approximately $3,054,000, $2,591,000 and $2,398,000 for fiscal year 2000, 1999 and 1998, respectively. Conversion funds In connection with the Merger, the company made available to the members funds to assist their stores in defraying various conversion costs associated with the Merger and costs associated with certain upgrades and expansions of their store. The total amount of conversion funds distributed was $27,175,000 with an amortization period of 5 years. The annual amortization expense for fiscal year 2000, 1999 and 1998 was $4,385,000, $3,466,000 and $0, respectively. Asset impairment For purposes of determining impairment, management groups long-lived assets based on a geographic region or revenue producing activity as appropriate. Such impairment review includes, among other criteria, management's estimate of future cash flows for the region or activity. If the estimated future cash flows (undiscounted and without interest charges) are not sufficient to recover the carrying value of the long-lived assets, including associated goodwill, of the region or activity, such assets would be determined to be impaired and would be written down to fair value. There were no impairments of long-lived assets as of December 31, 2000 or 1999. Start-up costs In April 1998, the AICPA issued Statement of Position ("SOP") 98-5, "Reporting the Costs of Start-up Activities." The SOP was effective beginning on January 1, 1999, and requires that start-up costs capitalized prior to January 1, 1999 be written-off and any future start-up costs be expensed as incurred. The unamortized balance of start-up costs was written off as of January 1, 1999 as a cumulative effect of an accounting change and resulted in an increase in the 1999 net loss of approximately $6,500,000, net of tax. Revenue recognition The company recognizes revenue when the customer takes possession of the merchandise or when services are rendered (the revenue of which was not material), net of reserves for returns. Advertising expenses Advertising costs are expensed in the period the advertising takes place. Such costs amounted to $82,675,000, $81,337,000 and $86,220,000 in fiscal year 2000, 1999 and 1998, respectively, and are included in Cost of revenues. Amortization of bank financing fees Amounts paid for bank fees incurred in connection with the company's financing arrangements are capitalized and amortized to interest expense over the lives of the underlying financing agreements. F-12 38 TRUSERV CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Repairs and maintenance expense Repairs and maintenance expenditures which extend the useful lives of the company's property and equipment are capitalized and depreciated over the remaining useful lives of the underlying assets. Otherwise such expenditures are expensed as incurred. Research and development costs Research and development costs related to the company's manufacturing operations are expensed as incurred. Such costs amounted to $993,000, $965,000 and $1,171,000 in fiscal year 2000, 1999 and 1998, respectively, and are included in Logistic and manufacturing expenses. Shipping and handling costs Amounts billed to customers for shipping and handling costs are included in Revenues. Amounts incurred for shipping and handling are included in Cost of revenues. Income taxes Deferred tax assets and liabilities are determined based on the differences between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Per share information There is no existing market for the common stock of the company and there is no expectation that any market will develop. The company's Redeemable Class A voting common stock is owned by members and former members whose stock has not yet been redeemed as a result of the moratorium. The company's Redeemable Class B non-voting common stock now outstanding was issued to members in partial payment of the annual patronage dividend. Accordingly, no earnings per share information is presented in the consolidated financial statements. 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 multiplied by hours worked. The company's policy is to fund annually all tax-qualified plans to the extent deductible for income tax purposes. Fair value of financial instruments The carrying amounts of the company's financial instruments at December 31, 2000 and 1999 approximate fair value. Fair value was estimated using discounted cash flow analyses, based on the company's incremental borrowing rate for similar borrowings. The carrying amount of debt and credit facilities approximate fair value due to their stated interest rates approximating market rates and as a result of such facilities being renegotiated in fiscal 2000. These estimated fair value amounts have been determined using available market information or other appropriate valuation methodologies. Concentration of credit risk Credit risk pertains mostly to the company's trade receivables. The company extends credit to its members as part of its day-to-day operations. The company believes that as no specific receivable or group of receivables comprises a significant percentage of total trade accounts, its risk with respect to trade receivables F-13 39 TRUSERV CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) is limited. Additionally, the company believes that its allowance for doubtful accounts is adequate with respect to member credit risks. Use of estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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. New accounting pronouncements In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial Statements," which was amended by SAB No. 101A in March 2000 and SAB No. 101B in June 2000. These SABs, which provide guidance on the recognition, presentation and disclosure of revenue in financial statements, were effective in the fourth quarter of fiscal 2000 and were adopted by the company at that time. As the company's existing revenue recognition, presentation and disclosures are in compliance with these SABs, their adoption did not affect the company's results of operations for fiscal 2000 or its financial position as of December 31, 2000. In October 2000, the FASB's Emerging Issues Task Force ("EITF") issued EITF Issue No. 99-19, "Reporting Revenue Gross as a Principal versus Net as an Agent." This standard provides guidance on whether a company should recognize revenue based on the gross amount billed to a customer because it has earned revenue from the sale of the goods or services or the net amount retained (that is, the amount billed to the customer less the amount paid to a supplier) because it has earned a commission or fee. The standard provides a number of factors or indicators that should be used to determine the appropriate treatment. This standard was effective in the fourth quarter of fiscal 2000 and was adopted by the company as of January 1, 2000. Since the underlying selling terms and conditions, shipping terms, risk of loss, payment terms and credit risk related to its warehouse shipment sales, direct shipment sales and relay sales support the company's presentation of such sales as gross, the adoption of this standard did not affect the company's presentation of its results of operations for fiscal 2000 or its financial position as of December 31, 2000. In November 2000, the EITF issued EITF Issue No. 00-10, "Accounting for Shipping and Handling Fees and Costs." This standard states that all amounts billed to customers in sale transactions related to shipping and handling represent revenues earned for goods provided and, accordingly, should be classified as revenues. The standard also addresses disclosure of the classification of shipping and handling costs; if shipping and handling costs are significant and are not included as part of cost of sales, disclosure should be made for both the amount of such costs and the line items on the income statement that include them. This standard was effective in the fourth quarter of fiscal 2000 and was adopted by the company at that time. As the company's existing treatment of shipping and handling revenues and costs are in compliance with Issue No. 00-10, the adoption of this standard did not affect the company's results of operations for fiscal 2000 or its financial position as of December 31, 2000. 2. DEBT COVENANT VIOLATION Under the senior notes and the revolving credit facility (further discussed at Note 5) the company is required to meet certain restrictive financial ratios and covenants relating to minimum EBITDA, minimum fixed charge coverage, minimum borrowing base to debt ratio, maximum capital expenditures and maximum asset sales, as well as other customary covenants, representations and warranties, funding conditions and events of default. As of December 31, 2000, the company was in compliance with the covenant requirements. However, as of February 24, 2001, the company failed to comply with a covenant under the revolving credit facility and the senior note agreements which requires the company to achieve a minimum monthly F-14 40 TRUSERV CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) borrowing base ratio. As a result, either the senior note holders or the participants in the revolving credit facility could declare this failure to comply with the covenant as an "event of default," in which case the senior notes and the amounts outstanding under the credit facility would become callable as immediately payable. On March 30, 2001 the participants in the revolving credit facility issued to the company a "reservation of rights" letter under which the participants effectively stated their intention to not call as immediately payable the company's outstanding debt obligations until May 1, 2001, although they were not precluded from doing so. All other rights of the participants were preserved. Additional letters were issued on April 30, 2001 and on July 3, 2001, which extended the reservation of rights until July 30, 2001 and September 30, 2001, respectively. The senior note holders also issued letters reserving their right to accelerate the maturity of the notes although agreeing not to do so at this time. The reservation of rights letters provided by the participants in the revolving credit facility required that the upper limit of the total amount that may be borrowed under the Credit Agreement at any time prior to September 30, 2001 be lowered from $275,000,000 to $225,000,000. The credit limit under this facility was reduced on May 11, 2001 from $275,000,000 to $250,000,000. Additionally, the interest rate on the amounts outstanding under the revolving credit facility was increased by approximately 2%; this increased interest rate also applies to the outstanding senior notes. As a result of this increased interest rate, the company will incur additional interest expense in fiscal year 2001. If this increased interest rate continues through December 31, 2001, the additional interest expense would aggregate approximately $6.0 million. The company is in discussions with the current lenders and with potential lenders regarding refinancing the senior note agreements and the revolving credit facility and, if successful, will replace the current senior note agreements and the revolving credit facility with an asset-based lending agreement with a new lending group in the fourth quarter of 2001. An alternative may be to amend the existing agreements with the existing lenders. However, no assurances can be given as to the outcome. The company's failure to successfully refinance or amend its current borrowing arrangements could cause the current lending group to call as immediately payable the company's currently outstanding debt obligations. The company's resulting inability to satisfy its debt obligations would force the company to pursue other alternatives to improve liquidity, possibly including among other things, restructuring actions, sales of assets and seeking additional sources of funds or liquidity. In particular, the company has engaged an investment banking firm to assist us in exploring the sale of the paint business. No assurances can be given that the company would be successful in pursuing such possible alternatives or, even if successful, that such undertakings would not have a material adverse impact on the company. Accordingly, the balances outstanding under the senior note agreements and the revolving credit facility have been classified as current liabilities as of December 31, 2000. However, the financial statements do not include any other adjustments that might result from the outcome of this uncertainty. 3. INVENTORIES Inventories consisted of the following at December 31:
2000 1999 -------- -------- (000'S OMITTED) Manufacturing inventories: Raw materials............................................. $ 2,242 $ 2,473 Work-in-process and finished goods........................ 30,705 39,456 -------- -------- 32,947 41,929 Merchandise inventories..................................... 410,716 440,486 -------- -------- $443,663 $482,415 ======== ========
F-15 41 TRUSERV CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The company performed physical inventory counts at certain of its distribution centers in October 2000; adjustments to recorded inventory quantities and amounts resulting from such counts were recorded after the amount and composition of such adjustments were analyzed. The adjustment recorded in the fourth quarter of fiscal year 2000 was an increase to inventory and a decrease to Cost of revenues of approximately $22,200,000. In the fourth quarter of fiscal year 1999, the company wrote off approximately $74,000,000 of inventory following the resolution of certain unreconciled differences. Indirect costs included in the cost of inventory for fiscal year 2000, 1999 and 1998 were $133,907,000, $140,934,000 and $156,560,000, respectively, of which $134,763,000, $150,191,000 and $148,970,000 was included in Cost of revenues for the respective years. The amount of indirect costs included in ending inventory at December 31, 2000, 1999 and 1998 was $29,144,000, $30,000,000 and $39,257,000, respectively. 4. PROPERTIES Properties consisted of the following at December 31:
2000 1999 --------- --------- (000'S OMITTED) Buildings and improvements.................................. $ 189,732 $ 193,676 Machinery and warehouse equipment........................... 96,696 100,705 Office and computer equipment............................... 157,417 152,439 Transportation equipment.................................... 38,204 38,913 --------- --------- 482,049 485,733 Less accumulated depreciation............................... (276,170) (252,834) --------- --------- 205,879 232,899 Land........................................................ 10,267 11,946 --------- --------- $ 216,146 $ 244,845 ========= =========
Depreciation expense for fiscal year 2000, 1999 and 1998 was $35,594,000, $35,074,000 and $29,714,000, respectively. F-16 42 TRUSERV CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 5. LONG-TERM DEBT AND BORROWING ARRANGEMENTS Long-term debt consisted of the following at December 31:
2000 1999 --------- -------- (000'S OMITTED) Senior Notes (rates at December 31, 2000/1999): 11.85% / 9.10%............................................ $ 32,000 $ 36,000 10.63% / 7.88%............................................ 50,000 50,000 10.16% / 7.41%............................................ 25,000 25,000 10.10% / 7.35%............................................ 105,000 105,000 10.04% / 7.29%............................................ 50,000 50,000 9.98% / 7.23%............................................. 25,000 25,000 Redeemable (subordinated) term notes: Fixed interest rates ranging from 5.24% to 7.79%.......... 18,624 28,712 Industrial Revenue Bonds 4.50%.............................. -- 4,000 Capital lease obligations (Note 6).......................... 2,645 5,000 --------- -------- 308,269 328,712 Less amounts due within one year............................ (299,178) (18,916) --------- -------- $ 9,091 $309,796 ========= ========
Principal payments for the 11.85%/9.10% senior note are due quarterly in incrementally increasing amounts through maturity in 2007. Principal payments for the 10.63%/7.88% senior note are due annually in the amount of $4,545,000 starting in November 2002 through maturity 2012. Principal payments for the 10.16%/7.41% senior note are due annually in the amount of $3,571,000 starting November 2001 through maturity in 2007. Principal payments for the 10.10%/7.35% senior note are due annually in increasing amounts starting January 2002 through maturity in July 2008. Principal payments for the 10.04%/7.29% senior note are due annually in the amount of $10,000,000 starting June 2006 through maturity in June 2010. The 9.98%/7.23% senior note is due in full in November 2002. Total maturities of long-term debt for fiscal years 2001, 2002, 2003, 2004, 2005 and thereafter are $19,340,000, $52,718,000, $31,371,000, $28,417,000, $30,153,000 and $146,270,000 respectively. At July 1, 1997, the company had established a $300,000,000 five-year revolving credit facility with a group of banks. The facility was amended and restated in April 2000 to include increased interest rates, new financial ratios and covenants, and the collateralization of the company's assets. The borrowings under the facility were $127,000,000 and $135,000,000 at December 31, 2000 and 1999, respectively. A commitment fee of .05% per annum is paid on the unused portion of the commitments. Also, the company had amounts due under a commercial paper program of $19,000,000 at December 31, 1999 that were paid in fiscal 2000. The weighted average interest rate on these borrowings was 8.9% and 6.4% for the years ended December 31, 2000 and 1999, respectively. The redeemable (subordinated) term notes have two to four year terms and are issued in exchange for promissory (subordinated) notes that were held by promissory note holders who do not own the company's Redeemable Class A voting common stock. They are also available for purchase by investors that are affiliated with the company. The industrial revenue bonds were paid in fiscal 2000. The company's Canadian subsidiaries have short-term borrowings of $7,736,000 and $8,629,000 at December 31, 2000 and 1999, respectively. The subsidiaries have a combined line of credit of C$27,400,000. F-17 43 TRUSERV CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The weighted average interest rate on these borrowing was 7.10% and 6.40% for the years ended December 31, 2000 and 1999, respectively. The company provides guarantees for certain member loans, but is not required to provide a compensating balance for the guarantees. The amount of member loans guaranteed by the company was approximately $6,709,511 and $6,443,000 as of December 31, 2000 and 1999, respectively. 6. LEASE COMMITMENTS The company rents buildings and warehouses, and office, computer and transportation equipment under operating and capital leases. The following is a schedule of future minimum lease payments under capital and long-term non-cancelable operating leases, together with the present value of the net minimum lease payments, as of December 31, 2000:
CAPITAL OPERATING ------- --------- (000'S OMITTED) 2001...................................................... $1,020 $ 21,582 2002...................................................... 621 19,583 2003...................................................... 439 14,737 2004...................................................... 439 13,573 2005...................................................... 332 12,966 Thereafter................................................ 73 57,454 ------ -------- Net minimum lease payments.................................. $2,924 $139,895 ======== Less amount representing interest........................... (279) ------ Present value of net minimum lease payments................. 2,645 Less amount due within one year............................. (1,332) ------ $1,313 ======
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 the expiration of the lease term. During 1999, the company entered into an agreement for the sale and leaseback of its Henderson facility, which resulted in a recognized loss of $1,295,000. The 30-month Henderson lease commenced in May 1999 and has annual payments of approximately $612,000. During 1998, the company entered into an agreement for the sale and leaseback of its Harvard facility. The $2,139,000 gain realized on the sale has been deferred and will be amortized over the 15-year lease term. The lease commenced in November 1998 and has annual payments of approximately $2,700,000. The Hagerstown, Maryland distribution center is subject to a synthetic lease with monthly payments that are recorded in Other interest expense. The lease payment commitments are for three years with two one-year renewal options and a principal payment due at the expiration of the lease agreement. All obligations under this lease arrangement are guaranteed by the company. Rent expense under operating leases was $29,942,000, $31,702,000 and $28,291,000 for the years ended December 31, 2000, 1999 and 1998, respectively. F-18 44 TRUSERV CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 7. COMMITMENTS AND CONTINGENCIES The company is involved in various claims and lawsuits incidental to its business. The following significant matters existed at December 31, 2000: In June, 2000, nineteen former members filed a claim against the company alleging that they voted for the Merger (see Note 1) based upon representations made to them by the company and its predecessors that the Coast to Coast name brand would be maintained. (Certain other former TruServ members have filed similar claims.) The plaintiffs allege, however, that, following the Merger, the Coast to Coast name brand was eliminated and that each plaintiff thereafter terminated or had its membership in TruServ terminated. Additionally, the plaintiffs allege that the company breached its obligations by failing to redeem those members' stock and by creating the Loss Allocation Account (see Note 1). Based upon the above, the plaintiffs have asserted claims for fraud, misrepresentation, breach of fiduciary duty and unjust enrichment. The claim seeks unidentified damages. The company intends to vigorously contest this claim and believes that, in the event of an unfavorable outcome, it carries adequate insurance coverage; accordingly, no related reserve has been recorded at December 31, 2000. In March, 2001, a similar action was brought on behalf of former SCC members in the same court by the same firm representing the plaintiffs discussed above. The complaint alleges substantially similar claims as those made by the other former TruServ members. The lawsuit is at an early stage and the extent of the damages being claimed has not yet determined; accordingly, no related reserve has been recorded at December 31, 2000. In August, 2000, a former member in New York filed a claim against the company's Board of Directors alleging that the Board failed in its fiduciary duty to oversee and manage the company's affairs in fiscal 1999. The claim seeks unidentified damages and the plaintiffs in the lawsuit seek to proceed on a class action basis. The company intends to vigorously contest this claim and believes that, in the event of an unfavorable outcome, it carries adequate insurance coverage; accordingly, no related reserve has been recorded at December 31, 2000. In October, 1999, the former president of the company, Paul Pentz, filed a claim against the company alleging that Mr. Pentz is due additional bonus and SERP payments (see Note 11) in addition to amounts already received. The company has filed a countersuit claiming Mr. Pentz breached his fiduciary duties as president of the company. Mr. Pentz's motion for summary judgement was denied on April 19, 2001. The company intends to vigorously contest Mr. Pentz's claim and, accordingly, has recorded no related reserve at December 31, 2000. F-19 45 TRUSERV CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 8. PROMISSORY (SUBORDINATED) AND INSTALLMENT NOTES Promissory (subordinated) and installment notes consisted of the following at December 31:
2000 1999 -------- -------- (000'S OMITTED) Promissory (subordinated) notes: Due on December 31, 2000 -- 6.50%......................... $ -- $ 21,823 Due on December 31, 2000 -- 7.42%......................... -- 14,019 Due on December 31, 2000 -- 7.58%......................... -- 27,271 Due on December 31, 2001 -- 5.74%......................... 14,376 14,514 Due on December 31, 2001 -- 8.06%......................... 22,237 22,448 Due on December 31, 2002 -- 7.86%......................... 23,259 24,559 Due on December 31, 2003 -- 7.90%......................... 22,525 -- Due on December 31, 2005 -- 7.90%......................... 1,692 -- Term (subordinated) notes Due on June 30, 2002 -- 8.06%............................. 12,408 12,513 Installment notes at interest rates of 4.75% to 8.20% with maturities through 2004................................... 11,359 15,829 -------- -------- 107,856 152,976 Less amounts due within one year............................ (42,010) (69,172) -------- -------- $ 65,846 $ 83,804 ======== ========
Prior to 1997, promissory notes were issued for partial payment of the annual patronage dividend. Promissory notes are subordinated to indebtedness to banking institutions, trade creditors and other indebtedness of the company as specified by its Board of Directors. 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 of extending notes will continue and, accordingly, these notes are classified as a component of capitalization. Total maturities of promissory and installment notes for fiscal years 2001, 2002, 2003, 2004 and 2005 are $42,010,000, $39,655,000, $24,451,000, $48,000 and $1,692,000, respectively. Term notes were issued in connection with the redemption of excess Redeemable Class B common stock. Term notes are subordinated to indebtedness to banking institutions, trade creditors and other indebtedness of the company as specified by its Board of Directors. F-20 46 TRUSERV CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 9. INCOME TAXES Income tax expense/(benefit) consisted of the following for the years ended December 31:
2000 1999 1998 ---- ------- ------ (000'S OMITTED) Current: Federal................................................... $231 $ -- $ -- State..................................................... 315 460 710 Foreign................................................... 306 281 290 ---- ------- ------ Total current............................................. 852 741 1,000 ---- ------- ------ Deferred: Federal................................................... -- 14,010 -- State..................................................... -- 2,472 -- Foreign................................................... 64 (203) (403) ---- ------- ------ Total deferred............................................ 64 16,279 (403) ---- ------- ------ $916 $17,020 $ 597 ==== ======= ======
The company operates as a nonexempt cooperative and is allowed a deduction in determining its taxable income for amounts paid as qualified patronage dividends based on margins from business done with or on behalf of members and for the redemption of nonqualified notices of allocation. The reconciliation of income tax expense to income tax computed at the U.S. federal statutory tax rate of 35% was as follows for the years ended December 31:
2000 1999 1998 -------- ------- -------- (000'S OMITTED) Tax at U.S. statutory rate............................ $ 12,262 $ -- $ 4,416 Effects of: Patronage dividend.................................. (12,233) -- (12,258) State income taxes, net of federal tax benefit...... 205 1,906 462 Increase/(decrease) in valuation allowance.......... (2,503) 14,010 6,675 Non-deductible goodwill............................. 2,819 -- -- Other, net.......................................... 366 1,104 1,302 -------- ------- -------- $ 916 $17,020 $ 597 ======== ======= ========
Deferred income taxes reflect the net tax effects of net operating loss carryforwards, which expire in years through 2020; alternative minimum tax credit carryforwards and nonqualified notices of allocations, which do not expire; and temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. To the extent tax benefits are subsequently recognized in excess of the net deferred tax assets, approximately $28,800,000 of the reduction in the valuation allowance for deferred tax assets will result in a reduction of goodwill. F-21 47 TRUSERV CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The significant components of the company's deferred tax assets and liabilities were as follows for the years ended December 31:
2000 1999 1998 ------- ------- ------- (000'S OMITTED) Deferred tax assets: Net operating loss carryforwards.......................... $58,462 $65,569 $15,868 AMT credit carryforward................................... 784 553 911 Nonqualified notices of allocation........................ 13,548 13,830 16,697 Bad debt provision........................................ 2,744 2,129 2,049 Vacation pay.............................................. 2,996 3,460 3,122 Contributions to fund retirement plans.................... -- 792 3,871 Book depreciation in excess of tax depreciation........... 532 -- -- Inventory reserves........................................ 1,272 -- -- Rent expense.............................................. 2,458 2,289 2,072 Merger-related valuations and accruals.................... 2,936 2,141 5,865 Inventory capitalization.................................. 2,657 2,808 -- Other..................................................... 5,739 4,156 3,752 ------- ------- ------- Total deferred tax assets................................... 94,128 97,727 54,207 Valuation allowance for deferred tax assets................. (89,700) (93,213) (33,067) ------- ------- ------- Net deferred tax assets..................................... 4,428 4,514 21,140 Deferred tax liabilities: Tax depreciation in excess of book depreciation........... -- 3,383 1,450 Inventory capitalization.................................. -- -- 1,725 Contributions to fund retirement plans.................... 3,296 -- -- Other..................................................... 1,132 1,131 1,475 ------- ------- ------- Total deferred tax liabilities.............................. 4,428 4,514 4,650 ------- ------- ------- Net deferred taxes.......................................... $ -- $ -- $16,490 ======= ======= =======
10. SUPPLEMENTAL CASH FLOW INFORMATION The patronage dividend and promissory (subordinated) and redeemable (subordinated) term note renewals relating to non-cash operating and financing activities were as follows for the years ended December 31:
2000 1999 1998 ------- -------- ------- (000'S OMITTED) Patronage dividend payable in cash..................... $10,459 $ -- $14,507 Promissory (subordinated) notes........................ (1,820) (5,436) (3,252) Redeemable Class A voting common stock................. 3 -- -- Redeemable Class B common stock........................ (2,733) (15,974) 9,950 Installment notes...................................... 2,515 9,722 5,532 Loss allocation........................................ 21,458 -- -- Member indebtedness.................................... 4,823 11,688 8,287 ------- -------- ------- Patronage dividend................................... $34,705 $ -- $35,024 ======= ======== ======= Note renewals and interest rollover.................... $22,525 $ 36,385 $24,058 ======= ======== =======
Additionally, in fiscal year 2000, the company's non-cash financing and investing activities are due to an asset sale and related agreements with Builder Marts of America, Inc. that included a note receivable of F-22 48 TRUSERV CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) $19,500,000 and debit memos of $4,000,000. The company's non-cash financing and investing activities in fiscal year 1999 and 1998 include $305,000 and $610,000, respectively, related to the acquisition of transportation equipment by entering into capital leases. Cash paid for interest during fiscal years 2000, 1999 and 1998 totaled $60,059,000, $58,730,000 and $52,722,000, respectively. Cash paid for income taxes during fiscal years 2000, 1999 and 1998 totaled $777,000, $848,000 and $903,000, respectively. 11. BENEFIT PLANS The change in the projected benefit obligation and in the plan assets for the company administered pension plans was as follows for the years ended December 31:
2000 1999 --------- -------- (000'S OMITTED) Change in projected benefit obligation: Projected benefit obligation at beginning of year......... $ 160,727 $200,951 Service cost.............................................. 6,414 8,377 Interest cost............................................. 9,474 12,312 Benefit payments.......................................... (4,980) (7,382) Actuarial losses/(gains).................................. 18,946 (23,601) Curtailments.............................................. -- 2,495 Settlements............................................... (114,083) (34,022) Special retirement benefits............................... -- 1,597 --------- -------- Projected benefit obligation at end of year............... $ 76,498 $160,727 --------- -------- Change in plan assets: Fair value of plan assets at beginning of year............ $ 178,426 $196,953 Actual return on assets................................... 3,068 16,891 Employer contributions.................................... 14,070 5,986 Benefit payments.......................................... (4,980) (7,382) Settlements............................................... (114,083) (34,022) --------- -------- Fair value of plan assets at end of year.................. $ 76,501 $178,426 --------- -------- Reconciliation of funded status: Funded status............................................. $ 3 $ 17,699 Unrecognized transition asset............................. (788) (2,642) Unrecognized prior service cost........................... 5,792 6,743 Unrecognized actuarial gain/(loss)........................ 5,815 (23,781) --------- -------- Prepaid benefit/(accrued cost)............................ $ 10,822 $ (1,981) ========= ========
The company has classified $4,280,000 of prepaid pension expense as of December 31, 2000 in Other current assets. F-23 49 TRUSERV CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The components of net periodic pension cost for the company administered pension plans were as follows for the years ended December 31:
2000 1999 1998 -------- -------- -------- (000'S OMITTED) Components of net periodic pension cost: Service cost..................................... $ 6,414 $ 8,377 $ 7,418 Interest cost.................................... 9,474 12,312 13,259 Expected return on assets........................ (12,987) (15,951) (16,083) Amortization of transition assets................ (529) (720) (835) Amortization of prior service cost............... 951 984 984 Amortization of actuarial gain/(loss)............ (91) 53 -- Special termination benefit...................... -- 1,597 -- Curtailment loss................................. -- 112 -- Settlement gain.................................. (1,965) (5,075) (1,745) -------- -------- -------- Net pension cost......................... $ 1,267 $ 1,689 $ 2,998 ======== ======== ========
One of the company's pension plans is the supplemental executive retirement plan ("SERP"), which is an unfunded unqualified defined benefit plan. The funded status in the table above is net of an accrued pension liability of $1,279,000 and $10,165,000 related to the SERP at December 31, 2000 and 1999, respectively. The company also participates in union-sponsored defined contribution plans. Costs related to these plans were $169,000, $315,000 and $861,000 for fiscal year 2000, 1999 and 1998, respectively. In the third quarter of fiscal year 2000, the company purchased from an insurance company non-participating annuity contracts to satisfy pension obligations related to certain former employees who were fully vested in their pension benefits. As a result of this transaction, the company recognized a pre-tax gain of approximately $5 million in fiscal year 2000 related to the settlement of these pension obligations. Such gain has been recorded as Other income, net. This gain was offset in the fourth quarter by approximately $3 million due to market value decreases on assets and settlement losses on employees leaving the plan. Plan assets consist primarily of publicly traded common stocks and corporate debt instruments. The assumptions used to determine the company's pension obligations were as follows for the years ended December 31:
2000 1999 ----- ----- Weighted average assumptions: Discount rate............................................. 7.50% 8.00% Expected return on assets................................. 9.50% 9.50% Rate of compensation increase............................. 4.50% 4.50%
The company also maintains a defined benefit retirement medical plan for former SCC employees who met certain age and service criteria that was frozen at the time of the Merger. The company contributes $105 per month per person for such employees who elect coverage for themselves and their dependants. The company also maintains similar benefits for some former SCC executives who were also contractually eligible for such coverage. The components of the retiree medical plan costs for the company administered plan consist of interest cost of $354,000 and $335,000 in fiscal year 2000 and 1999, respectively. The accumulated post retirement benefit obligation ("APBO") of $5,189,000 on December 31, 1998 was increased by interest cost in 1999 of $335,000, and offset by claims paid of $460,000 and an actuarial gain of F-24 50 TRUSERV CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) $510,000, resulting in an APBO of $4,554,000 at December 31, 1999. Reductions to the APBO in 2000 were claims paid of $427,000, offset by interest cost of $354,000 and an actuarial loss of $266,000, resulting in an APBO of $4,747,000 at December 31, 2000. The funded status at December 31, 1999 was a liability of $4,797,000, which includes the APBO of $4,554,000 plus an unrecognized gain of $243,000. The funded status at December 31, 2000 was a liability of $4,724,000, which includes the APBO of $4,747,000, offset by an actuarial loss of $23,000. The plan has no assets. During 2000 and 1999, the company contributed to the plan $427,000 and $460,000, respectively, and there were benefit payments of $427,000 and $460,000, respectively. The effect of a one percentage point increase in the medical trend rate would increase the service and interest cost components by $13,000 and the post-retirement benefit obligation by $158,000. The effect of a one percentage point decrease in the medical trend rate would decrease the service and interest cost components by $10,000 and the post-retirement benefit obligation by $131,000. The assumptions used to determine the company's health benefit obligations were as follows for the years ended December 31:
2000 1999 ----- ----- Weighted average assumptions: Discount rate............................................. 7.50% 8.00% Medical trend rate........................................ 5.00% 5.00%
12. SEGMENT INFORMATION The company is principally engaged as a wholesaler of hardware and related products and is a manufacturer of paint products. The company identifies segments based on management responsibility and the nature of the business activities of each component of the company. The company measures segment earnings as operating earnings including an allocation for interest expense and income taxes. Information regarding the identified segments and the related reconciliation to consolidated information are as follows:
DECEMBER 31, 2000 ----------------------------------------------------------------- ELIMINATION OF INTERSEGMENT CONSOLIDATED HARDWARE PAINT OTHER ITEMS TOTALS ---------- -------- -------- --------------- ------------ (000'S OMITTED) Net sales to external customers... $3,745,524 $139,109 $109,009 $ -- $3,993,642 Intersegment sales................ -- 1,856 -- (1,856) -- Interest expense.................. 62,184 4,661 861 -- 67,706 Depreciation & amortization....... 40,482 1,752 799 -- 43,033 Segment net margin/(loss)......... 24,984 9,000 133 -- 34,117 Identifiable segment assets....... 1,162,319 52,020 21,675 -- 1,236,014 Expenditures for long-lived assets.......................... 11,365 627 534 -- 12,526
F-25 51 TRUSERV CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1999 ----------------------------------------------------------------- ELIMINATION OF INTERSEGMENT CONSOLIDATED HARDWARE PAINT OTHER ITEMS TOTALS ---------- -------- -------- --------------- ------------ (000'S OMITTED) Net sales to external customers... $4,242,572 $148,001 $111,753 $ -- $4,502,326 Intersegment sales................ -- 1,810 -- (1,810) -- Interest expense.................. 53,993 6,014 695 -- 60,702 Depreciation & amortization....... 38,576 1,704 851 -- 41,131 Segment net margin/(loss)......... (146,200) 14,707 690 -- (130,803) Identifiable segment assets....... 1,247,320 63,975 24,102 -- 1,335,397 Expenditures for long-lived assets.......................... 41,906 2,207 817 -- 44,930
DECEMBER 31, 1998 ----------------------------------------------------------------- ELIMINATION OF INTERSEGMENT CONSOLIDATED HARDWARE PAINT OTHER ITEMS TOTALS ---------- -------- -------- --------------- ------------ (000'S OMITTED) Net sales to external customers... $4,062,390 $157,627 $108,221 $ -- $4,328,238 Intersegment sales................ -- 2,340 -- (2,340) -- Interest expense.................. 46,809 7,512 779 -- 55,100 Depreciation & amortization....... 29,691 1,652 769 -- 32,112 Segment net margin/(loss)......... 342 11,502 176 -- 12,020 Identifiable segment assets....... 1,488,108 80,121 19,445 -- 1,587,674 Expenditures for long-lived assets.......................... 67,199 2,710 824 -- 70,733
The company does not have a significant concentration of members in any geographic region of the United States or in any foreign countries. 13. ASSET SALE Effective December 29, 2000, the company sold the assets, primarily inventory, of the Lumber and Building Materials ("LBM") division, comprising fiscal year 2000 sales of approximately $1.1 billion, to Builder Marts of America, Inc. ("BMA"). In connection with this sale, the company received consideration of $20.2 million in cash (of which $1.0 million will be held in escrow until December 31, 2001 to satisfy any contingencies or disputes between the parties and which, accordingly, is classified as Restricted cash), a $19.5 million note receivable (payable in annual installments through December 31, 2007 and carrying an interest rate of 7.75% per annum) and $4.0 million in debit memos to be used as an offset against amounts payable to BMA existing at the date of the sale. Additionally, the company recorded deferred credits totaling $9.5 million related to certain non-compete, cooperation, trademark and license, and lease agreements entered into with BMA; such amount will be amortized to income over the lives of the underlying agreements, generally 5-10 years. The company also relieved $4.6 million of goodwill (net) and $0.7 million of inventory related to the LBM division at the time of the sale. As a result of the above, the company recognized a gain of $28.9 million in the fourth quarter, which is classified as Gain on sale of assets. F-26 52 TRUSERV CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 14. QUARTERLY FINANCIAL SUMMARY Selected quarterly financial information for each of the four quarter in fiscal 2000 and 1999 is as follows (000's omitted):
FIRST SECOND THIRD FOURTH QUARTER(1) QUARTER QUARTER QUARTER ---------- ---------- ---------- ---------- 2000 Revenues........................... $1,027,605 $1,137,262 $ 944,269 $ 884,506 Net margin/(loss) before income taxes........................... (8,869) 11,940 9,663 22,299(2) Net margin/(loss).................. (8,924) 11,923 9,447 21,671 1999 (restated) Revenues........................... $1,070,892 $1,264,108 $1,117,496 $1,049,830 Net margin/(loss) before income taxes and cumulative effect of a change in accounting principle....................... (17,724) 19,862 4,483 (113,920)(3) Net margin/(loss) before cumulative effect of a change in accounting principle....................... (17,811) 18,270 5,864 (130,642) Net margin/(loss).................. (24,295) 18,270 5,864 (130,642)
- --------------- (1) On January 1, 1999, the company wrote off the unamortized balance of start-up costs upon the adoption of SOP 98-5. (2) In the fourth quarter of fiscal 2000, the company recorded an inventory adjustment of approximately $22.2 million (as an increase to inventory and a reduction to cost of sales) resulting from physical inventory counts taken at certain of its distribution centers. (3) In the fourth quarter of fiscal 1999, the company wrote off approximately $74.0 million of inventory following the resolution of certain unreconciled differences. F-27 53 ITEM 14(a)(2). INDEX TO FINANCIAL STATEMENT SCHEDULES.
PAGE(S) ------- Schedule II -- Valuation and Qualifying Accounts............ F-29
F-28 54 TRUSERV CORPORATION SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS FOR FISCAL YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
FISCAL YEAR ENDED DECEMBER 31 ----------------------------- 2000 1999 1998 ------- -------- -------- Reserve for Doubtful Accounts Balance at beginning of year.............................. $5,613 $ 5,111 $ 8,691 Provision for doubtful accounts........................... 9,147 5,148 2,808 Write-offs of doubtful accounts(1)........................ (7,590) (4,646) (6,388) ------ ------- ------- Balance at end of year.................................... $7,170 $ 5,613 $ 5,111 ====== ======= =======
- --------------- (1) Notes and accounts written off as uncollectible, net of recoveries of accounts previously written off as collectible
FISCAL YEAR ENDED DECEMBER 31 ----------------------------- 2000 1999 1998 ------ -------- --------- Business Combination Reserves Balance at beginning of year.............................. $ 683 $ 4,000 $ 16,349 Utilization of reserves................................... (683) (3,317) (9,800) Adjustment to Goodwill.................................... -- -- (2,549) ----- ------- -------- Balance at end of year.................................... $ -- $ 683 $ 4,000 ===== ======= ========
F-29 55 ITEM 14(a)(3). INDEX TO EXHIBITS
EXHIBITS ENCLOSED DESCRIPTION -------- ----------- 4-B By-laws of the company, effective February 23, 2001. 10-A Current Form of "Retail Member Agreement with TruServ" between the company and its members that offer primarily hardware and related items. 10-D TruServ Corporation Employees' Savings and Compensation Deferral Plan (As Amended and Restated Effective July 1, 2000). 21 Subsidiaries
EXHIBITS INCORPORATED BY REFERENCE ------------ 2-A Agreement and Plan of Merger dated as of December 9, 1996 between the company and ServiStar Coast to Coast Corporation ("SCC"). Incorporated by reference--Exhibit 2-A to Registration Statement on Form S-4 (No. 333-18397). 4-A Amended and Restated Certificate of Incorporation of the company, effective July 1, 1997. Incorporated by reference--Exhibit 2-A to Registration Statement on Form S-4 (No. 333-18397). 4-C Specimen certificate of Class A common stock. Incorporated by reference--Exhibit 4-C to Post-Effective Amendment No. 8 on Form S-2 to Registration Statement on Form S-4 (No. 333-18397). 4-D Specimen certificate of Class B common stock. Incorporated by reference--Exhibit 4-D to Post-Effective Amendment No. 8 on Form S-2 to Registration Statement on Form S-4 (No. 333-18397). 4-E Promissory (subordinated) note form effective for the year-ending December 31, 1986 and thereafter. Incorporated by reference--Exhibit 4-H to Registration Statement on Form S-2 (No. 33-20960). 4-F Installment note form. Incorporated by reference--Exhibit 4-F to Registration Statement on Form S-2 (No. 2-82836). 4-G Copy of Note Agreement with Prudential Insurance Company of America dated April 13, 1992 securing 8.60% Senior Notes in the principal sum of $50,000,000 with a maturity date of April 1, 2007. Incorporated by reference--Exhibit 4-J to Post-Effective Amendment No. 2 to Registration Statement on Form S-2 (No. 33-39477). 4-H Cotter & Company $50,000,000 Private Shelf Agreement with Prudential Insurance Company of America dated December 29, 1995 incorporating amendment on existing Note Agreement with Prudential Insurance Company of America dated April 13, 1992 securing 8.60% Senior Notes in the principal sum of $50,000,000 with a maturity date of April 1, 2007. Incorporated by reference--Exhibit 4-H to Post-Effective Amendment No. 5 to Registration Statement on Form S-2 (No. 33-39477). 4-I Trust Indenture between Cotter & Company and US Bancorp (formerly First Trust of Illinois). Incorporated by reference--Exhibit T3C to Cotter & Company Form T-3 (No. 22-26210). 4-J Amended and Restated Credit Agreement dated as of April 14, 2000 for $300,000,000 Revolving credit between TruServ Corporation, various financial institutions, and Bank of America. Incorporated by reference--Exhibit 4-K to Post-Effective Amendment No. 10 to Registration Statement on Form S-2 to Form S-4 (No. 333-18397).
E-1 56
EXHIBITS INCORPORATED BY REFERENCE ------------ 4-K Amended and Restated Private Shelf Agreement between TruServ Corporation and Prudential Insurance Company of America dated November 13, 1997 for $150,000,000. Incorporated by reference--Exhibit 4-M to Post-Effective Amendment No. 5 to Registration Statement on Form S-4 (No. 333-18397) 4-L Amendment dated April 14, 2000 to the Amended and Restated Private Shelf Agreement between TruServ Corporation and Prudential Insurance Company of America dated November 13, 1997 for $150,000,000 and to Note Agreement of $50,000,000, dated as of April 13, 1992, between Cotter & Company and Prudential. Incorporated by reference on Exhibit 4-N to Post-Effective Amendment No. 10 to Registration Statement on Form S-2 to Form S-4 (No. 333-18397) 4-M Credit Agreement dated September 10, 1998 for $105,000,000 Note Purchase Agreement between TruServ Corporation and various purchasers. Incorporated by reference--Exhibit 4-L to Post-effective Amendment No. 6 to Registration Statement on Form S-4 (No. 333-183997) 4-N Amended and Restatement dated April 14, 2000 to Credit Agreement dated September 10, 1998 for $105,000,000 Note Purchase Agreement between TruServ Corporation and various purchasers. Incorporated by reference on Exhibit 4-Q to Post Effective Amendment No. 10 to Registration Statement on Form S-2 to Form S-4 (No. 333-18397). 4-O Participation Agreement dated April 30, 1998 for $40,000,000 between TruServ Corporation, various financial institutions and Bank of Montreal. Incorporated by reference--Exhibit 4-M to Post-Effective Amendment No. 6 to Registration Statement on Form S-4 (No. 333-18397) 10-B Current Form of "Subscription to Shares of TruServ." Incorporated by reference--Exhibit 10-B to Registration Statement on Form S-2 (No. 333-18397). 10-C TruServ Corporation Defined Lump Sum Pension Plan as Amended and Restated Effective as of January 1, 1998. Incorporated by reference--Exhibit 10-C to the Registrants's Annual Report on Form 10-K for the fiscal year ended December 31, 1999. 10-E TruServ Supplemental Retirement Plan between TruServ and selected executives of the company (As Amended Effective July 24, 1998). Incorporated by reference--Exhibit 10-E to Post-Effective Amendment No. 10 to Registration Statement on Form S-2 to Form S-4 (No. 333-18397). 10-F Retail Conversion Funds Agreement dated as of December 9, 1996 between the company and SCC. Incorporated by reference--Exhibit 10-L to Registration Statement on Form S-4 (No. 333-18397). 10-G Employment Agreement between the company and Donald J. Hoye dated September 1, 1996. Incorporated by reference--Exhibit 10-P to Post-Effective Amendment No. 2 to Registration Statement on Form S-4 (No. 333-18397).
SUPPLEMENTAL INFORMATION ------------ Supplemental Information to be Furnished with Reports Filed Pursuant to Section 15(d) of the Act by Registrants which have not Registered Securities Pursuant to Section 12 of the Act. As of the date of the foregoing Report, no annual report for the Registrant's year ended December 31, 2000 has been sent to security holders. Copies of such Annual Report and proxy soliciting materials will subsequently be furnished to the Securities and Exchange Commission. E-2 EX-4.B 3 c63737ex4-b.txt BY-LAWS OF THE COMPANY 1 EXHIBIT 4-B BY-LAWS OF TRUSERV CORPORATION 2 BY-LAWS OF TRUSERV CORPORATION Effective February 23, 2001 ARTICLE I OFFICES SECTION 1. OFFICE IN DELAWARE. The registered office of the Corporation in the State of Delaware shall be located in the City of Wilmington, County of New Castle. SECTION 2. ADDITIONAL OFFICES. The principal office of the Corporation in the State of Illinois shall be located at 8600 West Bryn Mawr Avenue in the City of Chicago, County of Cook. The Corporation may have such other office or offices within or without the State of Illinois as the Board of Directors may from time to time determine or the business of the Corporation may require. ARTICLE II PURPOSE SECTION 1. PRINCIPAL PURPOSE. The principal purposes of the Corporation are to benefit its members ("Members") through the manufacture, buying and selling of merchandise and supplies as are or may be handled by retail hardware, retail commercial and industrial supply, lumber and building supply, general rental and home and garden center Members; the rendering of services and furnishing of benefits as will be useful or beneficial to Members; the maintenance of offices, facilities and warehouses to offer services and benefits and to stock and deliver merchandise and supplies to Members; and to do any lawful act concerning any or all lawful business for which corporations may be incorporated under the Delaware General Corporation Law. ARTICLE III MEETINGS OF STOCKHOLDERS SECTION 1. PLACE OF MEETINGS. All meetings of the stockholders for the election of directors or for any other purposes shall be held at such location, within or without the State of Delaware, as the Board of Directors may from time to time designate and shall be held at such time as shall be stated in the notice of the meeting, or in a duly executed waiver of notice thereof. SECTION 2. DATE AND TIME OF ANNUAL MEETING. An annual meeting of stockholders shall be held on a date and at a time designated by resolution of the Board of Directors and such date and time shall be stated in the notice to stockholders of the meeting, or in a duly executed waiver of such notice. At the annual meeting, the stockholders shall elect by ballot directors of the Board and transact such other business as may properly be brought before the meeting. SECTION 3. STOCKHOLDERS' PROPOSALS. To bring a proposal to be voted upon at the annual meeting of stockholders, a stockholder of record must do so by submitting adequate notice, as described herein, to the Secretary of the Corporation, at its principal office, for receipt no later than ninety (90) days prior to the annual meeting. In no event shall an adjournment of an annual meeting commence a new time period for the giving of adequate notice. Such notice shall be signed and dated by the stockholder of record and shall state the name and address of the stockholder, a representation that the stockholder is a holder of record of shares of the Corporation entitled to vote at the meeting and intends to appear in person or by proxy at the meeting to make the proposal, a brief description of the proposal desired to be brought before the meeting, the reasons for requesting the proposal, and any material interest that the stockholder or any beneficial owner(s) may have in the outcome of the proposal. Any proposal must 2 3 (i) relate to operations which account for at least five percent (5%) of either the Corporation's total assets or gross sales, (ii) be otherwise deemed by the Corporation significantly related to its business operations, and (iii) be determined, in the discretion of the Board, or the Chairman if the Board so designates, to be in the best interest of the Corporation. A proposal that does not meet these requirements shall not be presented for stockholder vote. SECTION 4. NOTICE OF ANNUAL MEETING. Written notice of the annual meeting shall be served upon, either personally or by any electronic communication, or mailed to each stockholder entitled to vote thereat at such address as appears on the books of the Corporation, at least ten (10) days prior to the meeting, or such longer period of time as may be required by law. SECTION 5. LIST OF STOCKHOLDERS. At least ten (10) days before every election of directors by the stockholders, a complete list of the stockholders entitled to vote at said election, arranged in alphabetical order, with the address of each and the number of voting shares held by each, shall be prepared by the secretary. Such list shall be open at the place where the election is to be held for said ten (10) days to the examination of any stockholder, and shall be produced and kept at the time and place of election during the whole time thereof, and subject to the inspection of any stockholder who may be present. SECTION 6. SPECIAL MEETINGS. Special meetings of the stockholders, for any purpose or purposes, unless otherwise prescribed by statute or by Certificate of Incorporation, may be called by the chairman of the board with the approval of a majority of the Board of Directors, or may be called by the president, and shall be called by the president or secretary at the request in writing of a majority of the Board of Directors, or at the request in writing of stockholders owning at least ten percent (10%) of the shares of voting stock of the Corporation issued and outstanding and entitled to vote. Such request shall state the purpose or purposes of the proposed meeting. SECTION 7. NOTICE OF SPECIAL MEETINGS. Notice of a special meeting of stockholders, stating the time and place and object thereof, shall be served upon, either personally or by any electronic communication, or mailed, at least twenty (20) days before such meeting, to each stockholder entitled to vote thereat at such address as appears on the books of the Corporation. SECTION 8. BUSINESS AT SPECIAL MEETINGS. Business transacted at all special meetings shall be confined to the objects stated in the call. SECTION 9. QUORUM; ADJOURNMENTS. The holders of a majority of the stock issued and outstanding and entitled to vote thereat, present in person or represented by proxy, shall be requisite and shall constitute a quorum at all meetings of the stockholders for the transaction of business, except as otherwise provided by statute, by the Certificate of Incorporation or by these By-Laws. If, however, a quorum shall not be present or represented at any meeting of the stockholders, the stockholders entitled to vote thereat, present in person or represented by proxy, shall have power to adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present or represented. At such adjourned meeting at which a quorum shall be present or represented any business may be transacted which might have been transacted at the meeting as originally called. When a quorum is present or represented at any meeting, the vote of the holders of a majority of the stock having voting power present in person or represented by proxy shall decide any question brought before such meeting, unless the question is one upon which by express provision of the statutes or of the Certificate of Incorporation or of these By-Laws a different vote is required, in which case such express provision shall govern and control the decision of such question. SECTION 10. VOTING; NO PRE-EMPTIVE RIGHTS. At any meeting of the stockholders every stockholder of record having the right to vote shall be entitled to vote in person, or by proxy appointed by an instrument in writing subscribed by such stockholder and bearing a date not more than three (3) years prior to said meeting, unless said instrument provides for a longer period. Each share of Class A Common Stock shall be entitled to one (1) vote for all purposes. No holder of any class of stock of the Corporation shall have any pre-emptive or preferential right to subscribe to or purchase any shares of stock of the Corporation or shares or securities of any kind, either convertible 3 4 into or evidencing the right to purchase any shares of stock of the Corporation, other than such thereof, if any, as the Board of Directors in its discretion may from time to time determine. ARTICLE IV DIRECTORS SECTION 1. NUMBER; TERM. The number of directors which shall constitute the whole board shall be not less than nine (9) nor more than sixteen (16), including one management representative who shall be the person holding the position of president and chief executive officer of the Corporation. To be eligible to serve as a director, except for the president of the Corporation, a director must be a current Member of the Corporation or possess an ownership interest and actively participate in the business of a Member, or be a non-member approved by the affirmative vote of two-thirds of the Board of Directors. Within the limits above specified, the number of directors shall be determined by resolution of the Board of Directors. The directors shall be elected at the annual meeting of the stockholders to serve for a term of one (1) year, except as provided in section 4 of this Article, so that the term of office of each director shall expire in the following year, and each director shall hold office for the term elected and until a successor shall be elected and shall qualify, except in the event of death, resignation, retirement, disqualification or removal of a director where termination shall be immediate. The president of the Corporation shall be eligible for election or re-election or appointment as a director by the Board of Directors at any time without regard to the period of time during which the president has previously served as a director. SECTION 2. CHAIRMAN OF THE BOARD. The Board of Directors shall annually elect a chairman of the board. Unless otherwise resolved, each chairman elect's term shall commence as the first order of business at the meeting of the Board of Directors immediately following the annual stockholders' meeting. The chairman of the board shall preside at all meetings of the stockholders and directors and shall be ex-officio a member of all standing committees. The chairman shall perform all duties incident to the position of chairman of the board and such other duties as may be prescribed by the Board of Directors from time to time. SECTION 3. PLACE OF MEETINGS. The directors may hold meetings and to the extent permitted by law keep the books of the Corporation outside of Delaware, at such places as they may from time to time determine. SECTION 4. VACANCIES. If any vacancies occur in the Board of Directors, caused by death, resignation, retirement, disqualification or removal from office of any directors or otherwise, or any new directorship is created by any increase in the authorized number of directors, a majority of the directors then in office, though less than a quorum, may choose a successor or successors, or fill the newly created directorship and the directors so chosen shall hold office for the remainder of the unexpired term. In order for a non-member to fill any such vacancy, the non-member must be approved by the affirmative vote of two-thirds of the Board of Directors. SECTION 5. GENERAL POWERS. The property and business of the Corporation shall be managed by its Board of Directors which may exercise all such powers of the Corporation and do all such lawful acts and things as are not by applicable law, the Certificate of Incorporation or by these By-Laws directed or required to be exercised or done by the stockholders. SECTION 6. FIRST MEETING. The first meeting of each newly elected board shall be held immediately following the annual meeting of stockholders, within or without the State of Delaware and no notice of such meeting shall be necessary to the newly elected directors in order legally to constitute the meeting, provided a quorum shall be present, or they may meet at such place and time as shall be fixed by the consent in writing of all the directors. SECTION 7. REGULAR MEETING. Regular meetings of the board may be held without notice at such time and place either within or without the State of Delaware as shall from time to time be determined by the board. 4 5 SECTION 8. SPECIAL MEETINGS. Special meetings of the board may be called by the chairman or the president or any four (4) directors on five (5) days' notice to each director, either personally, by telephone, by any electronic communication, or by mail. Special meetings shall be called by the chairman, president or secretary in like manner and with like notice on the written request of five (5) directors. Special board meetings may take place by any means through which all participating directors can hear each other, when properly called. SECTION 9. QUORUM. At all meetings of the board a majority of the directors then in office and entitled to vote shall constitute a quorum for the transaction of business and the act of a majority of the directors present at any meeting at which there is a quorum shall be the act of the Board of Directors, except as may be otherwise specifically provided by statute or by the Certificate of Incorporation or by these By-Laws. If a quorum shall not be present at any meeting of directors the directors present thereat may adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present. SECTION 10. AGENDAS AND MINUTES. Agendas for all regular meetings shall be delivered, either personally or by any electronic communication, or mailed at least ten (10) days before the date of each such meeting. An item proposed by a Director for the agenda shall be delivered to the chairman's and secretary's offices fifteen (15) days before the meeting. Minutes of each meeting of the Board of Directors shall be approved at the next regular meeting. They shall be attested to by the chairman and the secretary. SECTION 11. COMPENSATION. Directors shall not receive a salary for their services as directors, but, by resolution of the board a fixed fee and expenses of attendance will be paid; provided that nothing herein contained shall be construed to preclude any director from serving the Corporation in any other capacity and receiving compensation therefor. SECTION 12. COMMITTEES. The Board of Directors may by resolution or resolutions passed by a majority of the entire board designate one (1) or more committees, each committee to consist of three (3) or more of the directors of the Corporation, which, to the extent provided in said resolution or resolutions, shall have and may exercise the powers of the Board of Directors in the management of the business and affairs of the Corporation. Such committee or committees shall have such name or names as may be determined from time to time by resolution adopted by the Board of Directors. A majority of the members of any such committee may determine its action and fix the time and place of its meetings unless the Board of Directors shall otherwise provide. The Board of Directors shall have power at any time to fill vacancies in, to change the membership of, or to dissolve any committee. Each committee shall keep regular minutes of its meetings and report the same to the Board of Directors when required. ARTICLE V NOTICES SECTION 1. FORM; DELIVERY. Whenever applicable law or the Certificate of Incorporation or these By-Laws requires notice to any director or stockholder, it shall not be construed to mean personal notice, but such notice may be given in writing, by telephone, by any electronic communication, or by mail addressed to such director or stockholder at such address as appears on the books of the Corporation, and such notice shall be deemed to be given at the time when the same shall be thus delivered, conveyed by telephone call, entered into the electronic process or mailed. SECTION 2. WAIVER. Whenever any notice is required, a waiver thereof in writing signed by the person or persons entitled to said notice, whether before or after the time stated therein, shall be deemed equivalent thereto. ARTICLE VI OFFICERS SECTION 1. OFFICERS. The officers of the Corporation shall be chosen by the Board of Directors at its first meeting after each annual meeting of stockholders and shall be a chief executive officer, a president, a vice president, a secretary and a treasurer. The Board of Directors may also choose additional vice presidents and one (1) or more assistant secretaries and assistant treasurers. Two (2) or more offices may be held by the same person. 5 6 SECTION 2. OTHER OFFICERS AND AGENTS. The board may appoint such other officers as it shall deem necessary, who shall hold their offices for such terms and shall exercise such powers and perform such duties as shall be determined from time to time by the board. All officers shall have power to sign certificates for shares of the Corporation, deeds, mortgages, bonds, contracts, loans, and any other instruments which the Board of Directors has authorized to be executed. SECTION 3. SALARIES. The salaries of the chief executive officer and president of the Corporation shall be fixed by the Board of Directors. SECTION 4. TENURE AND REMOVAL. Any officer elected or appointed by the Board of Directors may be removed at any time by the affirmative vote of a two-thirds (2/3) majority of the entire Board of Directors, with or without cause, and without prejudice to any of such officer's contract rights. If the office of any officer becomes vacant, the vacancy may be filled by the Board of Directors. SECTION 5. PRESIDENT AND CHIEF EXECUTIVE OFFICER. The president shall be the chief executive officer, and shall perform all duties incident to the offices of president and chief executive officer and such other duties as shall from time to time be assigned by the Board of Directors, and shall report to the Board of Directors on the affairs, performance and direction of the Company. SECTION 6. VICE PRESIDENTS. The vice presidents in the order of their seniority shall perform the duties and exercise the powers of their offices, and shall perform such other duties as the Board of Directors shall require. SECTION 7. SECRETARY. The secretary shall attend all sessions of the board and all meetings of the stockholders and record and preserve all votes and the minutes of all proceedings for the corporation's records. The secretary shall give, or cause to be given, notice of all meetings of the stockholders and special meetings of the Board of Directors, shall be the keeper of corporate records and shall perform such other duties as may be prescribed by the Board of Directors, chief executive officer, or president, under whose supervision the secretary shall act. SECTION 8. ASSISTANT SECRETARIES. The assistant secretaries in order of their seniority shall, in the absence or disability of the secretary, perform the duties and exercise the powers of the secretary and shall perform such other duties as the secretary and Board of Directors shall require. SECTION 9. TREASURER. The treasurer shall have the custody of the corporate funds and securities and shall keep full and accurate accounts of receipts and disbursements in books belonging to the Corporation and shall deposit all moneys and other valuable effects in the name and to the credit of the Corporation in such depositories as may be designated by the Board of Directors. The treasurer shall manage the funds of the Corporation, and shall report at the regular meetings of the Board of Directors, or whenever the board may require it, an account of all transactions as treasurer and of the financial condition of the Corporation. If required by the Board of Directors, the treasurer shall give the Corporation a bond (which shall be renewed every six (6) years) in such sum and with such surety as shall be required for the full and faithful performance of the duties of office, and for restoration to the Corporation of all books, papers, checks, money and other property of whatever kind in the treasurer's possession or control belonging to the Corporation. SECTION 10. ASSISTANT TREASURERS. The assistant treasurers in the order of their seniority shall, in the absence or disability of the treasurer, perform the duties and exercise the powers of the treasurer and shall perform such other duties as the treasurer and Board of Directors shall prescribe. 6 7 ARTICLE VII CERTIFICATES OF STOCK AND CERTAIN QUALIFICATIONS, LIMITATIONS AND RESTRICTIONS OF CAPITAL STOCK SECTION 1. STOCK CERTIFICATES. The certificates of stock of the Corporation shall be consecutively numbered and shall be entered on the books of the Corporation as they are issued. They shall exhibit the holder's name and number of shares and shall be signed by an officer. The designations, preferences and relative, participating, optional or other special rights of each class of stock and the qualifications, limitations or restrictions of such preferences and/or rights shall be set forth in full or summarized on the face or back of the certificates which the Corporation shall issue to represent such class of stock. If any stock certificate is signed (1) by a transfer agent or an assistant transfer agent or (2) by a transfer clerk acting on behalf of the Corporation and a registrar, the signature of any such officer may be by facsimile. SECTION 2. LOST CERTIFICATES. The Board of Directors may direct a new certificate or certificates to be issued in place of any certificate or certificates theretofore issued by the Corporation alleged to have been lost or destroyed, upon the making of an affidavit of that fact by the person claiming the certificate of stock to be lost or destroyed. When authorizing such issue of a new certificate or certificates, the Board of Directors may, in its discretion and as a condition precedent to the issuance thereof, require the owner of such lost or destroyed certificate or certificates, or the owner's legal representative, to advertise the same in such manner as it shall require and/or give the Corporation a bond in such sum as it may direct as indemnity against any claim that may be made against the Corporation with respect to the certificate alleged to have been lost or destroyed. SECTION 3. TRANSFER OF SHARES. Subject to the qualifications, limitations and restrictions set forth in the Certificate of Incorporation and these By-Laws, upon surrender to the Corporation, or the transfer agent of the Corporation, of a certificate for shares duly endorsed or accompanied by proper evidence of succession, assignment or authority to transfer, it shall be the duty of the Corporation to issue a new certificate to the person entitled thereto, cancel the old certificate and record the transaction upon its books. SECTION 4. CLOSING OF TRANSFER BOOKS. The Board of Directors shall have power to close the stock transfer books of the Corporation for a period not exceeding fifty (50) days preceding the date of any meeting of stockholders or the date for payment of any dividend or the date for the allotment of rights or the date when any change or conversion or exchange of capital stock shall go into effect or for a period of not exceeding fifty (50) days in connection with obtaining the consent of stockholders for any purpose; provided, however, that in lieu of closing the stock transfer books as aforesaid, the Board of Directors may fix in advance a date, not exceeding fifty (50) days preceding the date of any meeting of stockholders or the date for the payment of any dividend or the date for the allotment of rights or the date when any change or conversion or exchange of capital stock shall go into effect or a date in connection with obtaining such consent, as a record date for the determination of the stockholders entitled to notice of, and to vote at, any such meeting, and any adjournment thereof, or entitled to receive payment of any such dividend, or to any such allotment or rights, or to exercise the rights in respect of any such change, conversion or exchange of capital stock, or to give such consent, and in such case such stockholders and only such stockholders as shall be stockholders of record on the date so fixed shall be entitled to such notice of, and to vote at such meeting and any adjournment thereof, to receive payment of such dividend, to receive such allotment of rights, to exercise such rights, or to give such consent, as the case may be, notwithstanding any transfer of any stock on the books of the Corporation after any such record date fixed as aforesaid. 7 8 SECTION 5. REGISTERED STOCKHOLDERS. The Corporation shall be entitled to treat the holder of record of any share or shares of stock as the holder in fact thereof and, accordingly, shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of any other person, whether or not it shall have express or other notice thereof, except as otherwise provided by the laws of Delaware. SECTION 6. REDEMPTION OF STOCK. (a) TERMINATION REDEMPTION. Upon termination of a Member Agreement (as referred to in Article VIII hereof) for any reason whatsoever, the stockholder shall sell to the Corporation and the Corporation shall redeem from the stockholder all of its stockholder's capital stock in the Corporation for the par value thereof upon the terms and conditions set forth in section 7 of this Article VII. (b) OPTIONAL REDEMPTION. (i) Whenever the Board of Directors shall by the affirmative vote of two-thirds or more of the directors then in office decide that it is in the best interests of the Corporation that any stockholder shall cease to be associated with the Corporation in that capacity, the Corporation shall have the right, upon written demand addressed to such stockholder at the address as shown on the books of the Corporation, to purchase all (but not less than all) of such stockholder's capital stock in the Corporation for the par value thereof upon the terms and conditions set forth in section 7 of this Article VII. (ii) The Corporation shall, in the discretion of management, have the right to purchase, in cash at par value, all or any portion of outstanding shares of capital stock of the Corporation which are in excess of the number of shares required to be held by a stockholder or which are distributed as non-qualified written notices of allocation. Upon the effective date of the exercise of an option to purchase any stock redeemed pursuant to this section 6(b)(ii), the stock redeemed shall be deemed to be and shall be and become the property of this Corporation; from and after such date all rights and privileges incident to the ownership of the shares shall cease, except only the right to receive the purchase price, without interest, and subject to the Corporation's liens and right of setoff. (c) NOTICE OF REPURCHASE RIGHTS. The right or obligation of purchase or redemption hereby reserved to the Corporation may be stated in the subscription agreement under which the Corporation's stock is sold, in the Member Agreement and on any stock certificates. (d) REPURCHASE RIGHTS NOT EXCLUSIVE. The right or obligation of purchase or redemption provided for in this section 6 of Article VII of the By-Laws is in addition to, and not in derogation of, the rights reserved to the Corporation by the provisions of Article Fourth of the Certificate of Incorporation and any other rights to repurchase, redeem or otherwise acquire its stock that the Corporation may now have or ever obtain. SECTION 7. MECHANICS, TERMS AND CONDITIONS OF REDEMPTION. Any purchase or redemption of shares of stock of this Corporation made pursuant to section 6(a) and 6(b)(i) of these By-Laws or the Certificate of Incorporation, unless expressly provided otherwise, shall proceed as follows: (a) TERMINATION OF RIGHTS AND PRIVILEGES AS STOCKHOLDER. Upon the effective date of the termination of a Member Agreement or upon the date of exercise of any option to repurchase or redeem stock under section 6(b)(i) or upon such other date set by these By-Laws, the Certificate of Incorporation, or the Member and this Corporation, whichever shall be appropriate in the circumstances, all of this Corporation's stock owned by such stockholder (hereinafter referred to as "Terminated Stockholder") shall be deemed to be and shall be and become the property of this Corporation; from and after such date all rights and privileges incident to the ownership of the shares (including but not limited to the right to dividends thereon) shall cease, except only the right to receive the purchase price (as hereinafter provided) plus a sum equal to any dividends declared but unpaid at said date and accrued Patronage Dividends for the relevant year or portion thereof (to be paid in the manner 8 9 provided for payment of all Patronage Dividends) all without interest and subject to the Corporation's liens and right of setoff. The Terminated Stockholder shall promptly remit any certificates duly endorsed in blank or with stock powers. (b) PAYMENT OF REDEMPTION PRICE. Immediately upon receipt of properly endorsed certificates representing all of a Terminated Stockholder's stock of the Corporation, the Corporation shall remit the redemption price to the Terminated Stockholder in the following manner: (i) Cash equal to the par value of Terminated Stockholder's Class A Common Stock reduced by the amount of any lien or setoff to which the Corporation may be entitled; (ii) Cash equal to the par value of that portion, if any, of Terminated Stockholder's Class B Common Stock which has been designated by the Corporation as "non-qualified" B Common Stock reduced by the amount of any lien or setoff to which the Corporation may be entitled; and (iii) A note in face amount equal to the par value of Terminated Stockholder's remaining Class B Common Stock. The note shall be payable in five (5) equal annual installments of principal, the first of which shall be due on the December 31 next following termination of the Terminated Stockholder's rights and privileges as a stockholder (as provided in section 7(a) of this Article VII) and shall bear a fixed rate of interest, payable with the installments of principal, from the date of the note at a rate equal to the United States Treasury five (5) year notes plus one percent (1%), as determined on the first business day of the calendar year in which termination occurs. The note shall be dated as of the date upon which the Terminated Stockholder's rights as a stockholder terminated (as provided in section 7(a) of this Article VII) and shall be subject to any lien or right of setoff to which the Corporation may be entitled. (c) AVAILABILITY OF FUNDS. Notwithstanding anything to the contrary expressed or implied herein, should the Board of Directors in its discretion determine that the funds of the Corporation available for such purpose are insufficient for immediate payment of all or any part of the redemption price in light of the Corporation's legal or business requirements, or that immediate payment of all or any part of the redemption price is otherwise not in the best interests of the Corporation, the Corporation may delay (without interest) the payment of all or any part of the redemption price (including the issuance of any promissory note) until such time as the Board of Directors determines that sufficient funds are available for such purpose and that it is otherwise in the Corporation's best interests to recommence payments for such purpose, at which time the Corporation shall pay to those entitled thereto, in the chronological order in which such payments were delayed starting with those whose payment has been longest delayed and continuing until sufficient funds are no longer available, or through another equitable manner determined by the Board of Directors, the unpaid redemption price in accordance with Section 7(b), except that any promissory note shall be dated the date of its issuance. (d) HARDSHIP. Notwithstanding the provisions of Paragraph 7(b) of this Article VII, the Board of Directors in its discretion and with due regard for the financial condition and requirements of the Corporation, may authorize and cause payment in cash for all or part of the redemption price which would otherwise be paid by a note if the Board of Directors determines that the prescribed method of payment imposes an undue hardship upon the Terminated Stockholder. The Board of Directors may implement this provision by delegating authority to an officer or officers. SECTION 8. LIEN ON STOCK AND NOTES. The Corporation shall have a lien on, and a right of setoff against, any stock or notes, including those issued as Patronage Dividend and against any cash portion of such Patronage Dividend which is in excess of twenty percent (20%) of the overall patronage dividend payable in any year for such indebtedness of the stockholder to the Corporation as may, for whatever cause, exist. In the event that the 9 10 Corporation initiates proceedings to recover amounts due it by the stockholder, the Corporation shall be entitled to the recovery of all associated costs, interest and reasonable attorney's fees. ARTICLE VIII MEMBER AGREEMENTS SECTION 1. CORPORATE PURPOSE. The Corporation shall be organized and operated on a cooperative basis for the benefit of the holders of shares of its Class A Common Stock (who are its Members). SECTION 2. GENERAL TERMS. As a condition of Membership every prospective Member shall enter into a contract (the "Member Agreement") with this Corporation, must be actively engaged in buying, selling and/or renting merchandise, supplies and/or services as are handled by retail hardware dealers and/or dealers in lumber and building supplies or dealers engaged in business as stated in Article II, Section 1 hereof, must complete and receive approval of a Member Agreement in form and manner adopted by the Board of Directors and must become and remain the owner of such number of shares of stock of the Company as shall be established from time to time by the Board of Directors or have subscribed to purchase such shares by whatever plan of payment may be authorized by the Board of Directors. The Member Agreement shall contain such terms, conditions and agreements as the officers of this Corporation shall deem necessary or desirable or as shall be required hereunder, pursuant to the Certificate of Incorporation or these By-Laws, or pursuant to direction of the Board of Directors. The Member Agreement shall specify the servicemark under which such member may conduct his or her business. The Member Agreement shall not be assignable, or transferable, in any manner whatsoever, without the express written consent of the Corporation and shall contain, at a minimum, the following terms and provisions: (a) An express consent by the Member to the tax treatment and effects specified in section 2(b) of Article IX hereof; (b) An express condition to operate the business at the specific location stated in the Member Agreement. Member must apply for and obtain Membership for each location at which such Member sells or rents hardware, lumber and building supplies, and/or other merchandise or services received from or through the Company; (c) A requirement that the Member notify the Corporation in writing immediately upon any change in business name, form of organization (proprietorship, partnership, corporation or whatever), ownership or control; (d) A requirement that the Member purchase qualifying shares of the Corporation (as referred to in Article XII of these By-Laws) pursuant to a subscription agreement; (e) Automatic modification of the Member Agreement upon notice by the Corporation to the Member of any relevant changes in the Certificate of Incorporation, By-Laws, or by approval of the Board of Directors; and (f) Necessary conditions regarding use of the True Value and any other Company owned trademarks which must be complied with. SECTION 3. TERMINATION. Each Member Agreement may be terminated as provided therein. SECTION 4. CHANGE IN FORM OF BUSINESS. In the event a Member changes a sole proprietorship, partnership or joint venture to a corporate form, where the Corporation has agreed to accept the corporate successor-in-interest as a Member, then the Member shall sell, transfer or otherwise assign to such successor-in-interest all shares of stock of this Corporation owned by such Member. Such shares shall remain subject to the Corporation's liens and right of setoff and all other rights provided for in the Certificate of Incorporation, By-Laws or Member Agreement. 10 11 SECTION 5. MECHANICS OF SETOFF. Notes issued by the Corporation, whether issued incidental to the distribution of Patronage Dividend or to the redemption of Class B Common Stock, shall provide that if the Corporation exercises its right of setoff, the value of the note to be setoff against the holder's indebtedness to the Corporation or one of its subsidiaries shall be determined at the time of setoff as follows: The Corporation shall have the right to discount the note to its then current cash value, which shall be in the lesser of the face amount of the note or the yield to maturity of the note as discounted at a rate per annum equal to the prime rate at the time of setoff at the Harris Trust and Savings Bank, Chicago, Illinois, plus two (2) percentage points. ARTICLE IX PATRONAGE DIVIDENDS SECTION 1. PAYMENT OF PATRONAGE DIVIDENDS. The Corporation shall distribute Patronage Dividends to Members annually on the basis of the volume of and margins applicable to merchandise and/or services purchased by each Member, which equal the excess (if any) of gross margins and other income from business done with or for Members, after deducting therefrom the following: (a) Expenses directly or indirectly related to such business; (b) Such reasonable reserves for necessary corporate purposes as may from time to time be provided by the Board of Directors for depreciation and obsolescence, state and federal taxes, bad debts, casualty losses, insurance and other corporate and operating charges and expenses, all established and computed in accordance with generally accepted accounting principles; (c) Such reasonable reserves for working capital necessary for the operation of the Corporation and for deficits arising from such operation, (including deficits from business other than business done with or for Members). Any amount set aside for reserves shall first be set aside from net earnings, if any, of the Corporation from business other than business done with or for Members, and only the excess shall be deducted from gross margins from business done with or for Members in the computation described above. The amounts set aside for reserves in any year from gross margins of the Corporation from business done with or for Members shall be allocated, to the extent possible, to Members on the books of the Corporation on a patronage basis for that year, or, in lieu thereof, the books or records of the Corporation shall afford a means of doing so at any time, so that in the event of a distribution of amounts formerly carried in reserves each Member may receive, to the extent possible, Member's pro rata share thereof. SECTION 2. (a) METHOD AND TIMING OF PAYMENT. The Patronage Dividend to which stockholder-Members become entitled for each fiscal year shall be distributed no later than the fifteenth day of the ninth month following such fiscal year. The Board of Directors may, in its discretion, determine to pay Patronage Dividends either all in a form that will be treated as a deductible qualified written notice of allocation within the meaning of section 1388(c) of the Internal Revenue Code of 1986, as amended (hereinafter referred to as the "IRC"), all in a form that will be treated as a nonqualified written notice of allocation within the meaning of section 1388(d) of the IRC, or part in qualified form and part in nonqualified form. At least twenty percent (20%) of any qualified payment of Patronage Dividends shall be paid in cash. Subject to this limitation with respect to qualified distributions, the Board of Directors may decide that the balance of any Patronage Dividend be paid, in whole or in part, in cash, property, Class B Common Stock, promissory notes or other evidences of indebtedness, or in any other form of written notice of allocation (within the meaning of section 1388(b) of the IRC). 11 12 (b) TAX TREATMENT OF PATRONAGE DIVIDEND BY MEMBERS. Each person who is a Member of the Corporation on the effective date of this section 2(b) of this Article IX of the By-Laws and continues as a Member after such date and each person who becomes a Member of the Corporation after such effective date shall, by such act alone, consent and be deemed to have consented that the amount of any distributions with respect to the Member's patronage which are made in written notices of allocation (as defined in section 1388 of the IRC) and which are received by the Member from the Corporation, will be taken into account by the Member at their stated dollar amounts in the manner provided in section 1385(a) of the IRC in the taxable year in which such written notices of allocation are received by the Member. This consent, however, shall not extend to written notices of allocation received by the Member as part of a nonqualified payment of patronage which clearly indicate on their face that they are nonqualified. By way of illustration, the term "written notice of allocation" shall include such items as the Promissory Notes, the shares of Class B Common Stock, a notice or statement that such securities have been deposited with a bank or other qualified agent on behalf of the Member, a notice of credit to the account of the Member on the books of the Corporation (against stock subscription or any other indebtedness as the Corporation may elect) and such other forms of notice as the Board of Directors may determine, distributed by the Corporation in payment, or part payment of the Patronage Dividends. The stated dollar amount of the Promissory Notes is the principal amount thereof and the stated dollar amount of the shares of Class B Common Stock is the par value thereof. SECTION 3. ISSUANCE OF CLASS B COMMON STOCK. In order to ensure the Corporation's opportunity for healthy growth and expansion and in order to meet the corresponding needs for additional working capital the following plan for the investment by Members of part of the Patronage Dividend shall, subject to modification or termination by the Board of Directors, be in effect: (a) ANNUAL ISSUANCE. With respect to the Patronage Dividend payable for each fiscal year, the Corporation may pay each Member a portion of such Patronage Dividend, not to exceed two percent (2%) of Member's net purchases (computed to the nearest multiple of $100) from the Corporation during such fiscal year, in shares of Class B Common Stock of the Corporation at the par value thereof; provided, however, that at least twenty percent (20%) of such Member's Patronage Dividend shall be paid in money or by qualified check. SECTION 4. PROMISSORY NOTES. Subject only to the payment of at least twenty percent (20%) of each Member's annual Patronage Dividend in cash and distribution of Class B Common Stock as provided in section 3 of this Article IX, the Corporation may pay each Member all or any portion of the annual Patronage Dividend in Promissory Notes which shall bear interest at the rate from time to time fixed by the Board of Directors and shall mature at the time fixed by the Board of Directors not later than five (5) years from the date of issuance, and may be subordinated to any liabilities or obligations of the Corporation, existing, contingent or created after date of issuance. The Corporation shall have a lien upon and a right of setoff against any said Promissory Notes issued to a Member to secure payment of any indebtedness due the Corporation or any of its subsidiaries by the Member. SECTION 5. HARDSHIP. If, upon application by a Member, the Board of Directors shall determine that payment of such Member's Patronage Dividend for any year by the method herein provided or prescribed by the Board of Directors imposed an undue hardship upon such Member, the Board of Directors, in its discretion and with due regard for the financial condition and requirements of the Corporation, may authorize and cause the payment of all or any additional part of such Patronage Dividends in cash. The Board of Directors may implement this provision by adopting hardship guidelines and delegating authority to an officer or officers. ARTICLE X GENERAL PROVISIONS SECTION 1. DIVIDENDS. Dividends upon the capital stock of the Corporation, subject to the provisions of the Certificate of Incorporation, may be declared out of gross margins of the Corporation, other than gross margins from business done with or for Members, after deducting therefrom all expenses directly or indirectly allocable thereto, by the Board of Directors at any regular or special meeting, pursuant to law. Dividends may be paid in cash, property, Promissory Notes, or shares of the capital stock, subject to the provisions of the Certificate of Incorporation. 12 13 SECTION 2. ANNUAL STATEMENT. The Board of Directors shall present at each annual meeting and when called for by vote of the stockholders at any special meeting of the stockholders, a full and clear statement of the business and conditions of the Corporation. SECTION 3. CHECKS. All checks or demands for money and notes of the Corporation shall be signed by such officer or officers or as the Board of Directors may from time to time designate. SECTION 4. FISCAL YEAR. The fiscal year shall end on December 31 of each year. ARTICLE XI BY-LAW AMENDMENTS SECTION 1. BY-LAW AMENDMENTS. These By-Laws may be altered or repealed at any annual meeting of the stockholders or at any special meeting of the stockholders at which a quorum is present or represented, provided notice of the proposed alteration or repeal be contained in the notice of such special meeting, or by the affirmative vote of two-thirds of the Board of Directors then in office at any regular meeting of the board or at any special meeting of the board if notice of the proposed alteration or repeal be contained in the notice of such special meeting; provided, however, that no change of time or place of the meeting for the election of directors shall be made within sixty (60) days next before the day on which such meeting is to be held, and that in case of any change of such time or place, notice thereof shall be given to each stockholder in person, by any electronic communication, or by letter mailed to the stockholder's last known post office address at least twenty (20) days before the meeting is held. ARTICLE XII QUALIFYING SHARES OF CAPITAL STOCK SECTION 1. QUALIFYING SHARES. The unit ownership of Class A Common Stock shall consist of sixty (60) shares and no person shall be deemed to be a stockholder of the Corporation or shall exercise any of the rights of a stockholder until such person has become the holder of record of sixty (60) fully paid and nonassessable shares of said Class A Common Stock, $100 par value, for each store owned up to a maximum of three hundred (300) such shares, representing five (5) or more stores. ARTICLE XIII INDEMNIFICATION OF DIRECTORS, OFFICERS AND EMPLOYEES SECTION 1. INDEMNIFICATION. (a) The Corporation shall indemnify 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 (other than an action by or in the right of the Corporation) by reason of the fact that such person is or was a director, officer, employee or agent of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses for which such person has not otherwise been reimbursed (including attorneys' fees, judgments, fines and amounts paid in settlement) actually and reasonably incurred by such person in connection with such action, suit or proceeding, if such person acted in good faith and in a manner which was reasonably believed to be in or not opposed to the best interests of the Corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe that the conduct in question was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that the person did not act in good faith and in a manner which was reasonably believed to be in or not opposed to the best interest of the Corporation, and, with respect to any criminal action or proceeding had reasonable cause to believe that the conduct in question was unlawful. (b) The Corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the Corporation to procure a judgment in its favor by reason of the fact that such person is or was a director, officer, employee or agent of the Corporation, or is 13 14 or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against expenses for which such person has not otherwise been reimbursed (including attorneys' fees and amounts paid in settlement) actually and reasonably incurred by such person in connection with the defense or settlement of such suit or action if such person acted in good faith and in a manner which was reasonably believed to be in or not opposed to the best interests of the Corporation and except that no indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable for negligence or misconduct in the performance of such person's duty to the Corporation unless and only to the extent that the Court of Chancery of Delaware or the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnification for such expenses which the Court of Chancery of Delaware or such other court shall deem proper. (c) To the extent that a director, officer, employee or agent of the Corporation has been successful on the merits or otherwise in defense of any action, suit or proceeding referred to in Paragraphs 1(a) or (b) of this Article, or in defense of any claim, issue or matter therein, such person shall be indemnified against expenses (including attorneys' fees), actually and reasonably incurred by such person in connection therewith. (d) Any indemnification under Paragraphs 1(a) or (b) of this Article (unless ordered by a court) shall be made by the Corporation only as authorized in the specific case upon a determination that indemnification of the director, officer, employee or agent is proper in the circumstances because such person has met the applicable standard of conduct set forth in such Paragraphs 1(a) or (b) of this Article. Such determination shall be made (i) by the Board of Directors by a majority vote of a quorum, consisting of directors who were not parties to such action, suit or proceeding, or (ii) if such a quorum is not obtainable, and a quorum of disinterested directors so directs, by independent legal counsel in written opinion, or (iii) by the stockholders. (e) Expenses incurred by defending a civil or criminal action, suit or proceeding may be paid by the Corporation in advance of the final disposition of such action, suit or proceeding as authorized by the Board of Directors in the specific case upon receipt of an undertaking by or on behalf of the director, officer, employee or agent to repay such amount unless it shall ultimately be determined that he is entitled to be indemnified by the Corporation. (f) The indemnification provided in this Article shall not be deemed exclusive of any other rights to which those seeking indemnification may be entitled under any by-law, agreement, vote of stockholders or disinterested directors or otherwise, or of any other indemnification which may be granted to any person apart from this Article, both as to action in its official capacity and as to action in another capacity while holding office, and shall continue as to a person who has ceased to be a director, officer, employee or agent and shall inure to the benefit of the heirs, executors and administrators of such a person. SECTION 2. INSURANCE. The Corporation shall have power to purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the Corporation or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against any liability asserted against and incurred by such person in any such capacity, or arising out of its status as such, whether or not the Corporation would have the power to indemnify such person against such liability under the provisions of this Article. 14 EX-10.A 4 c63737ex10-a.txt RETAIL MEMBER AGREEMENT WITH TRUSERVE CORPORATION 1 EXHIBIT 10-A RETAIL MEMBER AGREEMENT WITH TRUSERV CORPORATION 2 RETAIL MEMBER AGREEMENT WITH TRUSERV CORPORATION AN INDEPENDENT RETAILER COOPERATIVE THIS AGREEMENT between -------------------------------------------------------- d/b/a ------------------------------------------------------------------------- [ ] True Value [ ] Home & Garden Showplace [ ] Induserve [ ] Non-Branded [ ] Grand Rental Station [ ] Party Central [ ] Taylor Rental - -------------------------------------------------------------------------------- (Full Address) the retail member hereinafter referred to as the "Member," and TRUSERV CORPORATION, a Delaware Corporation, hereinafter referred to as the "Company." The Company is an organization operated on a cooperative basis by and for independent retailers who operate hardware stores, home or garden centers, rental stores or similar retail operations. WHEREBY it is agreed as follows: THE COMPANY AGREES: To sell merchandise of the type typically sold in retail hardware stores or home and garden centers or rented at full service rental centers, to provide for shipment or delivery of such merchandise to the Member's address indicated on this Agreement, to permit use of the service mark associated with the program checked above ("Designated Mark") and other permitted Company owned servicemarks, trademarks, collective membership marks, tradenames or brandnames ("Marks") under the conditions of this Agreement for so long as the Company has a current registration, and to offer services to the Member. To invoice at the Company's current prices in respect of the category of merchandise and services involved, and to apply all payments by Member toward final settlement of the Member's financial obligations. The excess, if any, of the payments made, less any additional expenses due to non-conformance with established payment policies or prescribed procedures, shall be paid or credited to the Member. To pay annually to the Member a Patronage Dividend on the basis of the volume of and margins applicable to merchandise and services purchased by the Member from the Company during each such year. Patronage Dividends shall be determined as of the end of each fiscal year of the Company and shall be payable out of the excess, if any, of gross margins from business done with or for Members, after deducting therefrom the following: (a) Expenses directly or indirectly related to such business; (b) Such reasonable reserves for necessary corporate purposes as may from time to time be provided by the Board of Directors for depreciation and obsolescence, state and federal taxes, bad debts, casualty losses, insurance and other corporate and operating charges and expenses, all established and computed in accordance with generally accepted accounting principles; and (c) Such reasonable reserves for working capital necessary for the operation of the Company and for deficits arising from such operation, including deficits from business other than business done with or for Members. 3 That within a reasonable time following but in no event later than the fifteenth day of the ninth month after the close of each fiscal year, the Patronage Dividends shall be computed in respect of such year and a proper allocation and payment thereof made to the Member based on the volume and applicable margins of merchandise and services purchased by the Member. Patronage Dividends are paid in accordance with the Company's By-Laws (principally Article IX thereof) which provide, in substance, as follows: Re: Form of Patronage Distribution Generally "The Board of Directors may, in its discretion, determine to pay Patronage Dividends either all in a form that will be treated as a deductible qualified written notice of allocation within the meaning of section 1388(c) of the Internal Revenue Code of 1986, as amended (hereinafter referred to as the "IRC"), all in a form that will be treated as a nonqualified written notice of allocation within the meaning of section 1388(d) of the IRC, or part in qualified form and part in nonqualified form. At least twenty percent (20%) of any qualified payment of Patronage Dividends shall be paid in cash. Subject to this limitation with respect to qualified distributions, the Board of Directors may decide that the balance of any Patronage Dividend be paid, in whole or in part, in cash, property, Class B Common Stock, promissory notes or other evidences of indebtedness, or in any other form of written notice of allocation (within the meaning of section 1388(b) of the IRC)." [IX section 2(a), in part.] Re: Class B Common Stock "With respect to the Patronage Dividend payable for each fiscal year, the Company may pay each Member a portion of such Patronage Dividend, not to exceed two percent (2%) of Member's net purchases (computed to the nearest multiple of $100) from the Company during such fiscal year, in shares of Class B Common Stock of the Company at the par value thereof; provided, however, that at least twenty percent (20%) of such Member's Patronage Dividend shall be paid in money or by qualified check." [IX section 3(a).] Re: Promissory (Subordinated) Notes "Subject only to the payment of at least twenty percent (20%) of each Member's annual Patronage Dividend in cash and distribution of Class B Common Stock as provided in section 3 of this Article IX, the Company may pay each Member all or any portion of the annual Patronage Dividend in Promissory Notes which shall bear interest at the rate from time to time fixed by the Board of Directors and shall mature at the time fixed by the Board of Directors not later than five (5) years from the date of issuance, and may be subordinated to any liabilities or obligations of the Company, existing, contingent or created after date of issuance." [IX section 4, in part.] To hold Markets and other meetings from time to time for the purpose of keeping Members better informed on trends in the industry, presenting merchandise or services available and enabling Members to exchange ideas with fellow Members. THE MEMBER AGREES: Upon execution of this Agreement, to purchase sixty (60) qualifying shares of the Company's Class A Common Stock at a purchase price of $100 per share for each store owned by Member, to a maximum of three hundred (300) shares for five (5) or more stores, as defined in the Subscription to Shares agreement, attached hereto and made a part of this Agreement. To establish, operate and maintain a retail hardware store, home or garden center ("Retail Store") retailing merchandise and services to consumers if the Designated Mark is True Value or Home & Garden Showplace, or a full service rental store ("Rental Center") renting appropriate merchandise if the Designated Mark is Taylor Rental or Grand Rental, or to carry on related retail activities if using any other Designated Mark indicated above, and to sell or rent merchandise carrying the Company's exclusive brands only at the retail location indicated on this Agreement. To utilize the Company as its primary supplier for the types of merchandise offered by the Company under each Agreement for which a Member signs. To buy from the Company in accordance with the Company procedures and practices set forth in the Policies and Procedures Manual, which include entering warehouse orders using electronic order entry equipment functionally 2 4 compatible with the Company's equipment, and entering all other orders using electronic equipment whenever possible. To comply with the Company's By-Laws as may be amended from time to time. To notify the Company, in writing, immediately upon any change in business name, form, ownership or control. To pay on the date due all invoices on accounts receivable statements and any other financial obligations to the Company and subsidiaries, and to pay a one and one-half percent (1-1/2%) per month service charge, but not to exceed the maximum amount permitted by law, on past due balance of accounts. Upon either termination of this Agreement or Member's failure to pay on the date due all invoices on accounts receivable statements and any other financial obligations to the Company, to pay immediately all amounts due, including future dated invoices, from the Member to the Company and its subsidiaries. That all information and material furnished the Member, including without limitation, bulletins, price lists, brands, services, illustrated catalogs, merchandising and pricing options, computer hardware and software, electronic data and the Policies and Procedures Manual is confidential property of the Company, developed and promoted for the benefit of Members, and the Member agrees not to divulge or display any of the information contained in this material to anyone who is not a Member, or not affiliated with the Company, and not to use such information in a way which is detrimental to the Company or its Members. The Member agrees to use such information and material only in connection with the Member's purchases from the Company and for the purpose of promoting the Member's retail business with the Member's retail customers. The Member acknowledges and confirms that any dissemination or other disclosure of such information and material for any other purpose, or to anyone not affiliated with the Company, shall cause immediate and irreparable harm to fellow Members and the Company. All such information and material shall be immediately returned to the Company upon termination of this Agreement. To review the By-Laws and prospectus of the Company, receipt of which is hereby acknowledged, and which provide, in Article IX section 2(b) of the By-Laws, that Membership in the Company constitutes consent to take written notices of allocation into account at their stated dollar amount as provided in section 1385(a) of the IRC, unless such written notices clearly indicate on their face that they are nonqualified, in the taxable year in which received. By entering into this Agreement and becoming a member of this Company after receiving a copy of the By-Laws and notification of the By-Law consent provision, Member agrees and consents to be bound by Article IX, section 2(b) of the By-Laws. Such "membership consent" (within the meaning of section 1388(c)(2)(B) of the IRC) may be revoked by Member only by terminating its Membership in the Company in the manner provided in this Agreement. That the Board of Directors has the authority to set the composition of the Patronage Dividend each year, provided that at least twenty percent (20%) of each Member's share is paid in money or by qualified check. That the Member may receive different services or charges based on the amount of merchandise purchased by Member. To the right and necessity of the Company to control the use of its Designated Mark and other Marks and to maintain the reputation for quality products, services and goodwill associated with such Marks. That the display and use of the Designated Mark or any other Company owned Marks are permitted only on the following conditions: (a) The Designated Mark and any other Marks permitted by the Company, are the only servicemarks which Member is entitled to use, and the Company may, at its sole discretion, sell specified exclusive brand merchandise only to Members who are permitted to use a particular Designated Mark; (b) The Designated Mark or any other Company owned Marks cannot be used with the trademark or servicemark of any hardware store, home or garden center, building center, rental center or merchandising organization other than the Company's, and may only be used at the retail location indicated on this Agreement; (c) The Member's store and premises will be maintained in a clean and orderly condition; 3 5 (d) If a Retail Store, the Member will offer sufficient breadth and depth of merchandise in the core retail departments to serve the needs of retail consumers. For a hardware store, these departments include: Builders Hardware and Supplies, Cleaning Supplies, Electrical Supplies, Lawn and Garden, Paint and related Sundries, Plumbing, Tools and Home Decor; (e) If a Retail Store, the Member will maintain a retail inventory of representative quantities of the Company's exclusive brand merchandise (including, for example, paint and outdoor power equipment for hardware stores), as offered, advertised and promoted by the Company; (f) If a Rental Center, the Member will offer sufficient breadth and depth of rental merchandise to serve the needs of rental consumers; (g) The Member's business operations will be conducted in such a fashion as to enhance the reputation of fellow Members and the Company; and (h) That Member shall not be entitled to use the Designated Mark or any other Company owned Mark as part of its corporate or partnership name, with the exception of any Member who was a Member and used it as such prior to January, 1997. That during the term of this Agreement, Member shall not obtain any proprietary rights in the Designated Mark or any other Company Marks by use thereof. Member expressly acknowledges and agrees that the license granted under this Agreement to use the Designated Mark or any other Company owned Mark is non-exclusive and non-transferable, and that the Company has and retains the right to grant other licenses without any limitations as to territory, product, terms or otherwise. Within thirty days of termination of this Agreement, Member shall cease the use of all Company owned Marks, including the Designated Mark, and remove, at Member's expense, all store identification signs and decals which contain any Marks owned by the Company, shall cease any display or advertising, directly or indirectly, as a store using the Designated Mark, and shall delete the Designated Mark and any other Company owned Marks from its business name including, if applicable, Member's corporate name. That if Member fails to comply with this paragraph within the time stated, Member authorizes and fully empowers the Company, or its agent, at Member's expense, to enter upon its store property and buildings, and remove all exterior and interior signs, decals and other identification items specified in this paragraph, and also to withhold any monies due Member until the terms of this paragraph are complied with. That the Company has not made any representation or prediction as to the profitability of Member's store. THE COMPANY AND MEMBER AGREE: That Member, as an independent retailer, is free to decide how to operate its business, determine what merchandise it will stock, sell or rent and how its store shall be identified. That the amount of any distributions with respect to Member's patronage made in written notices of allocation (as defined in section 1388 of the IRC) and which are received by Member from the Company, will be taken into account by Member at their stated dollar amounts in the manner provided in section 1385(a) of the IRC in the taxable year in which such written notices of allocation are received by Member; provided, however, that this Agreement shall not extend to written notices of allocation received by Member as part of a Patronage Dividend which clearly indicate on their face that they are nonqualified. The Member understands and agrees that the Promissory Notes and the shares of Class B Common Stock distributed by the Company in payment, or part payment, of the Patronage Dividends are "written notices of allocation" within the meaning of the statute and must be taken into account by Member. The stated dollar amount of the Promissory Notes is the principal amount thereof and the stated dollar amount of the shares of Class B Common Stock is the par value thereof. The first sentence of this paragraph is intended to constitute "consent in writing" within the meaning of section 1388(c)(2)(A) of the IRC and may be revoked as provided in section 1388(c)(3)(B) of the IRC, provided, however, that, so long as Member remains a member of the Company, revocation by Member of its "consent in writing" shall not revoke Member's "membership consent." 4 6 That the Promissory Notes and Class A and Class B Common Stock need not be physically distributed to the Member but may be held in safekeeping for the Member (either in separate securities or as part of a bulk security) and that notices of the Member's allocation of Promissory Notes and Class B Common Stock to be deposited in safekeeping are "written notices of allocation" and shall be taken into account as provided for in this Agreement. That this Agreement is not assignable or transferable by the Member without the written consent of the Company, but Company shall have the right to assign this Agreement. Change in control or management of a corporate, partnership or limited liability company Member must be approved in writing by the Company. That this Agreement shall continue in force from year to year unless it is terminated as follows: The Company shall have the right to immediately terminate this Agreement by written notice to the Member, (i) in the event and at the time or after the Member becomes insolvent, commits any act of bankruptcy, files a voluntary petition in bankruptcy, is adjudicated a bankrupt, or (ii) breaches any term, condition or obligation under this Agreement or any other agreement with the Company or one of its subsidiaries, which breach is not cured within thirty (30) days (ten (10) days in case of nonpayment of accounts receivable statements or any other financial obligations to the Company, or within the applicable cure period in an agreement with the Company subsidiary) after the Member's receipt of written notice of such breach from the Company. This Agreement may be terminated unilaterally by the Member upon sixty (60) days written notice mailed to any executive officer of the Company at the Company's principal office. This Agreement may be terminated unilaterally by the Company upon sixty (60) days written notice mailed to the Member at the address shown on the books of the Corporation; provided, however, that such termination by the Company shall occur after the affirmative vote of two-thirds or more of the directors then in office that such termination is in the best interests of the Company. Without limiting the generality of the foregoing, the following events shall be deemed to create situations in which it is prima facie in the best interests of the Company to terminate an agreement with a Member: death or incapacity of a Member, low or no participation, change in the nature, composition, management, or control of a Member's business organization, or Member engages in a course of conduct or undertakes actions which are reasonably determined by the Board of Directors to be materially adverse to the interests of the Company, or any other reason set forth in the By-Laws of the Company. That this Agreement shall be automatically modified upon notice from the Company to the Member of any relevant change in the Certificate of Incorporation and/or By-Laws of the Company, or by resolution of the Board of Directors. That this Agreement, and any other agreement which Member signs with the Company, is the entire and complete Agreement between the Member and the Company and that there are no prior agreements, representations, promises, or commitments, oral or written, which are not specifically contained in this Agreement or any other agreement which Member signs with the Company. That the current form of the Company Member Agreement shall govern all past and present relations, actions or claims arising between the Company and the Member. That should any provision of this Agreement be declared invalid under or in conflict with any existing or future law or regulation such provision shall be modified to conform with that law and such modification shall not affect any other provision of this Agreement which shall continue in full force and effect. That failure on the part of the Company at any time or times to enforce any breach by Member of the Membership Agreement, Certificate of Incorporation, By-Laws, or Policies of the Company, or of any written agreements with Member shall not constitute or be held to be a waiver of any succeeding breach thereof. That the Company shall have a lien on and a right of setoff against any stock or notes, including those issued as Patronage Dividends, and against any cash portion of such Patronage Dividend which is in excess of twenty percent (20%) of the overall Patronage Dividend payable in any year for such indebtedness of the Member to the Company or its subsidiaries as may, for whatever cause, exist. In the event that the Company initiates proceedings to recover amounts due it by Member or for any breach of this Agreement or to seek equitable or injunctive relief against the Member, the Company shall be entitled to the recovery of all associated costs, interest and reasonable attorney's 5 7 fees. This Agreement shall be enforced against either Member or Company, only in courts located in Cook County or any Illinois county contiguous to Cook County, Illinois, and only be interpreted in accordance with the substantive laws of Illinois without giving effect to its conflict of laws principles. Prospective Member's signature on this Agreement constitutes an offer only and this Agreement shall have no force or effect until duly accepted and signed by the Company at its principal office and National Headquarters which is located at 8600 West Bryn Mawr Avenue, Chicago, Illinois 60631-3505. WITNESS the Member's hand and seal this _____ day of ________, 20__. - ------------------------------------------------------------------------------- Member Entity d/b/a --------------------------------------------------------------------------- check: sole proprietor partnership corporation limited liability company Retail Location Address --------------------------------------------------------- City State Zip ----------------------- --------------------- -------------- By: ----------------------------------------------------------------------------- [ ] [ ] [ ] [ ] Title: -------------------------------------------------------------------------- WITNESS ------------------------------------------------------------------------- Address ------------------------------------------------------------------------- City State Zip ----------------------- --------------------- -------------- ACCEPTED this _____ day of ______________, 20____, at Chicago, Illinois, By TRUSERV CORPORATION, by its duly authorized agent. - ----------------------------------------------------------------------- President - ----------------------------------------------------------------------- -6- EX-10.D 5 c63737ex10-d.txt SAVINGS AND COMPENSATION DEFERRAL PLAN 1 EXHIBIT 10-D TRUSERV CORPORATION SAVINGS AND COMPENSATION DEFERRAL PLAN Amended and restated as of July 1, 2000 2 ARTICLE 1. DEFINITIONS 1.01 Account means the entire interest of a Participant in the Trust Fund as of the date of reference. A Participant's Account shall consist of his Deferral Account, Profit Sharing Account, Matching Account, Savings Account, Pension Account and Rollover Account and, if applicable, his loan fund under Section 7.03. 1.02 Accrued Benefit means the amount standing in a Participant's Account as of any date, derived from both Company contributions and Associate contributions, if any. 1.03 Actual Deferral Percentage means, with respect to a specified group of Associates, the average of the ratios, calculated separately for each Associate in that group, of (a) the amount of Income Deferral Contributions made pursuant to Article 3. hereof for a Plan Year (including Income Deferral Contributions returned to a Highly Compensated Employee under Section 3.01(c) and Income Deferral Contributions returned to any Associate pursuant to Section 3.01(d), to (b) the Associates' Compensation for that entire Plan Year, provided that, upon direction of the Committee, Compensation for a Plan Year shall only be counted if received during the period an Associate is, or is eligible to become, a Participant. The Actual Deferral Percentage for each group and the ratio determined for each Associate in the group shall be calculated to the nearest one one-hundredth of one percent. For purposes of determining the Actual Deferral Percentage for a Plan Year, Income Deferral Contributions may be taken into account for a Plan Year only if they: (a) relate to compensation that either would have been received by the Associate in the Plan Year but for the deferral election, or are attributable to services performed by the Associate in the Plan Year and would have been received by the Associate within 2 1/2 months after the close of the Plan Year but for the deferral election, (b) are allocated to the Associate as of a date within that Plan Year and the allocation is not contingent on the participation or performance of service after such date, and (c) are actually paid to the Trustee no later than 12 months after the end of the Plan Year to which the contributions relate. 1.04 Adjustment Factor means the cost of living adjustment factor prescribed by the Secretary of the Treasury under Section 415(d) of the Code for calendar years beginning on or after January 1, 1988, and applied to such items and in such manner as the Secretary shall provide. 1.05 Affiliated Company means any company not participating in the Plan which is a member of a controlled group of corporations (as defined in Section 414(b) of the Code) which also includes as a member TruServ Corporation, any trade or business under common control (as defined in Section 414(c) of the Code) with TruServ Corporation, a member of an affiliated service group (as defined in Section 414(m) of the Code) which includes TruServ Corporation, or any other entity required to be aggregated with TruServ Corporation pursuant to Regulations under Section 414(o) of the Code, except that with respect to Section 3.10 and the definition of "leased employee" in Section 1.09 "more than 50%" shall be substituted for "at least 80%" where it appears in Section 1563(a)(1) of the Code. -1- 3 1.06 Anniversary Date means the last day in each Plan Year. 1.07 Annual Dollar Limit means $150,000 commencing with the 1994 Plan Year. The Annual Dollar Limit shall be adjusted in accordance with Section 401(a)(17)(B) of the Code. 1.08 Annuity Starting Date means the first day of the first period for which an amount is paid as an annuity or any other form following a Participant's retirement or other termination of employment. 1.09 Associate means any person employed by the Company who receives stated compensation other than a pension, severance pay, retainer or fee under contract and is a member of a group of Associates to whom the Plan has been and continues to be extended by the Company. Any person considered to be an independent contractor or consultant by the Company shall be excluded from the definition of Associate, regardless of such person's classification by the Internal Revenue Service for tax withholding purposes. Associate shall not include any "leased employee" as defined in Section 414(n) of the Code and any person who is included in a unit of Associates covered by a collective bargaining agreement which does not provide for his participation in the Plan. In the case of any person who is a leased employee immediately before or after a period of service as an Associate, the entire period during which he has performed services for the Company or an Affiliated Company as a leased employee shall be counted as service as an Associate for all purposes of the Plan, except that he shall not, by reason of that status, become a Participant of the Plan. 1.10 Beneficiary means any person, persons or entity named by a Participant by written designation filed with the Committee to receive benefits payable in the event of the Participant's death. However, if the Participant is married, his spouse shall be deemed to be the Beneficiary unless another Beneficiary has been named by a written designation filed with the Committee which has been signed by the Participant with Spousal Consent. If no such designation is in effect at the time of death of the Participant, or if no person, persons or entity so designated shall survive the Participant, the Participant's surviving spouse, if any, shall be deemed to be the Beneficiary; otherwise the Beneficiary(ies) shall be, at the Committee's discretion, any relative by blood, adoption or marriage in such proportion as the Committee determines or the estate of the last to die of the Participant or his designated Beneficiary. 1.11 Board of Directors means the Board of Directors of the Company. 1.12 Break in Service means an event affecting forfeitures, which shall occur as of the Participant's Severance Date if he is not reemployed by the Company or an Affiliated Company within one year after a Severance Date. However, if an Associate is absent from work immediately following his active employment, irrespective of whether the Associate's employment is terminated, because of the Associate's pregnancy, the birth of the Associate's child, the placement of a child with the Associate in connection with the adoption of that child by the Associate or for purposes of caring for that child for a period beginning immediately following that birth or placement and that absence from work began on or after the first day of the Plan Year which began in 1985, a Break in Service shall occur only if the Participant does not return to work within two years of his Severance Date. A Break in Service shall not occur during an approved leave of absence or during a period of military service which is included in the Associate's Service pursuant to Section 1.44. -2- 4 1.13 Coast Plan means the SERVISTAR/Coast to Coast Profit Sharing and Savings Plan sponsored by the SERVISTAR/Coast to Coast Corporation, which was merged into the SERVISTAR plan as of August 1, 1996. 1.14 Code means the Internal Revenue Code of 1986, as amended. 1.15 Committee means the committee named as such pursuant to the provisions of Article 8. 1.16 Company means TruServ Corporation and any successor entity thereto which adopts this Plan. Cotter & Company and SERVISTAR COAST TO COAST Corporation merged on July 1, 1997 and became TruServ Corporation. 1.17 Compensation means the total remuneration actually paid to the Participant by the Company during the Plan Year to which reference is made, determined prior to any pre-tax contributions under a "qualified cash or deferred arrangement" (as defined under Section 401(k) of the Code and its applicable regulations) or under a "cafeteria plan" (as defined under Section 125 of the Code and its applicable regulations). Compensation shall include basic salary or wages (including commissions, bonuses (other than sign-on bonuses)), and all other direct current remuneration, such as vacation, holiday and sick pay, but shall not include severance pay, moving or relocation allowances or bonuses, tuition reimbursements, automobile or travel allowances or bonuses, or long-term disability pay paid during the period the Participant is an active Participant, Company Contributions to Social Security, contributions to this or any other deferred profit sharing or retirement plan or program, stock options, or the value of any other fringe benefits provided at the expense of the Company and not specifically included herein. However, Compensation shall not exceed the Annual Dollar Limit, provided that such Annual Dollar Limit shall not be applied in determining Highly Compensated Employees under Section 1.27. 1.18 Contribution Percentage means, with respect to a specified group of Associates, the average of the ratios, calculated separately for each Associate in that group, of (a) the amount of Participant's Matching Contributions (excluding any Matching Contributions forfeited under the provisions of Sections 3.01 and 3.06, to (b) the Associate's Compensation for that Plan Year, provided that upon direction of the Committee, Compensation for a Plan Year shall only be counted if received during the period an Associate is, or is eligible to become, a Participant. The Contribution Percentage for each group and the ratio determined for each Associate in the group shall be calculated to the nearest one one-hundredth of one percent. 1.19 Cotter Plan means the Cotter & Company Employees' Savings and Compensation Deferral Plan, originally effective January 1, 1976, which was merged with the SERVISTAR Plan effective January 1, 1998 to create this Plan. 1.20 Date of Employment means the first date on which an Associate completes an Hour of Service as an Associate, provided that in the case of a Break in Service the "Date of Employment" shall be the first date thereafter on which he completes an Hour of Service. -3- 5 1.21 Deferral Account means so much of the Participant's Account as is attributable to a Participant's Income Deferral Contributions, adjusted as provided herein for investment income, gain or loss and expenses. The Deferral Account shall hold: (a) the Participant's "Deferral Account" under the Cotter Plan, (b) the Participant's "Pre-Tax Account" under the SERVISTAR Plan (known as the "Savings Plus Account" prior to July 1, 1996), which also includes (c) the Participant's Coast Plan "Pre-Tax Account" merged into the SERVISTAR Plan as of August 1, 1996. 1.22 Disability means total and permanent physical or mental disability, as evidenced by: (a) receipt of Social Security disability pension, or (b) receipt of disability payments under the Company's long-term disability program. 1.23 Earnings means the amount of earnings to be returned with any excess deferrals, excess contributions or excess aggregate contributions under Section 3.01, 3.06, 3.07 or 3.08 for a Plan Year, determined as of the last day of such Plan Year under the Plan's method of allocating income to Participants' Accounts pursuant to Section 4.03. 1.24 Effective Date means January 1, 1998 for this amended and restated Plan. 1.25 Entry Date means any day of the Plan Year following an Associate's completion of one year of Service. 1.26 ERISA means the Associate Retirement Income Security Act of 1974, as amended from time to time. 1.27 Highly Compensated Employee means any Associate of the Company or an Affiliated Company (whether or not eligible for membership in the Plan) who: (a) was a 5% owner of the Company (as defined in Section 416(i) of the Code) for such Plan Year or the prior Plan Year, or (b) for the preceding Plan Year received Compensation in excess of $80,000 commencing with the 1997 Plan Year (as adjusted by the Secretary of the Treasury from time to time for the cost-of-living in accordance with Section 414(q) of the Code). The Company's preceding Plan Year election as described above, shall be used consistently in determining Highly Compensated Employees for determination years of all Associate benefit plans of the Company and any Affiliated Company for which Section 414(q) of the Code applies (other than a multiemployer plan) that begin with or within the same calendar year, until such election is changed by Plan amendment in accordance with Internal Revenue Service requirements. Notwithstanding the foregoing, the consistency provision in the preceding sentence shall not apply for the Plan Year beginning in 1997, and for Plan Years beginning in 1998 and 1999, shall apply only with respect to all qualified retirement plans (other than a multiemployer plan) of the Company and any Affiliated Company. Notwithstanding the foregoing, Associates who are nonresident aliens and who receive no earned income from the Company or an Affiliated Company which constitutes income from sources within the United States shall be disregarded for all purposes of this Section. -4- 6 The provisions of this Section shall be further subject to such additional requirements as shall be described in Section 414(q) of the Code and its applicable regulations, which shall override any aspects of this Section inconsistent therewith. 1.28 Hour of Service means each hour for which an Associate is directly or indirectly paid, or entitled to payment, by the Company or an Affiliated Company for the performance of duties. 1.29 Income Deferral Contributions means amounts contributed pursuant to Section 3.01. 1.30 Investment Fund means any one of or all of the investment funds available to a Participant as provided in Section 4.02. 1.31 Matching Account means so much of a Participant's Account as is attributable to the Company's Matching Contributions, adjusted as provided herein for investment income, gain or loss and expenses. The Matching Account shall also hold the Participant's match account under any plan merged, either directly or indirectly, into this Plan. 1.32 Matching Contributions means amounts contributed by the Company pursuant of Section 3.02. 1.33 Nonhighly Compensated Employees means for any Plan Year an Associate of the Company or an Affiliated Company who is not a Highly Compensated Employee for that Plan Year. 1.34 Normal Retirement Age means attainment of age 65. 1.35 Participant means any person who is an Associate and who has been admitted to participation in this Plan pursuant to the eligibility provisions of Article 2. A Participant ceases to be a Participant when all assets in his Account to which he is entitled under the Plan have been distributed in accordance with the Plan. 1.36 Pension Account means so much of the Participant's Account which was credited the "Participant's Pension Account" under the Coast Plan which had been transferred into the SERVISTAR Plan on behalf of the Participant from the Coast America Retirement Savings Plan, adjusted as provided herein for investment income, gain or loss and expenses. 1.37 Plan means the TruServ Corporation Savings and Compensation Deferral Plan as set forth herein, and as the same may from time to time hereafter be amended. This Plan was created by merger of the Cotter & Company Employees' Savings and Compensation Deferral Plan and the SERVISTAR COAST TO COAST Corporation Supplemental Retirement Plan, effective January 1, 1998. 1.38 Plan Year means the twelve-month period commencing each January 1. 1.39 Profit Sharing Account means so much of a Participant's Account as is attributable to the SERVISTAR Plan "Profit Sharing Account" merged into this Plan as of January 1, 1998, adjusted as provided herein for investment income, gain or loss and expenses. This SERVISTAR Plan "Profit Sharing Account" was called the "Company Contribution -5- 7 Account" prior to July 1, 1996. The "Profit Sharing Account" shall also hold the Participant's Coast Plan "Retirement Account" merged into the SERVISTAR Plan as of August 1, 1996. 1.40 Qualified Joint and Survivor Annuity means an annuity payable for the life of a Participant, and, after the Participant's death, an annuity payable to his spouse for life at the rate of not less than 50% nor more than 100% of the amount payable to the Participant. 1.41 Rollover Account means so much of the Participant's Account into which shall be credited the Rollover Contributions made by a Participant as set forth in Section 3.03, adjusted as provided herein for investment income, gain or loss and expenses. This Rollover Account shall also hold the Participant's Cotter Plan "Rollover Account" and SERVISTAR Plan "Rollover Account" (which includes the Coast Plan "Rollover Account" merged as of August 1, 1996) merged into this Plan as of January 1, 1998. 1.42 Rollover Contributions means amounts contributed pursuant to Section 3.03. 1.43 Savings Account means so much of a Participant's Account as is attributable to a Participant's after-tax contributions under the Cotter Plan or the SERVISTAR Plan or any other plan previously merged into them, adjusted as provided herein for investment income, gain or loss and expenses. This Savings Account was called the Employee Contribution Account prior to July 1, 1986. The Savings Account shall hold the Participant's Coast Plan "Employee Thrift Account" merged into this Plan as of August 1, 1996. 1.44 Service means, with respect to any Associate, his period of employment with the Company or an Affiliated Company, whether or not as an Associate, beginning on the date he first completes an Hour of Service (or the date he first completes and Hour of Service upon reemployment after a Break in Service) and ending on his Severance Date, provided that: (a) if his employment terminates and he is reemployed within one year of the earlier of: (i) his date of termination, or (ii) the first day of an absence from service immediately preceding his date of termination, the period between his Severance Date and his date of reemployment shall be included in his Service; (b) to the extent provided by the Company in a written agreement, an Associate's service with any predecessor to the Company will be considered as employment by the Company, thus, Service shall include an Associate's continuous employment with Cotter & Company under the provisions of the Cotter Plan, "Years of Service" with the SERVISTAR Corporation under the provisions of the SERVISTAR Plan, and continuous service with the Coast-to-Coast Corporation prior to its acquisition by the SERVISTAR Corporation, as recognized under the provisions of the Coast-to-Coast Corporation qualified retirement plan; (c) if he is on a leave of absence, any portion of that period of leave which is not otherwise included in his Service shall be included in his Service. A leave of absence means any of the following: (i) Absence on leave granted by the Company or an Affiliated Company for any cause for the period stated in such leave and any extension that the -6- 8 Company or an Affiliated Company may grant in writing. For the purpose of this subsection, the Company or an Affiliated Company shall give uniform treatment to all Associates in similar circumstances; (ii) Absence in any circumstances so long as the Associate continues to receive his regular pay from the Company or an Affiliated Company; (iii) Absence because of service in the uniformed armed forces of the United States by an Associate, if he shall have returned to employment with the Company or an Affiliated Company having applied to return while his reemployment rights were protected by law; or (iv) Absence by reason of vacation, holidays, illness, disability, maternity or jury duty. When a leave of absence ceases and the Associate does not return to Service, the last day of the leave shall be deemed a Severance Date unless his Service actually terminated prior to the expiration of the leave. (d) if a former Associate who is not vested with respect to any portion of his Deferral Account or Matching Account is reemployed by the Company or an Affiliated Company after he has incurred five consecutive one-year Breaks in Service, his period of Service prior to such five consecutive one-year Breaks in Service shall be disregarded for purposes of determining the vested portion of his Matching Account upon his reemployment if the consecutive number of his one-year Breaks in Service equal or exceed his years of Service. In no event shall a period of Service after an Associate has incurred five consecutive one-year Breaks in Service be taken into account in determining the vested portion of his Matching Account attributable to Service prior to such five year Break in Service. 1.45 SERVISTAR Plan means the SERVISTAR COAST TO COAST Corporation Supplemental Retirement Plan, originally effective July 1, 1964, which was merged with the Cotter Plan effective January 1, 1998 to create this Plan. 1.46 Severance Date means the earlier of: (a) the date an Associate quits, retires, is discharged or dies, or (b) the first anniversary of the date on which an Associate is first absent from service, with or without pay, for any reason such as vacation, sickness, disability, layoff or leave of absence. 1.47 Spousal Consent means the written consent of a Participant's spouse to the Participant's election of a specified form of benefit or designation of a specified Beneficiary. The specified form or specified Beneficiary shall not be changed unless further Spousal Consent is given. Spousal Consent shall be duly witnessed by a Plan representative or notary public and shall acknowledge the effect on the spouse of the Participant election. The requirement for Spousal Consent may be waived by the Committee in the event that the Participant establishes to its satisfaction that he has no spouse, that such spouse cannot be located, or under such other circumstances as may be permitted under applicable Treasury Department regulations. Spousal Consent shall be applicable only to the particular spouse who provides such consent. 1.48 Trust Fund means such money or property as shall from time to time be paid to the Trustee under this Plan, and such earnings, profits, increments, additions and appreciation thereto, decreased by losses, depreciation, benefits paid and expenses incurred in the administration of the Plan and Trust. 1.49 Trustee means the party or parties so designated pursuant to a trust agreement by the Company for this Plan and any duly appointed successor Trustee or Trustees acting hereunder. 1.50 Valuation Date means any business day of the Plan Year. -7- 9 ARTICLE 2. PARTICIPATION AND ENTRY DATE 2.01 ELIGIBILITY FOR INCOME DEFERRAL CONTRIBUTIONS Any Participant in the Cotter Plan or SERVISTAR Plan on December 31, 1997 shall be a Participant in this Plan on January 1, 1998 based on his contribution election in effect in each respective plan on December 31, 1997. Any Associate who was eligible to participate on December 31, 1997 shall be eligible to become a Participant on January 1, 1998 provided he is then still an Associate. Each other Associate shall be eligible to make Income Deferral Contributions on any Entry Date coinciding with or immediately following the date he completes one year of Service. Any former Associate of Advocate Services, Inc. who becomes an Associate on or after January 1, 1998, shall be eligible to become a Participant when he becomes an Associate. 2.02 PARTICIPATION An eligible Associate shall become a Participant for purposes of Section 2.01 on the first Entry Date coinciding with or immediately following the date he completes one year of Service, provided he has completed the enrollment procedures established by the Committee for: (a) making an election for Income Deferral Contributions under Section 3.01; (b) authorizing the Company to reduce his Compensation; (c) making an investment election; and (d) designating a Beneficiary. 2.03 ELIGIBILITY UPON REEMPLOYMENT Any Associate whose employment terminates and who is subsequently reemployed shall become a Participant in accordance with Section 2.01. Upon reemployment, the eligible Associate must complete the enrollment procedures under Section 2.02. 2.04 TRANSFERRED PARTICIPANTS A Participant who remains in the employ of the Company or an Affiliated Company but ceases to be an Associate (e.g., the Associate enters a nonparticipating collective bargaining unit) shall continue to be a Participant of the Plan but shall not be eligible to receive allocations of Income Deferral Contributions or Matching Contributions while his employment status is other than as an Associate. ARTICLE 3. INCOME DEFERRAL CONTRIBUTIONS 3.01 INCOME DEFERRAL CONTRIBUTIONS (a) A Participant may elect on his application filed under Section 2.02 hereof to reduce his Compensation payable while a Participant by not less than 1% and not more than 15%, in multiples of 1% as elected by the Participant, and have that amount contributed to the Plan by the Company in a manner to be determined by the Committee. The Income Deferral Contributions shall be paid to the Trustee as of the earliest date on which such contributions can reasonably be segregated from the Company's general assets, but no later than the 15th day of the month following the month in which the Income Deferral Contributions were made and shall be credited to the Participant's Deferral Account. A Participant shall be 100% vested at all times in his Deferral Account. Income Deferral Contributions shall be further limited as provided below and in Sections 3.01(b), 3.06 and 3.10. (b) In no event shall the Participant's Income Deferral Contributions and similar contributions made on his behalf by the Company or an Affiliated Company to all plans, contracts or arrangements subject to the provisions of Section 401(a)(30) of the Code in any calendar year exceed $7,000 commencing in the 1987 Plan Year, as adjusted from time to time for cost-of-living pursuant to Section 402(g)(5) of the Code. If a Participant's Income Deferral Contributions in a calendar year reach that dollar limitation, his election of Income Deferral Contributions for the remainder of the calendar year will be canceled. As of the first pay period of the following calendar year, the Participant's election of Income Deferral Contributions shall again become effective in accordance with his previous election, unless the Participant elects otherwise. -8- 10 (c) In the event that the sum of the Income Deferral Contributions and similar contributions to any other qualified defined contribution plan maintained by the Company or an Affiliated Company exceeds the dollar limitation in subsection (b) above for any calendar year, the Participant shall be deemed to have elected a return of Income Deferral Contributions in excess of such limit ("excess deferrals") from this Plan. The excess deferrals, together with Earnings, shall be returned to the Participant no later than the April 15 following the end of the calendar year in which the excess deferrals were made. The amount of excess deferrals to be returned for any calendar year shall be reduced by any Income Deferral Contributions previously returned to the Participant under Section 3.06 for that calendar year. In the event any Income Deferral Contributions returned under this paragraph (b) were matched by Matching Contributions under Section 3.02, those Matching Contributions, together with Earnings, shall be forfeited and used to reduce Company contributions. (d) If a Participant makes tax-deferred contributions under another qualified defined contribution plan for any calendar year and those contributions when added to his Income Deferral Contributions under this Plan exceed the dollar limitation under subsection (b) above for that calendar year, the Participant may allocate all or a portion of such excess deferrals to this Plan. In that event, the excess deferrals, with Earnings thereon, as allocated shall be returned to the Participant no later than the April 15 following the end of the calendar year in which the excess deferrals were made. However, the Plan shall not be required to return excess deferrals unless the Participant notifies the Committee, in writing, by March 1 of that following calendar year of the amount of the excess deferrals allocated to this Plan. The amount of excess deferrals to be returned for any calendar year shall be reduced by any Income Deferral Contributions previously returned to the Participant under Section 3.06 for that calendar year. In the event any Income Deferral Contributions returned under this paragraph (d) were matched by Matching Contributions under Section 3.02, those Matching Contributions, together with Earnings, shall be forfeited and used to reduce Company contributions. 3.02 MATCHING CONTRIBUTIONS The Company shall contribute on behalf of each Participant who elects to make Income Deferral Contributions an amount equal to 100% of the first 3% plus 50% of the next 3% of Compensation which is contributed as Income Deferral Contributions on behalf of or by the Participant to the Plan during each payroll period. In no event, however, shall the Matching Contributions pursuant to this Section exceed 4.5% of the Participant's Compensation while a Participant with respect to a particular Plan Year. Notwithstanding the foregoing provisions of this Section 3.02, effective as of the first payroll period ending after July 1, 2000 (a) the Company may thereafter authorize Matching Contributions on behalf of each Participant who elects to make Income Deferral Contributions in an amount equal to a percentage of such Income Deferral Contributions with such maximum percentage amount as determined from time to time by the Company in its sole discretion; (b) any such Matching Contributions shall be allocated on an annual basis only to the accounts of Participants who are actively employed by the Company as of the Anniversary Date, who are on authorized medical leave of absence as of the Anniversary Date, or whose employment has terminated during the Plan Year after attainment of Normal Retirement Age, as a result of involuntary termination by the Company, or as a result of death or Disability; and (c) the Company reserves the right not to make any Matching Contributions for any reason it deems appropriate. The Matching Contributions are made expressly conditional on the Plan satisfying the provisions of Sections 3.01, 3.06, 3.07 and 3.08. If any portion of the Income Deferral Contributions to which the Matching Contribution relates is returned to the Participant under Sections 3.01, 3.06 and 3.08, the corresponding Matching Contribution shall be forfeited and if any amount of the Matching Contribution is deemed an excess aggregate contribution under Section 3.07, such amount shall be forfeited in accordance with the provisions of that Section. -9- 11 3.03 ROLLOVER CONTRIBUTIONS (a) With the permission of the Committee and without regard to any limitations on contributions set forth in Article 3, the Plan may receive from a Participant, or an Associate who has not yet met the eligibility requirements for membership, in cash, any amount previously received (or deemed to be received) by him from a qualified plan. The Plan may receive such amount either directly from the Participant or Associate or from an individual retirement account or from a qualified plan in the form of a direct rollover. Notwithstanding the foregoing, the Plan shall not accept any amount unless such amount is eligible to be rolled over to a qualified trust in accordance with applicable law and the Participant provides evidence satisfactory to the Committee that such amount qualifies for rollover treatment. Unless received by the Plan in the form of a direct rollover, the Rollover Contribution must be paid to the Trustee on or before the 60th day after the day it was received by the Participant. No "rollover amount" will be accepted, directly or indirectly, from an individual retirement account to which the Associate contributed on his own behalf or which consists, in whole or in part, of insurance contracts. (b) The Trustee shall establish a Rollover Account on whose behalf such "rollover amount" was received. (c) All "rollover amounts" shall be fully vested in the Associate on whose behalf they are established. (d) The assets held on behalf of any Associate in a rollover account shall be aggregated with any other vested interest he may have in this Plan for the purpose of distribution and shall be distributed at the same time and by the same method as the remainder of his vested interest in this Plan. 3.04 CHANGE IN CONTRIBUTIONS The percentages of Compensation designated by a Participant under Section 3.01 shall automatically apply to increases and decreases in his Compensation. Subject to the provisions of Section 3.01, a Participant may change the percentage of his authorized payroll deduction or reduction at any time. The changed percentage shall become effective as soon as administratively feasible following receipt of notice by the Committee, according to rules established by the Committee. 3.05 SUSPENSION OF CONTRIBUTIONS revoke his election under Section 3.01 at any time by giving notice to the Committee. The suspension or revocation shall become effective as soon as administratively feasible following receipt of notice by the Committee or its delegate, according to rules established by the Committee. A Participant who has suspended and/or revoked his contributions under Section 3.01 may apply to the Committee to have them resumed and to have his Compensation reduced in accordance with Section 3.01 as soon as administratively feasible following receipt of notice by the Committee or its delegate, according to rules established by the Committee. -10- 12 3.06 ACTUAL DEFERRAL PERCENTAGE TEST With respect to each Plan Year commencing on or after January 1, 1997, the Actual Deferral Percentage for that Plan Year for Highly Compensated Employees who are Participants or eligible to become Participants for that Plan Year shall not exceed the Actual Deferral Percentage for the preceding Plan Year for all Nonhighly Compensated Employees for the preceding Plan Year who were Participants or eligible to become Participants during the preceding Plan Year multiplied by 1.25. If the Actual Deferral Percentage for such Highly Compensated Employees does not meet the foregoing test, the Actual Deferral Percentage for such Highly Compensated Employees for that Plan Year may not exceed the Actual Deferral Percentage for the preceding Plan Year for all Nonhighly Compensated Employees for the preceding Plan Year who were Participants or eligible to become Participants during the preceding Plan Year by more than two percentage points, and such Actual Deferral Percentage for such Highly Compensated Employees for the Plan Year may not be more than 2.0 times the Actual Deferral Percentage for the preceding Plan Year for all Nonhighly Compensated Employees for the preceding Plan Year who were Participants or eligible to become Participants during the preceding Plan Year (or such lesser amount as the Committee shall determine to satisfy the provisions of Section 3.08). Notwithstanding the foregoing, the Company may elect to use the Actual Deferral Percentage for Nonhighly Compensated Employees for the Plan Year being tested rather than the preceding Plan Year provided that such election must be evidenced by a Plan amendment and once made may not be changed except as provided by the Secretary of the Treasury. The Committee may implement rules limiting the Income Deferral Contributions which may be made on behalf of some or all Highly Compensated Employees so that this limitation is satisfied. If the Committee determines that the limitation under this Section has been exceeded in any Plan Year, the following provisions shall apply: (a) The actual deferral ratio of the Highly Compensated Employee with the highest actual deferral ratio shall be reduced to the extent necessary to meet the actual deferral percentage test or to cause such ratio to equal the actual deferral ratio of the Highly Compensated Employee with the next highest ratio. This process will be repeated until the actual deferral percentage test is passed. Each ratio shall be rounded to the nearest one one-hundredth of one percent of the Participant's Compensation. The amount of Income Deferral Contributions made by each Highly Compensated Employee in excess of the amount permitted under his revised deferral ratio shall be added together. This total dollar amount of excess contributions ("excess contributions") shall then be allocated to some or all Highly Compensated Employees in accordance with the provisions of paragraph (b) below. (b) The Income Deferral Contributions of the Highly Compensated Employee with the highest dollar amount of Income Deferral Contributions shall be reduced by the lesser of (i) the amount required to cause that Associate's Income Deferral Contributions to equal the dollar amount of the Income Deferral Contributions of the Highly Compensated Employee with the next highest dollar amount of Income Deferral Contributions, or (ii) an amount equal to the total excess contributions. This procedure is repeated until all excess contributions are allocated. The amount of excess contributions allocated to a Highly Compensated Employee, together with Earnings thereon, shall be distributed to him or her in accordance with the provisions of paragraph (c). -11- 13 (c) The excess contributions, together with Earnings thereon, allocated to a Participant shall be paid to the Participant before the close of the Plan Year following the Plan Year in which the excess contributions were made, and to the extent practicable, within 2 1/2 months of the close of the Plan Year in which the excess contributions were made. However, any excess contributions for any Plan Year shall be reduced by any Income Deferral Contributions previously returned to the Participant under Section 3.01 for that Plan Year. In the event any Income Deferral Contributions returned under this Section were matched by Matching Contributions, such corresponding Matching Contributions, with Earnings thereon, shall be forfeited and used to reduce Company contributions. 3.07 CONTRIBUTION PERCENTAGE TEST With respect to each Plan Year commencing on or after January 1, 1997, the Contribution Percentage for that Plan Year for Highly Compensated Employees who are Participants or eligible to become Participants for that Plan Year shall not exceed the Contribution Percentage for the preceding Plan Year for all Nonhighly Compensated Employees for the preceding Plan Year who were Participants or eligible to become Participants during the preceding Plan Year multiplied by 1.25. If the Contribution Percentage for such Plan Year for such Highly Compensated Employees does not meet the foregoing test, the Contribution Percentage for such Highly Compensated Employees for the Plan Year may not exceed the Contribution Percentage for the preceding Plan Year for all Nonhighly Compensated Employees for the preceding Plan Year who were Participants or eligible to become Participants during the preceding Plan Year by more than two percentage points, and the Contribution Percentage for such Highly Compensated Employees for the Plan Year may not be more than 2.0 times the Contribution Percentage for the preceding Plan Year for all Nonhighly Compensated Employees for the preceding Plan Year who were Participants or eligible to become Participants during the preceding Plan Year (or such lesser amount as the Committee shall determine to satisfy the provisions of Section 3.08). Notwithstanding the foregoing, the Company may elect to use the Actual Contribution Percentage for Nonhighly Compensated Employees for the Plan Year being tested rather than the preceding Plan Year provided that such election must be evidenced by a Plan amendment and once made may not be changed except as provided by the Secretary of the Treasury. If the Committee determines that the limitation under this Section 3.07 has been exceeded in any Plan Year, the following provisions shall apply: (a) The actual contribution ratio of the Highly Compensated Employee with the highest actual contribution ratio shall be reduced to the extent necessary to meet the test or to cause such ratio to equal the actual contribution ratio of the Highly Compensated Employee with the next highest actual contribution ratio. This process will be repeated until the actual contribution percentage test is passed. Each ratio shall be rounded to the nearest one one-hundredth of one percent of a Participant's Compensation. The amount of Matching Contributions made by or on behalf of each Highly Compensated Employee in excess of the amount permitted under his revised actual contribution ratio shall be added together. This total dollar amount of excess contributions ("excess aggregate contributions") shall then be allocated to some or all Highly Compensated Employees in accordance with the provisions of paragraph (b) below. -12- 14 (b) The Matching Contributions of the Highly Compensated Employee with the highest dollar amount of such contributions shall be reduced by the lesser of: (i) the amount required to cause that Associate's Matching Contributions to equal the dollar amount of such contributions of the Highly Compensated Employee with the next highest dollar amount of such contributions, or (ii) an amount equal to the total excess aggregate contributions. This procedure is repeated until all excess aggregate contributions are allocated. The amount of excess aggregate contributions allocated to each Highly Compensated Employee, together with Earnings thereon, shall be distributed or forfeited in accordance with the provisions of paragraph (c) below. (c) Excess aggregate contributions allocated to a Highly Compensated Employee under paragraph (b) above shall be distributed or forfeited as follows: so much of the Matching Contributions, together with Earnings, as shall be necessary to equal the balance of the excess aggregate contributions shall be reduced, with the vested Matching Contributions, together with applicable Earnings, being paid to the Participant and the Matching Contributions which are forfeitable under the Plan, together with applicable Earnings, being forfeited and applied to reduce Company contributions. (d) Any repayment or forfeiture of excess aggregate contributions shall be made before the close of the Plan Year following the Plan Year for which the excess aggregate contributions were made, and to the extent practicable, any repayment or forfeiture shall be made within 2 1/2 months of the close of the Plan Year in which the excess aggregate contributions were made. 3.08 AGGREGATE CONTRIBUTION LIMITATION Notwithstanding the provisions of Sections 3.06 and 3.07, in no event shall the sum of the Actual Deferral Percentage of the group of eligible Highly Compensated Employees and the Contribution Percentage of such group, after applying the provisions of Sections 3.06 and 3.07, exceed the "aggregate limit" as provided in Section 401(m)(9) of the Code and the regulations issued thereunder. In the event the aggregate limit is exceeded for any Plan Year, the Contribution Percentages of the Highly Compensated Employees shall be reduced to the extent necessary to satisfy the aggregate limit in accordance with the procedure set forth in Section 3.07. 3.09 ADDITIONAL DISCRIMINATION TESTING PROVISIONS (a) If any Highly Compensated Employee is a member of another qualified plan of the Company or an Affiliated Company, other than an employee stock ownership plan described in Section 4975(e)(7) of the Code or any other qualified plan which must be mandatorily disaggregated under Section 410(b) of the Code, under which deferred cash contributions or matching contributions are made on behalf of the Highly Compensated Employee or under which the Highly Compensated Employee makes after-tax contributions, the Committee shall implement rules, which shall be uniformly applicable to all Associates similarly situated, to take into account all such contributions for the Highly Compensated Employee under all such plans in applying the limitations of Sections 3.06, 3.07 -13- 15 and 3.08. If any other such qualified plan has a plan year other than the Plan Year defined in Section 1.38, the contributions to be taken into account in applying the limitations of Sections 3.06, 3.07 and 3.08 will be those made in the plan years ending with or within the same calendar year. (b) In the event that this Plan is aggregated with one or more other plans to satisfy the requirements of Sections 401(a)(4) and 410(b) of the Code (other than for purposes of the average benefit percentage test) or if one or more other plans is aggregated with this Plan to satisfy the requirements of such sections of the Code, then the provisions of Sections 3.06, 3.07 and 3.08 shall be applied by determining the Actual Deferral Percentage and Contribution Percentage of Associates as if all such plans were a single plan. If this Plan is permissively aggregated with any other plan or plans for purposes of satisfying the provisions of Section 401(k)(3) of the Code, the aggregated plans must also satisfy the provisions of Sections 401(a)(4) and 410(b) of the Code as though they were a single plan. For Plan Years beginning after December 31, 1989, plans may be aggregated under this paragraph (b) only if they have the same plan year. (c) The Company may elect to use Income Deferral Contributions to satisfy the tests described in Sections 3.07 and 3.08, provided that the test described in Section 3.06 is met prior to such election, and continues to be met following the Company's election to shift the application of those Income Deferral Contributions to Sections 3.06 and 3.07. (d) The Company may authorize that special "qualified nonelective contributions" shall be made for a Plan Year, which shall be allocated in such amounts and to such Participants, who are Nonhighly Compensated Employees, as the Committee shall determine. The Committee shall establish such separate accounts as may be necessary. Qualified nonelective contributions shall be 100% nonforfeitable when made. Any qualified nonelective contributions made on or after January 1, 1989 and any earnings credited on any qualified nonelective contributions after such date shall only be available for withdrawal under the provisions of Section 7.03. Qualified nonelective contributions made for the Plan Year may be used to satisfy the tests described in Sections 3.06, 3.07 and 3.08, where necessary. (e) For Plan Years commencing on and after January 1, 1999, if the Company elects to apply the provisions of Section 410(b)(4)(B) to satisfy the requirements of Section 401(k)(3)(A)(i) of the Code, the Company may apply the provisions of Sections 3.06, 3.07 and 3.08 by excluding from consideration all eligible Associates (other than Highly Compensated Employees) who have not met the minimum age and service requirements of Section 410(a)(1)(A) of the Code. 3.10 ANNUAL ADDITIONS LIMITATIONS (a) Notwithstanding the provisions of Sections 3.01 or 3.02, in no event shall the "annual addition" to a Participant's Account for any Plan Year (which shall be the "limitation year"), when added to the Participant's "annual addition" for that Plan Year under any other qualified defined contribution plan of the Company and an Affiliated Company, exceed the lesser of $30,000 (as revised for the Adjustment Factor) or 25% of such Participant's aggregate remuneration for that Plan Year as defined hereinafter. -14- 16 (b) For purposes of this Section, the "annual addition" to a Participant's Account under this Plan or any other qualified defined contribution plan maintained by the Company or an Affiliated Company shall be the sum of: (i) the total of contributions, including Income Deferral Contributions made on the Participant's behalf, by the Company and any Affiliated Company, (ii) with respect to Plan Years beginning prior to 1987, Participant contributions in excess of 6% of his remuneration or, if less, one-half of Participant contributions; and with respect to Plan Years beginning after 1986, all Participant contributions (disregarding in any event Rollover Contributions), and (iii) forfeitures, if applicable, that have been allocated to the Participant's Account under this Plan or his accounts under any other such qualified defined contribution plan, and solely for purposes of the 25% limitation stated above, (iv) amounts described in Sections 415(l)(1) and 419A(d)(2) of the Code allocated to the Participant. For purposes of this paragraph (b), any Income Deferral Contributions distributed under Sections 3.06 and any after-tax or Matching Contributions distributed under the provisions of Sections 3.01, 3.06, 3.07 or 3.08 shall be included in the annual addition for the year allocated. However (i) any loan repayment made under Article 7; (ii) amounts required to be repaid under Section 5.04 as a condition of the restoration of a Participant's forfeited Account balance; and (iii) any excess deferrals timely distributed from the Plan under Section 3.01(c) or (d) shall be excluded from the definition of annual addition. (c) For purposes of this Section, the term "remuneration" with respect to any Participant shall mean the wages, salaries and other amounts paid in respect of that Participant by the Company or an Affiliated Company for personal services actually rendered, including, but not limited to, bonuses, overtime payments and commissions, but excluding deferred compensation, stock options and other distributions which receive special tax benefits under the Code. Notwithstanding the foregoing, for limitation years commencing prior to January 1, 1998, remuneration shall exclude amounts contributed by the Company pursuant to a salary reduction agreement which are not includible in the gross income of the Associate under Sections 125, 402(g)(3) or 457 of the Code. (d) The Committee shall have the duty and responsibility to monitor each Participant's Account and to determine if any annual additions may be in excess of the aforementioned limits, and, if so, the amount by which the annual additions should be reduced for such Plan Year. (e) If an excess results from the application of any of these limits, the annual addition to the Participant's Account shall be reduced to the extent necessary to bring such annual addition within these limitations in the following order: (i) the Participant's unmatched Income Deferral Contributions under Section 3.01 shall be reduced to the extent necessary. The amount of the reduction shall be returned to the Participant, together with any earnings on the contributions to be returned. -15- 17 (ii) the Participant's matched Income Deferral Contributions under Section 3.01 and corresponding Matching Contributions shall be reduced to extent necessary. The amount of the reduction attributable to the Participant's matched Income Deferral Contributions shall be returned to the Participant together with any earnings on those contributions to be returned, and the amount attributable to the Matching Contributions shall be forfeited and used to reduce subsequent Matching Contributions payable by the Company. Any Income Deferral Contributions returned to a Participant under this paragraph (e) shall be disregarded in applying the dollar limitation on Income Deferral Contributions under Section 3.01(b), and in performing the Actual Deferral Percentage Test under Section 3.06. Any Matching Contributions returned under this paragraph (e) shall be disregarded in performing the Contribution Percentage Test under Section 3.07. 3.11 CONTRIBUTIONS NOT CONTINGENT UPON PROFITS The Company may make contributions to the Plan without regard to the existence or the amount of current and accumulated earnings and profits. Notwithstanding the foregoing, however, this Plan is designed to qualify as a "profit sharing plan" for all purposes of the Code. 3.12 CONTRIBUTIONS DURING PERIOD OF MILITARY LEAVE (a) Notwithstanding any provision of this Plan to the contrary, contributions, benefits and service credit with respect to qualified military service will be provided in accordance with Section 414(u) of the Code. Without regard to any limitations on contributions set forth in this Article 3, a Participant who is reemployed on or after August 1, 1990 and is credited with Service under the provisions of Section 1.44 because of a period of service in the uniformed services of the United States, may elect to contribute to the Plan the Income Deferral Contributions that could have been contributed to the Plan in accordance with the provisions of the Plan had he remained continuously employed by the Company throughout such period of absence ("make-up contributions"). The amount of make-up contributions shall be determined on the basis of the Participant's Compensation in effect immediately prior to the period of absence, and the terms of the Plan at such time. Any Income Deferral Contributions so determined shall be limited as provided in Sections 3.01(b), 3.02, 3.06, 3.07 and 3.08 with respect to the Plan Year or Years to which such contributions relate rather than the Plan Year in which payment is made. Any payment to the Plan described in this paragraph shall be made during the applicable repayment period. The repayment period shall equal three times the period of absence, but not longer than five years and shall begin on the latest of: (i) the Participant's date of reemployment, (ii) October 13, 1996, or (iii) the date the Company notifies the Associate of his rights under this Section. Earnings (or losses) on make-up contributions shall be credited commencing with the date the make-up contribution is made in accordance with the provisions of Article 4. (b) With respect to a Participant who makes the election described in paragraph (a) above, the Company shall make Matching Contributions as in effect for the Plan -16- 18 Year to which such make-up contributions relate. Matching Contributions under this paragraph shall be made during the period described in paragraph (a) above. Earnings (or losses) on Matching Contributions shall be credited commencing with the date the contributions are made in accordance with the provisions of Article 4. Any limitations on Matching Contributions described in Sections 3.02, 3.06, 3.07 and 3.08 shall be applied with respect to the Plan Year or Years to which such contributions relate rather than the Plan Year or Years in which payment is made. 3.13 REFUND OF CONTRIBUTIONS All contributions made by the Company are made for the exclusive benefit of the Participants and their Beneficiaries and such contributions shall not be used for nor diverted to purposes other than for the exclusive benefit of the Participants and their Beneficiaries (including the costs of maintaining and administering the Plan and Trust Fund). Notwithstanding the foregoing, amounts contributed to the Trust Fund by the Company may be refunded to the Company by the Trustee under the following circumstances and subject to the following limitations: (a) To the extent that a federal income tax deduction is disallowed by the Internal Revenue Service for any contribution made by the Company, the Trustee shall refund to the Company upon demand the amount so disallowed or the net asset value of such amount, whichever is less. For this purpose, all contributions made by the Company are expressly declared to be conditioned upon their deductibility under Section 404 of the Code. (b) In the case of a contribution which is made in whole or in part by reason of a mistake of fact, so much of such contribution as is attributable to the mistake of fact or the net asset value of such contribution, whichever is less shall be returnable to the Company on demand. The aforesaid demand must be satisfactory to the Trustee and the demand and repayment must be effectuated within one year after the date of such disallowance or payment of the contribution to which the mistake applies. All refunds shall be limited in amount, circumstance and timing to the provisions of Section 403(c) of ERISA. (c) In the event that Income Deferral Contributions made under Article 3 hereof are returned to the Company in accordance with the provisions of this Section 3.13, the elections to reduce Compensation which were made by Participants on whose behalf those contributions were made shall be void retroactively to the beginning of the period for which those contributions were made. The Income Deferral Contributions so returned shall be distributed in cash to those Participants for whom those contributions were made. ARTICLE 4. ACCOUNTS AND INVESTMENT FUNDS 4.01 ACCOUNTS The Committee shall also cause to be established and maintained accounts in the name of each Participant as follows: (a) Deferral Account, to which shall be credited the respective Income Deferral Contributions of each Participant. -17- 19 (b) Matching Account, to which shall be credited for each active Participant who elects to make Income Deferral Contributions, a Matching Contribution as determined in Section 3.02. (c) Profit Sharing Account, to which shall be credited the balance in a Participant's profit sharing account under the SERVISTAR Plan, which is merged into this Plan. (d) Rollover Account, to which shall be credited rollovers for each Participant who elects to roll over amounts from another qualified plan pursuant to Section 3.03. (e) Savings Account, to which shall be credited the balances in a Participant's after-tax accounts under the Cotter Plan or the SERVISTAR Plan, which are merged into this Plan. (f) Pension Account, to which shall be credited the "Member's Pension Account" under the Coast Plan. 4.02 INVESTMENT FUNDS AND PARTICIPANT DIRECTIONS Every Participant shall have the right to designate the Investment Funds in which the Trustee is to invest Trust Fund assets held on behalf of such Participant. (a) The Trust Fund shall consist of such Investment Fund(s) as the Committee shall determine from time to time. Pending investment, reinvestment or distribution as provided in the Plan, the Trustee may temporarily retain the assets of any one or more of the Investment Funds in cash, commercial paper, short-term obligations or undivided interests or participations in common or collective short-term investment funds. Any Investment Fund may be partially or totally invested in any common or commingled trust fund, in any group annuity, deposit administration or separate account contract issued by a legal reserve life insurance company which is invested generally in property of the kind specified for the Investment Fund, in mutual funds, or in any other property so specified by the Committee. The Committee, in its discretion, may direct the Trustee to establish Investment Funds or terminate Investment Funds as it shall from time to time consider appropriate and in the best interest of Participants. Investment Funds will be described in materials provided under the summary plan description for this Plan or in investment materials supplementing the summary plan description. (b) Each Participant may elect to have a percentage or all of his contributions invested in one or any of the Investment Funds (in multiplies of 1%). This election will also apply to any subsequent contributions allocated to his Account. A Participant may change a percentage designation made by him and such change will apply to any contributions on or after the date such change is implemented by the Trustee. (c) Subject to any restrictions on the transfer from or to a particular Investment Fund which may be established by the Committee, each Participant may elect to transfer amounts credited to his Account under one Investment Fund to his Account under any other Investment Fund, in increments of 1% or a specified dollar amount of such Participant's Account balances. Such transfers (the number and frequency of which shall be established from time to time by the Committee) will occur as of any Valuation Date or as soon as practicable thereafter provided that the Participant makes his transfer election according to procedures established by the Committee for this purpose. -18- 20 (d) Subject to such rules and restrictions as the Committee may establish, any election described in this subsection shall be made pursuant to one of the following methods as determined by the Committee in its sole discretion: (i) in writing, by filing a written election form specified by the Committee, (ii) by telephone (to the extent permitted by law), through a telephone system designated by the Committee for this purpose, or (iii) by any other method (to the extent permitted by law) designated by the Committee. If the Committee in its discretion determines that elections under this subsection shall be made in a manner other than in writing, any Participant who makes an election pursuant to such method shall receive written confirmation of such election; further, any such election and confirmation will be the equivalent of a writing for all purposes. (e) In the absence of any Participant designation of Investment Fund preference in accordance with Article 4, the Trustee shall invest the Participant Account balance as directed by the Committee. (f) In the event the Participant is a borrower from the Fund, the Trustee shall establish a "loan fund" as provided in Section 7.05. (g) Each Participant is solely responsible for the selection of his investment options. The Trustee, the Committee, the Company, and the officers, supervisors and other Associates of the Company are not empowered to advise a Participant as to the manner in which his Accounts shall be invested. The fact that an Investment Fund is available to Participants for investment under the Plan shall not be construed as a recommendation for investment in that Investment Fund. (h) An administration fee established from time to time by the Committee may be assessed during each Plan Year. 4.03 CREDITING OF INVESTMENT RESULTS As of each Valuation Date, the Committee shall cause adjustment in the Participant's Accounts in the Investment Funds as follows: charge (or credit) to the proper Accounts all withdrawals, distributions, loans or transfers made since the last preceding Valuation Date that have not been charged (or credited) previously, credit each Participant's Account with its prorata share of any increase, or charge the Account with its prorata share of any decrease, in the value of the "adjusted net worth," as defined below, of the Investment Fund as of that date that has not been credited or charged previously, credit Participant's Income Deferral Contributions, if any, that are to be credited to the proper Accounts as of that date that have not been credited previously, and credit Matching Contributions and forfeitures, if any, that are to be credited as of that date that have not been credited previously. The "adjusted net worth" of an Investment Fund as at any Valuation Date means the then net worth of that Fund (that is, the fair market value of the Fund, less its liabilities other than liabilities to persons entitled to benefits under the Plan) as reported to or determined by the Trustee, less an amount equal to the sum of the portions of the Income Deferral Contributions and Matching Contributions paid to the Trustee which are invested in that Fund and which have not been credited to the Accounts of Participants as of a prior Valuation Date. Each Participant's Accounts will reflect the amounts invested in each Investment Fund(s) established under the Plan. -19- 21 4.04 ANNUAL STATEMENTS At least once a year, each Participant shall be furnished with a statement setting forth the value of his Accounts and the vested portion of his Accounts. 4.05 MERGER OF COTTER PLAN AND SERVISTAR PLAN ACCOUNTS The Participant account balances in the Cotter Plan and SERVISTAR Plan merged into this Plan effective as of January 1, 1998 shall be allocated to the Accounts indicated in Article 1 of this Plan and will be administrated in accordance with the general provisions applicable to the respective Accounts unless a specific provision provides for different administrative procedures. ARTICLE 5. VESTING OF ACCOUNTS 5.01 ALL ACCOUNTS EXCEPT MATCHING ACCOUNT A Participant shall at all times be 100% vested in, and have a nonforfeitable right to, his Savings Account, Deferral Account, Pension Account, Profit Sharing Account and Rollover Account. Any Participant in the SERVISTAR Plan on December 31, 1997 who becomes a Participant in this Plan on January 1, 1998 shall be 100% vested in his Profit Sharing Account balance under the SERVISTAR Plan which was merged into this Plan effective as of January 1, 1998. 5.02 COMPANY MATCHING ACCOUNT (a) If a Participant's employment terminates prior to his Normal Retirement Age, then for each year of Service he shall receive a vested percentage of his Matching Account equal to the following vesting schedule:
============================================================== PARTICIPANT'S YEARS OF SERVICE VESTED PERCENTAGE ============================================================== Less than 1 year 0% 1 year 20% 2 years 40% 3 years 60% 4 years 80% 5 year or more 100% ==============================================================
(b) In addition to the foregoing, a Participant shall be 100% vested in, and have a nonforfeitable right to, his Matching Account upon (i) death, (ii) termination of Service due to a Disability, (iii) early retirement from service with the Company after attaining age 55 with 3 years of Service, or (iv) after attaining Normal Retirement Age. -20- 22 Any Participant in the SERVISTAR Plan on December 31, 1997 who became a Participant in this Plan on January 1, 1998 shall be credited with an additional year of Service on January 1, 1998 and, upon his attaining age 50, also be 100% vested in his Matching Account. In addition, any Participant whose Service is terminated as a result of the Company permanently closing a facility or eliminating a job position on or after January 1, 1997, shall be 100% vested in his Accounts. A Participant will be considered to have terminated employment with the Company or any Affiliated Company for purposes of a Disability if he is no longer on the payroll (and performing services for) the Company or any Affiliated Company. If a Participant is transferred from employment with the Company to employment with an Affiliated Company, his termination date will not be considered to have occurred until his employment with the Company and any Affiliated Company has terminated. (c) A Participant's forfeiture, if any, of his Accrued Benefit derived from Matching Contributions shall occur under the Plan as of the Anniversary Date of the Plan Year in which the Participant: (i) receives a cash-out distribution of the vested percentage of his Accrued Benefit as a result of his termination of participation in the Plan, or, if earlier and if applicable; (ii) first incurs five consecutive one-year Breaks in Service. The Committee shall determine the percentage of a Participant's Accrued Benefit forfeiture, if any, under this Section solely by reference to the vesting schedule of this Section. A Participant shall not forfeit any portion of his Accrued Benefit for any other reason or cause except as expressly provided by this subsection. -21- 23 5.03 ALLOCATION OF FORFEITURES Any amounts in a Participant Matching Account forfeited during the Plan Year in accordance with Section 5.02(c) hereof shall be applied to reduce the Company's subsequent Matching Contributions or to restore forfeited Accrued Benefits in accordance with Section 5.04 hereof. 5.04 RESTORATION OF FORFEITED ACCRUED BENEFIT (a) If an amount of a Participant's Matching Account has been forfeited under Section 5.02(c), that amount shall be subsequently restored to the Participant's Matching Account, provided (i) he is reemployed by the Company or an Affiliated Company before he has incurred five consecutive one-year Breaks in Service and (ii) if applicable, he repays to the Plan during his period of reemployment and within five years of the date he is reemployed an amount in cash equal to the full amount distributed to him from the Plan on account of his termination of employment, other than the amount attributable to Participant rollover contributions, provided, however, that he may elect to repay to the Plan all or part of those amounts as well. A Participant shall have the same right to repay even if his Accrued Benefit was 100% vested at the time of the cash out distribution. (b) The Committee shall restore the Participant's Accrued Benefit coincident with or immediately following the repayment. To restore the Participant's Accrued Benefit, the Committee, to the extent necessary, shall allocate to the Participant's Account in the following order: -22- 24 (i) the amount, if any, of Participant forfeitures the Committee would otherwise allocate under Section 5.03; and (ii) to the extent the amount(s) available for restoration for a particular Plan Year are insufficient to enable the Committee to make the required restoration, the Company shall contribute, such additional amount as is necessary to enable the Committee to make the required restoration. The Committee shall not take into account the allocation(s) under this Section in applying the limitation on allocations under Section 3.10. ARTICLE 6. PAYMENT OF BENEFITS 6.01 TIME OF PAYMENT OF ACCRUED BENEFIT (a) Upon a Participant's termination of employment his vested Accrued Benefit shall be distributed as provided in this Article. (b) Unless a Participant elects in writing, his vested Accrued Benefit will commence to be distributed as soon as administratively practical following the later of: (i) The date the Participant attains his Normal Retirement Age (except that for any participant in the SERVISTAR Plan on December 31, 1997 who became a participant in this Plan on January 1, 1998, the date shall be the date the Participant attains his age 62); or (ii) The date the Participant terminates employment with the Company or any Affiliated Company (but no later than 60 days after the close of the Plan Year in which the later of (i) or (ii) occurs). -23- 25 (c) In lieu of a distribution as described in subsection (b) above, a Participant may, in accordance with such procedures as the Committee shall prescribe, elect to have the distribution of his vested Accrued Benefit commence as soon as administratively practicable following: (i) his termination of Service, or (ii) as of any subsequent date following his termination of Service, which is before his Normal Retirement Age. 6.02 AGE 70 1/2 DISTRIBUTION (a) Notwithstanding any provision of the Plan to the contrary, if a Participant is a 5% owner (as defined in Section 416(i) of the Code), distribution of the Participant's Accounts shall begin no later than the April 1 following the calendar year in which he attains age 70 1/2 provided that such commencement in active service shall not be required with respect to a Participant who elected by filing a written designation with the Committee prior to January 1, 1984 to have distribution of his Account balance made in accordance with the terms and provisions of the Cotter Plan as in effect immediately before January 1, 1984, who will have distributions made in accordance with such election. However, if a Participant who is not a 5% owner (as defined in Section 416(i) of the Code) remains in service after the April 1 following the calendar year in which he attains age 70 1/2, he may (but does not have to) elect to have the provisions of paragraph (b) apply as if the Participant was a 5% owner. Such election shall be made in accordance with such administrative procedures as the Committee shall prescribe. (b) In the event a Participant is required or elects to begin receiving payments while in service under the provisions of paragraph (a) above, the Participant will receive one lump sum payment on or before such Participant's required beginning date equal to his entire Account balance and annual lump sum payments thereafter of amounts accrued during each Plan Year. The commencement of payments under this Section 6.02 shall not constitute an Annuity Starting Date for purposes of Sections 72, 401(a)(11) and 417 of the Code. Upon the Participant's subsequent termination of employment, payment of the Participant's Accounts shall be made in accordance with the provisions of Section 6.04. -24- 26 6.03 SMALL BENEFITS Notwithstanding any provision of the Plan to the contrary, a lump sum payment shall be made in lieu of all vested benefits if the value of the Participant's nonforfeitable Accrued Benefit as of his termination of employment or as of any subsequent Anniversary Date is $5,000 or less. The lump sum payment shall automatically be made as soon as administratively practicable following the Participant's termination date or the last day of any Plan Year thereafter. For this purpose, the termination date is (a) for periods prior to January 1, 2000, the Participant's last active day of service plus all remaining earned or accrued vacation and any other accrued benefit days, and (b) for periods after December 31, 1999, the Participant's last active day of service. To the extent permitted by law, if the Participant's nonforfeitable Accrued Benefit exceeds $5,000 upon an initial determination, the Participant's nonforfeitable Accrued Benefit shall be reviewed annually as of the last day of each subsequent Plan Year. If at that time its value is $5,000 or less, a lump sum benefit payable shall be made as soon as practicable following that determination. In no event shall a lump sum payment be made following the date payments have commenced as an annuity or in installments. 6.04 METHOD OF PAYMENT OF ACCRUED BENEFIT (a) Subject to Section 5.04, after all required accounting adjustments, the Trustee shall make payment of the Participant's vested Accrued Benefit in a lump sum distribution except as provided under the provisions of Section 6.04(b) in relation to the account balances merged from the Cotter Plan, under Section 6.04(c) in relation to the account balances merged from the SERVISTAR Plan, and under Section 6.04(d) and (e) in relation to the account balances merged from the Coast Plan. -25- 27 (b) For account balances merged into this Plan from the Cotter Plan effective as of January 1, 1998, in the case of a Participant (or Beneficiary) in the Cotter Plan who had an Account balance in that plan on January 1, 1989, the Account balance merged into this Plan may also be distributed in a series of quarterly installments over a period of fifteen years (or, if less, the life expectancy of the Participant and his designated Beneficiary; provided that, if such Beneficiary is not the Participant's spouse and is more than ten years younger than the Participant, the installments shall be paid over a period not exceeding the joint life expectancy of the Participant and a Beneficiary ten years younger than the Participant). (c) For Account balances merged into this Plan from the SERVISTAR Plan effective as of January 1, 1998, a Participant shall have an additional method of payment available in relation to those merged accounts. A Participant may elect, in such manner as the Committee shall prescribe, to receive payment in substantially equal installments under a fixed reasonable period of time, not exceeding the life expectancy of the Participant, or the joint life and last survivor expectancy of the Participant and an individual the Participant designates as his Beneficiary. Furthermore, upon the Participant's written request, the Committee, in his sole discretion, may accelerate the payment of all, or any portion, of the Participant's unpaid Accrued Benefit. -26- 28 (d) For account balances merged into the SERVISTAR Plan from the Coast Plan effective as of October 21, 1996, and subsequently merged into this Plan as of January 1, 1998, a Participant shall have an additional method of payment available in relation to those merged accounts (except as provided in Section 6.04(e) relating to the Pension Account). A Participant may elect, in such manner as the Committee shall prescribe, to receive a purchased nonforfeitable fixed annuity, in the form of a Qualified Joint and Survivor Annuity. A Participant may elect not to take the Qualified Joint and Survivor Annuity and to take instead a life annuity or a lump sum payment. Elections under this subsection shall be in writing and in the event of an election of a life annuity or a lump sum payment by a married Participant, shall be subject to receipt by the Committee of Spousal Consent to that election. (e) (i) Notwithstanding the foregoing provisions of this Article, the amounts credited to the Participant's Pension Account shall be paid: (A) In the form of a life annuity if the Participant is unmarried on his Annuity Starting Date; or (B) In the form of a Qualified Joint and Survivor Annuity if the Participant is married on his Annuity Starting Date; unless the Participant elects otherwise pursuant to subsection (ii) below. Annuities shall be purchased from an insurance company in accordance with such procedures as the Committee shall prescribe. (ii) Alternatively, a married Participant may elect to receive his Pension Account in the form of a life annuity or in a lump sum payment. An election pursuant to this subsection (ii) shall be in writing and filed with -27- 29 the Committee at any time during the 90-day period ending on the Participant's Annuity Starting Date. A married Participant's election of a lump sum or life annuity shall not be effective without Spousal Consent. (iii) Notwithstanding the foregoing provisions of this Article, if a Participant dies before his Accounts have been distributed, the value of his Pension Account shall be distributed as follows: (A) if the Participant is unmarried on his date of death, it shall be paid in a lump sum to his Beneficiary as soon as practicable; or (B) if the Participant is married on his date of death, it shall be used to purchase a nonforfeitable fixed annuity for the life of his spouse unless the spouse elects, in accordance with such procedures as the Committee shall prescribe, to receive a lump sum payment in lieu thereof. Annuity payments shall commence as soon as administratively practicable following the Valuation Date coincident with or next following what would have been the Participant's 62th birthday, unless the spouse elects to have reduced annuity payments commence as soon as administratively practicable following the Valuation Date coincident with or next following the Participant's date of death. (f) The Committee shall furnish to each Participant a written explanation in nontechnical language of the terms and conditions of the payments available to the Participant in the normal and optional forms. Such explanation shall include a general description of the eligibility conditions for, and the material features and relative values of, the optional forms of payment under the Plan, any rights the -28- 30 Participant may have to defer commencement of his payment, the requirement for Spousal Consent, and the right of the Participant to make, and to revoke, elections. The Committee must provide the notice no more than 90 days and no less than 30 days prior to the Participant's Annuity Starting Date. A Participant's Annuity Starting Date may not occur less than 30 days after receipt of the notice. An election shall be made on a form provided by the Committee and may be made during the 90-day period ending on the Participant's Annuity Starting Date, but not prior to the date the Participant receives the written explanation described herein. However, a Participant may, after having received the notice, affirmatively elect to have his benefit commence sooner than 30 days following his receipt of the notice, provided all of the following requirements are met: (i) the Committee clearly informs the Participant that he has a period of at least 30 days after receiving the notice to decide when to have his benefits begin and, if applicable, to choose a particular optional form of payment; (ii) the Participant affirmatively elects a date for his benefits to begin and, if applicable, an optional form of payment, after receiving the notice; (iii) the Participant is permitted to revoke his election until the later of his Annuity Starting Date or seven days following the day he received the notice; and (iv) payment does not commence less than seven days following the day after the notice is received by the Participant. An election of an option may be revoked on a form provided by the Committee, and subsequent elections and revocations may be made at any time and from -29- 31 time to time during the election period. An election of an optional benefit shall be effective on the Participant's Annuity Starting Date and may not be modified or revoked after his Annuity Starting Date unless otherwise provided. A revocation of any election shall be effective when the completed form is filed with the Committee. If a Participant who has elected an optional benefit dies before the date the election of the option becomes effective, the election shall be revoked. If the Beneficiary designated under an option dies before the date the election of the option becomes effective, the election shall be revoked. (g) Upon the death of the Participant, the Committee shall direct the Trustee to pay the Participant's vested Accrued Benefit in accordance with this subsection. If the Participant's death occurs after the Trustee has commenced payment of the Participant's vested Accrued Benefit, the Committee shall direct the Trustee to complete payment over a period which does not exceed the payment period which had commenced. If the Participant's death occurs prior to the time the Trustee commences payment of the Participant's vested Accrued Benefit, the payment shall be a lump sum payment except as otherwise provided herein and in no event will the Committee direct the Trustee to make payment over a period exceeding (i) five years after the date of the Participant's death, or (ii) if the Beneficiary is a designated Beneficiary, in installments over the Beneficiary's life expectancy. The Committee shall not direct payment of the Participant's vested Accrued Benefit over a period described in (i) unless the Trustee will commence payment to the designated Beneficiary no later than one year after the date of the Participant's death or, if later, and the designated Beneficiary is the Participant's surviving spouse, the date the Participant would have attained age 70 1/2. The Committee will not recalculate life expectancies. -30- 32 (h) Notwithstanding any other provision of this Article 6, all distributions from this Plan shall conform to the regulations issued under Section 401(a)(9) of the Code, including the incidental death benefit provisions of Section 401(a)(9)(G) of the Code. Further, such regulations shall override any Plan provision that is inconsistent with Section 401(a)(9) of the Code. 6.05 STATUS OF ACCOUNTS PENDING DISTRIBUTION Until completely distributed under Section 6.01 or 6.02 the Accounts of a Participant who is entitled to a distribution shall continue to be invested as part of the Investment Funds of the Plan. 6.06 PROOF OF DEATH AND RIGHT OF BENEFICIARY OR OTHER PERSON The Committee may require and rely upon such proof of death and such evidence of the right of any Beneficiary or other person to receive the value of the Accounts of a deceased Participant as the Committee may deem proper and its determination of the right of that Beneficiary or other person to receive payment shall be conclusive. -31- 33 6.07 DIRECT ROLLOVER OF CERTAIN DISTRIBUTIONS Notwithstanding any provision of the Plan to the contrary that would otherwise limit a distributee's election under this Section, a distributee may elect, at the time and in the manner prescribed by the Committee, to have any portion of an eligible rollover distribution paid directly to an eligible retirement plan specified by the distributee in a direct rollover. The following definitions apply to the terms used in this Section: (a) "Eligible rollover distribution" means any distribution of all or any portion of the balance to the credit of the distributee, except that an eligible rollover distribution does not include any distribution that is one of a series of substantially equal periodic payments (not less frequently than annually) made for the life (or life expectancy) of the distributee or the joint lives (or joint life expectancies) of the distributee and the distributee's designated Beneficiary, or for a specified period of 10 years or more, any distribution to the extent such distribution is required under Section 401(a)(9) of the Code, and the portion of any distribution that is not includible in gross income (determined without regard to the exclusion for net unrealized appreciation with respect to employer securities); (b) "Eligible retirement plan" means an individual retirement account described in Section 408(a) of the Code, an individual retirement annuity described in Section 408(b) of the Code, an annuity plan described in Section 403(a) of the Code, or a qualified trust described in Section 401(a) of the Code, that accepts the distributee's eligible rollover distribution. However, in the case of an eligible rollover distribution to the surviving spouse, an eligible retirement plan is an individual retirement account or individual retirement annuity; -32- 34 (c) "Distributee" means an Associate or former Associate. In addition, the Associate's or former Associate's surviving spouse and the Associate's or former Associate's spouse or former spouse who is the alternate payee under a qualified domestic relations order as defined in Section 414(p) of the Code, are distributees with regard to the interest of the spouse or former spouse; and (d) "Direct rollover" means a payment by the Plan to the eligible retirement plan specified by the distributee. ARTICLE 7. WITHDRAWALS AND LOANS 7.01 SAVINGS ACCOUNT WITHDRAWALS The Participant may withdraw from the Trust Fund all or part of his Savings Account. 7.02 DEFERRAL ACCOUNT WITHDRAWALS AFTER AGE 59 1/2 A Participant who has attained age 59 1/2 may elect to withdraw any portion or all of his Deferral Account balance while continuing to be employed by the Company or an Affiliated Company. Each election by a Participant under this Section 7.02 shall be made at such time and in such manner as the Committee shall determine. 7.03 DEFERRAL ACCOUNT WITHDRAWALS A Participant who has withdrawn the total amount available for withdrawal under the Sections 7.01 and 7.02 may elect to withdraw all or part of the Income Deferral Contributions (but not the earnings thereon) made on his behalf to his Deferral Account upon furnishing proof to the Committee that a financial hardship has caused an immediate and heavy financial need on the Participant. For the purposes of this subsection, a financial hardship shall include: -33- 35 (a) expenses for medical care described in Section 213(d) of the Code incurred by the Participant, his spouse or dependents (as defined in Section 152 of the Code), or not yet incurred but necessary for those persons to obtain medical care; (b) costs directly related to the purchase of a principal residence of the Participant (excluding mortgage payments); (c) payment of tuition and related educational fees for the next 12 months of post-secondary education for the Participant, his spouse, his children or dependents; or (d) payment of amounts necessary to prevent the eviction of the Participant from his principal residence or to avoid foreclosure in the mortgage of the Participant's principal residence. The amount to be withdrawn shall not exceed the amount required to meet the immediate financial need created by the hardship, including amounts necessary to pay any taxes or penalties reasonably anticipated to result from the withdrawal. The Participant must request, on such form as the Committee shall prescribe, that the Committee make its determination of the necessity for the withdrawal solely on the basis of his application. In that event, the Committee shall make such determination, provided all of the following requirements are met: -34- 36 (e) the Participant has obtained all distributions, other than distributions available only on account of hardship, and all nontaxable loans currently available under all plans of the Company and any Affiliated Company, (f) the Participant is prohibited from making Income Deferral Contributions to the Plan and all other plans of the Company and any Affiliated Company under the terms of such plans or by means of an otherwise legally enforceable agreement for at least 12 months after receipt of the distribution, and (g) the limitation on elective deferrals described in Section 3.01(b) under all plans of the Company and any Affiliated Company for the calendar year following the year in which the withdrawal is made must be reduced by the Participant's elective deferral made in the calendar year of the distribution for hardship. For purposes of subsection (f), "all other plans of the Company and any Affiliated Company" shall include stock option plans, stock purchase plans, qualified and nonqualified deferred compensation plans and such other plans as may be designated under regulations issued under Section 401(k) of the Code, but shall not include health and welfare benefit plans or the mandatory employee contribution portion of a defined benefit plan. However, such rules shall not require a Participant to take any action that would increase, rather than alleviate the financial hardship. 7.04 WITHDRAWAL PROCEDURES Withdrawal requests must be made on forms provided by the Committee. Any withdrawals will be made pro rata from each of the Participant's Investment Funds based on the values determined on the Valuation Date immediately preceding the -35- 37 withdrawal. An administrative fee as established from time to time by the Committee may be assessed on each withdrawal. If a loan and a hardship withdrawal are processed as of the same Valuation Date, the amount available for the hardship withdrawal will equal the vested portion of the Participant's Accounts on such Valuation Date reduced by the amount of the loan. Subject to the provisions of Section 6.07, all payments to Participants under this Article shall be made in cash as soon as practicable. 7.05 LOANS TO PARTICIPANTS (a) A Participant who is an Associate of the Company or an Affiliated Company may borrow, on written application to the Committee and on approval by the Committee under such uniform rules as it shall adopt, an amount which, when added to the outstanding balance of any other loans to the Participant from the Plan, does not exceed the lesser of (i) 50% of the vested portion of his Accounts (excluding the Pension Account), or (ii) $50,000 reduced by the excess, if any, of (A) the highest outstanding balance of loans to the Participant from the Plan during the one year period ending on the day before the day the loan is made, over (B) the outstanding balance of loans to the Participant from the Plan on the date on which the loan is made. The minimum loan shall be $1,000. (b) A reasonable interest rate to be charged on loans made shall be determined at the time of the loan application and shall be specified by the Committee. The interest rate so determined for purposes of the Plan shall be fixed for the duration of each loan. -36- 38 (c) The amount of the loan is to be transferred from the Participant's Accounts, in the following order: first, from the Deferral Account, then from the Savings Account, then from the Rollover Account, then from the Matching Account, and last from the Profit Sharing Account, pro rata from each Investment Fund thereunder to a special "loan fund" for the Participant under the Plan. The loan fund consists solely of the amount of the Participant's Account transferred to the loan fund and is invested solely in the loan made to the Participant. The amount of the Participant's Account transferred to the loan fund shall be pledged as security for the loan. Payments of principal on the loan will reduce the amount held in the Participant's loan fund. Those payments, together with the attendant interest payment, will be credited to the Participant's Accounts in the following order: first, to the Profit Sharing Account, then to the Matching Account, then to the Rollover Account, then to the Savings Account, and finally to the Deferral Account, and invested in the Investment Funds in accordance with the Participant's then effective investment election. (d) In addition to such rules and regulations as the Committee may adopt, all loans shall comply with the following terms and conditions: (i) An application for a loan by a Participant may be made by telephone to the Trustee or its agent, who will process the application for approval by a Plan representative, whose action in approving or disapproving the application shall be made pursuant to uniform nondiscriminatory policies and shall be final; (ii) Each loan shall be evidenced by a promissory note payable to the Plan containing terms deemed necessary by the Committee to protect the Plan's investment; -37- 39 (iii) The period of repayment for any loan shall be arrived at by mutual agreement between the Committee and the Trustee or its agent, but that period shall not exceed 60 months unless the loan is to be used in conjunction with the purchase of a dwelling which within a reasonable time is to be used (determined at the time of the loan) as the principal residence of the Participant in which event the period shall not exceed 180 months; (iv) Payments of principal and interest will be made by payroll deductions or in a manner agreed to by the Participant and the Trustee or its agent in substantially level amounts, but no less frequently than quarterly, in an amount sufficient to amortize the loan over the repayment period; (v) Loan repayments will be suspended under this Plan as permitted under Section 414(u) of the Code; (vi) A loan may be prepaid in full as of any date following the first three months of the loan period, without penalty (partial prepayment of principal is not permitted); (vii) Only one loan may be outstanding at any given time, except that any loans outstanding as of January 1, 1998 may continue until repaid under their established terms. (viii) A loan processing fee and annual maintenance fee may be charged by the Plan, as determined by the Committee. -38- 40 (e) If a loan is not repaid in accordance with the terms contained in the promissory note and a default occurs, the Plan may execute upon its security interest in the Participant's Account under the Plan to satisfy the debt and any other security held by the Plan; however, the Plan shall not levy against any portion of the loan fund attributable to amounts held in the Participant's Deferral Account or Matching Account or Profit Sharing Account until such time as a distribution of the Deferral Account or Matching Account or Profit Sharing Account could otherwise be made under the Plan. (f) Any additional rules or restrictions as may be necessary to implement and administer the loan program shall be in writing and communicated to Associates. Such further documentation is hereby incorporated into the Plan by reference, and the Committee is hereby authorized to make such revisions to these rules as it deems necessary or appropriate, on the advice of counsel. (g) To the extent required by law and under such rules as the Committee shall adopt, loans shall also be made available on a reasonably equivalent basis to any Beneficiary or former Associate (i) who maintains an account balance under the Plan and (ii) who is still a party-in-interest (within the meaning of Section 3(14) of ERISA). (h) If, on a Participant's Severance Date, any loan or portion of a loan made to him under the Plan, together with the accrued interest thereon, remains unpaid, the entire amount of the unpaid loan and accrued interest shall be due and payable by the Participant; provided that, if such amount is not repaid, an amount equal to such loan or any part thereof, together with the accrued interest thereon, shall be charged to the Participant's Accounts after all other adjustments required under the Plan, but before any distribution pursuant to Section 6.04. -39- 41 (i) All loans made prior to January 1, 1998 shall be subject to the rules in effect under the Plan at that time the loan was made. 7.06 MISSING PARTICIPANTS AND BENEFICIARIES Each Participant and each designated Beneficiary must file with the Committee from time to time in writing his post office address and each change of post office address. Any communication, statement or notice addressed to a Participant or Beneficiary at his last post office address filed with the Committee, or if no address is filed with the Committee then, in the case of a Participant, at his last post office address as shown on the Company's records, will be binding on the Participant and his Beneficiary for all purposes of the Plan. Neither the Company nor the Committee will be required to search for or locate a Participant or Beneficiary. If the Committee notifies a Participant or Beneficiary that he is entitled to a payment and also notifies him of the provisions of this subsection, and the Participant or Beneficiary fails to claim his benefits or make his whereabouts known to the Committee within three years after the notification, the benefits of the Participant or Beneficiary will be disposed of, to the extent permitted by applicable law, as follows: (a) If the whereabouts of the Participant then is unknown to the Committee but the whereabouts of the Participant's spouse then is known to the Committee, payment will be made to the spouse; (b) If the whereabouts of the Participant and his spouse, if any, then is unknown to the Committee but the whereabouts of the Participant's designated Beneficiary then is known to the Committee, payment will be made to the designated Beneficiary; -40- 42 (c) If the whereabouts of the Participant, his spouse and the Participant's designated Beneficiary then is unknown to the Committee but the whereabouts of one or more relatives by blood, adoption or marriage of the Participant is known to the Committee, the Committee may direct the Trustee to pay the Participant's benefits to one or more of such relatives and in such proportions as the Committee decides; or (d) If the whereabouts of such relatives and the Participant's designated Beneficiary then is unknown to the Committee, then benefits of such Participant or Beneficiary will be disposed of in an equitable manner permitted by law under rules adopted by the Committee. -41- 43 ARTICLE 8. ADMINISTRATION OF THE PLAN 8.01 COMMITTEE This Plan administrator shall be the Committee composed of five or more persons who may, but need not be, Associates of the Company, as appointed by the Company. Any Committee member may be dismissed at any time, with or without cause, on 10 days' notice from the Company. Any Committee member may resign by delivering his written resignation to the Company with 10 day's notice. Vacancies rising by the death, resignation or removal of a Committee member shall be filled by the Company. 8.02 MEETING, MAJORITY RULE (a) The Committee shall hold meetings upon such notice, at such place or places and at such time or times as it may from time to time determine. Notice shall not be required if waived in writing. A majority of the members of the Committee at the time in office shall constitute a quorum for the transaction of business. All resolutions or other actions take by the Committee at any meeting shall be by majority vote of the members of the Committee. Resolutions may be adopted or other action taken without a meeting upon written consent, signed by a majority of the members of the Committee. 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. -42- 44 (b) The Committee shall appoint one of its members to act as its chairman and shall appoint a secretary, who need not be a member of the Committee, who shall keep all records of the meetings and of any action taken by the Committee and who shall perform such other services as may be prescribed by the Committee. All third parties may rely on a certificate of the Committee's secretary or a majority of the Committee members that the Committee has taken or authorized any action. A Committee member by writing may delegate any or all of his rights, powers, duties or discretions to any other member, with the consent of the latter. 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. (c) The Committee may, by written majority decision, delegate to each or any of its number or to its secretary authority to sign any documents on its behalf, or to perform ministerial acts, but no person to whom such authority is delegated shall perform any act involving the exercise of any discretion without first obtaining the concurrence of a majority of the members of the Committee, even though he alone may sign any document required by third parties. If at any time there will be less than three members of the Committee in office, pending the appointment of a successor(s) to fill an existing vacancy, the remaining members shall have the authority to act as Committee. (d) 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. -43- 45 8.03 RESPONSIBILITY FOR ADMINISTRATION OF THE PLAN The Committee shall have complete control of the management, operation and administration of this Plan with all powers necessary to enable it to carry out its duties in that respect, including 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. The Committee shall be designated agent for service of legal process. Without limiting the foregoing, the Committee shall have the following specific duties and responsibilities: (a) to maintain and retain records relating to Plan Participants, former Participants and each of their Beneficiaries, and all other records necessary for the proper operation of the Plan and to furnish the Company or any Affiliated Company with such information as may be required by them; (b) to prepare and furnish during normal business hours to Participants all information required under Federal law or provisions of this Plan to be furnished to them; (c) to prepare and furnish to the Trustee sufficient Associate data and the amount of contributions received from all sources so that the Trustee may maintain separate Accounts for Participants and make required payments of benefits; -44- 46 (d) to provide directions to the Trustee with respect to the methods of benefit payment, all other matters where called for in the Plan or requested by the Trustee; (e) to prepare and file or publish with the Secretary of Labor, the Secretary of the Treasury, their delegates and all other appropriate government official all reports, forms, documents, and other information required under law to be so filed or published; (f) to construe and interpret the provisions of the Plan, to correct defects therein, to supply omissions thereto and determine all questions of fact (including, but not limited to, determination of an individual's eligibility to Plan participation, the right and amount to any benefit payable under the Plan, and the date on which any individual ceases to be a Participant) that may arise thereunder and any such construction or determination shall be conclusively binding upon all persons interested in the Plan to the extent permitted by applicable law; (g) to engage such assistants or representatives as deemed necessary for the effective exercise of duties and to allocate and delegate to such assistants or representatives any powers or duties, both ministerial and discretionary, as deemed expedient and appropriate, provided that any allocation or delegation and the acceptance thereof shall be in writing; (h) to engage such professional consultants in its sole discretion, deemed necessary or advisable, including, but not limited to, accountants, attorneys, consultants, and medical practitioners; (i) to arrange for bonding as required by law; and (j) to provide procedures for determination of claims for benefits. -45- 47 8.04 COMPENSATION AND EXPENSES The members of the Committee and any individual who receives full-time pay from the Company or any Affiliated Company shall serve without compensation for their services to the Plan but shall be reimbursed by the Company for all necessary expenses incurred in the discharge of their duties. 8.05 LIMITATION OF LIABILITY The Company, any Affiliated Company, their Board of Directors, the Committee, and any officer, Associate or agent of the Company or an Affiliated Company shall not incur any liability individually or on behalf of any other individuals or on behalf of the Company or an Affiliated Company for any act or failure to act, made in good faith in relation to the Plan or the funds of the Plan. However, this limitation shall not act to relieve any such individual or the Company or an Affiliated Company from a responsibility or liability for any fiduciary responsibility, obligation or duty under Part 4, Title I of ERISA. 8.06 INDEMNIFICATION The Company, any Affiliated Company, their Board of Directors, the Committee and the officers, Associates and agents of the Company or an Affiliated Company shall be indemnified against any and all liabilities arising by reason of any act, or failure to act, in relation to the Plan or the funds of the Plan, including, without limitation, expenses reasonably incurred in the defense of any claim relating to the Plan or the funds of the Plan, and amounts paid in any compromise or settlement relating to the Plan or the funds of the Plan, except such liability, losses or costs which result from: -46- 48 (a) actions or failures to act made in bad faith; (b) their own gross negligence or willful misconduct; (c) any settlement, without the Company's prior approval, of an action, suit, or proceeding; or (d) suits or actions at law or in equity advanced by the Company against such party. Indemnification shall be from the funds of the Plan to the extent of those funds and to the extent permitted under applicable law; otherwise from the assets of the Company. Rights granted hereunder shall be in addition to and not in lieu of any rights to indemnification to which the Committee member may be entitled pursuant to the by-laws of the Company. Service on the Committee shall be deemed in partial fulfillment of the Committee member's function as an Associate, officer and/or director of the Company, if he serves in such other capacity as well. The foregoing shall not relieve any one of them from any responsibility or liability for responsibility, obligation or duty that they may have pursuant to ERISA. 8.07 PRUDENT CONDUCT The Committee shall use that degree of care, skill, prudence and diligence that a prudent man acting in a like capacity and familiar with such matters would use in his conduct of a similar situation and shall administer the Plan on a reasonable and nondiscriminatory basis and shall apply uniform rules to all persons similarly situated. -47- 49 8.08 SERVICE IN MORE THAN ONE FIDUCIARY CAPACITY Any individual, entity or group of persons may serve in more than one fiduciary capacity with respect to the Plan and/or the funds of the Plan. 8.09 WRITTEN ELECTIONS Any elections, notifications or designations made by a Participant pursuant to the provisions of the Plan shall be made in writing and filed with the Committee in a time and manner determined by the Committee under rules uniformly applicable to all Associates similarly situated. The Committee reserves the right to change from time to time the time and manner for making notifications, elections or designations by Participants under the Plan if it determines after due deliberation that such action is justified in that it improves the administration of the Plan. In the event of a conflict between the provisions for making an election, notification or designation set forth in the Plan and such new administrative procedures, those new administrative procedures shall prevail. ARTICLE 9. MANAGEMENT OF FUNDS 9.01 TRUST AGREEMENT All the funds of the Plan shall be held by a Trustee appointed from time to time by the Board of Directors under a Trust Agreement adopted, or as amended, by the Board of Directors for use in providing the benefits of the Plan and paying its expenses not paid directly by the Company. The Company shall have no liability for the payment of benefits under the Plan nor for the administration of the funds paid over to the Trustee. Neither the Committee nor the Company or any Affiliated Company in any way guarantees the Trust Fund from loss or depreciation. -48- 50 9.02 EXCLUSIVE BENEFIT RULE Except as otherwise provided in the Plan, no part of the corpus or income of the funds of the Plan shall be used for, or diverted to, purposes other than for the exclusive benefit of Participants and other persons entitled to benefits under the Plan and paying the expenses of the Plan not paid directly by the Company. No person shall have any interest in or right to any part of the earnings of the funds of the Plan, or any right in, or to, any part of the assets held under the Plan, except as and to the extent expressly provided in the Plan. 9.03 APPOINTMENT OF INVESTMENT MANAGER The Company may, in its discretion, appoint one or more investment managers (within the meaning of Section 3(38) of ERISA) to manage (including the power to acquire and dispose of) all or part of the assets of the Plan, as the Company shall designate. In that event authority over and responsibility for the management of the assets so designated shall be the sole responsibility of that investment manager. -49- 51 ARTICLE 10. AMENDMENT, TERMINATION, MERGERS AND CONSOLIDATIONS OF THE PLAN 10.01 PLAN AMENDMENT The Company, by action of its Board of Directors, reserves the right at any time and from time to time, and retroactively if deemed necessary or appropriate, to amend in whole or in part any or all of the provisions of the Plan. However, no amendment shall make it possible for any part of the funds of the Plan to be used for, or diverted to, purposes other than for the exclusive benefit of persons entitled to benefits under the Plan. No amendment shall be made which has the effect of decreasing the balance of the Accounts of any Participant or of reducing the nonforfeitable percentage of the balance of the Accounts of a Participant below the nonforfeitable percentage computed under the Plan as in effect on the date on which the amendment is adopted or, if later, the date on which the amendment becomes effective. Notwithstanding the foregoing, the duties and liabilities of the Committee cannot be changed substantially without its consent. 10.02 PLAN TERMINATION (a) The Company expects to continue this Plan and the payment of its contributions hereunder indefinitely, but the continuance of this Plan is not assumed as a contractual obligation of the Company, and the Company expressly reserves the right to discontinue the Plan in its entirety at any time for any reason whatsoever upon 30 day's advance written notice of termination given to the Committee, the Trustee and any other participating Affiliated Companies. -50- 52 (b) In the event of the full or partial termination of this Plan or upon the permanent discontinuance of Company contributions under the Plan, the rights of all affected Participants to the amounts credited to the affected Participants' Accounts shall be nonforfeitable. Said Plan termination or discontinuance of contributions shall be effective as of the date specified by resolution of the Board of Directors. (c) Termination of the Plan shall have no effect upon payment of installments and benefits to former Participant and their Beneficiaries, whose benefit payments commenced prior to Plan termination. The Trustee shall retain sufficient assets to complete any such payments, and shall have the right, upon direction by the Committee, to purchase annuity contracts to assure the completion of such payments or to pay the value of the remaining payments in a lump sum distribution. (d) The Company shall instruct the Trustee either (1) to continue to manage and administer the assets of the Trust for the benefit of the Participants and their Beneficiaries pursuant to the terms and provisions of the applicable trust agreement, or (2) to pay over to each Participant (and any vested former Participant) the value of his vested interest, and to thereupon dissolve the Trust Fund. (e) Upon termination of the Plan, Income Deferral Contributions, with earnings thereon, shall only be distributed to Participants if (1) neither the Company nor an Affiliated Company establishes or maintains a successor defined contribution plan, and (2) payment is made to the Participants in the form of a lump sum distribution (as defined in Section 402(d)(4) of the Code, without regard to -51- 53 clauses (i) through (iv) of subparagraph (A), subparagraph (B), or subparagraph (F) thereof). For purposes of this paragraph, a "successor defined contribution plan" is a defined contribution plan (other than an employee stock ownership plan as defined in Section 4975(e)(7) of the Code ("ESOP") or a simplified employee pension as defined in Section 408(k) of the Code ("SEP")) which exists at the time the Plan is terminated or within the 12-month period beginning on the date all assets are distributed. However, in no event shall a defined contribution plan be deemed a successor plan if fewer than 2% of the Associates who are eligible to participate in the Plan at the time of its termination are or were eligible to participate under another defined contribution plan of the Company or an Affiliated Company (other than an ESOP or a SEP) at any time during the period beginning 12 months before and ending 12 months after the date of the Plan's termination. 10.03 MERGERS AND CONSOLIDATIONS OF PLANS In the event of any merger or consolidation with, or transfer of assets or liabilities to, any other plan, each Participant in the event of termination shall have a benefit in the surviving or transferee plan (determined as if such plan were then terminated immediately after such merger, etc.) that is equal to or greater than the benefit he would have been entitled to receive immediately before such merger, etc. in this Plan (had this Plan been terminated at that time). For the purposes hereof, former Participants and Beneficiaries shall be considered Participants. -52- 54 10.04 DISTRIBUTION OF ACCOUNTS UPON A SALE OF ASSETS OR A SALE OF A SUBSIDIARY Upon the disposition by the Company of at least 85% of the assets (within the meaning of Section 409(d)(2) of the Code) used by the Company in a trade or business or upon the disposition by the Company of its interest in a subsidiary (within the meaning of Section 409(d)(3) of the Code), Income Deferral Contributions, with earnings thereon, may be distributed to those Participants who continue in employment with the employer acquiring such assets or with the sold subsidiary, provided that: (a) the Company maintains the Plan after the disposition, (b) the buyer does not adopt the Plan or otherwise become a participating employer in the Plan and does not accept any transfer of assets or liabilities from the Plan to a plan it maintains in a transaction subject to Section 414(l)(1) of the Code, and (c) payment is made to the Participant in the form of a lump sum distribution (as defined in Section 402(d)(4) of the Code, without regard to clauses (i) through (iv) of subparagraph (A), subparagraph (B), or subparagraph (F) thereof). 10.05 REORGANIZATIONS No Plan termination will occur solely as a result of the judicially declared bankruptcy or insolvency of the Company or any participating Affiliated Company, or the dissolution, merger, consolidation or reorganization of the Company or any participating Affiliated Company, or the sale by the Company or any participating Affiliated Company of all or substantially all of its assets, or the termination or complete discontinuance of contributions by any Company. However, arrangements may be made with the consent of the Company whereby the Plan will be continued by any successor to the Company or any participating Affiliated Company or any purchaser of all or substantially all of its -53- 55 assets, in which case the successor or purchaser will be substituted for the Company or any participating Affiliated Company under the Plan and the Trust Agreement; provided that, if the Company or any participating Affiliated Company is merged, dissolved, or in any other way organized into, or consolidated with, any other employer, the Plan as applied to the Company or any participating Affiliated Company will automatically continue in effect without a termination thereof. ARTICLE 11. GENERAL PROVISIONS 11.01 APPLICABLE LAW This Plan shall be construed, regulated and administered under the laws of the State of Illinois, except where ERISA or any superseded law of the United States controls. 11.02 NONALIENATION (a) Except as required by applicable law or by paragraph (c), no benefit under the Plan shall in any manner be anticipated, assigned or alienated, and any attempt to do so shall be void. However, payment shall be made in accordance with the provisions of any judgment, decree, or order which: (i) creates for, or assigns to, a spouse, former spouse, child or other dependent of a Participant the right to receive all or a portion of the Participant"s benefits under the Plan for the purpose of providing child support, alimony payments or marital property rights to that spouse, child or dependent, (ii) is made pursuant to a State domestic relations law, -54- 56 (iii) does not require the Plan to provide any type of benefit, or any option, not otherwise provided under the Plan, and (iv) otherwise meets the requirements of Section 206(d) of ERISA, as amended, as a "qualified domestic relations order", as determined by the Committee. (b) Notwithstanding anything herein to the contrary, if the amount payable to the alternate payee under the qualified domestic relations order is less than $5,000 such amount shall be paid in one lump sum as soon as practicable following the qualification of the order. If the amount exceeds $5,000, it may be paid as soon as practicable following the qualification of the order if the qualified domestic relations order so provides and the alternate payee consents thereto; otherwise it may not be payable before the earliest of (i) the Participant's termination of employment, (ii) the time such amount could be withdrawn under Article 7 or (iii) the Participant's attainment of age 50. (c) A Participant's benefit under the Plan shall be offset or reduced by the amount the Participant is required to pay to the Plan under the circumstances set forth in Section 401(a)(13)(C) of the Code. 11.03 SEVERABILITY OF PROVISIONS If any provision of this Plan shall be held invalid and unenforceable, such invalidity or unenforceability shall not affect any other provisions hereof, and this Plan shall be construed and enforced as if such provisions had not been included. 11.04 FACILITY OF PAYMENT If the Committee shall find that a Participant or other person entitled to a benefit is -55- 57 unable to care for his affairs because of illness or accident or because he is a minor, the Committee may direct that any benefit due him, unless claim shall have been made for the benefit by a duly appointed legal representative, be paid to his spouse, a child, a parent or other blood relative, or to a person with whom he resides. Any payment so made shall be a complete discharge of the liabilities of the Plan for that benefit. 11.05 GENDER AND NUMBER Except where otherwise clearly indicated by context, the masculine and the neuter shall include the feminine and the neuter, the singular shall include the plural, and vice-versa. 11.06 CONDITIONS OF EMPLOYMENT NOT AFFECTED BY PLAN The establishment of the Plan shall not confer any legal rights upon any Associate or other person for a continuation of employment, nor shall it interfere with the rights of the Company to discharge any Associate and to treat him without regard to the effect which that treatment might have upon him as a Participant or potential Participant of the Plan. 11.07 ERRONEOUS ALLOCATIONS Notwithstanding any provision of the Plan to the contrary, if a Participant's Account is credited with an erroneous amount due to a mistake in fact or law, the Committee shall adjust such Account in such equitable manner as it deems appropriate to correct the erroneous allocation. 11.08 ADDITIONAL PARTICIPATING EMPLOYERS (a) If any company is or becomes an United States subsidiary of or Associated with -56- 58 the Company, the Board of Directors may include the Associates of that subsidiary or Associated company in the membership of the Plan upon appropriate action by that company necessary to adopt the Plan. In that event, or if any persons become Associates of the Company as the result of merger or consolidation or as the result of acquisition of all or part of the assets or business of another company, the Board of Directors shall determine to what extent, if any, previous service with the subsidiary, Associated or other company shall be recognized under the Plan, but subject to the continued qualification of the trust for the Plan as tax-exempt under the Code. (b) Any subsidiary or Associated company may terminate its participation in the Plan upon appropriate action by it. In that event the funds of the Plan held on account of Participant in the employ of that company, and any unpaid balances of the Accounts of all Participants who have separated from the employ of that company, shall be determined by the Committee. Those funds shall be distributed as provided in Section 10.02 if the Plan should be terminated, or shall be segregated by the Trustee as a separate trust, pursuant to certification to the Trustee by the Committee, continuing the Plan as a separate plan for the Associates of that company under which the board of directors of that company shall succeed to all the powers and duties of the Board of Directors, including the appointment of the members of the committee. ARTICLE 12. TOP-HEAVY PROVISIONS The provisions of this Article shall become applicable under the circumstances described in the -57- 59 following special provisions. In the event that the provisions contained in this Article are inconsistent with the terms contained in the remainder of the Plan, the provisions contained in this Article shall take precedence. 12.01 TOP-HEAVINESS DEFINED (a) For purposes of this Article, the Plan shall be "top-heavy" if, as of the Determination Date, (i) the value of the aggregate of the account balances under the Plan for key employees exceeds 60% of the value of the aggregate of the Account balances under the Plan for all Associates, or (ii) the Plan is part of a required aggregation group, and the sum of the present values of the cumulative account balances and the aggregate present values of accrued benefits of key employees in all plans in the required aggregation group exceeds 60% of a similar sum determined for all Associates. Notwithstanding the results of the said 60% text, the Plan shall not be considered top-heavy for any Plan Year in which the Plan is in a required aggregation group or the Company elects to treat the Plan as a part of a permissive aggregation group and such group is not determined to be top-heavy. -58- 60 (b) For purposes of this Article, the following terms shall be interpreted according to the definitions assigned to them: (i) "Account balance" means the sum of (i) the balance of a Participant's Accounts as of the most recent Valuation Date occurring within the 12- month period ending on the determination date, and (ii) the value of any contributions actually made after the Valuation Date but on or prior to the determination date. The term shall include the aggregate distributions made with respect to such Participant under the Plan during the five-year period ending on the determination date but shall not include any qualifying rollover distributions (or similar transfers) initiated by the Associate, and shall not include the account balance of a nonkey employee who was a key employee for any prior Plan Year, or the account balance of any Participant who has not performed services for the Company during the five-year period ending on the determination date. (ii) "Compensation" means the amount paid to the Associate by the Company as stated on the Associate's Form W-2 for the calendar year that ends with or within the applicable Plan Year, but such amount shall be deemed not to exceed the Annual Dollar Limit. (iii) "Defined benefit plan" means a qualified pension plan which is not a defined contribution plan; however, in the case of a defined benefit plan which provides a benefit which is based partly on the balance of the separate account of a Participant, that plan shall be treated as a defined contribution plan to the extent benefits are based on the separate -59- 61 account of a Participant and as a defined benefit plan with respect to the remaining portion of the benefits under the plan. (iv) "Defined contribution plan" means a qualified plan which provides for an individual account for each Participant and for benefits based solely upon the amount contributed to the Participant's account, and any income, expenses, gains and losses, and any forfeitures of accounts of other Participants which may be allocated to that Participant's accounts, subject to (iii) above. (v) "Determination date" means the last day of the preceding Plan Year, or in the case of the first Plan Year, the last day of that Plan Year. (vi) "5% owner of the Company" means any person who either directly or constructively (as defined in Section 318 of the Code) owns more than 5% of either the value of the outstanding stock of the Company or the total combined voting power of all of the Company's stock. (vii) Associate includes such Beneficiary or beneficiaries who obtain an interest in the Plan by Beneficiary designation, will, devise or through the laws of intestacy. (viii) "Key Employee" means any Associate or former Associate in this Plan who, at any time during the Plan Year ending on the determination date, or during any of the four preceding Plan Years which began after 1982, was: (A) An officer of the Company, (B) A 5% owner of the Company, (C) One of the top ten owners of the Company, or -60- 62 (D) A 1% owner of the Company having an annual compensation of more than $150,000. The term shall also include beneficiaries of key employees. (ix) "Nonkey employee" means any Associate who is not a key employee. (x) "Officer" means at any time during the Plan Year or any four preceding Plan Years an Associate who serves as an administrative executive for the Company or an Affiliated Company on a regular and continuous basis and during the applicable year has annual compensation from the Company or an Affiliated Company greater than 50% of the amount in effect under Section 415(b)(1)(A) of the Code. The maximum number of Associates who shall be deemed to be officers for purposes of this Article shall be the lesser of: (A) 50, or (B) The greater of 3, or 10% of all Associates. If the actual number of officers of the Company exceeds the maximum number of Associates who are deemed to be officers hereunder, the maximum number of officers for purposes of this Article shall include those officers who had the highest one-year compensation while serving as an officer of the Company during any applicable Plan Year. (xi) "1% owner of the Company" means any person, who either directly or constructively (as defined in Section 318 of the Code) owns more than 1% of either the outstanding stock of the Company or the total combined voting power of all of the Company's stock. -61- 63 (xii) "Permissive aggregation group" means each qualified plan in the required aggregation group and any other qualified defined benefit and defined contribution plan of the Company or an Affiliated Company with contributions or benefits at least comparable to the contributions or benefits under this Plan in which all members are nonkey employees, if the resulting aggregation group continues to meet the requirements of Section 401(a)(4) and 410 of the Code. (xiii) "Required aggregation group" includes: (A) Each qualified defined benefit plan and defined contribution plan of the Company or an Affiliated Company (regardless of whether the Plan terminated within the past five years) in which a key employee is a Participant, and (B) Each other qualified defined benefit and defined contribution plan of the Company or an Affiliated Company which enables any plan described in paragraph (xiii)(A), above, to meet the requirements of Section 401(a)(4) or 410 of the Code. (xiv) "Top ten owner" means the 10 Associates who own directly or constructively (as defined in Section 318 of the Code) both more than "% ownership interest in value and the largest percentage ownership interest in value of the Company and any Affiliated Company and during the applicable year have annual compensation from the Company or an Affiliated Company greater than 100% of the amount in effect under Section 415(c)(1)(A) of the Code. -62- 64 12.02 COMPANY CONTRIBUTIONS The following provisions shall be applicable to Participants for any Plan Year with respect to which the Plan is top-heavy: (a) If the required minimum contribution is not provided by the Plan for any Participant who is a nonkey employee, then in each Plan Year, in addition to the contributions otherwise provided under the Plan, the Company shall make contributions on behalf of any such Participant (or each Associate eligible to become a Participant) who is a nonkey employee and who has not separated from service as of the last day of the Plan Year (regardless of whether the nonkey employee elects to make Income Deferral Contributions) which, when added to the Company contributions allocated to his Matching Account for the Plan Year (and not needed to meet the Contribution Percentage Test) will be equal to a percentage of the Participant's compensation for the Plan Year, that percentage to be the lesser of 3% or the percentage rate, determined for the key employee for whom that percentage is the highest, equivalent to the fraction the numerator of which is the contribution allocated to that key employee in accordance with this Section 12.02 and the denominator of which is the compensation of the key employee for that Plan Year. (b) For purposes of this Section 12.02, all defined contribution plans required to be included in a required aggregation group shall be treated as one plan. This Section 12.02 shall not apply if this Plan is required to be included in a required aggregation group under Section 12.01 and if this Plan enables a defined benefit plan required to be included in such group to meet the requirements of Section 401(a)(4) or 410 of the Code. -63- 65 (c) Notwithstanding the foregoing provisions, no minimum contribution shall be made with respect to a Participant (or an Associate eligible to become a Participant) if the required minimum benefit under Section 416(c)(1) of the Code is provided under a Company sponsored defined benefit plan. 12.03 VESTING (a) The following provisions shall be applicable to Participants for any Plan Year with respect to which the Plan is top-heavy: (i) In lieu of the vesting schedule in Article 5 the following shall apply:
===================================================== YEARS OF SERVICE VESTED PERCENTAGE ===================================================== Less than 2 Years 0% 2 but less than 3 years 20% 3 but less than 4 years 40% 4 but less than 5 years 60% 5 years or more 100% =====================================================
provided that in no event shall the vested portion of the Matching Account be less than the percentage under Article 5. (ii) If the Plan is top-heavy with respect to a Plan Year and ceases to be top-heavy for a subsequent Plan Year, the following provisions shall be applicable: (A) With respect to a Participant who has completed at least three years of Service on or before the last day of the most recent Plan Year for which the Plan was top-heavy, the vesting schedule set forth above shall continue to be applicable, to the extent the application of that schedule provides the Participant with a greater -64- 66 vested portion of his Matching Account than that provided under the provisions of Article 5. (B) With respect to a Participant who has completed at least 2, but less than 3, years of Service on or before the last day of the most recent Plan Year for which the Plan was top-heavy, the vesting provisions of Article 5 shall again be applicable; provided, however, that in no event shall the vested portion of his Matching Account be less than the percentage determined under paragraph (A) above as of the last day of the most recent Plan Year for which the Plan was top-heavy. 12.04 IMPACT ON MAXIMUM BENEFITS For any Plan Year in which the Plan is a top-heavy plan, Section 3.10 shall be read by substituting the number "1.0" for the number "1.25" wherever it appears therein except such substitution shall not have the effect of reducing any benefit accrued under a defined benefit plan sponsored by the Company prior to the first day of the Plan Year in which this provision becomes applicable. -65- 67 TruServ Corporation herewith causes this Plan to be executed as of July 1, 2000 in accordance with a duly adopted resolution of the Board of Directors and by its duly authorized officer on this 1st day of July, 2000. TruServ Corporation /s/ BILL EVANS, Director of Employee Benefits /s/ ROBERT OSTROV, SVP - --------------------------------------------- ------------------------------ Witness -66- EX-21 6 c63737ex21.txt SUBSIDIARIES 1 Exhibit 21 Subsidiaries of Registrant The registrant owns 100% of the issued and outstanding capital stock of TruServ Real Estate Agency, Inc., TruServ Acceptance Company, TruServ Logistics Company, and General Paint and Manufacturing Co., all Illinois corporations, ServiStar Paint Company and Advocate Services Incorporated, both Pennsylvania Corporations, True Value.com, a Delaware Corporation and indirectly through TruServ Real Estate Agency, Inc., 100% of the issued and outstanding capital stock of True Value de Mexico, S.A. de C.V., a Mexican Corporation, Mary Green, LLC, a Delaware Corporation, and is the sole member of True Specialty Company, LLC. The accounts of these subsidiaries have been consolidated with the registrant's in December 31, 2000 and December 31, 1999. In January 1992, the registrant formed a Canadian subsidiary, Cotter Canada Hardware & Variety Company, Inc., owning 100% of the issued and outstanding capital stock. Indirectly, through this subsidiary, the registrant owns 100% of the issued and outstanding voting Preferred Stock of the Canadian cooperative, TruServ Canada Cooperative, Inc. -----END PRIVACY-ENHANCED MESSAGE-----