-----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, KaI9W+Da0XiNLX7Xog0asXn2Do4gWaYd48qNmOB2DVxC6sJKR5CREIb2imnbI96u 1Vm1aCJcffEqc+jKQGgP4Q== 0000950137-02-002200.txt : 20020416 0000950137-02-002200.hdr.sgml : 20020416 ACCESSION NUMBER: 0000950137-02-002200 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 13 CONFORMED PERIOD OF REPORT: 20011231 FILED AS OF DATE: 20020415 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-K SEC ACT: 1934 Act SEC FILE NUMBER: 333-18397 FILM NUMBER: 02611541 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-K 1 c66649e10-k.txt ANNUAL REPORT - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 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, 2001 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 X. NO__. 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 and Class B common stock. The Registrant's Class A common stock is offered by the Registrant in units of 60 shares each, exclusively to retailers of hardware and related merchandise, in connection with their becoming members of the Registrant. The Class B common stock is issued as part of the patronage dividend to members of the Registrant. The terms of the Class A and Class B 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 February 23, 2002 ----- ----------------- Class A common stock, $100 Par Value................ 456,600 Class B common stock, $100 Par Value................ 1,731,490
- -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- TABLE OF CONTENTS PAGE PART I Item 1. Business.................................................... 1 Item 2. Properties.................................................. 10 Item 3. Legal Proceedings........................................... 11 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters......................................... 12 Item 6. Selected Financial Data..................................... 13 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations....................................... 14 Item 7A. Quantitative and Qualitative Disclosures About Market Risk........................................................ 23 Item 8. Financial Statements and Supplementary Data................. 23 Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.................................... 23 PART III Item 10. Directors and Executive Officers of the Registrant.......... 24 Item 11. Executive Compensation...................................... 27 Item 12. Security Ownership of Certain Beneficial Owners and Management.................................................. 31 Item 13. Certain Relationships and Related Transactions.............. 31 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K......................................................... 31
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 TRUSERV 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, Cotter & Company was renamed TruServ Corporation. TruServ'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, TruServ sold its lumber and building materials business, consisting primarily of intangibles and inventory, to Builder Marts of America, Inc. ("BMA"). TruServ concluded that BMA would be able to provide lumber and building materials to TruServ members at lower cost. The lumber and building materials business had been a low-margin business for TruServ. In connection with the sale of the lumber and building materials business to BMA, TruServ entered into non-compete, cooperation, trademark license and lease agreements with BMA. The terms of these agreements range from two to ten years. In fiscal year 2001, TruServ sold its ownership interest in TruServ Canada Cooperative, Inc. along with the headquarters and warehouse building and other parcels of real estate in Winnipeg, Manitoba to the Canadian cooperative entity, controlled by the current management group of the cooperative. The price enabled TruServ to recover its capital investment in the Canadian cooperative as well as the appraised value of the real estate and to retire all indebtedness relating to Canadian activities. In connection with the transaction, TruServ revised and extended a license agreement with the Canadian cooperative to enable it and its members to continue to do business under the principal TruServ trademarks. In addition, TruServ continues to provide TruTest paints and supplies to the Canadian cooperative. GENERAL DESCRIPTION OF THE BUSINESS TruServ, organized as a cooperative, is one of the largest member-owned wholesalers of hardware and related merchandise in the United States, serving approximately 7,200 retail outlets for its members as of December 31, 2001. TruServ also manufactures and sells paint and paint applicators. TruServ sells its products to hardware retailers who have entered into retail member agreements with it. TruServ 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 1 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 Dividends" below. As of December 31, 2001, TruServ serves approximately 7,200 retail outlets for its 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). SALES AND SUPPLIERS TruServ provides each of its members with an illustrated price catalog showing the products available from TruServ, which the members can access through the internet site for members. Upon request, a member will also receive a printed version of the catalog. These products, comprised of more than 55,000 stockkeeping units ("SKUs") maintained at TruServ's regional distribution centers, are divided into seven classes of merchandise which represent the products sold within TruServ's three operating segments. Those seven categories are set forth in the table below, along with the corresponding dollars of total revenues for each category during the last three fiscal years:
FOR THE FISCAL YEARS ENDED DECEMBER 31 --------------------------- 2001 2000 1999 ------- ------- ------- (IN MILLIONS) Hardware goods.................................. $ 551 $ 627 $ 688 Farm and garden................................. 514 579 632 Electrical and plumbing......................... 441 497 542 Painting and cleaning........................... 379 400 427 Appliances and housewares....................... 286 323 364 Sporting goods and toys......................... 149 180 193 Lumber and building materials*.................. 79 1,139 1,414 Other........................................... 220 249 242 ------ ------ ------ $2,619 $3,994 $4,502 ====== ====== ======
- --------------- * This business was sold on December 29, 2000. TruServ's sales to its members are divided into three delivery or logistics categories, as follows: - warehouse shipment sales (approximately 63% of total sales); - direct shipment sales (approximately 33% of total sales); and - relay sales (approximately 4% of total sales). Warehouse shipment sales are sales of products that are purchased, warehoused and resold by TruServ in response to orders from the members. Direct shipment sales are sales of products that are purchased through TruServ by the members but delivered directly to members from manufacturers. Relay sales are sales of products that are purchased through TruServ in response to the requests of several members for a product which is: - to be included in future promotions, - seasonal in nature, - not normally held in inventory, and - not conducive to direct shipment. 2 Generally, TruServ 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 TruServ, it is not warehoused; rather, TruServ breaks up the shipment and "relays" the appropriate quantities to the members who placed orders. TruServ has numerous individual agreements with or commitments from its suppliers, most of which are terminable by the suppliers or TruServ without cause. These termination provisions, either individually or in the aggregate, have not had any material adverse effect on TruServ's ability to conduct its business. The goods and services purchased by TruServ from these suppliers are generally available from a wide variety of sources. TruServ is not dependent upon any one supplier or group of suppliers and in the past has not experienced any significant problems in obtaining necessary goods. TruServ also manufactures and sells paint and paint applicators. The principal raw materials used by TruServ in its manufacturing activities are chemicals. All raw materials are purchased from outside sources. In the past, TruServ has been able to obtain adequate sources of raw materials and other items used in production. TruServ does not currently anticipate shortages of materials that would materially impact its manufacturing operations. OTHER SERVICES TruServ annually sponsors two "markets" for its members in order to keep them better informed as to industry trends and the availability of new and seasonal merchandise. In the year 2002, both of these markets are in Dallas, Texas. 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. BACKLOG As of February 23, 2002 and February 24, 2001, respectively, TruServ had a backlog of firm orders (including relay orders) of approximately $56,177,000 and $28,814,000. TruServ's backlog at any given time is made up of two principal components: - normal resupply orders; and - 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 TruServ's two markets for new or seasonal merchandise, to be delivered during the subsequent period between markets. Thus, TruServ generally has a relatively high backlog at the end of each market, which decreases in subsequent months until the next market occurs. The increase in backlog orders in 2002 is due to the timing of the market. In 2002, the spring market was held in February but was held in May in 2001. COMPETITION The retail hardware industry is characterized by intense competition. Independent retail hardware businesses, including those served by TruServ, face intense competition from chain stores, discount stores, home centers and warehouse operations such as Wal-Mart, Home Depot, Menards, Sears and Lowe's. Increased operating expenses for the retail stores, including increased costs due to longer store hours and higher rental costs of retail space, have cut into operating margins for members and brought pressure on TruServ to achieve lower merchandise costs for its members. In response, TruServ 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 retail outlets. In 2002, TruServ is introducing a revised 3 program to build upon the strong foundation of the trueAdvantage(R) program by focusing on retail best practices. 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. TruServ competes with other member-owned and non-member-owned wholesalers as a source of supply and merchandising support for independent retailers. Competitive factors considered by independent retailers in choosing a source of supply include pricing, servicing capabilities, promotional support and merchandise selection and quality. TruServ is concentrating on its supply channel strategies and practices for gaining sustainable competitive advantage. In several markets in the United States, TruServ competes directly with other member-owned wholesalers such as Ace Hardware Corporation, Do it Best Corporation and United Hardware Distributing Co. TRADEMARKS, SERVICE MARKS AND COLLECTIVE MEMBERSHIP MARKS TruServ's trademarks, service marks and collective membership marks are of prime importance to TruServ. Many of the marks are highly recognized and utilized in extensive advertising and marketing campaigns, and TruServ vigorously defends its marks. As of December 31, 2001, TruServ's members have approximately 7,200 retail outlets that operate predominately as retail hardware stores, rental facilities, horticulture outlets and commercial and industrial distributors, throughout the United States and in 60 countries, 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 Party Central(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 TruServ intends to use the marks in commerce in the future. Each of the marks is renewable at TruServ's option and TruServ 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). EMPLOYEES As of December 31, 2001, TruServ employed approximately 4,000 persons in the United States on a full-time basis. Due to the widespread geographical distribution of TruServ's operations, employee relations are governed by the practices prevailing in the particular area where the employees are located and are generally implemented locally. Approximately 36% of the TruServ's hourly-wage employees are covered by collective bargaining agreements that are generally effective for periods of three or four years. In general, TruServ considers its relationship with its employees to be good. FINANCING AGREEMENTS On March 26, 2001, TruServ reported that, as of February 24, 2001, it failed to comply with a covenant under the revolving credit facility and senior note agreements that required it to achieve a minimum monthly borrowing base ratio. This constituted an "event of default" under which the senior notes and amounts outstanding under the credit facility would become callable as immediately payable. Accordingly, these amounts were classified as current liabilities as of December 31, 2000. On April 11, 2002, TruServ entered into various amendments to its existing revolving credit facility and other senior lending agreements. The amendment to the revolving credit facility extends the terms of the facility from June 2002 to June 2004. The amount of the commitment remains at $200 million. There are, however, borrowing base limitations that fluctuate in part with the seasonality of the business. The borrowing base formula limits advances to the sum of 85% of eligible accounts receivable, 50% of eligible inventory, 60% of the appraised value of eligible real estate and 50% of the appraised value of eligible machinery and equipment; availability is further increased by seasonal over-advances and decreased by reserves against availability. The interest rate on the revolving credit facility was increased to the prime rate plus 3.25%. The 4 revolving credit facility has certain minimum unusable commitment amounts, which vary based upon the projected working capital needs of TruServ. The unused commitment fee is 0.75% per annum. The amendments to the various senior notes maintain the existing debt amortization schedules of the various notes. Interest rates on the notes are at the previous non-default rates, which range from 9.98% to 11.85%. The senior note and revolving credit facility amendments also require initial, quarterly and annual maintenance fees. All of the proceeds from certain asset sales, amortization of certain notes receivable and 80% of any excess cash flow, as defined in the amended senior note and revolving credit facility agreements, will be used to prepay all parties to these amendments in accordance with an amended intercreditor agreement. The intercreditor agreement establishes how the assets of TruServ, which are pledged as collateral, are shared and how certain debt prepayments are allocated among the senior lenders. The commitment under the revolving credit facility will be permanently reduced by the amount of the prepayments allocated and paid on the revolving credit facility. The amendments all require TruServ to meet certain restrictive covenants relating to minimum sales, minimum adjusted EBITDA (earnings before interest, taxes, depreciation and amortization), minimum fixed charge coverage, minimum interest coverage and maximum capital expenditures. The term of the revolving credit facility is accelerated to June 30, 2003, if on that date: total senior debt outstanding is in excess of $270 million, or total senior debt outstanding, plus the unused amount of the commitment under the revolving credit facility, less $30 million, is in excess of $320 million. The senior lenders may accelerate their notes if the company does not have a revolving credit facility in place to fund its seasonal cash flows. The amendments limit the amount of the cash portion of patronage dividends to the 20% minimum required to be paid under applicable IRS regulations in order for TruServ to maintain its status as a cooperative, unless TruServ's operating performance achieves certain EBITDA targets, in which case, up to 30% of the patronage dividend may be paid in cash. The amendments also require the continuation of the stock redemption moratorium through the term of the amended senior debt. It is an event of default under the amendments to exceed certain levels of subordinated note payments. In addition, an event of default arises under the amendments in the event that TruServ fails to comply with its corporate governance policy requiring the retention by TruServ of at least two outside directors prior to May 31, 2002, at least four outside directors prior to September 1, 2002 and at least five outside directors prior to November 1, 2002. The amendments also contain requirements for other customary covenants, representations and warranties, funding conditions and events of default. These amendments eliminate the "event of default" discussed above and, accordingly, the long-term portions of the senior notes are no longer recorded as a component of current debt at December 31, 2001 or 2000. RETAIL MEMBER AGREEMENT The TruServ Retail Member Agreement provides, among other things, that each member: (1) 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; (2) will conduct its businesses subject to the terms of the Retail Member Agreement; (3) will conduct a retail hardware, home or garden center, rental or industrial/commercial operation at a designated location; (4) will comply with TruServ's By-Laws, as may be amended from time to time; (5) will accept patronage dividends in a form complying with the requirements of the Internal Revenue Code for deduction from gross income by TruServ; (6) may receive different services or charges based upon the amount of merchandise purchased by the member; 5 (7) agrees to have its Retail Member Agreement terminated in certain circumstances by unilateral action by TruServ's board of directors; (8) agrees to have its Retail Member Agreement automatically modified upon notice from TruServ to the member of any relevant change in the Certificate of Incorporation and/or By-Laws of TruServ, or by resolution of the board of directors; (9) agrees to have its Retail Member Agreement governed by Illinois law, enforced or interpreted only in courts located in Cook County, Illinois, or any Illinois county contiguous to Cook County and only interpreted in accordance with the substantive laws of Illinois without giving effect to its conflict of laws principles; and (10) may terminate the Retail Member Agreement upon 60 days written notice mailed to any executive officer of TruServ 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 for each store owned; however, 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 of the Class A common stock during the prior year in connection with the patronage dividend distributed to the members, as discussed below. See "Distribution of Patronage Dividends." Neither class of TruServ common 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 common 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 purchasing 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 and Class B common stock. As TruServ reported a net loss for 2001, there is no patronage dividend payable in 2002 related to 2001 results. 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 TruServ and 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 and members who did not request redemption were saddled with the losses of those members who requested redemption. Moreover, the board of directors considered TruServ's debt agreements and, in particular, the financial covenants thereunder, which prohibit redemptions when TruServ, among other things, does not attain certain profit margins. At the time the board of directors declared the moratorium on redemptions, TruServ's By-Laws did not impose limitations on the board's discretion to initiate or to continue a moratorium on redemption. The By- 6 Laws merely provided that upon termination of a member's agreement, TruServ was to redeem the member's shares. Nevertheless, the board of directors concluded that their fiduciary obligations to TruServ and its members would not permit them to effect redemptions under the circumstances described above. After the board of directors declared the moratorium, the board of directors amended the By-Laws to provide that if TruServ's funds available for redemption are insufficient to pay all or part of the redemption price of shares of capital stock presented for redemption, the board of directors may, in its sole discretion, delay the payment of all or part of the redemption price. The amended debt agreements preclude the lifting of the stock moratorium until June 2004 except for certain hardship cases, not to exceed $2,000,000 annually. Subsequent to the expiration of the prohibition against stock redemptions under the debt agreements, the board of directors will consider the financial condition of TruServ, and will not lift the moratorium unless it can conclude that effecting redemptions of TruServ's capital stock will not "impair the capital" of TruServ, 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 TruServ quarterly. As of February 19, 2002, the amount of Class A common stock and Class B common stock presented for redemption but deferred due to the moratorium is approximately $27,569,000 after the offset of the loss allocation account. The $27,569,000 includes approximately $11,699,000 related to the Class A common stock historically paid out at time of redemption and $34,712,000 related to Class B common stock historically paid out in five equal annual installments, offset by the amount of the loss allocation accounts related to the Class B common stock in an aggregate amount of $18,842,000. 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, as authorized by the board of directors, is paid to members out of patronage source income, less certain deductions, calculated as provided in the following sentence. The total 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. The total dividend is allocated to each purchase category, with the main purchase categories being warehouse, relay, direct shipment and paint. Once the patronage dividend is allocated to the purchase categories, it is distributed to members based on the relative gross margin participation of the member for each type of purchase category. Patronage dividends are usually paid to members within 90 days after the close of TruServ's fiscal year; however, the Internal Revenue Code (the "Code") permits distribution of patronage dividends as late as the 15th day of the ninth month after the close of TruServ's fiscal year, and TruServ may elect to distribute the annual patronage dividend at a later time than usual in accordance with the provisions of the Code. TruServ's By-Laws provide for the payment of annual patronage dividends, after payment of at least 20% of such patronage dividends in cash, in "qualified written notices of allocation" including: - Class B common stock based on its par value, 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), - promissory (subordinated) notes, or - other property. 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. "Non- 7 qualified written notices of allocation" are usually issued in the form of Class B common stock. 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 a certain amount, the cumulative value of which would not exceed two percent (2%) of the member's net purchases of merchandise and services from TruServ. Commencing in 1996, the board established a minimum Class B common stock ownership requirement, which may be varied from time to time. However, not all members have achieved the minimum target. This minimum is calculated as the aggregate of a member's various types of annual purchases multiplied by a specific percentage, which varies from 1% to 14%, decreasing as total dollar purchases by category increase. The amount of the 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 allocation accounts reflect each member's proportionate share of the 1999 loss, reduced by certain non-patronage amounts that are not allocable to members. The loss allocation accounts are not accounts receivable from members and do not represent amounts currently due from members. Rather, the loss allocation accounts are satisfied, on a member by member basis, by withholding the portion of each member's patronage dividend that would have been paid in Class B common stock, at par value, and applying that amount to reduce the loss allocation account until it is reduced to zero. The current levels of members' stock investments in TruServ are not affected. However, in the event a member should cease to be a shareholder of TruServ, any unsatisfied portion of that member's loss allocation account would be satisfied by reducing the amount paid in redemption of the member's stock investment in TruServ. Currently, TruServ has in effect a moratorium on stock redemptions. See "Moratorium on Redemptions of Capital Stock" above. TruServ has retained the fiscal 2001 loss as part of the accumulated deficit account. A final determination of whether to retain or distribute the fiscal 2001 loss to members will be made prior to filing the 2001 Federal tax return. Nevertheless, members will be assigned a share in this loss based generally on their patronage in the years to which the loss relates. TruServ has the right to use 100% of future patronage income to offset the accumulated deficit account as well as to set off the accumulated deficit account against other amounts owed to members. In the event a member leaves TruServ, any remaining portion of the member's share of the accumulated deficit account will be offset against amounts due to the member upon redemption. 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 the member by TruServ and the portion thereof that 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 8 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 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, usually 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: (1) 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 (2) 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. 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 approximately 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. TruServ's amended debt agreements limit the cash portion of the patronage dividend to 20% unless certain annual EBITDA targets are achieved; then the cash portion of the patronage dividend may be paid at a higher percent up to 30%. 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. TruServ keeps the allocations of Class B common stock in book entry form. TruServ then sends a written notice to each member of these deposits and the allocation thereof to the member. SET OFF RIGHTS OF TRUSERV TruServ's Certificate of Incorporation and By-Laws specifically provide that TruServ may set off its obligation to make any payment to a member for such member's stock, notes, interest and declared and 9 unpaid dividends against any obligation owed by the member to TruServ. TruServ exercised these set off rights in 2001, when TruServ notes and interest came due to former members with outstanding merchandise accounts receivable to TruServ and current members with past due merchandise accounts receivable to TruServ. TruServ also set off its obligation to former members against their related loss allocation balance. The set off rights were exercised in an aggregate amount of $7,483,000 during 2001. Members with multiple stores who elect to sell one or more, but not all, of their stores must notify TruServ, in writing, of their intention to transfer the stock for the terminating store(s) to the remaining store(s). This is to avoid TruServ exercising its right to offset the stock for the terminating store against the loss allocation account balance. ITEM 2. PROPERTIES. TruServ's worldwide headquarters is located in Chicago, Illinois. Information with respect to TruServ's owned and leased warehousing and office facilities at December 31, 2001 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 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 Woodland, California.......................... 350,000 Owned
No location owned by TruServ is subject to individual mortgages. All owned facilities are assigned as collateral under the senior debt obligations. The Hagerstown, Maryland facility is assigned as collateral under a synthetic lease obligation. The Westfield, Massachusetts distribution center was closed and sold in 2000. In 2001, TruServ closed its Henderson, North Carolina distribution center and the lease agreement expired on November 11, 2001. The Indianapolis, Indiana distribution center was closed and sold in 2001. TruServ's interest in TruServ Canada Cooperative, Inc. was sold in October of 2001, which included the sale of the Winnipeg, Manitoba property. Also in 2001, TruServ announced the closure of its Brookings, South Dakota and Hagerstown, Maryland distribution centers; such facilities are currently up for sale. A sale/leaseback transaction is currently being pursued for the East Butler, Pennsylvania facility. 10 Information with respect to TruServ'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
TruServ announced in the third quarter of 2001 that it is considering the possible sale of the paint manufacturing business which would include one or both of these facilities; a possible sale transaction could include the sale of a majority interest in the manufacturing business. TruServ has subleases with third parties for the Ft. Smith, Arkansas and Peachtree City, Georgia leased facilities, which are currently not being used in operations. Also, TruServ has subleases for approximately 33,000 square feet in the corporate headquarters facility located in Chicago, Illinois. TruServ's facilities are suitable for their respective uses and are, in general, adequate for TruServ's present needs. TruServ owns and leases transportation equipment for use at its regional distribution centers for the primary purpose of delivering merchandise from TruServ's regional distribution centers to its members. 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 former members of TruServ filed an action against TruServ in the Circuit Court of the 19th Judicial Circuit (McHenry County, Illinois). The plaintiffs in the action each allege that, based upon representations made to them by TruServ 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 the action and it is too early to determine the extent of the damages being claimed. In March 2001, a similar action was brought on behalf of additional former members in the same court, by the same law firm. The complaint alleges substantially similar claims as those made in the June 2000 action, except that the March 2001 action relates to the ServiStar brand name instead of the Coast to Coast brand name. The lawsuit is in an early stage and the extent of damages being claimed has not yet been determined. In total, approximately 40 former members have brought claims against TruServ based on this type of allegation in the Circuit Court of the 19th Judicial Circuit (McHenry County, Illinois). In August 2000, an action was brought in Delaware Chancery Court (New Castle County) by a former TruServ member against certain present and former directors of TruServ and against TruServ. The plaintiff in the lawsuit seeks to proceed on a class-action basis on behalf of all those affected by the moratorium and the creation of the loss allocation accounts. The complaint alleges that the named directors breached their fiduciary duties in connection with the accounting adjustments made by TruServ 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 11 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, a former president of TruServ, filed a claim in the Circuit Court of the 20th Judicial Circuit (Collier County, Florida) against TruServ alleging he is due bonus and retirement compensation payments in addition to amounts already paid to him. TruServ has filed a counterclaim against Mr. Pentz alleging that he breached his fiduciary duties as president of TruServ. Mr. Pentz's motion to dismiss the counterclaim was denied. Trial has been scheduled for June 2002. TruServ intends to vigorously defend all of these cases. 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 TruServ and there is no expectation that any market will develop. TruServ'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 TruServ and purchased at least 60 shares of TruServ's Class A common stock (the only class of voting stock) upon becoming a member. TruServ is organized as a Delaware stock corporation and operates as a member-owned wholesaler cooperative corporation. The shares of TruServ'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 TruServ. In accordance with TruServ'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 February 23, 2002) of each class of stock of TruServ is as follows:
NUMBER OF HOLDERS OF RECORD TITLE OF CLASS ---------- Class A common stock, $100 Par Value........................ 7,619 Class B common stock, $100 Par Value........................ 7,486
Dividends (other than patronage dividends) on the Class A common stock and Class B common stock, subject to the provisions of TruServ's Certificate of Incorporation, may be declared out of gross margins of TruServ, other than gross margins from operations with or for members and other patronage source income, after deduction for expenses, reserves and provisions 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, TruServ 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 in 2002 for the year ended December 31, 2001. See Item 1--"Business--Distribution of Patronage Dividends." 12 ITEM 6. SELECTED FINANCIAL DATA.
SELECTED FINANCIAL DATA FOR THE FISCAL YEARS -------------------------------------------------------------- 2001(C) 2000 1999 1998 1997(B) ---------- ---------- ---------- ---------- ---------- (IN THOUSANDS) Revenues............................. $2,619,434 $3,993,642 $4,502,326 $4,328,238 $3,331,686 Gross margin......................... 264,034 277,397 181,465 298,135 241,020 Net margin/(loss).................... (50,687) 34,117 (130,803) 12,020 38,086 Patronage dividends(a)............... -- 34,705 -- 35,024 43,782 Total assets......................... 1,020,837 1,236,014 1,335,397 1,587,674 1,425,483 Long-term debt....................... 236,268 288,928 309,796 316,959 169,209 Promissory (subordinated) and installment notes payable(d)....... 42,973 65,846 83,804 124,422 172,579 Class A common stock(e).............. 49,896 49,084 47,270 49,880 47,423 Class B common stock(e).............. 174,448 174,448 177,779 195,643 187,259
- --------------- (a) No patronage dividends were issued in 2001 and 1999 due to the reported net loss of $50,687,000 and $130,803,000, respectively. (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) The lumber and building materials business was sold on December 29, 2000 and, as such, 2001 financial results do not include the activity of this business. (d) The noncurrent portion of promissory and installment notes payable to members are classified in members' capitalization on the balance sheet. (e) Class A common stock and Class B common stock include $11,699,000 and $34,712,000, respectively, of amounts related to the stock moratorium. See "Item 1. Business -- Moratorium on Redemptions of Capital Stock." 13 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FISCAL YEAR 2001 COMPARED TO FISCAL YEAR 2000 RESULTS OF OPERATIONS A reconciliation of revenue and gross margin between 2001 and 2000 follows:
% OF CHANGE IN GROSS GM % REVENUE REVENUE MARGIN OF REVENUE (IN THOUSANDS) ----------- --------- -------- ---------- FISCAL YEAR 2000 RESULTS..................... $ 3,993,642 $277,396 6.9% Lumber and building materials business*...... (1,063,680) (77.40)% (18,196) Canadian business**.......................... (24,611) (1.79) (3,251) Terminated members........................... (184,223) (13.41) (20,384) New members.................................. 26,436 1.92 3,116 Same store sales Warehouse and relay revenues............... (10,665) (0.78) 12,941 Vendor direct revenues..................... (110,875) (8.06) (824) Advertising, transportation and other revenues................................... (6,590) (0.48) (493) Indirect cost of revenues.................... -- n/a 13,729 ----------- -------- Total change................................. (1,374,208) (100.00)% (13,362) ----------- -------- FISCAL YEAR 2001 RESULTS..................... $ 2,619,434 $264,034 10.1%
- --------------- * This business was sold on December 29, 2000; therefore, for comparability purposes, fiscal 2000 results for this business are being removed. ** This business was sold on October 22, 2001; therefore, for comparability purposes, the results for the last 2 months of fiscal 2000 for this business are being removed. A reconciliation of gross margin percentage between 2001 and 2000 follows:
GROSS % OF MARGIN % CHANGE -------- ------ FISCAL YEAR 2000 RESULTS.................................... 6.9% Effect of sale of lumber and building materials business.... 1.9 61.7% Effect of shift from vendor direct to warehouse and relay sales..................................................... 0.7 22.1 All other................................................... 0.6 16.2 ----- ------ Total change.............................................. 3.2 100.0% ----- FISCAL YEAR 2001 RESULTS.................................... 10.1% =====
Revenues for 2001 totaled $2,619,434,000. This represented a decrease in revenues of $1,374,208,000 or 34.4% from 2000. The key contributors to the decrease in revenue are the sale of the lumber and building materials business to Builder Marts of America, Inc. in December 2000, the sale of TruServ Canada Cooperative, Inc. in October 2001, and the 11% decline in the number of participating member retail outlets in 2001. While not as significant as in 2001, we anticipate a continued decline in retail outlets in 2002. The remaining revenue reduction occurred in same store sales, with 90% of this decrease in direct sales to members, which generate approximately 1% gross margin for TruServ. The reduction in direct sales is partially due to a shift in member purchases to warehouse sales. Certain marketing programs and sales initiatives, together with the impact of a slow down in the national economy, have encouraged members to buy in smaller quantities that are available by purchasing merchandise from warehouse. This trend has favorably improved the sales mix toward more warehouse sales from the less profitable direct sales. Gross margin for 2001 totaled $264,034,000. This represented a decrease in gross margin dollars of $13,362,000 or 4.8% compared to 2000. The sale of the lumber and building materials business, the sale of TruServ Canada Cooperative, Inc. and the decline in the number of participating member retail outlets are the 14 key contributors to the negative variance relative to the prior year. The gross margin as a percent of revenue increased to 10.1% in 2001 from 6.9% for 2000. The shift in the sales mix to warehouse sales from vendor direct orders, a reduction in member returns and allowances, and certain product price increases contributed to the increase in gross margin as a percent of revenue. The indirect cost of revenues favorably impacted the gross margin dollars as of result of the closure of distribution centers and headcount reduction, which reduced the direct inbound logistics costs and labor and related overhead incurred to bring merchandise to the distribution centers. The reduction in member returns and allowances is principally due to a change in processes resulting in part in fewer shipping errors. Additional impact to gross margin was due to a reduction in gross advertising costs of $23,400,000 partially offset by a reduction in advertising support fees of $12,527,000. Logistics (outbound to members' stores) and manufacturing expenses decreased $1,524,000 or 1.8% as compared to the prior year, primarily due to the closure of distribution centers, headcount reductions and a reduction in the member base. Selling, general and administrative expenses ("SG&A") increased by a net $11,167,000 or 9.2% in 2001 compared to the prior year. Health and pension benefit costs increased $8,894,000 due to pension settlements with terminated employees and a decline in the expected investment return on plan assets. Software license fees related to retail point of sale software increased $3,553,000. Financing and legal costs, including consulting and legal fees related to the debt covenant violation under the senior debt agreements and other legal matters, were $9,337,000. The aggregate of this increase, $21,784,000, was partially offset principally by $7,146,000 of lower corporate staff expenses due to headcount reductions that were part of the 2000 and 2001 restructuring initiatives and $4,511,000 of lower headcount and operational expenses as a result of the December 2000 sale of the lumber and building materials business. In fiscal 2001, TruServ continued the workforce reductions initiated in fiscal 1999 and 2000 related to regional distribution center closures and workforce reductions at its corporate headquarters. TruServ recorded a pre-tax charge to income from continuing operations of $38,522,000 in fiscal 2001. The charge is comprised of $10,722,000 for severance, $8,899,000 for asset impairments related to the regional distribution centers based upon current estimates of the market values of the assets compared to their book values and $18,901,000 of facility exit costs related to the regional distribution center closures. The largest component of these exit costs relates to the Hagerstown, Maryland distribution center closure, which is subject to a synthetic lease. The synthetic lease has a principal balance of $40,000,000 which is due at the end of the lease term in April 2003. This obligation and the original cost of the facility are not recorded on TruServ's balance sheet because it does not meet the requirement for capital lease treatment under Statement of Financial Accounting Standards ("SFAS") No. 13, "Accounting for Leases." The difference between the lease obligation and management's estimate of the fair value of the building is approximately $14,800,000 and is the major component of its facility exit costs. In fiscal 2000, TruServ recorded a restructuring charge of $4,944,000, approximately $2,000,000 of which was related to the closures of the Henderson, North Carolina and the Indianapolis, Indiana distribution centers. The closures of the Brookings and Hagerstown regional distribution centers are expected to be substantially completed by the end of fiscal 2002; the closures of Henderson and Indianapolis were completed by the end of fiscal 2001. A summary of restructuring charges, related uses of reserves and ending reserve balances is as follows (dollar amounts in thousands):
DECEMBER 31, 2000 ADDITIONAL DECEMBER 31, 2001 ESTIMATED RESTRUCTURING RESTRUCTURING ASSET RESTRUCTURING ANNUALIZED RESERVE CHARGES IMPAIRMENTS PAYMENTS RESERVE SAVINGS ----------------- ------------- ----------- -------- ----------------- ---------- Severance and outplacement..... $ 861 $10,722 $ -- $(3,313) $ 8,270 Facility exit costs............ 1,051 18,901 -- (1,973) 17,979 Asset impairments.............. -- 8,899 (8,899) -- -- ------ ------- ------- ------- ------- $1,912 $38,522 $(8,899) $(5,286) $26,249 $28,957 ====== ======= ======= ======= ======= ======= HEADCOUNT REDUCTION ------------- Severance and outplacement..... Facility exit costs............ Asset impairments.............. 909 ===
15 Interest expense to members decreased by $3,289,000 or 29.5% as compared to the prior year, primarily due to a lower average principal balance of debt outstanding to members. Other interest expense decreased by 15.1 $1,144,000 or 2% as compared to prior year. The interest expense savings from the lower average principal balance of senior debt outstanding, as compared to the prior year, was offset by the interest rate increase of approximately 2% imposed as a result of the debt covenant violation under the revolving credit facility and the senior note agreements. As a result of this default interest rate, TruServ incurred additional interest expense of $6,779,000 in fiscal 2001. Gain on sale of assets decreased $28,379,000. The variance was due to the nonrecurrence of the gain of $28,981,000 recorded upon the sale of TruServ's lumber and building materials business in December 2000. Other income decreased by $3,813,000, due principally to the nonrecurrence of a gain of $4,999,000 recorded in fiscal 2000 from the settlement of certain pension obligations to fully vested employees through the purchase of annuity contracts. The net loss in 2001 was $50,687,000 compared to a net margin of $34,117,000 in 2000, a decrease in net margin of $84,804,000. Listed below are the non-operational or unusual items recorded in fiscal 2001 and 2000 in a reconciliation from total net margin, as reported, to an adjusted net margin/(loss), showing what underlying operating results would have been without the non-operational and unusual items.
FAV/(UNFAV) 2001 2000 VARIANCE % CHANGE ---- ---- ----------- -------- (IN THOUSANDS) Total net margin/(loss)........................... $(50,687) $ 34,117 $(84,804) (249)% Non-operational or unusual items: Asset sale gains.................................. (1,958) (30,337) 28,379 Pension annuitization............................. -- (4,999) 4,999 Restructuring charges and other related expenses........................................ 38,522 4,944 33,578 Inventory reduction program....................... 5,572 -- 5,572 Re-financing fees................................. 9,337 -- 9,337 Incremental pension settlements................... 5,868 -- 5,868 -------- -------- -------- Total non-operational or unusual items:........... 57,341 (30,392) 87,733 -------- -------- -------- Adjusted net margin............................... $ 6,654 $ 3,725 $ 2,929 79% ======== ======== ======== ====
The adjusted net margin increase of $2,929,000 was achieved though comparable revenue was lower by $310,528,000. 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 TruServ'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 TruServ'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, TruServ 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. TruServ's improvement of inventory controls in 2000 and a significant reduction in member claims contributed to the increase in gross margins. In addition, TruServ conducted a physical inventory count in the fourth quarter of 2000, which resulted in a $22,200,000 adjustment that positively impacted gross margins. TruServ recorded an inventory adjustment in 1999 resulting in a charge of $74,000,000 related to the consolidation of the distribution network, which was caused by larger than usual employee turnover, less than adequate training procedures and 16 increased member claims. TruServ'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 TruServ increasing training procedures for employees in the last year, particularly in the handling of inventory. Logistics and manufacturing expenses decreased $9,220,000 or 9.6% as compared to the prior year. TruServ's initiatives in consolidating its distribution network, developed with the merger plan from 1997, led to the reduction in these expenses as the merger integration costs incurred in fiscal 1999 of $18,683,000 were no longer incurred by TruServ in fiscal 2000. The merger integration costs TruServ had previously incurred related to: - additional costs TruServ incurred implementing the merger plan from 1997 that related to former Cotter distribution center closings, severance pay and the temporary incremental increase in warehousing costs to convert the product assortment, and - the integration of the three distribution networks by consolidating operating systems, revising truck runs for overlapping distribution centers and resizing and reconfiguring warehouse racking. The decrease in logistics and manufacturing expenses was partially offset by increased handling and packaging expenses and lower capitalization of warehouse costs due to lower inventory levels. As a result of the decreases in sales that TruServ experienced in early 2000, TruServ implemented significant cost cutting measures in 2000 that resulted in a decrease in SG&A expenses. SG&A expenses decreased $16,823,000 or 12.2% over the prior year. SG&A expenses as a percentage of sales were 3.0%, which is consistent with the prior year. Restructuring charges and other related expenses decreased $2,569,000 as TruServ had completed the workforce reduction of the merger plan related to the former Cotter & Company operations. As a result of a reduction in the aggregate principal balance of debt to members of TruServ, the amount of interest expense 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 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 TruServ's sale of its lower gross margin lumber and building materials business. 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 TruServ recording in 1999 a full valuation allowance on deferred taxes of $16,490,000 existing as of December 31, 1998. The valuation allowance was required under FASB Statement No. 109, since TruServ had cumulative losses for the three most recent fiscal years and consequently did not have sufficient evidence to support the realization of this asset. In 2000, there was no change in the valuation allowance. TruServ's net margin in 2000 was $34,117,000 compared to a net loss of $130,803,000 in 1999. TruServ 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 business and the settlement of certain pension obligations through the purchase of annuity contracts. LIQUIDITY AND CAPITAL RESOURCES The Securities and Exchange Commission ("SEC") recently issued Financial Reporting Release No. 61, which sets forth the views of the SEC regarding certain disclosures relating to liquidity and capital resources. The information provided below describing TruServ's debt, credit facilities, guarantees and future commitments is included in order to facilitate a review of TruServ's liquidity. 17 Cash provided by operating activities for the fiscal year 2001, 2000 and 1999 was $179,441,000, $83,573,000 and $181,607,000, respectively. The cash generated from the decrease in inventory was $100,692,000 in fiscal 2001 as a result of TruServ's initiatives to improve inventory turns and eliminate excess and/or obsolete inventory, as well as a result of the effects of reducing the number of regional distribution centers, which in turn reduced stock levels. In addition, a reduction in membership contributed to this decrease in inventory levels. In fiscal 2000 and 1999, cash generated from the decrease in inventory was $38,752,000 and $112,703,000, respectively. This decrease was a result of TruServ's consolidation of its distribution network to respond to the decline in sales it had experienced, along with its efforts to commonize inventory assortment and implement the distribution network strategic plan from the merger. While not as significant, we anticipate continued decline in inventory investments in 2002, as TruServ continues its initiative to improve inventory turns and respond to the anticipated decline in revenue due to the decrease in the number of participating member retail outlets. The cash generated from the decrease in accounts and notes receivable for the fiscal year 2001, 2000 and 1999 was $127,000,000, $52,187,000 and $63,059,000, respectively. The decrease in fiscal 2001 is primarily due to the sale of the lumber and building materials business, which accounts for approximately $64,000,000. The remaining decrease in accounts and notes receivable is mainly due to a decline in sales, change in sales mix from direct sales to warehouse sales, and the implementation of improved collection efforts. TruServ's DSO (Days Sales Outstanding) decreased to 39.3 days from 47.1 days, an improvement of 7.8 days, which generated approximately $54,000,000 in cash. The other significant impact in operating activities was in accounts payable. In fiscal 2001 and 2000, cash used to fund the decrease in accounts payable was $92,216,000 and $81,944,000, respectively. The decrease in fiscal 2001 is partially due to the reduction of lumber vendors resulting from the sale of the lumber and building materials business, which accounts for approximately $39,000,000 of the decrease. The remaining decrease is a result of lower inventory purchases. In fiscal 1999, the cash generated from the increase in accounts payable was $56,087,000 due to improved terms with vendors. Cash flows used for investing activities for the fiscal year 2001, 2000 and 1999 were $26,502,000, $1,954,000 and $10,532,000, respectively. Total capital expenditures, including expenditures under capital leases, were $15,151,000 for the fiscal year ended December 31, 2001, as compared to $12,526,000 and $44,930,000 for the fiscal years ended December 31, 2000 and December 31, 1999, respectively. In fiscal 1999, the majority of the capital expenditures were for merger related projects. These projects were related to building expansions and system upgrades. In fiscal 2001 and 2000, the capital expenditures are comprised of various building improvements and purchases of additional equipment and technology at TruServ's regional distribution centers and at its corporate headquarters. TruServ anticipates the capital expenditure investment for fiscal 2002 will approximate fiscal 2001 spending. In fiscal 2001, the proceeds from sale of properties were $10,511,000, which were generated from the sale of TruServ Canada Cooperative, Inc. and the sale of its Indianapolis, Indiana property. In fiscal 2000, the proceeds from the sale of properties were $23,113,000. The principal amount of cash generated in 2000 was from the sale of the lumber and building materials business 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. In fiscal 1999, the proceeds from the sale of properties were $39,714,000. These proceeds were predominantly generated from the sale of closed distribution centers. Restricted cash consisted of the following at December 31:
2001 2000 -------- -------- (000'S OMITTED) Letters of credit........................................... $ 11,392 $ 2,820 Proceeds from sale of assets available for debt reduction by the collateral agent...................................... 10,906 -- Lockbox cash management deposit requirements................ 4,000 -- Redeemable (subordinated) notes............................. 1,746 5 Escrow...................................................... 1,031 1,000 -------- -------- $ 29,075 $ 3,825 ======== ========
18 As a result of the debt covenant violation, TruServ's current lenders require that it maintains a minimum cash management deposit in its lockbox accounts, cash collateralize all letters of credit and hold the proceeds from the sale of properties in a restricted cash account with the collateral agent to be used for debt reduction. TruServ's cash flows generated from operating activities were primarily used for financing activities of $79,614,000, $67,943,000 and $170,910,000 for fiscal year 2001, 2000 and 1999, respectively, predominantly relating to reducing its long-term and short-term financing. In fiscal 2001, the short-term borrowings in financing activities generated cash of $11,300,000 due to TruServ maintaining the revolving credit facility borrowings at $140,000,000, which included $57,000,000 of cash recorded in cash and cash equivalents that is available to reduce outstanding borrowings to $83,000,000. TruServ's total debt, including notes which are a component of Members' capitalization, was $514,287,000 at December 31, 2001, and $554,210,000 at December 31, 2000. TruServ achieved the debt reduction by making principal payments on the senior notes and on maturity of subordinated notes. TruServ's debt consisted of the following at December 31:
2001 2000 -------- -------- (IN THOUSANDS) -------------------- Short-term borrowings....................................... $141,755 $138,085 Senior notes................................................ 279,429 287,000 Redeemable (subordinated) term notes........................ 7,819 18,624 Capital lease obligations................................... 2,678 2,645 Promissory (subordinate) and installment notes.............. 82,606 107,856 -------- -------- 514,287 554,210 Cash and cash equivalents available to reduce debt.......... (57,000) -- -------- -------- Adjusted debt outstanding................................... $457,287 $554,210 ======== ========
TruServ had borrowings under the revolving credit facility agreement of $140,000,000 and $127,000,000 at December 31, 2001 and 2000, respectively. The $140,000,000 outstanding as of December 31, 2001 includes $57,000,000 of cash recorded in cash and cash equivalents that is available to reduce outstanding borrowings to $83,000,000. The weighted average interest rate on these borrowings was 9.9% and 8.9% for the years ended December 31, 2001 and 2000, respectively. The 2001 average interest rate reflects the inclusion of the 2% default premium. TruServ's Hagerstown, Maryland distribution center is subject to a synthetic lease. The synthetic lease has a principal balance of $40,000,000 which is due at the end of the lease term in April 2003. This obligation and the original cost of the facility are not recorded in TruServ's balance sheet because the synthetic lease does not meet the requirement for capital lease treatment under SFAS No. 13, "Accounting for Leases." The difference between the lease obligation and management's estimate of the fair value of the building is approximately $14,800,000 and has been recorded in fiscal 2001 as part of restructuring charges and other related expenses. 19 The principal payment schedule for long-term debt, promissory and installment notes is as follows:
2002 2003(A) 2004 2005 2006 THEREAFTER ------- ------- ------- ------- ------- ---------- (IN THOUSANDS) Senior notes(a)...................... $47,616 $27,866 $27,866 $29,866 $40,366 $105,849 Redeemable (subordinated) term notes(b)........................... 4,611 3,102 106 -- -- -- Capital lease obligations............ 1,431 424 441 311 71 -- Promissory (subordinate) and installment notes issued to members(b)......................... 39,633 21,658 20,011 1,304 -- -- ------- ------- ------- ------- ------- -------- $93,291 $53,050 $48,424 $31,481 $40,437 $105,849 ======= ======= ======= ======= ======= ========
- ------------------------- (a) In addition to the scheduled principal payments, TruServ is obligated under the terms of the amended debt agreements to use the net proceeds from the sale of assets or other non-operating sources to pay to the senior note holders as well as the revolving credit facility banks their prorata share of the net proceeds. This will reduce principal amounts outstanding and the revolver commitment level, respectively. Total senior debt can not exceed $270,000,000 by June 30, 2003 under the terms of the amended debt agreements (see footnote 4 of TruServ's consolidated financial statements). Management believes it has adequate options to reduce senior debt to $270,000,000, including the possible sale of a majority interest in TruServ's paint manufacturing business or the sale/leaseback of several of its owned regional distribution centers. (b) Amounts shown as scheduled repayments are the stated note amounts; however, it is an event of default in the amended debt agreements if payments of subordinated notes exceed $24,000,000 and $14,000,000, in 2002 and 2003, respectively. TruServ will seek members' consent to extend the note due dates in exchange for an increase in the interest rate. On March 26, 2001, TruServ reported that, as of February 24, 2001, it failed to comply with a covenant under the revolving credit facility and senior note agreements that required it to achieve a minimum monthly borrowing base ratio. This constituted an "event of default" under which the senior notes and amounts outstanding under the credit facility would become callable as immediately payable. Accordingly, these amounts were classified as current liabilities as of December 31, 2000. On April 11, 2002, TruServ entered into various amendments to its existing revolving credit facility and other senior lending agreements. The amendment to the revolving credit facility extends the terms of the facility from June 2002 to June 2004. The amount of the commitment remains at $200 million. There are, however, borrowing base limitations that fluctuate in part with the seasonality of the business. The borrowing base formula limits advances to the sum of 85% of eligible accounts receivable, 50% of eligible inventory, 60% of the appraised value of eligible real estate and 50% of the appraised value of eligible machinery and equipment; availability is further increased by seasonal over-advances and decreased by reserves against availability. The interest rate on the revolving credit facility was increased to the prime rate plus 3.25%. The revolving credit facility has certain minimum unusable commitment amounts, which vary based upon the projected working capital needs of TruServ. The unused commitment fee is 0.75% per annum. The amendments to the various senior notes maintain the existing debt amortization schedules of the various notes. Interest rates on the notes are at the previous non-default rates, which range from 9.98% to 11.85%. The senior note and revolving credit facility amendments also require initial, quarterly and annual maintenance fees. All of the proceeds from certain asset sales, amortization of certain notes receivable and 80% of any excess cash flow, as defined in the amended senior note and revolving credit facility agreements, will be used to prepay all parties to these amendments in accordance with an amended intercreditor agreement. The intercreditor agreement establishes how the assets of TruServ, which are pledged as collateral, are shared and how certain debt prepayments are allocated among the senior lenders. The commitment under the revolving credit facility will be permanently reduced by the amount of the prepayments allocated and paid on the revolving credit facility. 20 The amendments all require TruServ to meet certain restrictive covenants relating to minimum sales, minimum adjusted EBITDA (earnings before interest, taxes, depreciation and amortization), minimum fixed charge coverage, minimum interest coverage and maximum capital expenditures. The term of the revolving credit facility is accelerated to June 30, 2003, if on that date: total senior debt outstanding is in excess of $270 million, or total senior debt outstanding, plus the unused amount of the commitment under the revolving credit facility, less $30 million, is in excess of $320 million. The senior lenders may accelerate their notes if the company does not have a revolving credit facility in place to fund its seasonal cash flows. The amendments limit the amount of the cash portion of patronage dividends to the 20% minimum required to be paid under applicable IRS regulations in order for TruServ to maintain its status as a cooperative, unless TruServ's operating performance achieves certain EBITDA targets, in which case, up to 30% of the patronage dividend may be paid in cash. The amendments also require the continuation of the stock redemption moratorium through the term of the amended senior debt. It is an event of default under the amendments to exceed certain levels of subordinated note payments. In addition, an event of default arises under the amendments in the event that TruServ fails to comply with its corporate governance policy requiring the retention by TruServ of at least two outside directors prior to May 31, 2002, at least four outside directors prior to September 1, 2002 and at least five outside directors prior to November 1, 2002. The amendments also contain other customary covenants, representations and warranties, funding conditions and events of default. These amendments eliminate the "event of default" discussed above and, accordingly, the long-term portions of the senior notes are no longer recorded as a component of current debt at December 31, 2001 or 2000. TruServ 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 TruServ was approximately $3,966,000 and $6,710,000 as of December 31, 2001 and 2000, respectively. The balance of $3,966,000 as of December 31, 2001 includes approximately $800,000 that will mature in fiscal 2002. Cash and cash equivalents at December 31, 2001 and 2000 were $88,816,000 and $15,491,000, respectively. As of December 31, 2001 the revolving credit facility borrowings were at $140,000,000, which included $57,000,000 of cash recorded in cash and cash equivalents that is available to reduce outstanding borrowings to $83,000,000. Also, the lockbox cash received from the members on the last day of the year was approximately $11,000,000 higher in 2001 than in 2000. At December 31, 2001, TruServ's working capital was $18,252,000, as compared to $91,098,000 at December 31, 2000 and $85,789,000 at December 31, 1999. The current ratio was 1.03 at December 31, 2001, as compared to 1.12 at December 31, 2000 and 1.10 at December 31, 1999. TruServ believes that its cash from operations and existing credit facilities will provide sufficient liquidity to meet its working capital needs, planned capital expenditures and debt obligations that are due to be repaid in fiscal year 2002. CRITICAL ACCOUNTING POLICIES Financial Reporting Release No. 60 recently released by the SEC recommends that all registrants include a discussion of "critical" accounting policies or methods used in the preparation of financial statements. TruServ's significant accounting policies are contained in the accompanying Notes to Consolidated Financial Statements. The financial statements have been prepared in conformity with generally accepted accounting principles and, accordingly, include amounts based on informed estimates and judgments of management with due consideration given to materiality. Accordingly, actual results could differ from those estimates. The following represents those critical accounting policies where materially different amounts would be reported under different conditions or using different assumptions. - Receivables, net of valuation allowances -- At December 31, 2001, accounts receivable, net of $9,402,000 in allowance for doubtful accounts, were $243,275,000. The valuation allowance was determined based upon TruServ's evaluation of known requirements, aging of receivables, historical 21 experience, the current economic environment and the ability of TruServ to set off against any unpaid receivable amounts due to members for stock, notes, interest and declared and unpaid dividends. While TruServ believes it has appropriately considered known or expected outcomes, its members' ability to pay their obligations, including those to TruServ, could be adversely affected by declining sales of hardware at retail resulting from such factors as contraction in the economy, loss of memberships or intense competition from chain stores, discount stores, home centers and warehouse operations. - Inventory valuation -- At December 31, 2001, inventories were $333,976,000, and reflect the reductions from cost in order to state inventories at the lower of cost or market. The lower of cost or market valuation considers the estimated realizable value in the current economic environment associated with disposing of surplus and/or damaged/obsolete inventories. Should the current economic climate significantly contract further resulting in retailers being unwilling to accept deliveries of advance orders placed (or TruServ electing not to ship inventories to those retailers where additional credit risk is not deemed appropriate), unanticipated decline in retail outlets or a significant contraction in TruServ's warehouse stock replenishment business for selected product categories, additional downward valuation adjustments could be required. The potential additional downward valuation adjustments could result from unanticipated additional excess quantities of finished goods and raw materials, and/or from lower disposition values offered by the parties who normally purchase surplus inventories. - Deferred tax assets -- At December 31, 2001, the accompanying Consolidated Balance Sheet reflects $113,042,000 of deferred tax assets, principally related to tax operating loss carryforwards and the nonqualified notices of allocation. These deferred tax assets, net of deferred tax liabilities of $2,505,000, are offset by a full valuation allowance at December 31, 2001. As described in the Notes to Consolidated Financial Statements, the company had approximately $65,440,000 of tax operating loss carryforwards available to offset future income taxes. In general, such carryforwards must be utilized within 20 years of incurring the net operating loss. At December 31, 2001, TruServ concluded that it is more likely than not that there would not be sufficient future taxable earnings to utilize the operating loss carryforwards, and a full tax valuation allowance was required. The valuation allowance will not be adjusted until TruServ has sufficient evidence to support the realization of this asset. - Accrued expenses -- At December 31, 2001, the accompanying Consolidated Balance Sheet reflects $119,490,000 of accrued expenses, principally related to restructuring, pension, health and other benefits. The company utilized current real estate market values in writing down the value of the Brookings, South Dakota regional distribution center, which is scheduled to close, as well as in adjusting its obligation under a synthetic lease related to the Hagerstown, Maryland regional distribution center, which is also scheduled to close. Should real estate values continue to decline, an additional provision may be required. The company works with an actuarial firm in the valuation of benefit obligations. TruServ selects certain actuarial assumptions on which to base the calculation of the actuarial valuation of the obligation, such as the discount rate (interest rate used to determine present value of obligations payable in the future), medical trend rate, expected return on assets and mortality tables to determine the expected future benefit obligations. To the extent that the actual rates and mortality vary from the assumptions used to determine the present actuarial valuation of these benefits, additional provision for expense may be necessary. NEW ACCOUNTING PRONOUNCEMENTS In July 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No. 141, "Business Combinations," and SFAS No. 142 "Goodwill and Other Intangible Assets." SFAS No. 141 requires that all business combinations initiated after June 30, 2001 be accounted for using the purchase method of accounting. SFAS No. 142 changes the accounting for goodwill and certain other intangible assets from an amortization method to an impairment only approach. Due to the adoption of SFAS No. 142, TruServ will not amortize goodwill beginning in fiscal 2002. The goodwill amortization expense during fiscal 2001 was approximately $2,577,000. TruServ is in the process of finalizing its initial impairment assessment as required by SFAS No. 142, but does not expect the adoption of this standard as of January 1, 2002 to have a material impact on the company's financial position or results of operations. 22 In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations." SFAS No. 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. SFAS No. 143 is effective January 1, 2003 for TruServ. TruServ is currently evaluating the impact this standard will have on its financial statements. In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment of Long-Lived Assets," replacing SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" and portions of Accounting Principles Board ("APB") Opinion No. 30, "Reporting the Results of Operations." SFAS No. 144 provides a single accounting model for long-lived assets to be disposed of and changes the criteria to be met to classify an asset as held-for-sale. SFAS No. 144 retains the requirement of APB Opinion No. 30 to report discontinued operations separately from continuing operations and extends that reporting to a component of an entity that either has been disposed of or is classified as held-for-sale. SFAS No. 144 is effective January 1, 2002 for TruServ. TruServ is currently evaluating the impact this standard will have on its financial statements. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK TruServ's operations are subject to certain market risks, primarily interest rate risk and credit risk. Interest rate risk pertains to TruServ's variable rate debt which totals approximately $141,755,000 at December 31, 2001. A 50 basis point movement in interest rates would result in an approximate $709,000 annualized increase or decrease in interest expense and cash flows. For the most part, TruServ manages interest rate risk through a combination of variable and fixed-rate debt instruments with varying maturities. Credit risk pertains primarily to TruServ's trade receivables. TruServ extends credit to its members as part of its day-to-day operations. TruServ 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, TruServ believes that its allowance for doubtful accounts is adequate with respect to member credit risks. TruServ has no investments in derivative instruments and performs no speculative hedging activities. TruServ does not have any special purpose entities ("SPE's") and all related party transactions are at arms length. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. TruServ'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. On June 20, 2000, TruServ dismissed Ernst & Young LLP as its independent accountants, as recommended by its audit and finance committee and approved by its board of directors. The report of Ernst & Young LLP on the financial statements for 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 TruServ's change in accounting principle for start-up costs. In connection with its audit for 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 TruServ 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. TruServ'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. 23 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. The directors and senior executive officers of TruServ are:
POSITION(S) HELD AND NAME AGE BUSINESS EXPERIENCE ---- --- -------------------- Bryan R. Ableidinger............... 53 Director since August 2000. Term expires at the 2002 annual stockholders' meeting. Benjamin J. Andre.................. 65 Director since August 2000. Term expires at the 2002 annual stockholders' meeting. Joe W. Blagg....................... 52 Chairman since January 2000. Acting Chief Executive Officer from July 3, 2001 to November 16, 2001. Director since April 1996. Term expires at the 2002 annual stockholders' meeting. James D. Burnett................... 66 Director since April 1998. Term expires at the 2002 annual stockholders' meeting. Harold A. Douthitt................. 54 Director since August 2000. Term expires at the 2002 annual stockholders' meeting. Jay B. Feinsod..................... 59 Director since July 1997. Term expires at the 2002 annual stockholders' meeting. Formerly director of SCC since October 1986. William F. Godwin.................. 47 Senior Vice President, Merchandise Supply Chain since March 2001. Prior positions were Vice President of Advertising, Merchandising and Inventory Management with TruServ. Neil A. Hastie..................... 53 Senior Vice President, Chief Information Officer since December 1999. Prior position was Director of E-Business since 1998. James D. Howenstine................ 58 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..................... 58 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 TruServ. Robert J. Ladner................... 55 Director since April 1994. Term expires at the 2002 annual stockholders' meeting. Formerly Chairman of Cotter & Company. Formerly Vice-Chairman of TruServ. Pamela Forbes Lieberman............ 48 President, Chief Executive Officer and Director since November 16, 2001. Prior positions with TruServ were Senior Vice President, Chief Operating Officer and Chief Financial Officer since July 3, 2001, Senior Vice President and Chief Financial Officer since April 18, 2001 and Senior Vice President, Finance since March 12, 2001. Previous positions were Senior Vice President, Finance and Chief Financial Officer of Shoptalk, Inc., Martin-Brower Company and Fel-Pro Incorporated. Robert M. Liebgott................. 51 Senior Vice President, Sales, Marketing & Advertising since March 2001. Prior position was Vice President of Merchandising with TruServ.
24
POSITION(S) HELD AND NAME AGE BUSINESS EXPERIENCE ---- --- -------------------- Robert Ostrov...................... 52 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................... 49 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 Cotter & Company's lumber and building materials business. David A. Shadduck.................. 41 Senior Vice President and Chief Financial Officer since November 20, 2001. Prior position with TruServ was Vice President, Corporate Controller since June 2001. Prior positions were Controller for Tenneco Automotive Aftermarket and Fel-Pro Incorporated. George V. Sheffer.................. 49 Director since July 1994. Term expires at the 2002 annual stockholders' meeting. Gilbert Wachsman................... 54 Director since March 1, 2002. Previous positions were Vice Chairman and Director of Musicland Group, Inc. and Senior Vice President of Kmart Corporation. John M. West, Jr. ................. 50 Director since October 1991. Term expires at the 2002 annual stockholders' meeting. Barbara B. Wilkerson............... 54 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 TruServ, other than Ms. Forbes Lieberman and Mr. Wachsman, has been 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 consists of four non-employee directors. The committee assists the board of directors in fulfilling its responsibilities for setting and administering the policies which govern annual compensation and monitoring TruServ's pension and other benefit plans. The committee, which meets regularly, calls upon outside consultants for assistance in carrying out its obligations. The philosophy of the committee is to maintain an executive compensation program to help TruServ 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 or retention incentives and long-term incentives for the senior executives of TruServ. To achieve its goals, the committee has developed three executive compensation policies for TruServ: - Salaried compensation should be competitive with the median for executives of companies of a comparable size within TruServ's industry; - Annual incentive compensation should vary and reflect TruServ's performance; and - A long-term (multiple year) incentive program should be available to help TruServ retain selected executives. 25 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. TruServ provides salary levels that are intended to fall within the median (between the 50th to 60th percentile) of the executive marketplace of comparable size in TruServ's industry. The following types of organizations are considered within TruServ'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 2001 compensation of Pamela Forbes Lieberman, TruServ's President and Chief Executive Officer, was determined as follows: Ms. Forbes Lieberman began her employment in March 2001 as a Senior Vice President. In May 2001 she became Senior Vice President and Chief Financial Officer. In July 2001, she was appointed Senior Vice President, Chief Financial Officer and Chief Operating Officer. In November 2001, she was appointed President and Chief Executive Officer. The base salary of the positions that Ms. Forbes Lieberman held for the length of time stated above aggregate to $318,868, all of which was paid in fiscal 2001. This amount is comparable to the aggregate of the three base salaries for persons holding those positions at companies of comparable size within TruServ's industry, prorated for the periods during which she held each of the three positions. The incentive component of Ms. Forbes Lieberman's compensation was set by the compensation committee to reflect the achievement of company performance goals determined by the committee, including the attainment of targets for product fill rates, net product sales, earnings before income taxes, depreciation and amortization (EBITDA), as well as TruServ's obtaining of permanent financing prior to the filing of the Form 10-K for 2001. The incentive portion of the 2001 compensation will be paid to Ms. Forbes Lieberman after the filing of the Form 10-K. The 2001 compensation of Donald Hoye, TruServ's former President and Chief Executive Officer, was determined as follows: The base salary of $500,000 prorated from the beginning of the year up to his termination date. The 2001 compensation of Joe W. Blagg, Chairman of the Board, Director and former acting Chief Executive Officer, was determined as follows: The salary component of his position as Chairman of the Board was maintained at $100,000, the same level as in 2000. Mr. Blagg held the position of acting Chief Executive Officer from July 3, 2001 to November 16, 2001, in consideration of which he was paid an additional $100,000 for undertaking the additional duties. Harold A. Douthitt Peter G. Kelly Robert J. Ladner John M. West Joe W. Blagg (ex officio) COMPENSATION COMMITTEE 26 EXECUTIVE COMPENSATION The following table sets forth the total annual compensation paid to individuals serving as TruServ's Chief Executive Officer and the four most highly compensated executive officers of TruServ during fiscal year 2001 and the total compensation paid to each such individual for TruServ's two previous fiscal years: SUMMARY COMPENSATION TABLE
NAME AND OTHER PRINCIPAL POSITION YEAR SALARY BONUS(1) COMPENSATION(2) ------------------ ---- -------- -------- --------------- Pamela Forbes Lieberman........................... 2001 $318,868 $211,657 $ 22,746 President and 2000 -- -- -- Chief Executive Officer 1999 -- -- -- Donald J. Hoye.................................... 2001 261,218 -- 1,539,426 Former President and 2000 500,000 417,500 44,855 Chief Executive Officer 1999 500,000 -- 38,418 Joe W. Blagg...................................... 2001 -- -- 200,000 Chairman of the Board, Director and 2000 -- -- 100,000 Former Acting Chief Executive Officer 1999 -- -- 24,000 Robert Ostrov..................................... 2001 308,250 180,285 31,080 Senior Vice President, Chief Administrative 2000 264,080 172,550 31,036 Officer and General Counsel 1999 244,000 36,000 19,302 Robert M. Liebgott................................ 2001 281,859 164,444 25,435 Senior Vice President, Sales, Marketing 2000 255,000 129,000 27,843 and Advertising 1999 246,000 15,000 10,940 William F. Godwin................................. 2001 266,249 159,808 22,867 Senior Vice President, 2000 233,145 122,400 22,921 Merchandise Supply Chain 1999 218,535 40,000 30,439 Neil A. Hastie.................................... 2001 246,000 153,763 24,633 Senior Vice President and 2000 206,251 119,250 27,705 Chief Information Officer 1999 131,042 30,000 8,200
- --------------- (1) Annual bonus amounts are earned and accrued during the fiscal years indicated, and paid subsequent to the end of each fiscal year. To incentivize achievement of the business plan objectives necessary to obtain new financing or amendment of existing agreements and necessary to turn the company around, the board of directors approved effective, August 1, 2001, a key associate special retention and restructuring incentive plan for identified key associates and officers employed by TruServ on or after August 1, 2001 who remain employed through the payment date of the plan (subsequent to the filing of the Form 10-K). The new incentive plan had targets related to fill rates, sales, EBITDA, and executive-specific goals associated with one or more of TruServ's key initiatives established in August 2001. In fiscal 2000, a bonus was earned and paid in fiscal 2001 as a result of TruServ's improved service levels to members. (2) Other compensation consists of TruServ's 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 15% of his annual compensation, not to exceed $30,000 (including TruServ's contributions) per year, of which $10,000 of the executive officer's salary in fiscal year 1999 may be deferred. TruServ's contribution to the Savings Plan, from January 1 through June 30 of 2000, was equal to 75% of the participant's contribution, but not to exceed 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 TruServ's net earnings. Robert Ostrov, William F. Godwin and Neil A. Hastie did earn a profit sharing match for the second half of fiscal 2000 that was paid in March 2001. The officers did not earn a profit sharing match for fiscal 2001. 27 The 2001 compensation of Joe W. Blagg, Chairman of the Board, Director and former acting Chief Executive Officer, was determined as follows: The salary component of his position as Chairman of the Board was maintained at $100,000, the same level as in 2000. Mr. Blagg held the position of acting Chief Executive Officer from July 3, 2001 to November 16, 2001 in consideration of which he was paid an additional $100,000 for undertaking the additional duties. In 2001, other compensation for Mr. Hoye also included amounts related to his termination agreement. These amounts include severance pay of $1,300,000, insurance and annuity obligations of $150,000 and vacation pay of $82,500. In 1999, other compensation for Mr. Hoye also included a transition bonus of $20,000. For Mr. Godwin the 1999 other compensation also included a transition bonus of $10,000 and relocation payments of $2,500. TruServ has a severance policy providing termination benefits based upon annual compensation and years of service. Officers of TruServ 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 TruServ to its executive officers or to its directors during the last three fiscal years. BOARD COMPENSATION In 2001, directors of TruServ (except the Chairman and Vice Chairman) were each paid $2,000 per month. The Chairman of the Board was paid $100,000 in consideration for his services as chairman and the Vice Chairman of the Board was paid $54,000 in consideration for his services as vice chairman for 2001. The Chairman of the Board held the position of acting Chief Executive Officer from July 3, 2001 to November 16, 2001, in consideration of which he was paid an additional $100,000 for undertaking those additional responsibilities. The Vice Chairman of the Board was paid an additional $12,500 for undertaking additional responsibilities during the same time frame. The President and Chief Executive Officer does not receive additional compensation for serving in the capacity of director. DEFINED BENEFIT RETIREMENT PLANS TruServ 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 TruServ'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. For participants who had attained age 50 and completed at least fifteen years of service as of January 1, 1996, the sum of their annual pension credit percentage is increased by 25 percentage points. The benefits under the plan cannot be less than the 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, for any of these employees who had attained age 50 and completed at least 15 years of service as of January 1, 1998, the sum of their annual 28 pension credit percentage is increased by 25 percentage points. 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 consecutive calendar years within the ten 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 estimated annual retirement benefits which may be payable pursuant to the qualified 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 qualified plan in determining retirement benefits. This limit was $170,000 for 2001. Section 415 of the Internal Revenue Code outlines the maximum annual benefit which may be payable from the qualified 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. No year of service will be credited to any participant for any period of employment with Coast to Coast, Inc. occurring prior to July 1, 1996 or any period of employment with Advocate Services, Inc. occurring prior to January 1, 1998. TruServ amended and restated, effective July 24, 1998, a Supplemental Retirement Plan for certain employees as designated by TruServ's President and Chief Executive 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 660%. This amount is reduced by any benefits payable under the qualified plan. "Average Compensation" for the supplemental plan is defined similarly to the qualified plan, as discussed above, although the three highest years need not be consecutive and pay is not annualized in the final year of employment. The supplemental plan is not a qualified plan under the Internal Revenue Code. Benefits payable under the supplemental plan are financed through operations. The following table reflects the combined estimated annual retirement benefits which may be payable pursuant to the qualified 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.............................. $387,772 $540,111 $609,356 $609,356 $609,356 900,000.............................. 348,995 486,100 548,421 548,421 548,421 800,000.............................. 310,218 432,089 487,485 487,485 487,485 700,000.............................. 271,441 378,078 426,549 426,549 426,549 600,000.............................. 232,663 324,067 365,614 365,614 365,614 500,000.............................. 193,886 270,056 304,678 304,678 304,678 400,000.............................. 155,109 216,045 243,743 243,743 243,743 300,000.............................. 116,332 162,033 182,807 182,807 182,807 200,000.............................. 77,554 108,022 121,871 121,871 121,871 100,000.............................. 38,777 54,011 60,936 60,936 60,936
The present credited years of service for the officers listed in the above table are as follows: Pamela Forbes Lieberman, 1 year; Robert Ostrov, 5 years; Robert M. Liebgott, 5 years; William F. Godwin, 7 years; Neil A. Hastie, 4 years. TruServ is amending and restating the pension plan and has amended and restated the supplemental plan, both effective January 1, 2002. The significant change to the pension plan is that credits for service beginning 29 January 1, 2002 will be reduced from a 2%-12% scale to a 1%-9% scale. The significant changes to the supplemental plan include years of service that are credited will be limited to years of service as an officer, "average compensation" will exclude long-term incentive payments and years of service will accrue at 33% per year with no increase at age 55. PERFORMANCE GRAPH There is no existing market for TruServ's common stock and there is no expectation that any market will develop. There are no broad market or peer group indices TruServ believes would render meaningful comparisons. Accordingly, a performance graph of TruServ's cumulative total stockholder return for the previous five years, with a performance indicator of the overall stock market for TruServ's peer group, has not been prepared. EMPLOYMENT AND SEPARATION AGREEMENTS On November 15, 2001, TruServ entered into an employment agreement effective November 16, 2001 with Pamela Forbes Lieberman, in connection with her assuming the duties of President and Chief Executive Officer of TruServ. The employment agreement specifies that Ms. Forbes Lieberman will serve in those capacities at the will of the board of directors. Pursuant to the employment agreement, Ms. Forbes Lieberman will receive an annual base salary of $625,000. In addition, Ms. Forbes Lieberman will be eligible for an annual bonus, if and when approved by the board of directors of TruServ, in an amount of 60% of her base salary for year 2001 and 70% of her base salary for calendar years thereafter. In addition, Ms. Forbes Lieberman will be eligible to receive a long-term incentive bonus of 50% of her base salary if TruServ meets a certain threshold financial performance level and 100% of her base salary if TruServ attains a targeted financial performance level. See "Summary Compensation Table" under the item "Executive Compensation" for the amount of salary and bonus received by Ms. Forbes Lieberman in 2001. None of the TruServ officers were eligible for long-term incentive compensation in 2001. Ms. Forbes Lieberman is also eligible to participate in the other benefit plans available from time to time to executives of TruServ. In the event that TruServ terminates Ms. Forbes Lieberman's employment without "cause," she is entitled to receive a severance payment, payable over 24 months, in an amount equal to two times her base salary, but only if she signs a release of claims against TruServ and agrees to comply with certain obligations upon her departure. "Cause" includes her inability or unwillingness to perform the material duties of her position or her performance of any action injurious to TruServ. If within one year following a "change of control" of TruServ, Ms. Forbes Lieberman terminates her employment with TruServ for "good reason," she may be entitled to a severance payment equal to an amount up to two times her base salary and, in certain cases, a percentage of bonuses received in prior years, but only if she signs a release and agrees to comply with certain obligations upon her departure. "Change of control" is defined as a business combination through a merger, consolidation or share exchange in which TruServ or its shareholders after the combination do not own 51% or more of the voting equity of the entity. "Good reason" is defined to include a demotion or a substantial reduction in benefits within a year after the change of control. On July 3, 2001, Mr. Hoye resigned from the position of President and Chief Executive Officer of TruServ. Pursuant to the terms of his separation agreement with TruServ, Mr. Hoye is entitled to receive $1,300,000 as severance pay to be paid over two years. In addition, TruServ will pay approximately $150,000 to fund the insurance and annuity obligation included in the termination agreement. In addition, TruServ will pay Mr. Hoye's retirement benefits within six months of the effective date of the separation agreement. The separation agreement also provides for certain medical insurance coverage and outplacement services of the kind provided to other former senior executives of TruServ. Mr. Hoye in the separation agreement, provides TruServ, among other things, with a general release, a covenant not to sue, a confidentiality covenant, a non-solicitation covenant, a cooperation covenant and an indemnification agreement. 30 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. As of March 31, 2002, each of the member directors of TruServ was the owner of at least 60 shares of Class A common stock of TruServ (but no more than 300 shares), constituting in the aggregate less than 1% of the issued and outstanding shares of Class A Common Stock. No non-member director or senior officer owns any shares of Class A common stock. The member directors own, in the aggregate, less than 1% of Class B common stock as of March 31, 2002. No non-member director or 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-29 is filed as part of this annual report. 3. EXHIBITS The exhibits listed in the index on pages E-1, E-2 and E-3 are filed as part of this annual report. (B) REPORTS ON FORM 8-K Filed January 8, 2002. 31 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/ DAVID A. SHADDUCK ------------------------------------- David A. Shadduck Senior Vice President and Chief Financial Officer DATED: April 15, 2002 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 of the Board and April 15, 2002 - ----------------------------------------------------- Director Joe W. Blagg /s/ PAMELA FORBES LIEBERMAN President, Chief Executive April 15, 2002 - ----------------------------------------------------- Officer and Director Pamela Forbes Lieberman /s/ DAVID A. SHADDUCK Senior Vice President and April 15, 2002 - ----------------------------------------------------- Chief Financial Officer David A. Shadduck /s/ BRYAN R. ABLEIDINGER Director April 15, 2002 - ----------------------------------------------------- Bryan R. Ableidinger /s/ BENJAMIN J. ANDRE Director April 15, 2002 - ----------------------------------------------------- Benjamin J. Andre /s/ JAMES D. BURNETT Director April 15, 2002 - ----------------------------------------------------- James D. Burnett /s/ HAROLD A. DOUTHITT Director April 15, 2002 - ----------------------------------------------------- Harold A. Douthitt /s/ JAY B. FEINSOD Director April 15, 2002 - ----------------------------------------------------- Jay B. Feinsod /s/ JAMES D. HOWENSTINE Director April 15, 2002 - ----------------------------------------------------- James D. Howenstine /s/ PETER G. KELLY Director April 15, 2002 - ----------------------------------------------------- Peter G. Kelly /s/ ROBERT J. LADNER Director April 15, 2002 - ----------------------------------------------------- Robert J. Ladner
32
SIGNATURE TITLE DATE --------- ----- ---- /s/ GEORGE V. SHEFFER Director April 15, 2002 - ----------------------------------------------------- George V. Sheffer /s/ GILBERT WACHSMAN Director April 15, 2002 - ----------------------------------------------------- Gilbert Wachsman /s/ JOHN M. WEST, JR. Director April 15, 2002 - ----------------------------------------------------- John M. West, Jr. /s/ BARBARA B. WILKERSON Director April 15, 2002 - ----------------------------------------------------- Barbara B. Wilkerson
33 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, 2001 and December 31, 2000.................................................. F-4 Consolidated Statement of Operations for each of the three years in the period ended December 31, 2001............... F-5 Consolidated Statement of Cash Flows for each of the three years in the period ended December 31, 2001............... F-6 Consolidated Statement of Members' Equity for each of the three years in the period ended December 31, 2001......... F-7 Notes to Consolidated Financial Statements.................. F-8 to F-28
F-1 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, 2001 and 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, 2001 and 2000, and the results of their operations and their cash flows for the years 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, 2001 and 2000 and for the years then ended listed in the index appearing under Item 14(a)(2) on page F-29 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. /s/ PricewaterhouseCoopers LLP Chicago, Illinois February 20, 2002, except as to Note 4 which is as of April 11, 2002 F-2 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, and the related consolidated statements of operations, cash flows, and members' equity for the year ended December 31, 1999. Our audit also included the financial statement schedule listed in the index at Item 14(a)(2). 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 audit. We conducted our audit 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 audit 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, and the consolidated results of its operations and its cash flows for the year ended December 31, 1999, 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, presents fairly in all material respects the information set forth therein. 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 F-3 TRUSERV CORPORATION CONSOLIDATED BALANCE SHEET ASSETS
DECEMBER 31, DECEMBER 31, 2001 2000 ------------ ------------ (000'S OMITTED) Current assets: Cash and cash equivalents................................. $ 88,816 $ 15,491 Restricted cash (Note 4).................................. 29,075 3,825 Accounts and notes receivable, net of allowance for doubtful accounts of $9,402,000 and $7,170,000......... 243,275 396,587 Inventories (Note 2)...................................... 333,976 443,663 Other current assets...................................... 16,688 12,274 ---------- ---------- Total current assets.............................. 711,830 871,840 Properties, net (Note 3).................................... 180,347 216,146 Goodwill, net............................................... 91,474 94,051 Other assets................................................ 37,186 53,977 ---------- ---------- Total assets...................................... $1,020,837 $1,236,014 ========== ========== LIABILITIES AND CAPITALIZATION Current liabilities: Accounts payable.......................................... $ 251,657 $ 356,196 Outstanding checks........................................ 87,385 129,490 Accrued expenses.......................................... 119,490 85,161 Short-term borrowings (Note 4)............................ 141,755 138,085 Current maturities of long-term debt, notes and capital lease obligations (Notes 4, 5 and 7)................... 93,291 61,351 Patronage dividend payable in cash........................ -- 10,459 ---------- ---------- Total current liabilities......................... 693,578 780,742 Long-term debt, including capital lease obligations, less current maturities (Notes 4 and 5)........................ 236,268 288,928 Deferred credits (Note 12).................................. 8,758 9,821 ---------- ---------- Total liabilities and deferred credits............ 938,604 1,079,491 ---------- ---------- Minority interest........................................... -- 4,999 Commitments and contingencies (Note 6)...................... -- -- Members' capitalization: Promissory (subordinated) and installment notes, net of current portion (Note 7)............................... 42,973 65,846 Members' equity: Redeemable Class A voting common stock, $100 par value; 750,000 shares authorized; 455,220 and 411,180 shares issued and fully paid; 54,840 and 98,880 shares issued (net of subscriptions receivable of $1,110,000 and $1,922,000)........................................... 49,896 49,084 Redeemable Class B non-voting common stock and paid-in capital, $100 par value; 4,000,000 shares authorized; 1,731,490 and 1,731,482 shares issued and fully paid.................................................. 174,448 174,448 Loss allocation (Note 1)............................... (89,972) (92,460) Deferred patronage (Note 1)............................ (26,541) (27,288) Accumulated deficit.................................... (68,568) (17,134) Accumulated other comprehensive loss................... (3) (972) ---------- ---------- Total members' equity............................. 39,260 85,678 ---------- ---------- Total members' capitalization..................... 82,233 151,524 ---------- ---------- Total liabilities and members' capitalization..... $1,020,837 $1,236,014 ========== ==========
The accompanying notes are an integral part of the Consolidated Financial Statements F-4 TRUSERV CORPORATION CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEARS ENDED --------------------------------------------- DECEMBER 31, DECEMBER 31, DECEMBER 31, 2001 2000 1999 ------------ ------------ ------------ (000'S OMITTED) Revenues.............................................. $2,619,434 $3,993,642 $4,502,326 ---------- ---------- ---------- Cost and expenses: Cost of revenues.................................... 2,355,400 3,716,245 4,320,861 Logistics and manufacturing expenses................ 85,523 87,047 96,267 Selling, general and administrative expenses........ 131,980 120,813 137,636 Restructuring charges and other related expenses (Note 14)........................................ 38,522 4,944 7,513 Interest expense to members......................... 7,842 11,131 14,498 Other interest expense.............................. 55,431 56,575 46,204 Gain on sale of assets (Note 12).................... (1,958) (30,337) (11,724) Other income, net................................... (3,996) (7,809) (1,630) ---------- ---------- ---------- 2,668,744 3,958,609 4,609,625 ---------- ---------- ---------- Net margin/(loss) before income taxes and cumulative effect of a change in accounting principle.......... (49,310) 35,033 (107,299) Income tax expense (Note 8)........................... 1,377 916 17,020 ---------- ---------- ---------- Net margin/(loss) before cumulative effect of a change in accounting principle............................. (50,687) 34,117 (124,319) Cumulative effect on prior years of a change in accounting principle, net of tax.................... -- -- 6,484 ---------- ---------- ---------- Net margin/(loss)..................................... $ (50,687) $ 34,117 $ (130,803) ========== ========== ==========
The accompanying notes are an integral part of the Consolidated Financial Statements F-5 TRUSERV CORPORATION CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED --------------------------------------------- DECEMBER 31, DECEMBER 31, DECEMBER 31, 2001 2000 1999 ------------ ------------ --------------- (000'S OMITTED) Operating activities: Net margin/(loss).................................... $(50,687) $ 34,117 $(130,803) Adjustments to reconcile net margin/(loss) to net cash and cash equivalents provided by/(used for) operating activities: Cumulative effect of change in accounting principle....................................... -- -- 6,484 Depreciation and amortization..................... 41,519 43,033 41,131 Provision for losses on accounts and notes receivable...................................... 6,275 9,147 5,148 Restructuring charges and other related expenses........................................ 26,099 1,912 -- Gain on sale of assets............................ (1,958) (30,337) (11,724) Changes in operating assets and liabilities: Accounts and notes receivable................... 127,000 52,187 63,059 Inventories..................................... 100,692 38,752 112,703 Other current assets............................ 3,836 (2,337) 26,110 Accounts payable................................ (92,216) (81,944) 56,087 Accrued expenses................................ 11,049 14,927 2,229 Other adjustments, net............................ 7,832 4,116 11,183 -------- -------- --------- Net cash and cash equivalents provided by operating activities....................... 179,441 83,573 181,607 -------- -------- --------- Investing activities: Additions to properties.............................. (15,151) (12,526) (44,930) Proceeds from sale of properties (Note 12)........... 10,511 23,113 39,714 Changes in restricted cash (Note 4).................. (25,250) (3,825) -- Changes in other assets.............................. 3,388 (8,716) (5,316) -------- -------- --------- Net cash and cash equivalents used for investing activities....................... (26,502) (1,954) (10,532) -------- -------- --------- Financing activities: Payment of patronage dividend........................ (9,483) -- (14,507) Payment of notes, long-term debt and lease obligations....................................... (40,138) (67,355) (57,340) Proceeds from long-term borrowings................... -- 1,098 731 Increase/(decrease) in outstanding checks............ (42,105) 26,726 (3,912) Increase/(decrease) in short-term borrowings......... 11,300 (28,922) (91,140) Purchase of common stock............................. -- (599) (5,359) Proceeds from sale of Redeemable Class A common stock and subscription receivable....................... 812 1,109 617 -------- -------- --------- Net cash and cash equivalents used for financing activities....................... (79,614) (67,943) (170,910) -------- -------- --------- Net increase in cash and cash equivalents.............. 73,325 13,676 165 Cash and cash equivalents at beginning of year......... 15,491 1,815 1,650 -------- -------- --------- Cash and cash equivalents at end of year............... $ 88,816 $ 15,491 $ 1,815 ======== ======== =========
See Note 9 for supplemental cash flow information. The accompanying notes are an integral part of the Consolidated Financial Statements F-6 TRUSERV CORPORATION CONSOLIDATED STATEMENT OF MEMBERS' EQUITY
REDEEMABLE COMMON STOCK ---------------------------------------------- RETAINED CLASS A CLASS B EARNINGS/ --------------------- ---------------------- LOSS DEFERRED (ACCUMULATED # OF SHARES AMOUNT # OF SHARES AMOUNT ALLOCATION PATRONAGE DEFICIT) ----------- ------- ----------- -------- ---------- --------- ------------ (000'S OMITTED, EXCLUDING SHARE DATA) Balances at and for the year ended December 31, 1998................ 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) Payments from stock subscriptions receivable....................... 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................ 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 Payments from stock subscriptions receivable....................... 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) Net loss........................... (50,687) Foreign currency translation adjustment....................... Amortization of deferred patronage........................ 747 (747) Payments from stock subscriptions receivable....................... -- 812 Other.............................. 8 -- Matured notes applied against loss allocation....................... 2,488 ------- ------- --------- -------- --------- -------- --------- Balances at and for the year ended December 31, 2001................ 510,060 $49,896 1,731,490 $174,448 $ (89,972) $(26,541) $ (68,568) ======= ======= ========= ======== ========= ======== ========= ACCUMULATED OTHER TOTAL TOTAL COMPREHENSIVE MEMBERS' COMPREHENSIVE INCOME/(LOSS) EQUITY INCOME/(LOSS) ------------- ---------- ------------- (000'S OMITTED, EXCLUDING SHARE DATA) Balances at and for the year ended December 31, 1998................ $(1,374) $ 217,200 Net loss........................... (130,803) $(130,803) Foreign currency translation adjustment....................... 528 528 528 Amortization of deferred patronage........................ -- Payments from stock subscriptions receivable....................... 2,881 Stock purchased and retired........ (23,355) ------- --------- --------- Balances at and for the year ended December 31, 1999................ (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....................... -- Payments from stock subscriptions receivable....................... 3,407 Stock purchased and retired........ (6,020) ------- --------- --------- Balances at and for the year ended December 31, 2000................ (972) 85,678 33,991 ========= Net loss........................... (50,687) (50,687) Foreign currency translation adjustment....................... 969 969 969 Amortization of deferred patronage........................ -- Payments from stock subscriptions receivable....................... 812 Other.............................. -- Matured notes applied against loss allocation....................... 2,488 ------- --------- --------- Balances at and for the year ended December 31, 2001................ $ (3) $ 39,260 $ (49,718) ======= ========= =========
Redeemable Class A common stock amounts are net of unpaid subscription amounts of $1,110,000 relating to 54,840 issued shares at December 31, 2001; $1,922,000 relating to 98,880 issued shares at December 31, 2000; $3,874,000 relating to 106,380 issued shares at December 31, 1999 and $5,890,000 relating to 178,020 issued shares at December 31, 1998. The accompanying notes are an integral part of the Consolidated Financial Statements F-7 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 and sells 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 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. This transaction was accounted for as a purchase and 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, TruServ recorded a liability in Accrued expenses for costs associated with the Merger plan on July 1, 1997. The schedule below shows the remaining balance of the liability as of December 31, 1998 and the utilization of the reserve in fiscal 1999 and 2000:
RDC SHUTDOWN SEVERANCE TOTAL -------- --------- ------- (000'S OMITTED) 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......................... $ -- $ -- $ -- ======= ======= =======
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 latex paint manufacturing at the Cary manufacturing facility. 3) The merger plan specified the elimination of 1,500 SCC employees. As of December 31, 1999 F-8 TRUSERV CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) approximately 99% of these employees had been terminated. 4) The company also opened a new distribution center in May 1999. F-8.1 TRUSERV CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The reserve utilization in fiscal 2000 was related to the closure of the Parkesburg, Pennsylvania distribution center. Consolidation The consolidated financial statements include the accounts of the company and all wholly owned subsidiaries. The consolidated statement of operations and cash flows also include the activities of TruServ Canada Cooperative, Inc., a Canadian member-owned wholesaler of hardware, through the date of sale of October 22, 2001. The consolidated balance sheet at December 31, 2001 excludes TruServ Canada Cooperative, Inc. The company does not have any special purpose entities ("SPE's"). Reclassifications Certain reclassifications have been made to the prior years' 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, as well as the reclassification of restructuring charges and other related expenses from 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 No patronage dividends were declared for the fiscal year ended December 31, 2001. Patronage dividends in the amount of $34,705,000 were paid on March 31, 2001 related to the fiscal year ended December 31, 2000, 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. 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%. TruServ has initiated a moratorium, effective March 17, 2000, on the redemption of its stock. The amended debt agreements preclude the lifting of the stock moratorium until June 2004 except for allowed hardship cases, not to exceed $2,000,000 annually. Subsequent to the lenders' lifting of the prohibition against stock redemptions, the board of directors will consider the financial condition of TruServ, and will not lift the F-9 TRUSERV CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) moratorium unless it can conclude that effecting redemptions of TruServ's capital stock will not "impair the capital" of TruServ, unfairly advantage some members to the disadvantage of others, or violate the financial covenants under its debt agreements. As of February 19, 2002, the amount of Class A common stock and Class B common stock presented for redemption but deferred due to the moratorium is approximately $27,569,000 after the offset of the Loss allocation account. The $27,569,000 includes approximately $11,699,000 related to the Class A common stock historically paid out at time of redemption and $34,712,000 related to Class B common stock historically paid out in five equal annual installments, offset by the amount of the Loss allocation accounts related to the Class B common stock in an aggregate amount of $18,842,000. Loss allocation to members and Accumulated deficit 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. TruServ has retained the fiscal 2001 loss as part of the accumulated deficit account. A final determination of whether to retain or distribute the fiscal 2001 loss to members will be made prior to filing the 2001 Federal tax return. Nevertheless, members will be assigned a share in this loss based generally on their patronage in the years to which the loss relates. TruServ has the right to use 100% of future patronage income to offset the Accumulated deficit account as well as to set off the Accumulated deficit account against other amounts owed to members. In the event a member leaves TruServ, any remaining portion of the member's share of the Accumulated deficit account will be offset against amounts due to the member upon redemption. 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 indirect costs are treated as product costs, classified in inventory and subsequently recorded as cost of revenues as the product is sold (see Note 2). Properties Properties are recorded at cost. Depreciation and amortization are computed by using the straight-line method over the following estimated useful lives: buildings and improvements -- 10 to 40 years; machinery and warehouse, office and computer equipment 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. F-10 TRUSERV CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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 $2,577,000, $3,054,000 and $2,591,000 for fiscal year 2001, 2000 and 1999, 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 2001, 2000 and 1999 was $5,747,000, $4,385,000 and $3,466,000, respectively. The unamortized balance at December 31, 2001 was approximately $12,113,000. The members agree to refund to TruServ all or a portion of the conversion funds in the event of default during the five fiscal years following the date of the agreement. Any uncollectible amounts are written off to expense. Asset impairment For purposes of determining impairment, management reviews 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. In fiscal 2001, TruServ recorded asset impairment charges of $8,899,000 related to its Brookings, South Dakota distribution center and certain equipment at its Hagerstown, Maryland distribution center. There were no impairment charges recorded in fiscal 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 $6,484,000, net of tax. Revenue recognition The company's policy is to recognize revenues from product sales and services when earned, as in accordance with SEC Staff Accounting Bulletin ("SAB") No. 101. Specifically, revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred (or services have been rendered), the price is fixed or determinable, and collectibility is reasonably assured. Revenue is not recognized until title and risk of loss have transferred to the customer, which is upon delivery of products. Provisions for discounts, rebates to customers, and returns are provided for at the time the related sales are recorded, and are reflected as a reduction of sales. Advertising expenses Advertising costs are expensed in the period the advertising takes place. Such costs amounted to $59,275,000, $82,675,000 and $81,337,000 in fiscal year 2001, 2000 and 1999, respectively, and are included in Cost of revenues. F-11 TRUSERV CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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. The costs incurred for the attempted asset based lending refinancing were expensed as incurred. Repairs and maintenance expense Expenditures which extend the useful lives of the company's property and equipment are capitalized and depreciated on a straight line basis over the remaining useful lives of the underlying assets. Otherwise, repair and maintenance 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 $1,003,000, $993,000 and $965,000 in fiscal year 2001, 2000 and 1999, 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. At December 31, 2001, TruServ concluded that it is more likely than not that there would not be sufficient future taxable earnings to utilize the operating loss carryforwards and a full tax valuation allowance was required. The valuation allowance will not be adjusted until TruServ provides sufficient evidence to support the realization of this asset. 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, which were comprised primarily of accounts and notes receivables, accounts payable, short-term borrowings, long-term debt and promissory (subordinated) and installment notes, approximate fair value. Fair value was estimated using discounted cash F-12 TRUSERV CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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 having been renegotiated in fiscal 2002 (see Note 4). These estimated fair value amounts have been determined using available market information or other appropriate valuation methodologies. Concentration of credit risk Credit risk pertains primarily 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 is limited. Additionally, the company believes that its allowance for doubtful accounts is adequate with respect to member credit risks. Also, TruServ's Certificate of Incorporation and By-Laws specifically provide that TruServ may set off its obligation to make any payment to a member for such member's stock, notes, interest and declared and unpaid dividends against any obligation owed by the member to TruServ. TruServ has exercised these set off rights when TruServ notes and interest came due to former members with outstanding merchandise accounts receivable to TruServ and current members with past due merchandise accounts receivable to TruServ. 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 July 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No. 141, "Business Combination," and SFAS No. 142 "Goodwill and Other Intangible Assets." SFAS No. 141 requires that all business combination initialized after June 30, 2001 be accounted for using the purchase method of accounting. SFAS No. 142 changes the accounting for goodwill and certain other intangible assets from an amortization method to an impairment only approach. Due to the adoption of SFAS No. 142, the company will not amortize goodwill beginning in fiscal 2002. The goodwill amortization expense during fiscal 2001 was approximately $2,577,000. TruServ is in the process of finalizing its initial impairment assessment as required by SFAS No. 142, but does not expect the adoption of this standard as of January 1, 2002 to have a material impact on the Company's financial position or results of operations. In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations." SFAS No. 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. SFAS No. 143 is effective January 1, 2003 for TruServ. The company is currently evaluating the impact this standard will have on its financial statements. In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment of Long-Lived Assets," replacing SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long -Lived Assets to be Disposed Of" and portions of Accounting Principles Board ("APB") Opinion No. 30, "Reporting the Results of Operations." SFAS No. 144 provides a single accounting model for long-lived assets to be disposed of and changes the criteria to be met to classify an asset as held-for-sale. SFAS No. 144 retains the requirement of APB Opinion No. 30 to report discontinued operations separately from continuing operations and extends that reporting to a component of an entity that either has been disposed of or is classified as held-for-sale. SFAS No. 144 is effective January 1, 2002 for TruServ. The company is currently evaluating the impact this standard will have on its financial statements. F-13 TRUSERV CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 2. INVENTORIES Inventories consisted of the following at December 31:
2001 2000 -------- -------- (000'S OMITTED) Manufacturing inventories: Raw materials............................................. $ 1,607 $ 2,242 Work-in-process and finished goods........................ 22,298 30,705 -------- -------- 23,905 32,947 Merchandise inventories..................................... 310,071 410,716 -------- -------- $333,976 $443,663 ======== ========
The amount of indirect costs included in ending inventory at December 31, 2001 and 2000 was $23,272,000 and $29,144,000, respectively. Indirect costs incurred for fiscal year 2001 and 2000 were $115,162,000 and $133,907,000, respectively. In fiscal 2001, the Company recorded physical inventory adjustments aggregating $4,800,000 (as an increase to Inventory and a reduction to Cost of revenues) principally in the third and fourth quarters of the year. In fiscal 2000, the Company recorded physical inventory adjustments aggregating $22,200,000 (as an increase to Inventory and a reduction to Cost of revenues) principally in the fourth quarter of the year. 3. PROPERTIES Properties consisted of the following at December 31:
2001 2000 --------- --------- (000'S OMITTED) Buildings and improvements.................................. $ 176,414 $ 189,732 Machinery and warehouse equipment........................... 91,842 96,696 Office and computer equipment............................... 156,644 157,417 Transportation equipment.................................... 40,961 38,204 --------- --------- 465,861 482,049 Less accumulated depreciation............................... (294,842) (276,170) --------- --------- 171,019 205,879 Land........................................................ 9,328 10,267 --------- --------- $ 180,347 $ 216,146 ========= =========
Depreciation expense for fiscal year 2001, 2000 and 1999 was $33,195,000, $35,594,000 and $35,074,000, respectively. F-14 TRUSERV CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 4. LONG-TERM DEBT AND BORROWING ARRANGEMENTS Long-term debt consisted of the following at December 31:
2001 2000 -------- -------- (000'S OMITTED) Senior Notes (rates at December 31, 2001/2000): 13.85% / 11.85%........................................... $ 28,000 $ 32,000 12.63% / 10.63%........................................... 50,000 50,000 12.16% / 10.16%........................................... 21,429 25,000 12.60% / 10.10%........................................... 105,000 105,000 12.04% / 10.04%........................................... 50,000 50,000 11.98% / 9.98%............................................ 25,000 25,000 Redeemable (subordinated) term notes: Fixed interest rates ranging from 5.3% to 7.83%........... 7,819 18,624 Capital lease obligations (Note 5).......................... 2,678 2,645 -------- -------- 289,926 308,269 Less amounts due within one year............................ (53,658) (19,341) -------- -------- $236,268 $288,928 ======== ========
Principal payment schedule for long-term debt:
BALANCE AS OF 12/31/01 CURRENT 2003 2004 2005 2006 THEREAFTER (000'S OMITTED) -------------- ------- ------- ------- ------- ------- ---------- Senior notes: (rates at December 31, 2001/2000): 13.85% / 11.85%.............................. $ 28,000 $ 4,000 $ 4,000 $ 4,000 $ 6,000 $ 6,500 $ 3,500 12.63% / 10.63%.............................. 50,000 4,545 4,545 4,545 4,545 4,545 27,275 12.16% / 10.16%.............................. 21,429 3,571 3,571 3,571 3,571 3,571 3,574 12.60% / 10.1%............................... 105,000 10,500 15,750 15,750 15,750 15,750 31,500 12.04% / 10.04%.............................. 50,000 -- -- -- -- 10,000 40,000 11.98% / 9.98%............................... 25,000 25,000 -- -- -- -- -- -------- ------- ------- ------- ------- ------- -------- 279,429 47,616 27,866 27,866 29,866 40,366 105,849 Redeemable (subordinated) term notes: Fixed interest rates ranging from 5.3% to 7.83%...................................... 7,819 4,611 3,102 106 -- -- -- Capital lease obligations...................... 2,678 1,431 424 441 311 71 -- -------- ------- ------- ------- ------- ------- -------- Total.......................................... $289,926 $53,658 $31,392 $28,413 $30,177 $40,437 $105,849 ======== ======= ======= ======= ======= ======= ========
The company had outstanding borrowings under its revolving credit facility agreement of $140,000,000 and $127,000,000 at December 31, 2001 and 2000, respectively. The $140,000,000 outstanding as of December 31, 2001 includes approximately $57,000,000 of cash recorded in cash and cash equivalents that is available to reduce this amount to $83,000,000. The weighted average interest rate on these borrowings was 9.9% and 8.9% for the years ended December 31, 2001 and 2000, respectively. The average 2001 interest rate reflects the inclusion of a 2% default premium. On March 26, 2001, TruServ reported that, as of February 24, 2001, it failed to comply with a covenant under the revolving credit facility and senior note agreements that required it to achieve a minimum monthly borrowing base ratio. This constituted an "event of default" under which the senior notes and amounts outstanding under the credit facility would become callable as immediately payable. Accordingly, these amounts were classified as current liabilities as of December 31, 2000. On April 11, 2002, TruServ entered into various amendments to its existing revolving credit facility and other senior lending agreements. The amendment to the revolving credit facility extends the terms of the facility from June 2002 to June 2004. The amount of the commitment remains at $200 million. There are, F-15 TRUSERV CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) however, borrowing base limitations that fluctuate in part with the seasonality of the business. The borrowing base formula limits advances to the sum of 85% of eligible accounts receivable, 50% of eligible inventory, 60% of the appraised value of eligible real estate and 50% of the appraised value of eligible machinery and equipment; availability is further increased by seasonal over-advances and decreased by reserves against availability. The interest rate on the revolving credit facility was increased to the prime rate plus 3.25%. The revolving credit facility has certain minimum unusable commitment amounts, which vary based upon the projected working capital needs of TruServ. The unused commitment fee is 0.75% per annum. The amendments to the various senior notes maintain the existing debt amortization schedules of the various notes. Interest rates on the notes are at the previous non-default rates, which range from 9.98% to 11.85%. The senior note and revolving credit facility amendments also require initial, quarterly and annual maintenance fees. All of the proceeds from certain asset sales, amortization of certain notes receivable and 80% of any excess cash flow, as defined in the amended senior note and revolving credit facility agreements, will be used to prepay all parties to these amendments in accordance with an amended intercreditor agreement. The intercreditor agreement establishes how the assets of TruServ, which are pledged as collateral, are shared and how certain debt prepayments are allocated among the senior lenders. The commitment under the revolving credit facility will be permanently reduced by the amount of the prepayments allocated and paid on the revolving credit facility. The amendments all require TruServ to meet certain restrictive covenants relating to minimum sales, minimum adjusted EBITDA (earnings before interest, taxes, depreciation and amortization), minimum fixed charge coverage, minimum interest coverage and maximum capital expenditures. The term of the revolving credit facility is accelerated to June 30, 2003, if on that date: total senior debt outstanding is in excess of $270 million, or total senior debt outstanding, plus the unused amount of the commitment under the revolving credit facility, less $30 million, is in excess of $320 million. The senior lenders may accelerate their notes if the company does not have a revolving credit facility in place to fund its seasonal cash flows. The amendments limit the amount of the cash portion of patronage dividends to the 20% minimum required to be paid under applicable IRS regulations in order for TruServ to maintain its status as a cooperative, unless TruServ's operating performance achieves certain EBITDA targets, in which case, up to 30% of the patronage dividend may be paid in cash. The amendments also require the continuation of the stock redemption moratorium through the term of the amended senior debt. It is an event of default under the amendments to exceed certain levels of subordinated note payments. In addition, an event of default arises under the amendments in the event that TruServ fails to comply with its corporate governance policy requiring the retention by TruServ of at least two outside directors prior to May 31, 2002, at least four outside directors prior to September 1, 2002 and at least five outside directors prior to November 1, 2002. The amendments also contain other customary covenants, representations and warranties, funding conditions and events of default. These amendments eliminate the "event of default" discussed above and, accordingly, the long-term portions of the senior notes are no longer recorded as a component of current debt at December 31, 2001 or 2000. 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 company's Canadian operations, TruServ Canada Cooperative Inc., had short-term borrowings of $7,736,000 at December 31, 2000. TruServ Canada Cooperative Inc. was sold on October 22, 2001. As such, the consolidated balance sheet excludes the TruServ Canada Cooperative, Inc. as of December 31, 2001. 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 F-16 TRUSERV CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) $3,966,000 and $6,710,000 as of December 31, 2001 and 2000, respectively. The balance of $3,966,000 as of December 31, 2001 includes approximately $800,000 that will mature in fiscal 2002. Restricted cash consisted of the following at December 31:
2001 2000 ------- ------ (000'S OMITTED) Letters of credit........................................... $11,392 $2,820 Proceeds from sale of assets available for debt reduction by the collateral agent...................................... 10,906 -- Lockbox cash management deposit requirements................ 4,000 -- Redeemable (subordinated) notes............................. 1,746 5 Escrow...................................................... 1,031 1,000 ------- ------ $29,075 $3,825 ======= ======
As a result of the debt covenant violation, TruServ's current lenders require that it maintains a minimum cash management deposit in its lockbox accounts, cash collateralize all letters of credit and hold the proceeds from the sale of properties in a restricted cash account with the collateral agent to be used for debt reduction. 5. 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, 2001:
CAPITAL OPERATING ------- --------- (000'S OMITTED) 2002...................................................... $1,553 $ 21,235 2003...................................................... 464 18,237 2004...................................................... 464 14,309 2005...................................................... 358 12,672 2006...................................................... 85 9,875 Thereafter................................................ -- 49,429 ------ -------- Net minimum lease payments.................................. $2,924 $125,757 ======== Less amount representing interest........................... 246 ------ Present value of net minimum lease payments................. 2,678 Less amount due within one year............................. 1,431 ------ $1,247 ======
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. 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. The synthetic lease has a principal balance of $40 million which is due at the end of the lease term. This debt and the original cost of the facility are not recorded in the company's balance sheet because the synthetic lease does not meet the requirement for capital lease treatment under SFAS No. 13, "Accounting for Leases." The difference between the lease obligation F-17 TRUSERV CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) and management's estimation of the fair value of the building is recorded in accrued expenses at December 31, 2001 as a cost to exit the facility (see Note 14). Rent expense under operating leases was $25,338,000, $29,942,000 and $31,702,000 for the years ended December 31, 2001, 2000 and 1999, respectively. 6. COMMITMENTS AND CONTINGENCIES The company is involved in various claims and lawsuits incidental to its business. The following significant matters existed at December 31, 2001: In June 2000 former members of TruServ filed an action against TruServ in the Circuit Court of the 19th Judicial Circuit (McHenry County, Illinois). The plaintiffs in the action each allege that, based upon representations made to them by TruServ 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 the action and it is too early to determine the extent of the damages being claimed. In March 2001, a similar action was brought on behalf of additional former members in the same court, by the same law firm. The complaint alleges substantially similar claims as those made in the June 2000 action, except that the March 2001 action relates to the ServiStar brand name instead of the Coast to Coast brand name. The lawsuit is in an early stage and the extent of damages being claimed has not yet been determined. In total, approximately 40 former members have brought claims against TruServ based on this type of allegation in the Circuit Court of the 19th Judicial Circuit (McHenry County, Illinois). In August 2000, an action was brought in Delaware Chancery Court (New Castle County) by a former TruServ member against certain present and former directors of TruServ and against TruServ. The plaintiff in the lawsuit seeks to proceed on a class-action basis on behalf of all those affected by the moratorium and the creation of the loss allocation accounts. The complaint alleges that the named directors breached their fiduciary duties in connection with the accounting adjustments made by TruServ 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, a former president of TruServ, filed a claim in the Circuit Court of the 20th Judicial Circuit (Collier County, Florida) against TruServ alleging he is due bonus and retirement compensation payments in addition to amounts already paid to him. TruServ has filed a counterclaim against Mr. Pentz alleging that he breached his fiduciary duties as president of TruServ. Mr. Pentz's motion to dismiss the counterclaim was denied. Trial has been scheduled for June 2002. TruServ intends to vigorously defend all of these cases. F-18 TRUSERV CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 7. PROMISSORY (SUBORDINATED) AND INSTALLMENT NOTES Promissory (subordinated) and installment notes consisted of the following at December 31:
2001 2000 -------- -------- (000'S OMITTED) Promissory (subordinated) notes: Due on December 31, 2001 -- 5.74%......................... $ -- $ 14,376 Due on December 31, 2001 -- 8.06%......................... -- 22,237 Due on December 31, 2002 -- 7.86%......................... 23,253 23,259 Due on December 31, 2003 -- 7.90%......................... 19,731 22,525 Due on December 31, 2004 -- 9.00% to 10.00%............... 19,963 -- Due on December 31, 2005 -- 7.90%......................... 1,304 1,692 Term (subordinated) notes Due on June 30, 2002 -- 8.06%............................. 12,393 12,408 Installment notes at interest rates of 4.75% to 8.20% with maturities through 2004................................... 5,962 11,359 -------- -------- 82,606 107,856 Less amounts due within one year............................ (39,633) (42,010) -------- -------- $ 42,973 $ 65,846 ======== ========
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 TruServ 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 2002, 2003, 2004 and 2005 are $39,633,000, $21,658,000, $20,011,000 and $1,304,000 respectively. Amounts shown as scheduled repayments in 2002 are the stated note amounts; however, it is an event of default in the amended debt agreements if payments of subordinated notes exceed $24,000,000 and $14,000,000 in 2002 and 2003, respectively. TruServ will seek members' consent to extend the note due dates in exchange for an increase in the interest rate. 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 TruServ as specified by its board of directors. F-19 TRUSERV CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 8. INCOME TAXES Income tax expense/(benefit) consisted of the following for the years ended December 31:
2001 2000 1999 ------ ---- ------- (000'S OMITTED) Current: Federal................................................... $ 203 $231 $ -- State..................................................... 194 315 460 Foreign................................................... 641 306 281 ------ ---- ------- Total current............................................. 1,038 852 741 ------ ---- ------- Deferred: Federal................................................... -- -- 14,010 State..................................................... -- -- 2,472 Foreign................................................... 339 64 (203) ------ ---- ------- Total deferred............................................ -- 64 16,279 ------ ---- ------- $1,377 $916 $17,020 ====== ==== =======
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:
2001 2000 1999 -------- -------- ------- (000'S OMITTED) Tax at U.S. statutory rate............................ $(19,224) $ 12,262 $ -- Effects of: Patronage dividend.................................. -- (12,233) -- State income taxes, net of federal tax benefit...... 126 205 1,906 Increase/(decrease) in valuation allowance.......... 18,353 (2,503) 14,010 Non-deductible goodwill............................. 902 2,819 -- Other, net.......................................... 1,220 366 1,104 -------- -------- ------- $ 1,377 $ 916 $17,020 ======== ======== =======
Deferred income taxes reflect the net tax effects of net operating loss carryforwards, which expire in years through 2021; 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. In 2001, the increase in the valuation allowance was due to the increase in net operating loss carryforwards and other deferred tax assets that, along with all other previously recorded deferred tax assets, have a full valuation allowance because the company has concluded that it is more likely than not that there would not be sufficient future taxable earnings to utilize these assets. F-20 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:
2001 2000 --------- -------- (000'S OMITTED) Deferred tax assets: Net operating loss carryforwards.......................... $ 65,440 $ 58,462 AMT credit carryforward................................... 784 784 Nonqualified notices of allocation........................ 13,548 13,548 Bad debt provision........................................ 3,761 2,744 Vacation pay.............................................. 2,617 2,996 Book depreciation in excess of tax depreciation........... -- 532 Inventory reserves........................................ 1,272 1,272 Rent expense.............................................. 2,623 2,458 Merger-related valuations and accruals.................... 2,160 2,936 Inventory capitalization.................................. 2,657 2,657 Severance................................................. 5,304 1,327 Facility exit costs....................................... 7,574 -- Other..................................................... 5,302 4,412 --------- -------- Total deferred tax assets................................... 113,042 94,128 Valuation allowance for deferred tax assets................. (110,537) (89,700) --------- -------- Net deferred tax assets..................................... 2,505 4,428 Deferred tax liabilities: Tax depreciation in excess of book depreciation........... 960 -- Contributions to fund retirement plans.................... 414 3,296 Other..................................................... 1,131 1,132 --------- -------- Total deferred tax liabilities.............................. 2,505 4,428 --------- -------- Net deferred taxes.......................................... $ -- $ -- ========= ========
9. 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:
2001 2000 1999 ------- ------- -------- (000'S OMITTED) Patronage dividend payable in cash..................... $ (976) $10,459 $ -- Accrued expenses....................................... (569) -- -- Promissory (subordinated) notes........................ (5,888) (1,820) (5,436) Redeemable Class A voting common stock................. -- 3 -- Redeemable Class B common stock........................ -- (2,733) (15,974) Installment notes...................................... (50) 2,515 9,722 Loss allocation........................................ 2,488 21,458 -- Member indebtedness.................................... 4,995 4,823 11,688 ------- ------- -------- Patronage dividend................................... $ -- $34,705 $ -- ======= ======= ======== Note renewals and interest rollover.................... $21,936 $22,525 $ 36,385 ======= ======= ========
F-21 TRUSERV CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) TruServ may set off its obligation to make any payment to a member for such member's stock, notes, interest and declared and unpaid dividends against any obligation owed by the member to TruServ. TruServ exercised its set off rights in 2001, when TruServ notes and interest came due to former members with outstanding accounts receivable to TruServ and current members with past due accounts receivable to TruServ. TruServ also set off its obligation to former members against their related loss allocation balance. The set off rights were exercised in an aggregate amount of $7,483,000, which decreased the loss allocation account by $2,488,000 and accounts receivable by $4,995,000 during 2001. $976,000 of the offset to accounts receivable was generated from the payment of the fiscal 2000 patronage dividend in 2001, which reduced the cash payment from $10,459,000 to $9,483,000. The company's non-cash financing and investing activities in fiscal year 2001 include $1,300,000 related to a note received for the sale of its Indianapolis, Indiana property. 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 $19,500,000 and debit memos of $4,000,000. The company's non-cash financing and investing activities in fiscal year 1999 include $305,000 related to the acquisition of transportation equipment by entering into capital leases. Cash paid for interest during fiscal years 2001, 2000 and 1999 totaled $59,048,000, $60,059,000 and $58,730,000, respectively. Cash paid for income taxes during fiscal years 2001, 2000 and 1999 totaled $133,000, $777,000 and $848,000, respectively. 10. BENEFIT PLANS The change in the projected benefit obligation and in the plan assets for the company administered pension plans were as follows for the years ended December 31:
2001 2000 -------- --------- (000'S OMITTED) Change in projected benefit obligation: Projected benefit obligation at beginning of year......... $ 76,498 $ 160,727 Service cost.............................................. 5,850 6,414 Interest cost............................................. 4,874 9,474 Benefit payments.......................................... (391) (4,980) Actuarial losses.......................................... 13,180 18,946 Plan amendments........................................... (10,678) -- Settlements............................................... (25,693) (114,083) -------- --------- Projected benefit obligation at end of year............... 63,640 76,498 -------- --------- Change in plan assets: Fair value of plan assets at beginning of year............ 76,501 178,426 Actual return on assets................................... (3,086) 3,068 Employer contributions.................................... 7,047 14,070 Benefit payments.......................................... (391) (4,980) Settlements............................................... (25,695) (114,083) -------- --------- Fair value of plan assets at end of year.................. 54,376 76,501 -------- --------- Reconciliation of funded status: Funded status............................................. (9,264) 3 Unrecognized transition asset............................. (361) (788) Unrecognized prior service cost........................... (5,436) 5,792 Unrecognized actuarial loss............................... 19,395 5,815 -------- --------- Prepaid expense........................................... $ 4,334 $ 10,822 ======== =========
F-22 TRUSERV CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The company has a prepaid pension expense of $4,334,000 and $10,822,000 at December 31, 2001 and 2000, respectively. The full prepaid pension expense at December 31, 2001 is classified in "Other current assets." The prepaid pension expense at December 31, 2000 consists of a short term portion of $4,280,000 classified in "Other current assets" and a long term portion of $6,542,000 classified in "Other assets." One of TruServ'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 a prepaid pension asset of $1,636,000 and accrued pension liability of $1,279,000 related to the SERP at December 31, 2001 and 2000, respectively, due to the early separation of former executives in 2001. The components of net periodic pension cost for the company administered pension plans were as follows for the years ended December 31:
2001 2000 1999 ------- -------- -------- (000'S OMITTED) Components of net periodic pension cost: Service cost...................................... $ 5,850 $ 6,414 $ 8,377 Interest cost..................................... 4,874 9,474 12,312 Expected return on assets......................... (5,986) (12,987) (15,951) Amortization of transition assets................. (311) (529) (720) Amortization of prior service cost................ 550 951 984 Amortization of actuarial (gain)/loss............. 278 (91) 53 Special termination benefit....................... -- -- 1,597 Curtailment loss.................................. -- -- 112 Settlement (gain)/loss............................ 8,280 (1,965) (5,075) ------- -------- -------- Net pension cost.......................... $13,535 $ 1,267 $ 1,689 ======= ======== ========
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 vested employees leaving the plan. TruServ is amending and restating the pension plan and has amended and restated the SERP, both effective January 1, 2002. The significant change to the pension plan is that credits for service beginning January 1, 2002 will be reduced from a 2%-12% scale to a 1%-9% scale. The significant changes to the supplemental plan include years of service that are credited will be limited to years of service as an officer, "average compensation" will exclude long-term incentive payments and years of service will accrue at 33% per year with no increase at age 55. The company also participates in union-sponsored defined contribution plans. Costs related to these plans were $30,000, $169,000 and $315,000 for fiscal year 2001, 2000 and 1999, respectively. Plan assets consist primarily of publicly traded common stocks and corporate debt instruments. F-23 TRUSERV CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The assumptions used to determine TruServ's pension obligations for all plans were as follows for the years ended December 31:
2001 2000 ----- ----- Weighted average assumptions: Discount rate............................................. 7.00% 7.50% Expected return on assets................................. 8.50% 9.50% Rate of compensation increase............................. 4.50% 4.50%
TruServ 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 dependents. The company also maintains similar benefits for some former SCC executives who were also contractually eligible for such coverage. The change in the benefit obligation and in the plan's assets for the company's post-retirement plan, as well as the components of net periodic post-retirement benefit cost, was as follows for the years ended December 31:
2001 2000 ------- ------- (000'S OMITTED) Change in benefit obligation: Accumulated post-retirement benefit obligation at beginning of year...................................... $ 4,747 $ 4,554 Interest cost............................................. 350 354 Claims paid............................................... (427) (427) Actuarial losses.......................................... 302 266 ------- ------- Accumulated post-retirement benefit obligation at end of year................................................... 4,972 4,747 ------- ------- Change in plan assets: Fair value of plan assets at beginning of year............ -- -- Employer contribution..................................... 427 427 Claims paid............................................... (427) (427) ------- ------- Fair value of plan assets at end of year.................. -- -- ------- ------- Reconciliation of funded status: Funded status............................................. (4,972) (4,747) Unrecognized actuarial losses............................. 326 23 ------- ------- Net amount recognized..................................... (4,646) (4,724) ------- ------- Component of net periodic post-retirement benefit cost: Interest cost............................................. 350 354 ------- ------- Net periodic benefit cost................................. $ 350 $ 354 ======= =======
The effect of a one percentage point increase in the medical trend rate would increase the service and interest cost components by $11,000 and the post-retirement benefit obligation by $151,000. The effect of a one percentage point decrease in the medical trend rate would decrease the service and interest cost components by $9,000 and the post-retirement benefit obligation by $126,000. F-24 TRUSERV CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The assumptions used to determine TruServ's health benefit obligations were as follows for the years ended December 31:
2001 2000 ----- ----- Weighted average assumptions: Discount rate............................................. 7.00% 7.50% Medical trend rate........................................ 5.00% 5.00%
11. 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, 2001 ------------------------------------------------------------------------ PAINT ELIMINATION MANUFACTURING OF INTERSEGMENT CONSOLIDATED HARDWARE AND DISTRIBUTION OTHER ITEMS TOTALS ---------- ---------------- ------- --------------- ------------ (000'S OMITTED) Net sales to external customers.... $2,404,553 $130,484 $84,397 $ -- $2,619,434 Intersegment sales................. -- 1,649 -- (1,649) -- Interest expense................... 58,967 3,819 487 -- 63,273 Depreciation and amortization...... 39,344 1,671 504 -- 41,519 Segment net margin/(loss).......... (64,562) 12,826 1,049 -- (50,687) Identifiable segment assets........ 976,781 41,712 2,344 -- 1,020,837 Expenditures for long-lived assets........................... 14,188 615 348 -- 15,151
DECEMBER 31, 2000 ------------------------------------------------------------------------- PAINT ELIMINATION MANUFACTURING OF INTERSEGMENT CONSOLIDATED HARDWARE AND DISTRIBUTION 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 and 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 TRUSERV CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1999 ------------------------------------------------------------------------- PAINT ELIMINATION MANUFACTURING OF INTERSEGMENT CONSOLIDATED HARDWARE AND DISTRIBUTION 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 and 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
The company does not have a significant concentration of members in any geographic region of the United States or in any foreign countries. 12. ASSET SALES Effective December 29, 2000, the company sold the assets, primarily inventory, of the lumber and building materials ("LBM") business, 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 was 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 business 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 of 2000, which is recorded in Gain on sale of assets. Effective October 22, 2001, TruServ sold its ownership interest in TruServ Canada Cooperative, Inc. along with the headquarters and warehouse building and other parcels of real estate to the current management group of the cooperative. Net proceeds from the transaction were $9,654,000. The company recorded a net gain of $1,550,000 which is recorded in Gain on sale of assets. 13. QUARTERLY FINANCIAL SUMMARY Selected quarterly financial information for each of the four quarters in fiscal 2001 and 2000 is as follows (000's omitted):
FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER ---------- ---------- ---------- ---------- 2001 Revenues........................... $ 654,350 $ 747,765 $ 621,977 $ 595,342 Net margin/(loss) before income taxes........................... (13,900) 2,847 (2,345) (35,912) Net margin/(loss).................. (13,936) 2,573 (2,477) (36,847) 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(1) Net margin/(loss).................. (8,924) 11,923 9,447 21,671
F-26 TRUSERV CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) - --------------- (1) 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 revenues) resulting from physical inventory counts taken at certain of its distribution centers. 14. RESTRUCTURING CHARGES AND OTHER RELATED EXPENSES In fiscal 2001, TruServ continued the workforce reductions initiated in fiscal 1999 and 2000 related to regional distribution center closures and workforce reductions at the company's corporate headquarters. TruServ recorded a pre-tax charge to income from continuing operations of $38,522,000 in fiscal 2001. The charge is comprised of $10,722,000 for severance, $18,901,000 of facility exit costs for the regional distribution centers and $8,899,000 for asset impairments. The Hagerstown, Maryland distribution center is subject to a synthetic lease. The synthetic lease has a principal balance of $40,000,000 which is due at the end of the lease term. This obligation and the original cost of the facility are not recorded on the company's balance sheet because the synthetic lease does not meet the requirement for capital lease treatment under SFAS No. 13, "Accounting for Leases." The difference between the lease obligation and management's estimate of the fair value of the building is approximately $14,800,000 and is a component of the facility exit cost amount shown above. In fiscal 2000, TruServ recorded a restructuring charge of $4,944,000, of which approximately $2,000,000 was related to the closures of Henderson, North Carolina and Indianapolis, Indiana distribution centers. F-27 TRUSERV CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Restructuring initiatives summary (dollar amounts in thousands):
DECEMBER 31, 2000 ADDITIONAL DECEMBER 31, 2001 ESTIMATED RESTRUCTURING RESTRUCTURING ASSET RESTRUCTURING ANNUALIZED RESERVE CHARGES IMPAIRMENTS PAYMENTS RESERVE SAVINGS ----------------- ------------- ----------- -------- ----------------- ---------- Closure of Henderson, North Carolina distribution center: Severance and outplacement..... $ -- $ 569 $ -- $ (419) $ 150 Facility exit costs............ 150 780 -- (930) -- Asset impairments.............. -- -- -- -- -- ------ ------- ------- ------- ------- 150 1,349 -- (1,349) 150 $ 798 ------ ------- ------- ------- ------- Closure of Indianapolis, Indiana distribution center: Severance and outplacement..... 861 106 -- (889) 78 Facility exit costs............ 901 142 -- (1,043) -- Asset impairments.............. -- -- -- -- -- ------ ------- ------- ------- ------- 1,762 248 -- (1,932) 78 1,476 ------ ------- ------- ------- ------- Closure of Brookings, South Dakota distribution center: Severance and outplacement..... -- 1,656 -- (48) 1,608 Facility exit costs............ -- 979 -- -- 979 Asset impairments.............. -- 5,338 (5,338) -- -- ------ ------- ------- ------- ------- -- 7,973 (5,338) (48) 2,587 4,041 ------ ------- ------- ------- ------- Closure of Hagerstown, Maryland distribution center: Severance and outplacement..... -- 1,122 -- -- 1,122 Facility exit costs............ -- 17,000 -- -- 17,000 Asset impairments.............. -- 3,561 (3,561) -- -- ------ ------- ------- ------- ------- -- 21,683 (3,561) -- 18,122 7,545 ------ ------- ------- ------- ------- Corporate headquarter workforce reduction: Severance and outplacement..... -- 7,269 -- (1,957) 5,312 Facility exit costs............ -- -- -- -- -- Asset impairments.............. -- -- -- -- -- ------ ------- ------- ------- ------- -- 7,269 -- (1,957) 5,312 15,097 ------ ------- ------- ------- ------- Total: Severance and outplacement..... 861 10,722 -- (3,313) 8,270 Facility exit costs............ 1,051 18,901 -- (1,973) 17,979 Asset impairments.............. -- 8,899 (8,899) -- -- ------ ------- ------- ------- ------- ------- $1,912 $38,522 $(8,899) $(5,286) $26,249 $28,957 ====== ======= ======= ======= ======= ======= HEADCOUNT REDUCTION --------- Closure of Henderson, North Carolina distribution center: Severance and outplacement..... Facility exit costs............ Asset impairments.............. 102 Closure of Indianapolis, Indiana distribution center: Severance and outplacement..... Facility exit costs............ Asset impairments.............. 94 Closure of Brookings, South Dakota distribution center: Severance and outplacement..... Facility exit costs............ Asset impairments.............. 166 Closure of Hagerstown, Maryland distribution center: Severance and outplacement..... Facility exit costs............ Asset impairments.............. 331 Corporate headquarter workforce reduction: Severance and outplacement..... Facility exit costs............ Asset impairments.............. 216 Total: Severance and outplacement..... Facility exit costs............ Asset impairments.............. ---- 909 ====
F-28 ITEM 14(a)(2). INDEX TO FINANCIAL STATEMENT SCHEDULES.
PAGE(S) ------- Schedule II -- Valuation and Qualifying Accounts............ F-30
F-29 TRUSERV CORPORATION SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS FOR FISCAL YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
FISCAL YEAR ENDED DECEMBER 31 ------------------------------ 2001 2000 1999 -------- -------- -------- (000'S OMITTED) Reserve for Doubtful Accounts: Balance at beginning of year.............................. $ 7,170 $ 5,613 $ 5,111 Provision for doubtful accounts........................... 6,275 9,147 5,148 Write-offs of doubtful accounts(1)........................ (4,043) (7,590) (4,646) ------- ------- ------- Balance at end of year.................................... $ 9,402 $ 7,170 $ 5,613 ======= ======= =======
- --------------- (1) Notes and accounts written off as uncollectible, net of recoveries of accounts previously written off as uncollectible F-30 ITEM 14(a)(3). INDEX TO EXHIBITS
EXHIBITS ENCLOSED DESCRIPTION -------- ----------- 4-B By-Laws of the company, effective December 17, 2001. 4-J Second Amended and Restated Credit Agreement dated as of April 11, 2002 for $200,000,000 Revolving credit between TruServ Corporation, various financial institutions, and Bank of America. 4-M Security Agreement dated as of April 14, 2000 among TruServ Corporation, various subsidiaries of the Company and Bank of America, N.A., as Collateral Agent. 4-N First Amendment dated as of April 11, 2002 amends the Security Agreement dated of as April 14, 2000 among TruServ Corporation, various subsidiaries of the Company and Bank of America, N.A., as Collateral Agent. 4-P Fourth amendment dated as of April 11, 2002 amends the Participation Agreement dated as of April 30, 1998 for $40,000,000 between TruServ Corporation, various financial institutions and Bank of Montreal. 4-Q Amendment dated as of April 11, 2002 amends the Amended and Restated Note Purchase Agreement dated April 14, 2000 to Credit Agreement dated September 10, 1998 for $105,000,000 Note Purchase Agreement between TruServ Corporation and various purchasers. 4-R Amendment dated April 11, 2002 to the Amended Private Shelf Agreement between TruServ Corporation and Prudential Insurance Company of America for $150,000,000 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. 4-S First Amended and Restated Intercreditor Agreement among Bank of America, N.A. as Agent under a Credit Agreement with TruServ Corporation, Allstate Insurance Company and certain financial institutions. The Prudential Insurance Company of America and certain of its affiliates. Shelf Noteholders, TruServ 1998 Trust, Wilmington Trust Company in its individual capacity and as owner trustee, BMO Global Capital Solutions, Inc., Bank of Montreal, as Administrative Agent. Bank of America, N.A., as Collateral Agent and TruServ Corporation, et al. dated as of April 11, 2002. 10-E TruServ Supplemental Retirement Plan (As Amended and Restated Effective January 1, 2002). 10-H Employment Agreement between the company and Pamela Forbes Lieberman dated November 15, 2001. 10-I Termination Agreement between the company and Donald J. Hoye dated August 31, 2001. 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).
E-1
EXHIBITS INCORPORATED BY REFERENCE ------------ 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 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--Exhibit 4-Q to Post Effective Amendment No. 10 to Registration Statement on Form S-2 to Form S-4 (No. 333-18397). 4-I 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-K Amendment dated May 12, 1999 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. Incorporated by reference--Exhibit 4-M to the registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1999 (File No. 2-20910). 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-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) 4-T 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). 10-A Current Form of "Retail Member Agreement with TruServ" between the company and its members that offer primarily hardware and related items. Incorporated by reference--Exhibit 10-A to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 2000. 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.
E-2
EXHIBITS INCORPORATED BY REFERENCE ------------ 10-D TruServ Corporation Employees' Savings and Compensation Deferral Plan (As Amended and Restated Effective July 1, 2000). Incorporated by reference--Exhibit 10-D to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 2000.
E-2.1
EXHIBITS INCORPORATED BY REFERENCE ------------ 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, 2001 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-3 EX-4.B 3 c66649ex4-b.txt BY-LAWS OF THE COMPANY EXHIBIT 4-B BY-LAWS OF TRUSERV CORPORATION Effective December 17, 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 (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 one-third 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 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. 2 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. 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 3 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. 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. 4 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. 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. 5 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. 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. 6 (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 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 7 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 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. 8 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. 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 9 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). (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. 10 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. 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 11 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 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. 12 EX-4.J 4 c66649ex4-j.txt SECOND AMENDED AND RESTATED CREDIT AGREEMENT Exhibit 4-J ================================================================================ SECOND AMENDED AND RESTATED CREDIT AGREEMENT DATED AS OF APRIL 11, 2002 AMONG TRUSERV CORPORATION, VARIOUS FINANCIAL INSTITUTIONS, AND BANK OF AMERICA, N.A., AS AGENT ================================================================================ TABLE OF CONTENTS
PAGE ARTICLE I DEFINITIONS..................................................................... 1 1.2 Other Interpretive Provisions....................................................... 23 1.3 Accounting Principles............................................................... 24 ARTICLE II THE CREDITS..................................................................... 24 2.1 Amounts and Terms of Commitments.................................................... 24 2.2 Notes............................................................................... 24 2.3 Procedure for Borrowing............................................................. 25 2.4 Termination or Reduction of Commitments............................................. 25 2.5 Prepayments......................................................................... 26 2.6 Repayment........................................................................... 26 2.7 Interest............................................................................ 26 2.8 Fees................................................................................ 27 2.9 Computation of Fees and Interest.................................................... 28 2.10 Payments by the Company............................................................. 28 2.11 Payments by the Lenders to the Agent................................................ 28 2.12 Sharing of Payments, Etc............................................................ 29 2.13 Swing Line Commitment............................................................... 30 2.14 Borrowing Procedures for Swing Line Loans........................................... 30 2.15 Prepayment or Refunding of Swing Line Loans......................................... 30 2.16 Participations in Swing Line Loans.................................................. 31 2.17 Participation Obligations Unconditional............................................. 31 2.18 Conditions to Swing Line Loans...................................................... 32 ARTICLE III TAXES AND YIELD PROTECTION AND ILLEGALITY....................................... 32 3.1 Taxes............................................................................... 32 3.2 Increased Costs and Reduction of Return............................................. 33 3.3 Certificates of Lenders............................................................. 33 3.4 Substitution of Lenders............................................................. 33 3.5 Survival............................................................................ 34 ARTICLE IV CONDITIONS PRECEDENT............................................................ 34 4.1 Conditions to Effectiveness......................................................... 34
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PAGE 4.3 Conditions to All Credit Extensions................................................. 36 ARTICLE V REPRESENTATIONS AND WARRANTIES.................................................. 36 5.1 Organization; Subsidiary Preferred Stock............................................ 36 5.2 Financial Statements................................................................ 36 5.3 Actions Pending..................................................................... 37 5.4 Outstanding Debt.................................................................... 37 5.5 Title to Properties................................................................. 37 5.6 Taxes............................................................................... 37 5.7 Conflicting Agreements and Other Matters............................................ 37 5.8 Use of Proceeds..................................................................... 38 5.9 ERISA............................................................................... 38 5.10 Governmental Consent................................................................ 38 5.11 Environmental Compliance............................................................ 38 5.12 Disclosure.......................................................................... 39 5.13 Priority of Obligations............................................................. 39 ARTICLE VI AFFIRMATIVE COVENANTS........................................................... 39 6.1 Financial Statements................................................................ 39 6.2 Certificates; Other Information..................................................... 40 6.3 Notices............................................................................. 41 6.4 Preservation of Corporate Existence, Etc............................................ 42 6.5 Maintenance of Property............................................................. 42 6.6 Insurance........................................................................... 42 6.7 Payment of Obligations.............................................................. 43 6.8 Compliance with Laws................................................................ 43 6.9 Compliance with ERISA............................................................... 43 6.10 Inspection of Property and Books and Records........................................ 43 6.11 Environmental Laws.................................................................. 43 6.12 Use of Proceeds..................................................................... 43 6.13 Covenant to Secure Obligations Equally.............................................. 44 6.14 Cooperative Status.................................................................. 44
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PAGE 6.15 Further Assurances.................................................................. 44 6.16 Insurance and Condemnation Proceeds................................................. 44 ARTICLE VII NEGATIVE COVENANTS.............................................................. 45 7.1 Fixed Charge Coverage Ratio......................................................... 45 7.2 Lien Restrictions................................................................... 45 7.3 Debt Restrictions................................................................... 46 7.4 Sale of Assets...................................................................... 47 7.5 Merger.............................................................................. 47 7.6 Restrictions on Transactions with Affiliates and Stockholders....................... 47 7.7 Issuance of Stock by Subsidiaries................................................... 47 7.8 Compliance with ERISA............................................................... 47 7.9 No Change in Subordination Terms, etc............................................... 48 7.10 Nature of Business.................................................................. 48 7.11 Restricted Investments.............................................................. 48 7.12 Restricted Payments................................................................. 49 7.13 Use of Proceeds..................................................................... 49 7.14 Interest Coverage Ratio............................................................. 50 7.15 Minimum Sales....................................................................... 50 7.16 Capital Expenditures................................................................ 51 7.17 Minimum Adjusted EBITDA............................................................. 51 7.19 Amendments to Financing Agreements.................................................. 52 7.20 Subordinated Notes.................................................................. 53 7.21 Chief Executive Officer............................................................. 53 7.22 Sale of Hagerstown Facility......................................................... 53 ARTICLE VIII EVENTS OF DEFAULT............................................................... 53 8.1 Event of Default.................................................................... 53 8.2 Remedies............................................................................ 55 8.3 Rights Not Exclusive................................................................ 56 ARTICLE IX THE AGENT....................................................................... 56 9.1 Appointment and Authorization; "Agent".............................................. 56
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PAGE 9.2 Delegation of Duties................................................................ 56 9.3 Liability of Agent.................................................................. 57 9.4 Reliance by Agent................................................................... 57 9.5 Notice of Default................................................................... 57 9.6 Credit Decision..................................................................... 58 9.7 Indemnification of Agent............................................................ 58 9.8 Agent in Individual Capacity........................................................ 58 9.9 Successor Agent..................................................................... 59 9.10 Withholding Tax..................................................................... 59 ARTICLE X MISCELLANEOUS................................................................... 61 10.1 Amendments and Waivers.............................................................. 61 10.2 Notices............................................................................. 61 10.3 No Waiver; Cumulative Remedies...................................................... 62 10.4 Costs and Expenses.................................................................. 62 10.5 Company Indemnification............................................................. 63 10.6 Payments Set Aside.................................................................. 63 10.7 Successors and Assigns.............................................................. 63 10.8 Assignments, Participations, etc.................................................... 64 10.9 Confidentiality..................................................................... 65 10.10 Set-off............................................................................. 65 10.11 Automatic Debits of Fees............................................................ 66 10.12 Notification of Addresses, Lending Offices, Etc..................................... 66 10.13 Counterparts........................................................................ 66 10.14 Severability........................................................................ 66 10.15 No Third Parties Benefited.......................................................... 66 10.16 Governing Law and Jurisdiction...................................................... 66 10.17 Waiver of Jury Trial................................................................ 67 10.18 Judgment............................................................................ 67 10.19 Entire Agreement.................................................................... 68 10.20 Amendment and Restatement........................................................... 68
-iv- TABLE OF CONTENTS (continued)
PAGE 10.21 Collateral Matters.................................................................. 68
SCHEDULES Schedule 1.1(a) Borrowing Base Schedule 1.1(b) Proprietary Rights Schedule 2.1 Commitments and Pro Rata Shares Schedule 5.3 Pending Actions Schedule 4.1(f) Material Adverse Effect Schedule 5.7 Restrictive Agreements Schedule 6.16 Mortgaged Property Schedule 7.2(d) Liens Schedule 7.2(l) Specified Facilities Schedule 7.4 Designated Permitted Asset Sales Schedule 7.10 Business Activities Schedule 7.11 Investments Schedule 7.12 Adjusted EBITDA Schedule 10.2 Offshore and Domestic Lending Offices; Addresses for Notices EXHIBITS Exhibit A Form of Notice of Borrowing Exhibit B [Intentionally Deleted] Exhibit C Form of Consent Exhibit D Form of First Amendment to Security Agreement Exhibit E Form of Compliance Certificate Exhibit F Form of Legal Opinion of Counsel to the Company Exhibit G Form of Assignment and Acceptance Exhibit H-1 Form of Series A Note Exhibit H-2 Form of Series B Note Exhibit I Form of Subordinated Note Exhibit J Form of Trademark Security Agreement Exhibit K Form of Guaranty Exhibit L Form of Pledge Agreement Exhibit M Form of Security Agreement Exhibit N Form of Intercreditor Agreement Exhibit O Form of Borrowing Base Certificate Exhibit P Form of Lumber Note Notice Exhibit Q Form of Excess Cash Flow Report -v- SECOND AMENDED AND RESTATED CREDIT AGREEMENT This SECOND AMENDED AND RESTATED CREDIT AGREEMENT is entered into as of April 11, 2002, among TRUSERV CORPORATION, a Delaware corporation (the "Company"), the several financial institutions from time to time party to this Agreement (collectively the "Lenders"; individually each a "Lender"), and BANK OF AMERICA, N.A. (in its individual capacity, "Bank of America"), as Swing Line Lender and Agent. WHEREAS, the Company, the Lenders and Bank of America, as agent, are parties to an Amended and Restated Credit Agreement dated as of April 14, 2000 (the "Original Agreement"); and WHEREAS, the parties hereto have agreed to amend and restate the Original Agreement to make various changes thereto; NOW, THEREFORE, in consideration of the mutual agreements, provisions and covenants contained herein, the parties agree as follows: ARTICLE I DEFINITIONS 1.1 Certain Defined Terms. The following terms have the following meanings: Account Debtor means any Person who is obligated to the Company or any Subsidiary under, with respect to, or on account of an Account Receivable. Account Receivable means, with respect to any Person, any right of such Person to payment for goods sold or leased or for services rendered, whether or not evidenced by an instrument or chattel paper and whether or not yet earned by performance. Adjusted EBITDA means, for any period, EBITDA plus Restructuring Charges to extent taken in such period. Adjusted Cash Flow means, with respect to any period, Consolidated Net Earnings for such period less (a) the sum of (i) to extent not already deducted in the calculation of Consolidated Net Earnings, gains from Asset Sales realized during such period, (ii) Capital Expenditures during such period, (iii) amortization of all Indebtedness (including amortization of Indebtedness from payments of Excess Cash Flow but excluding amortization of Indebtedness from the proceeds of Asset Sales) for such period, (iv) patronage dividends accrued in the current fiscal year to be paid in the following fiscal year, (v) any increase in restricted cash during such period and (vi) Restructuring Charges taken during such period; plus (b) the sum of (i) to the extent deducted in the calculation of Consolidated Net Earnings, losses from Asset Sales realized during such period, (ii) depreciation and amortization expense for such period, (iii) non-cash income tax expense for such period and (iv) any decrease in restricted cash during such period. Adjusted Working Capital means, at any date of determination, the result of (a) current assets of the Borrower and its Subsidiaries at such date, minus (b) without duplication, cash and restricted cash of the Borrower and its Subsidiaries at such date, minus (c) current liabilities of the Borrower and its Subsidiaries at such date plus (d) the sum of (i) the current portion of Subordinated Debt and other Debt at such date, (ii) accrued and unpaid patronage dividends at such date, (iii) the value of current assets purchased, transferred or assumed in connection with Asset Sales consummated during such period, minus (e) the value of current liabilities purchased, transferred or assumed in connection with Asset Sales consummated during such period. Adjusted Working Capital Change means, for any fiscal year, the result of (a) Adjusted Working Capital for such fiscal year minus (b) Adjusted Working Capital for the fiscal year immediately preceding such fiscal year. Affected Lender - see Section 3.4. Affiliate means, as to any Person, any other Person which, directly or indirectly, is in control of, is controlled by, or is under common control with, such Person. A Person shall be deemed to control another Person if the controlling Person possesses, directly or indirectly, the power to direct or cause the direction of the management and policies of such other Person, whether through the ownership of voting securities, membership interests, by contract, or otherwise. A Person that is or was a Member, Substantial Stockholder or material customer shall not be deemed an Affiliate solely on account of such status. Agent means BofA in its capacity as agent for the Lenders hereunder, and any successor agent arising under Section 9.9. Agent-Related Persons means the Agent and any successor thereto in such capacity hereunder, together with their respective Affiliates, and the officers, directors, employees, agents and attorneys-in-fact of such Persons and Affiliates. Agent's Fee Letter - see subsection 2.8(a). Agent's Payment Office means the address for payments to the Agent set forth on Schedule 10.2 or such other address as the Agent may from time to time specify in accordance with Section 10.2. Agreement means this Second Amended and Restated Credit Agreement. Asset Sale means the sale, lease, assignment, transfer or other disposition for value (each a "Disposition") by the Company or any Subsidiary to any Person (other than the Company or a Subsidiary) of any assets of the Company or such Subsidiary, other than (i) the Disposition of inventory in the ordinary course of business, (ii) the Disposition of inventory or receivables to a Guarantor or to the Company, (iii) leases or subleases entered into in the ordinary course of business, (iv) the licensing of Proprietary 2 Rights by the Company or any Subsidiary in the ordinary course of business (so long as such licensing does not prevent the Company or such Subsidiary from using Proprietary Rights material to the business of the Company or such Subsidiary) or (v) the Disposition of other assets having a value not exceeding $250,000 in the aggregate in any fiscal year. Assignee - see subsection 10.8(a). Attorney Costs means and includes all fees and charges of any law firm or other external counsel, and, without duplication, the allocated cost of internal legal services and all disbursements of internal counsel. Bankruptcy Code means the Federal Bankruptcy Reform Act of 1978 (11 U.S.C. Section 101, et seq.). Bankruptcy Law - see subsection 8.1(h). Base Rate means, for any day, a per annum rate equal to the higher of: (a) the sum of 0.50% plus the latest Federal Funds Rate; and (b) the rate of interest in effect for such day as publicly announced from time to time by BofA as its "prime rate." (The "prime rate" is a rate set by BofA based upon various factors including BofA's costs and desired return, general economic conditions and other factors, and is used as a reference point for pricing some loans, which may be priced at, above, or below such announced rate.) Any change in the prime rate announced by BofA shall take effect at the opening of business on the day specified in the public announcement of such change. Benefited Obligations has the meaning set forth in the Intercreditor Agreement. Benefited Parties has the meaning set forth in the Intercreditor Agreement. BofA means Bank of America, N.A., a national banking association. Borrowing means a borrowing hereunder consisting of Committed Loans made to the Company on the same day by one or more Lenders under Article II. Borrowing Base means, at any time as of the last day of the prior week, the total of (i) 85% of all Eligible Accounts Receivable plus (ii) 50% of all Eligible Inventory plus (iii) 60% of the appraised value of Eligible Real Estate plus (iv) 50% of the appraised value of Eligible Machinery and Equipment plus (v) the Overadvance Amount minus (vi) the aggregate amount of Reserves. The Borrowing Base shall be adjusted on a periodic basis as set forth on Schedule 1.1(a) or as often as the Agent or the Required Lenders may request. The above percentages may be decreased from time to time by the Agent in its sole discretion after notice to the Company. Borrowing Base Certificate means a certificate substantially in the form of Exhibit O. Borrowing Date means any date on which a Borrowing occurs or a Swing Line Loan is made under Section 2.3 or 2.14. 3 Business Day means any day other than a Saturday, Sunday or other day on which commercial banks in New York City, Chicago or Charlotte are authorized or required by law to close. Business Plan means the business plan delivered by the Company to the Agent on March 20, 2002. Capital Adequacy Regulation means any guideline, request or directive of any central bank or other Governmental Authority, or any other law, rule or regulation, whether or not having the force of law, in each case, regarding capital adequacy of any bank or of any corporation controlling a bank. Capital Expenditures means, for any period, the sum without duplication of (a) the aggregate amount of all expenditures of the Company and its Subsidiaries for fixed or capital assets made during such period which, in accordance with GAAP, would be classified as capital expenditures; and (b) the aggregate amount of all Capitalized Lease Obligations incurred during such period excluding, in each case, expenditures made pursuant to Section 6.16(ii) hereof and refinancings or renewals of Capitalized Lease Obligations in effect on the Closing Date. Capitalized Lease Obligation means any rental obligation which, under GAAP, is or will be required to be capitalized on the books of the Company or any Subsidiary, taken at the amount thereof accounted for as indebtedness (net of interest expense). Closing Date means the date on which all conditions precedent set forth in Section 4.1 are satisfied or waived by all Lenders (or, in the case of subsection 4.1(e), waived by the Person entitled to receive the applicable payment). Code means the Internal Revenue Code of 1986. Collateral Agent means BofA in its capacity as collateral agent under the Intercreditor Agreement, together with any successor thereto in such capacity. Collateral Documents means the Security Agreement, the Trademark Security Agreement, the Pledge Agreement, each Mortgage and any other document or instrument pursuant to which the Company or any Guarantor grants to the Collateral Agent, for the benefit of the Benefited Parties, a security interest in any of its property to secure the payment of any of the Benefited Obligations. Commitment - see Section 2.1. Committed Loan means a Loan by a Lender to the Company under Section 2.1. Company - see the Preamble. Compliance Certificate means a certificate substantially in the form of Exhibit E. Consent means the consent of the Guarantors in the form of Exhibit C. 4 Consolidated Net Earnings means with respect to any period: (i) consolidated gross revenues of the Company and its Subsidiaries, minus (ii) all operating and non-operating expenses of the Company and its Subsidiaries including all charges of a proper character (including current and deferred taxes on income, provision for taxes on unremitted foreign earnings which are included in gross revenues, current additions to reserves and merger integration costs), but not including in gross revenues: (a) any extraordinary gains or losses (net of expenses and taxes applicable thereto) resulting from the sale, conversion or other disposition of capital assets (i.e., assets other than current assets); (b) any gains resulting from the appraised write-up of assets; (c) any equity of the Company or any Subsidiary in the unremitted earnings of any corporation which is not a Subsidiary; (d) any earnings of any Person acquired by the Company or any Subsidiary through purchase, merger or consolidation or otherwise for any year prior to the year of acquisition; or (e) any deferred credit representing the excess of equity in any Subsidiary at the date of acquisition over the cost of the investment in such Subsidiary; all determined in accordance with GAAP. Contractual Obligation means, as to any Person, any provision of any security issued by such Person or of any agreement, undertaking, contract, indenture, mortgage, deed of trust or other instrument, document or agreement to which such Person is a party or by which it or any of its property is bound. Credit Extension means and includes the making of any Loan hereunder. Debt means Short Term Debt and Funded Debt. Designated Permitted Asset Sale means the sale or other disposition of the properties set forth on Schedule 7.4. Dollars, dollars and $ each mean lawful money of the United States. EBITDA means, for any period, Consolidated Net Earnings for such period plus, to the extent deducted in computing such Consolidated Net Earnings, interest expense (including rent expense with respect to Synthetic Leases), taxes, depreciation and amortization. 5 Effective Date - see Section 4.1. Eligible Accounts Receivable mean all Accounts Receivable of the Company and its Subsidiaries, other than Accounts Receivable which the Agent in the exercise of its reasonable commercial discretion determines not to be Eligible Accounts Receivable. Without limiting the discretion of the Agent to establish other criteria of ineligibility, Eligible Accounts Receivable shall not include any Account Receivable: (a) which is (i) due more than 180 days beyond the issuance of the applicable Borrowing Base Certificate or (ii) more than 60 days past due; (b) with respect to which any of the representations, warranties, covenants, and agreements contained in the Security Agreement are incorrect in any material respect or have been breached in any material respect; (c) with respect to which Account Receivable (or any other Account Receivable due from such Account Debtor), in whole or in part, a check, promissory note, draft, trade acceptance or other instrument for the payment of money has been received, presented for payment and returned uncollected for any reason; (d) which represents a progress billing (as hereinafter defined) or as to which the Company or any Subsidiary has extended the time for payment beyond original terms without the consent of the Agent; for the purposes hereof, "progress billing" means any invoice for goods sold or leased or services rendered under a contract or agreement pursuant to which the Account Debtor's obligation to pay such invoice is conditioned upon the completion by the Company or any Subsidiary of any further performance under the contract or agreement; provided that "progress billing" shall not refer to the Company's practice of billing an Account Debtor for program fees, such as advertising assessments, on a percentage of sales, straight-line or other periodic basis; (e) with respect to which any one or more of the following events has occurred to the Account Debtor on such Account Receivable: death or judicial declaration of incompetency of an Account Debtor who is an individual; the filing by or against the Account Debtor of a request or petition for liquidation, reorganization, arrangement, adjustment of debts, adjudication as a bankrupt, winding-up, or other relief under the bankruptcy, insolvency, or similar laws of the United States, any state or territory thereof, or any foreign jurisdiction, now or hereafter in effect; the making of any general assignment by the Account Debtor for the benefit of creditors; the appointment of a receiver or trustee for the Account Debtor or for all or any substantial portion of the assets of the Account Debtor, including, without limitation, the appointment of or taking possession by a "custodian," as defined in the Bankruptcy Code; the institution by or against the Account Debtor of any other type of insolvency proceeding (under the bankruptcy laws of the United States or otherwise) or of any formal or informal proceeding for the dissolution or liquidation of, settlement of claims against, or winding up of affairs of, the Account Debtor; the sale, assignment, or transfer of all or any material part of the assets of the Account Debtor; the nonpayment generally by the Account Debtor of its debts as they become due; or the cessation of the business of the 6 Account Debtor as a going concern, in each case unless such Account Receivable is supported by a letter of credit satisfactory to the Agent in its sole discretion; (f) if twenty-five percent (25%) or more of the aggregate Dollar amount of outstanding Accounts Receivable owed at such time by the Account Debtor thereon is classified as ineligible under clause (a)(ii) above; (g) owed by an Account Debtor which: (i) does not maintain its chief executive office in the United States of America or Canada (other than the Province of Quebec or Newfoundland) (unless the Account Debtor's obligations are supported by letters of credit or cash collateral deposits satisfactory to the Agent in its sole discretion); or (ii) is not organized under the laws of the United States of America or any state thereof or Canada or any province thereof (other than the Province of Quebec or Newfoundland) (unless the Account Debtor's obligations are supported by letters of credit or cash collateral deposits satisfactory to the Agent); or (iii) is the government of any foreign country or sovereign state, or of any state, province, municipality, or other political subdivision thereof, or of any department, agency, public corporation, or other instrumentality thereof; except to the extent that such Account Receivable is secured or payable by a letter of credit satisfactory to the Agent in its discretion; (h) owed by an Account Debtor which is an Affiliate or employee of the Company; (i) except as provided in clause (k) below, with respect to which either the perfection, enforceability, or validity of the Collateral Agent's Liens in such Account Receivable, or the Collateral Agent's right or ability to obtain direct payment to the Agent of the proceeds of such Account, is governed by any federal, state, or local statutory requirements other than those of the UCC; (j) owed by an Account Debtor to which the Company or any of its Subsidiaries, is indebted in any way, or which is subject to any right of setoff or recoupment by the Account Debtor, unless the Account Debtor has entered into an agreement acceptable to the Agent to waive setoff rights; or if the Account Debtor thereon has disputed liability or made any claim with respect to any other Account Receivable due from such Account Debtor; but in each such case only to the extent of such indebtedness, setoff, recoupment, dispute, or claim; (k) owed by the government of the United States of America, or any department, agency, public corporation, or other instrumentality thereof, unless the Federal Assignment of Claims Act of 1940, as amended (31 U.S.C. Section 3727 et seq.), and any other steps necessary to perfect the Agent's Liens therein, have been complied with to the Agent's satisfaction with respect to such Account; (l) owed by any state, municipality, or other political subdivision of the United States of America, or any department, agency, public corporation, or other instrumentality thereof and as to which the Agent determines that its Lien therein is not or cannot be perfected; 7 (m) which represents a sale on a bill-and-hold, guaranteed sale, sale and return, sale on approval, consignment, or other repurchase or return basis; (n) which is evidenced by a promissory note or other instrument or by chattel paper; (o) if the Agent believes, in the exercise of its reasonable judgment, that the prospect of collection of such Account Receivable is impaired or that the Account Receivable may not be paid by reason of the Account Debtor's financial inability to pay; (p) with respect to which the Account Debtor is located in any state requiring the filing of a Notice of Business Activities Report or similar report in order to permit the Company or a Subsidiary to seek judicial enforcement in such State of payment of such Account Receivable, unless such Company or a Subsidiary has qualified to do business in such state or has filed a Notice of Business Activities Report or equivalent report for the then current year; (q) which arises out of a sale not made in the ordinary course of the business of the Company and its Subsidiaries; (r) with respect to which the goods giving rise to such Account Receivable have not been shipped and delivered to and accepted by the Account Debtor or the services giving rise to such Account Receivable have not been performed by the Borrower, and, if applicable, accepted by the Account Debtor, or the Account Debtor revokes its acceptance of such goods or services; (s) owed by an Account Debtor which is obligated to the Company and its Subsidiaries respecting Accounts Receivable the aggregate unpaid balance of which exceeds ten percent (10%) of the aggregate unpaid balance of all Accounts owed to the Company and its Subsidiaries at such time by all of the Account Debtors of the Company and its Subsidiaries, but only to the extent of such excess; or (t) which is not subject to a first priority and perfected security interest in favor of the Agent for the benefit of the Lenders. An Account Receivable of the Company or any Subsidiary which is at any time an Eligible Account Receivable but which subsequently fails to meet any of the foregoing requirements shall forthwith cease to be an Eligible Account Receivable unless otherwise agreed by the Required Lenders. Eligible Inventory means all Inventory of the Company and its Subsidiaries, valued at the lower of cost (on a first-in, first-out basis) or market, other than Inventory which the Agent, in its reasonable discretion, determines not to be Eligible Inventory. Without limiting the discretion of the Agent to establish other criteria of ineligibility, Eligible Inventory shall not include any Inventory: (a) that is not owned by the Company or a Subsidiary; 8 (b) that is not subject to the Collateral Agent's Liens, which are perfected as to such Inventory, or that are subject to any other Lien whatsoever; (c) that does not consist of finished goods or raw materials; (d) that consists of work-in-process, samples, prototypes, supplies, packing and shipping materials, labels or sales aids or inventory capitalization, including freight and insurance costs; (e) that is not in good condition, is unmerchantable, or does not meet all standards imposed by any Governmental Authority, having regulatory authority over such goods, their use or sale; (f) that is not currently either usable or salable, at prices approximating at least cost, in the normal course of the business of the Company and its Subsidiaries, or that is slow moving or stale; (g) that is obsolete, no longer sold in the ordinary course of business or returned or repossessed or used goods taken in trade; (h) that is more than a six (6) month forecasted supply; (i) that is located outside the United States of America; (j) that is located in a public warehouse or in possession of a bailee or in a facility leased by the Company and its Subsidiaries, if the warehouseman, or the bailee, or the lessor has not delivered to the Agent, if requested by the Agent, a subordination agreement in form and substance satisfactory to the Agent or if a reserve for rents or storage charges has not been established for Inventory at that location; (k) that contains or bears any Proprietary Rights licensed to the Company and its Subsidiaries by any Person, if the Agent is not satisfied that the Collateral Agent may sell or otherwise dispose of such Inventory in accordance with the terms of the Security Agreement without infringing the rights of the licensor of such Proprietary Rights or violating any contract with such licensor (and without payment of any royalties other than any royalties due with respect to the sale or disposition of such Inventory pursuant to the existing license agreement), and, as to which the Company and its Subsidiaries have not delivered to the Collateral Agent a consent or sublicense agreement from such licensor in form and substance acceptable to the Agent if requested; (l) that is not reflected in the details of a current perpetual inventory report; (m) that consists of raw materials or work-in-process related to paint manufacturing; or (n) that is Inventory placed on consignment. 9 If any Inventory at any time ceases to be Eligible Inventory, such Inventory shall promptly be excluded from the calculation of Eligible Inventory. Inventory of the Company or any Subsidiary which is at any time Eligible Inventory but which subsequently fails to meet any of the foregoing requirements shall forthwith cease to be Eligible Inventory unless otherwise agreed by the Required Lenders. Eligible Machinery and Equipment means all machinery and equipment of the Company and its Subsidiaries valued at market (based upon appraisals in effect on the date hereof, which appraisals shall be updated in a manner acceptable to the Agent no later than August 31, 2002, and annually thereafter), other than machinery and equipment which the Agent, in its reasonable discretion, determines not to be Eligible Machinery and Equipment. Without limiting the discretion of the Agent to establish other criteria of ineligibility, Eligible Machinery and Equipment shall not include any machinery and equipment: (a) that is not owned by the Company or a Subsidiary, (b) that is not subject to the Collateral Agent's Liens, which are perfected as to such machinery and equipment; or (c) that is not in good condition, is unmerchantable, or does not meet all standards imposed by any Governmental Authority having regulatory authority over such machinery and equipment. Any machinery and equipment of the Company or any Subsidiary which is at any time Eligible Machinery and Equipment but fails to meet any of the foregoing requirements shall cease to be Eligible Machinery and Equipment unless otherwise agreed by the Required Lenders. Eligible Real Estate means all real estate of the Company and its Subsidiaries, valued at market (based upon appraisals in effect on the date hereof, which appraisals shall be updated in a manner acceptable to the Agent no later than August 31, 2002, and annually thereafter), other than real estate which the Agent, in its reasonable discretion, determines not to be Eligible Real Estate, it being understood that the Hagerstown Facility shall not be included in Eligible Real Estate. Without limiting the discretion of the Agent to establish other criteria of ineligibility, Eligible Real Estate shall not include any real estate: (a) that is not owned by the Company or a Subsidiary; (b) that is not subject to the Collateral Agent's Liens, which are perfected as to such real estate; (c) that is located in a flood zone and is not covered by flood insurance coverage reasonably acceptable to the Agent; or 10 (d) that is subject to title defects, restrictions, Environmental Claims or other liabilities unsatisfactory to the Agent in its sole discretion. Any real estate of the Company or any Subsidiary which is at any time Eligible Real Estate but fails to meet any of the foregoing requirements shall cease to be Eligible Real Estate unless otherwise agreed by the Required Lenders. Environmental Claims means all claims, however asserted, by any Governmental Authority or other Person alleging potential liability or responsibility for violation of any Environmental Law, or for release or injury to the environment. Environmental Laws means all federal, state or local laws, statutes, common law duties, rules, regulations, ordinances and codes, together with all administrative orders, directed duties, requests, licenses, authorizations and permits of, and agreements with, any Governmental Authorities, in each case relating to environmental, health, safety and land use matters. ERISA means the Employee Retirement Income Security Act of 1974 and regulations promulgated thereunder. ERISA Affiliate means any trade or business (whether or not incorporated) under common control with the Company within the meaning of Section 414(b) or (c) of the Code (and Sections 414(m) and (o) of the Code for purposes of provisions relating to Section 412 of the Code). ERISA Event means (a) a Reportable Event with respect to a Pension Plan; (b) a withdrawal by the Company or any ERISA Affiliate from a Pension Plan subject to Section 4063 of ERISA during a plan year in which it was a substantial employer (as defined in Section 4001(a)(2) of ERISA) or a substantial cessation of operations which is treated as such a withdrawal; (c) a complete or partial withdrawal by the Company or any ERISA Affiliate from a Multiemployer Plan or notification that a Multiemployer Plan is in reorganization; (d) the filing of a notice of intent to terminate, the treatment of a Pension Plan amendment as a termination under Section 4041 or 4041A of ERISA, or the commencement of proceedings by the PBGC to terminate a Pension Plan or Multiemployer Plan; (e) an event or condition which could reasonably be expected to constitute grounds under Section 4042 of ERISA for the termination of, or the appointment of a trustee to administer, any Pension Plan or Multiemployer Plan; or (f) the imposition of any liability under Title IV of ERISA, other than PBGC premiums due but not delinquent under Section 4007 of ERISA, upon the Company or any ERISA Affiliate. Event of Default - see Section 8.1. Excess Cash Flow means, for any period, 80% of the result of (a) Adjusted Cash Flow for such period, plus (b) any negative Adjusted Working Capital Change for such period, minus (c) any positive Adjusted Working Capital Change for such period. 11 Exchange Act means the Securities Exchange Act of 1934 and regulations promulgated thereunder. Federal Funds Rate means, for any day, the rate set forth in the weekly statistical release designated as H.15(519), or any successor publication, published by the Federal Reserve Bank of New York (including any such successor, "H.15(519)") on the preceding Business Day opposite the caption "Federal Funds (Effective)"; or, if for any relevant day such rate is not so published on any such preceding Business Day, the rate for such day will be the arithmetic mean as determined by the Agent of the rates for the last transaction in overnight Federal funds arranged prior to 9:00 a.m. (New York City time) on that day by each of three leading brokers of Federal funds transactions in New York City selected by the Agent. First Amendment to Security Agreement means a first amendment to security agreement substantially in the form attached as Exhibit D. Fixed Charge Coverage Ratio means, as of the last day of any fiscal quarter, the ratio of (a) the result, for the period of four consecutive fiscal quarters ending on such day, of (i) Consolidated Net Earnings, plus (ii) to the extent deducted in determining such Consolidated Net Earnings, interest expense (including rent expense with respect to Synthetic Leases), taxes, depreciation and amortization, plus (iii) Restructuring Charges taken during such period, minus (iv) gains from Asset Sales realized during such period, to the extent included in determining Consolidated Net Earnings, plus (v) losses from Asset Sales realized during such period, to the extent deducted in determining Consolidated Net Earnings to (b) the sum for such period of (i) scheduled payments of principal with respect to the Shelf Notes and the Senior Notes (each as defined in the Intercreditor Agreement), (ii) interest expense (including rent expense with respect to Synthetic Leases but excluding interest expense with respect to Make-Whole Obligations and new Make-Whole Obligations of principal arising in such period) and (iii) Capital Expenditures; each as determined for the Company and its Subsidiaries on a consolidated basis. The amount in each of clauses (a) and (b) shall be calculated for the period ending (x) March 31, 2002 based upon such period and then multiplied by four, (y) June 30, 2002 based upon the period of two consecutive fiscal quarters ending on such date and then multiplied by two and (z) September 30, 2002 based upon the period of three consecutive fiscal quarters ending on such date and then multiplied by one and one-third. FRB means the Board of Governors of the Federal Reserve System, and any Governmental Authority succeeding to any of its principal functions. Funded Debt means and includes, (i) any obligation payable more than one year from the date of creation thereof which under GAAP is shown on a balance sheet as a 12 liability (including Capitalized Lease Obligations, notes payable to Members and other Subordinated Debt but excluding reserves for deferred income taxes and other reserves to the extent that such reserves do not constitute an obligation); (ii) indebtedness payable more than one year from the date of creation thereof which is secured by any lien on property owned by the Company or any Subsidiary and (iii) Guarantees (excluding Guarantees of loans made to Members in an amount not exceeding in the aggregate $20,000,000). Further Taxes means any and all present or future taxes, levies, assessments, imposts, duties, deductions, fees, withholdings or similar charges (including net income taxes and franchise taxes), and all liabilities with respect thereto, imposed by any jurisdiction on account of amounts payable or paid pursuant to Section 3.1. GAAP means generally accepted accounting principles set forth from time to time in the opinions and pronouncements of the Accounting Principles Board and the American Institute of Certified Public Accountants and statements and pronouncements of the Financial Accounting Standards Board (or agencies with similar functions of comparable stature and authority within the U.S. accounting profession), which are applicable to the circumstances as of the date of determination. Governmental Authority means any nation or government, any state or other political subdivision thereof, any central bank (or similar monetary or regulatory authority) thereof, any entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government, and any corporation or other entity owned or controlled, through stock or capital ownership or otherwise, by any of the foregoing. Guarantee means, with respect to any Person, any direct or indirect liability, contingent or otherwise, of such Person with respect to any indebtedness, lease, dividend or other obligation of another, including, without limitation, any such obligation directly or indirectly guaranteed, endorsed (other than for collection of deposit in the ordinary course of business) or discounted or sold with recourse by such Person, or in respect of which such Person is otherwise directly or indirectly liable, including, without limitation, any such obligation in effect guaranteed by such Person through any agreement (contingent or otherwise) to purchase, repurchase or otherwise acquire such obligation or any security therefor, or to provide funds for the payment or discharge of such obligation (whether in the form of loans, advances, stock purchases, capital contributions or otherwise), or to maintain the solvency or any balance sheet or other financial condition of the obligor of such obligation, or to make payment for any products, materials or supplies or for any transportation or services regardless of the non-delivery or non-furnishing thereof, in any such case if the purpose or intent of such agreement is to provide assurance that such obligation will be paid or discharged, or that any agreements relating thereto will be complied with, or that the holders of such obligation will be protected against loss in respect thereof. The amount of any Guarantee shall be equal to the outstanding principal amount of the obligation guaranteed or such lesser amount to which the maximum exposure of the guarantor shall have been specifically limited. 13 Guarantor means, on any day, each Subsidiary that has executed a counterpart of the Guaranty on or prior to that day (or is required to execute a counterpart of the Guaranty on that day). Guaranty means the Guaranty dated April 14, 2000 executed by various Subsidiaries. Hagerstown Facility means the distribution center located at 16500 Hunters Green Parkway, Hagerstown, Maryland. Hardship Case Payment means the payment to any stockholder that has notified the Company of his termination and requested an accelerated redemption payment of any portion of his stock and/or Subordinated Debt investment pursuant to a hardship case request authorized in the by-laws of the Company. Such redemption payment must be administered by a Responsible Officer and made according to the Company's hardship case guidelines. Inactive Subsidiary means any Subsidiary which does not actively conduct business and which has less than $100,000 of assets. Indebtedness means, with respect to any Person, without duplication, (i) all items (excluding items of contingency reserves or of reserves for deferred income taxes) which in accordance with GAAP would be included in determining total liabilities as shown on the liability side of a balance sheet of such Person as of the date on which Indebtedness is to be determined, (ii) all indebtedness secured by any Lien on any property or asset owned or held by such Person subject thereto, whether or not the indebtedness secured thereby shall have been assumed, (iii) all indebtedness of others with respect to which such Person has become liable by way of Guarantee and (iv) obligations of such Person with respect to Synthetic Leases. Indemnified Liabilities - see Section 10.5. Indemnified Person - see Section 10.5. Independent Auditor - see subsection 6.1(a). Insolvency Proceeding means, with respect to any Person, (a) any case, action or proceeding with respect to such Person before any court or other Governmental Authority relating to bankruptcy, reorganization, insolvency, liquidation, receivership, dissolution, winding-up or relief of debtors, or (b) any general assignment for the benefit of creditors, composition, marshalling of assets for creditors, or other, similar arrangement in respect of its creditors generally or any substantial portion of its creditors undertaken under U.S. Federal, state or foreign law, including the Bankruptcy Code. Intercreditor Agreement means the First Amended and Restated Intercreditor Agreement dated as of April 11, 2002, among the Agent, the Collateral Agent and various other parties, substantially in the form of Exhibit N. 14 Interest Coverage Ratio means, as of the last day of any fiscal quarter, the ratio of (a) the sum, for the period of four consecutive fiscal quarters ending on such day, of (i) Consolidated Net Earnings plus (ii) to the extent deducted in determining such Consolidated Net Earnings, interest expense (including rent expense with respect to Synthetic Leases), taxes, depreciation and amortization, plus (iii) Restructuring Charges less (iv) gains from Asset Sales, to the extent included in determining Consolidated Net Earnings plus (v) losses from Asset Sales, to the extent deducted in determining Consolidated Net Earnings to (b) interest expense for such period (including rent expense with respect to Synthetic Leases but excluding interest expense with respect to Make-Whole Obligations and new Make-Whole Obligations of principal arising in such period); each as determined for the Company and its Subsidiaries on a consolidated basis. Notwithstanding the foregoing, the amount in each of clauses (a) and (b) shall be calculated for the period ending (x) March 31, 2002 based upon such period and then multiplied by four, (y) June 30, 2002 based upon the period of two consecutive fiscal quarters ending on such date and then multiplied by two and (z) September 30, 2002 based upon the period of three consecutive fiscal quarters ending on such date and then multiplied by one and one-third. Interest Payment Date means the last day of each calendar quarter. Inventory has the meaning given to it in the UCC. Investments means any loan or advance to, or ownership, purchase or acquisition of any security (including stock) or obligations of, or any other interest in, or any capital contribution made to, any Person. IRS means the Internal Revenue Service, and any Governmental Authority succeeding to any of its principal functions under the Code. Lender - see the Preamble. Lending Office means, as to any Lender, the office or offices of such Lender specified as its "Lending Office", on Schedule 10.2, or such other office as such Lender may from time to time notify the Company and the Agent. Lien means any mortgage, pledge, security interest, encumbrance, lien (statutory or otherwise) or charge of any kind (including any agreement to give any of the foregoing, any conditional sale or other title retention agreement, any lease in the nature thereof, and the filing of or agreement to give any financing statement under the Uniform Commercial Code of any jurisdiction) or any other type of preferential arrangement for the purpose, or having the effect, of protecting a creditor against loss or securing the payment or performance of an obligation. Loan means an extension of credit by a Lender to the Company under Article II and shall include Committed Loans and Swing Line Loans. Loan Documents means this Agreement, any Note, the Guaranty, the Collateral Documents, the Agent's Fee Letter, the Intercreditor Agreement, the Consent and all 15 other documents delivered to the Collateral Agent, the Agent or any Lender in connection herewith. Lumber Note means the $19,500,000 promissory note of Builder Marts of America, Inc. payable to the Company. Lumber Note Notice means a notice in the form attached as Exhibit P. Make-Whole Obligations has the meaning set forth in the Intercreditor Agreement. Margin Stock means "margin stock" as such term is defined in Regulation T, U or X of the FRB. Material Adverse Effect means (a) a material adverse change in, or a material adverse effect upon, the operations, business, properties, condition (financial or otherwise) or prospects of the Company or the Company and its Subsidiaries taken as a whole; (b) a material impairment of the ability of the Company or any Subsidiary to perform its obligations under any Loan Document; or (c) a material adverse effect upon the legality, validity, binding effect or enforceability against the Company or any Subsidiary of any Loan Document. Member means any Person which is a stockholder of the Company or has applied for stock ownership of the Company. Minimum Tranche means, in respect of Committed Loans, comprising part of the same Borrowing, $1,000,000 or a higher integral multiple thereof. Mortgage means a mortgage, deed of trust, leasehold mortgage or similar instrument granting the Collateral Agent a Lien on real property owned or leased by the Company or any Subsidiary. Multiemployer Plan means any Plan which is a "multiemployer plan" (as such term is defined in section 4001(a)(3) of ERISA). Net Debt Proceeds means, as to any issuance of Indebtedness for borrowed money (other than any such Indebtedness incurred to refinance existing Indebtedness, provided that the principal amount of such existing Indebtedness is not increased) by any Person, cash proceeds received by such Person in connection therewith, net of reasonable out-of-pocket costs and expenses paid or incurred in connection therewith in favor of any Person not an Affiliate of such Person, such costs and expenses not to exceed 5% of the gross proceeds of such issuance. Net Disposition Proceeds means, as to any Asset Sale, proceeds in cash, checks or other cash equivalent financial instruments as and when received by such Person, net of: (a) the direct costs relating to such disposition, excluding amounts payable to such Person or any Affiliate of such Person, (b) an estimate of cash taxes paid or payable by such Person within nine months of the disposition as a direct result of such Asset Sale and (c) 16 amounts required to be applied to repay principal, interest and prepayment premiums and penalties on purchase money liens on the asset which is the subject of such Asset Sale. Net Disposition Proceeds shall include any insurance proceeds received upon the loss of, damage to, or destruction of property, except to the extent such insurance proceeds are applied to replace, repair, restore or rebuild such property in accordance with Section 6.16(ii). Note means a Series A Note or a Series B Note, as the context requires. Notice of Borrowing means a notice in substantially the form of Exhibit A. Obligations means all advances, debts, liabilities, obligations, covenants and duties arising under any Loan Document owing by the Company to any Lender, the Agent or any Indemnified Person, whether direct or indirect (including those acquired by assignment), absolute or contingent, due or to become due, or now existing or hereafter arising. Organizational Documents means, for any corporation, the certificate or articles of incorporation, the bylaws, any certificate of determination or instrument relating to the rights of preferred shareholders of such corporation, any shareholder rights agreement, and all applicable resolutions of the board of directors (or any committee thereof) of such corporation. Original Agreement - see the Recitals. Other Taxes means any present or future stamp, court or documentary taxes or any other excise or property taxes, charges or similar levies which arise from any payment made hereunder or from the execution, delivery, performance, enforcement or registration of, or otherwise with respect to, this Agreement or any other Loan Document. Overadvance Amount means the following amount during the following periods:
Month Maximum Overadvance March 2002 $ 64,412,000 April 2002 $ 50,442,000 May 2002 $ 0 June 2002 $ 28,975,000 July 2002 $ 40,204,000 August 2002 $ 55,923,000 September 2002 $ 63,963,000 October 2002 $ 52,486,000 November 2002 $ 28,960,000 December 2002 $ 39,661,000 January 2003 $ 100,723,000
17 February 2003 $ 88,416,000 March 2003 $ 69,011,000 April 2003 $ 42,056,000 May 2003 $ 0 June 2003 $ 0 July 2003 $ 0 August 2003 $ 5,795,000 September 2003 $ 20,392,000 October 2003 $ 7,782,000 November 2003 $ 0 December 2003 $ 0 January 2004 $ 24,316,000 February 2004 $ 13,809,000 March 2004 $ 0 April 2004 $ 0 May 2004 $ 0 June 2004 $ 539,000
Paint Business means the manufacturing portion of the business classified as the "Paint Segment" in the Company's form 10-K for the fiscal year ended December 31, 2000. Participant - see subsection 10.8(c). PBGC means the Pension Benefit Guaranty Corporation, or any Governmental Authority succeeding to any of its principal functions under ERISA. Pension Plan means a pension plan (as defined in Section 3(2) of ERISA) subject to Title IV of ERISA with respect to which the Company or any ERISA Affiliate may have any liability. Person means an individual, partnership, corporation, limited liability company, business trust, joint stock company, trust, unincorporated association, joint venture or Governmental Authority. Plan means any employee pension benefit plan (as such term is defined in section 3 of ERISA) which is or has been established or maintained, or to which contributions are or have been made, by the Company or any ERISA Affiliate. Pledge Agreement means the Pledge Agreement among the Company, various Subsidiaries of the Company and the Collateral Agent, dated April 14, 2000. 18 Pro Rata Share means, as to any Lender at any time, the percentage equivalent (expressed as a decimal, rounded to the ninth decimal place) at such time of such Lender's Commitment divided by the combined Commitments of all Lenders (or, after the Commitments have terminated, of (i) the amount of such Lender's Loans plus (without duplication) the participation of such Lender in (or, in the case of the Swing Line Lender, its unparticipated portion of) all Swing Line Loans divided by (ii) the amount of all outstanding Loans). Proprietary Rights means all of the Company's and its Subsidiaries' now owned and hereafter arising or acquired: licenses, franchises, permits, patents, patent rights, copyrights, works which are the subject matter of copyrights, trademarks, service marks, trade names, trade styles, patent, trademark and service mark applications, and all licenses and rights related to any of the foregoing, including those patents, trademarks, service marks, trade names and copyrights set forth on Schedule 1.1(b) hereto, and all other rights under any of the foregoing, all extensions, renewals, reissues, divisions, continuations, and continuations-in-part of any of the foregoing, and all rights to sue for past, present and future infringement of any of the foregoing. Replacement Lender - see Section 3.4. Reportable Event means, any of the events set forth in Section 4043(b) of ERISA or the regulations thereunder, other than any such event for which the 30-day notice requirement under ERISA has been waived by the PBGC. Required Lenders means Lenders having Pro Rata Shares of 66-2/3% or more. Requirement of Law means, as to any Person, any law (statutory or common), treaty, rule or regulation or determination of an arbitrator or of a Governmental Authority, in each case applicable to or binding upon the Person or any of its property or to which the Person or any of its property is subject. Reserves means the sum of (a) 100% of the positive result of (i) the total Accounts Receivable set forth in the most recent month-end Accounts Receivable aging report delivered to the Agent minus (ii) the related general ledger Accounts Receivable balance for such month-end plus (b) such other reserves that limit the availability of credit hereunder, consisting of reserves against such availability, Eligible Accounts Receivable or Eligible Inventory, established by the Agent from time to time in the Agent's reasonable credit judgment. Responsible Officer means the chief executive officer, chief operating officer, chief financial officer, treasurer or chief accounting officer of the Company, general counsel of the Company or any other officer of the Company involved principally in its financial administration or its controllership function. Restricted Investments shall mean any Investment prohibited by Section 7.11. Restricted Payment - see Section 7.12. 19 Restructuring Charges means any charges recorded under "Emerging Issues Task Force 94-3: Liability Recognition for Certain Employee Benefits and Other Costs to Exit an Activity (including certain costs incurred in a Restructuring)" issued by the American Institute of Certified Public Accounts; provided that any such charges in excess of $2,000,000 in the aggregate after the date hereof may not be taken by the Company or its Subsidiaries for purposes of covenant calculations and related definitions without the prior written consent of the Required Lenders. Such charges include, but are not limited to, costs related to employee benefits, such as severance and termination benefits, costs associated with the elimination and reduction of product lines, costs to consolidate or relocate facilities, costs for new systems development or acquisition, costs to retrain employees to use newly-deployed systems, costs incurred to reduce excess inventory (defined to be inventory on hand in excess of 180 days' worth of supply), costs incurred to dispose of any remaining inventory on hand at the time of closure of a facility, and losses and asset impairments and disposals of assets. Same Day Funds means immediately available funds. SEC means the Securities and Exchange Commission or any Governmental Authority succeeding to any of its principal functions. Security Agreement means the Security Agreement among the Company, various Subsidiaries and the Collateral Agent dated April 14, 2000. Senior Funded Debt means Funded Debt of the Company which is not Subordinated Debt. Series A Note means a promissory note executed by the Company in favor of a Lender pursuant to subsection 2.2, in substantially the form of Exhibit H-1. Series B Note means a promissory note executed by the Company in favor of a Lender pursuant to subsection 2.2, in substantially the form of Exhibit H-2. Short Term Debt means, as of any date of determination with respect to any Person, (i) all Indebtedness of such Person for borrowed money other than Funded Debt of such Person and (ii) Guarantees by such Person of Short Term Debt of Persons other than Members. Specified Facilities - see Section 7.2(l). Subordinated Debt shall mean any Indebtedness of the Company which contains terms of subordination identical to or, in the reasonable determination of the Agent no less favorable to the Lenders than, the terms of subordination set forth in Exhibit I hereto and, which by virtue of such language and any necessary action of the Board of Directors of the Company, is subordinated to the Obligations. Subsidiary means any corporation all of the stock of every class of which, except directors' qualifying shares, shall, at the time as of which any determination is being made, be owned by the Company either directly or through Subsidiaries. 20 Substantial Stockholder means (i) any Person owning, beneficially or of record, directly or indirectly, either individually or together with all other Persons to whom such Person is related by blood, adoption or marriage, stock of the Company (of any class having ordinary voting power for the election of directors) aggregating five percent (5%) or more of such voting power or (ii) any Person related by blood, adoption or marriage to any Person described or coming within the provisions of clause (i) of this definition. Swing Line Lender means BofA in its capacity as swing line lender hereunder, together with any successor thereto in such capacity. Swing Line Loan - see Section 2.13. Synthetic Lease means (a) a so-called synthetic, off-balance sheet or tax retention lease, or (b) an agreement for the use or possession of property creating obligations that do not appear on the balance sheet of such Person but which, upon the insolvency or bankruptcy of such Person, would be characterized as the indebtedness of such Person (without regard to accounting treatment). Taxes means any and all present or future taxes, levies, assessments, imposts, duties, deductions, charges or withholdings, fees, withholdings or similar charges, and all liabilities with respect thereto, excluding, in the case of each Lender and the Agent, such taxes (including income taxes or franchise taxes) as are taxes imposed on or measured by its net income by the jurisdiction (or any political subdivision thereof) under the laws of which such Lender or the Agent, as the case may be, is organized or maintains a lending office. Termination Date means the earlier to occur of: (a) June 30, 2004 (the "Scheduled Termination Date"); and (b) the date on which the Commitments terminate in accordance with the provisions of this Agreement; provided, that the Scheduled Termination Date shall be June 30, 2003, unless on June 30, 2003 (i) the sum of the Commitments (less $30,000,000) plus the result of (w) the aggregate outstanding principal amount of the Shelf Notes (as defined in the Intercreditor Agreement) plus (x) the aggregate outstanding principal amount of the Senior Notes (as defined in the Intercreditor Agreement) plus (y) the Synthetic Maximum Shortfall (as such term is defined in the Intercreditor Agreement) minus (z) the aggregate amount of Make-Whole Obligations is less than $320,000,000 and (ii) the result of (x) the aggregate outstanding principal amount of the Shelf Notes, the Senior Notes and the Loans plus (y) the Synthetic Maximum Shortfall minus (z) the aggregate amount of Make-Whole Obligations is less than $270,000,000. TIP Notes means the registered subordinated debt securities, as amended from time to time, issued under the Company's investment program and designated "Variable Denomination Redeemable Subordinated Fixed Rate Term Notes." 21 Total Outstandings means at any time the principal amount of all outstanding Loans (whether Committed Loans or Swing Line Loans). Trademark Security Agreement means the Trademark Security Agreement between the Company and the Collateral Agent dated as of April 14, 2000. UCC means the Uniform Commercial Code as in effect from time to time in the State of Illinois. Unfunded Pension Liability means the excess of a Pension Plan's benefit liabilities under Section 4001(a)(16) of ERISA, over the current value of that Plan's assets, determined in accordance with the assumptions used for funding the Pension Plan pursuant to Section 412 of the Code for the applicable plan year. United States and U.S. each means the United States of America. Unmatured Event of Default means any event or circumstance which, with the giving of notice, the lapse of time, or both, would (if not cured or otherwise remedied during such time) constitute an Event of Default. Unusable Amount means the following amounts during the following periods:
Period Minimum Unusable Commitment 3/1/31-3/31/02 $ 10,000,000 4/1/02-6/29/02 $ 0 6/30/02-7/31/02 $ 60,000,000 8/1/02-8/31/02 $ 50,000,000 9/1/02-9/30/02 $ 40,000,000 10/1/02-10/31/02 $ 30,000,000 11/1/02-12/30/02 $ 20,000,000 12/31/02 $ 70,000,000 1/1/03-6/29/03 $ 0 6/30/03 $ 30,000,000 7/1/03-7/31/03 $ 20,000,000 8/1/03-8/31/03 $ 20,000,000 9/1/03-9/30/03 $ 10,000,000 10/1/03-11/29/03 $ 0 11/30/03-12/30/03 $ 20,000,000 12/31/03 $ 60,000,000 1/1/04-6/30/04 $ 0
Unused Commitment Share means, for any Lender at any time, a fraction (a) the numerator of which is the remainder of (i) the Commitment of such Lender minus (ii) the 22 aggregate principal amount of all then outstanding Loans of such Lender (excluding, in the case of the Swing Line Lender, all Swing Line Loans) and (b) the denominator of which is the remainder of (i) the aggregate Commitments of all Lenders, minus (ii) the principal amount of all then outstanding Loans of all Lenders. Solely for purposes of the foregoing, (i) Loans to be repaid with the proceeds of Loans proposed to be made shall be deemed not to be outstanding; and (ii) funded participations in Swing Line Loans pursuant to Section 2.16 shall be deemed to constitute Loans (but unfunded participations of the types described above shall not constitute Loans). 1.2 Other Interpretive Provisions. (a) The meanings of defined terms are equally applicable to the singular and plural forms of the defined terms. (b) The words "hereof", "herein", "hereunder" and similar words refer to this Agreement as a whole and not to any particular provision of this Agreement; and subsection, Section, Schedule and Exhibit references are to this Agreement unless otherwise specified. (c) The term "documents" includes any and all instruments, documents, agreements, certificates, indentures, notices and other writings, however evidenced. (i) The term "including" is not limiting and means "including without limitation." (ii) In the computation of periods of time from a specified date to a later specified date, the word "from" means "from and including"; the words "to" and "until" each mean "to but excluding", and the word "through" means "to and including." (d) Unless otherwise expressly provided herein, (i) references to agreements (including this Agreement) and other contractual instruments shall be deemed to include all subsequent amendments and other modifications thereto, but only to the extent such amendments and other modifications are not prohibited by the terms of any Loan Document, and (ii) references to any statute or regulation are to be construed as including all statutory and regulatory provisions consolidating, amending, replacing, supplementing or interpreting the statute or regulation. (e) The captions and headings of this Agreement are for convenience of reference only and shall not affect the interpretation of this Agreement. (f) This Agreement and other Loan Documents may use several different limitations, tests or measurements to regulate the same or similar matters. All such limitations, tests and measurements are cumulative and shall each be performed in accordance with their terms. Unless otherwise expressly provided herein, any reference to any action of the Agent, the Lenders or the Required Lenders by way of consent, approval or waiver shall be deemed modified by the phrase "in its/their sole discretion." (g) This Agreement and the other Loan Documents are the result of negotiations among and have been reviewed by counsel to the Agent, the Company and the other 23 parties, and are the products of all parties. Accordingly, they shall not be construed against the Lenders or the Agent merely because of the Agent's or Lenders' involvement in their preparation. 1.3 Accounting Principles. (a) Unless the context otherwise clearly requires, all accounting terms not expressly defined herein shall be construed, and all financial computations required under this Agreement shall be made, in accordance with GAAP, consistently applied; provided that if the Company notifies the Agent that the Company wishes to amend any covenant in Article VII to eliminate the effect of any change in GAAP on the operation of such covenant (or if the Agent notifies the Company that the Required Lenders wish to amend Article VII for such purpose), then the Company's compliance with such covenant shall be determined on the basis of GAAP in effect immediately before the relevant change in GAAP became effective, until either such notice is withdrawn or such covenant is amended in a manner satisfactory to the Company and the Required Lenders. (b) References herein to "fiscal year", "fiscal quarter" and "fiscal month" refer to such fiscal periods of the Company. ARTICLE II THE CREDITS 2.1 Amounts and Terms of Commitments. Each Lender severally agrees, on the terms and conditions set forth herein, to make Committed Loans to the Company from time to time on any Business Day during the period from the Closing Date to the Termination Date, in an aggregate amount not to exceed at any time outstanding the amount set forth on Schedule 2.1 (such amount, as the same may be reduced under Section 2.4 or as a result of one or more assignments under Section 10.8, such Lender's "Commitment"); provided, however, that the Total Outstandings shall not at any time exceed the lesser of (i) combined Commitments minus the Unusable Amount or (ii) the Borrowing Base; and provided, further, that the aggregate principal amount of all outstanding Loans of any Lender plus such Lender's participation interest in all Swing Line Loans shall not at any time exceed the lesser of (i) such Lender's Commitment minus its Pro Rata Share of the Unusable Amount or (ii) such Lender's Pro Rata Share of the Borrowing Base. Within the foregoing limits, and subject to the other terms and conditions hereof, the Company may borrow under this Section 2.1, prepay under Section 2.5 and reborrow under this Section 2.1. All Loans and payments with respect thereto shall be in Dollars. 2.2 Notes. The Committed Loans made by each Lender shall be evidenced by two Notes payable to such Lender. One such Note (the "Series A Note") shall be in the amount of such Lender's Pro Rata Share of $169,130,000 and the second such Note (the "Series B Note") shall be in Lender's Pro Rata Share of $30,870,000. All Loans shall be made first under the Series B Note until the full amount thereof is outstanding. All payments shall be applied to the Series A Note until it is paid in full. Each such Lender shall endorse on the schedules annexed to its Notes the date, amount and maturity of each Committed Loan made by it and the amount of each payment of principal made by the Company with respect thereto. Each such Lender is 24 irrevocably authorized by the Company to endorse its Notes and each Lender's record shall be rebuttably presumptive evidence; provided, however, that the failure of a Lender to make, or an error in making, a notation thereon with respect to any Loan shall not limit or otherwise affect the obligations of the Company hereunder or under any such Note to such Lender. 2.3 Procedure for Borrowing. (a) Each Borrowing shall be made upon the Company's irrevocable written notice delivered to the Agent in the form of a Notice of Borrowing, which notice must be received by the Agent prior to 11:00 a.m. (Chicago time) on the requested Borrowing Date, specifying: (i) the amount of the Borrowing, which shall be in an aggregate amount not less than the Minimum Tranche; (ii) the requested Borrowing Date, which shall be a Business Day; and (iii) the Borrowing Base determined as of the latest of (x) the Friday immediately preceding the date of such Notice of Borrowing for which a Borrowing Base Certificate has been (or was required to be) delivered, (y) the date of the most recent Borrowing Base Certificate delivered to the Agent or (z) such later date selected by the Agent. (b) The Agent will promptly notify each Lender of its receipt of any Notice of Borrowing and of the amount of such Lender's Unused Commitment Share of such Borrowing. (c) Each Lender will make the amount of its Unused Commitment Share of each Borrowing available to the Agent for the account of the Company at the Agent's Payment Office on the Borrowing Date requested by the Company in Same Day Funds by noon (Chicago time). The proceeds of all such Committed Loans will then be made available to the Company by the Agent at such office by crediting the account of the Company on the books of BofA with the aggregate of the amounts made available to the Agent by the Lenders and in like funds as received by the Agent. 2.4 Termination or Reduction of Commitments. 2.4.1 Voluntary Termination or Reduction of Commitments. The Company may, upon not less than five Business Days' prior notice to the Agent, terminate the Commitments, or permanently reduce the Commitments by an aggregate amount of $5,000,000 or a higher integral multiple of $1,000,000; unless, after giving effect thereto and to any payments or prepayments of Loans made on the effective date thereof, the aggregate principal of all Loans would exceed the amount of the combined Commitments minus the Unusable Amount then in effect. 2.4.2 Mandatory Reductions of Commitments. Upon any required prepayment under Section 2.5.2(b), (c) or (d), the Commitments shall be reduced by the amount of the required prepayment, even if such reduction is in excess of the outstanding amount of the Loans prior to such required prepayment. 2.4.3 All Reductions of Commitments. Once reduced in accordance with this Section 2.4, the Commitments may not be increased. Any reduction of the Commitments shall be 25 applied to each Lender according to its Pro Rata Share. All accrued commitment fees to, but not including, the effective date of any reduction or termination of Commitments, shall be paid on the effective date of such reduction or termination. 2.5 Prepayments. 2.5.1 Optional Prepayments. The Company may, from time to time, upon irrevocable notice to the Agent not later than 11:00 a.m. (Chicago time) on any Business Day, ratably prepay Committed Loans in whole or in part, in minimum amounts of not less than the Minimum Tranche, except that any prepayment pursuant to Section 4 of the Security Agreement shall not be required to be in the amount of the Minimum Tranche or greater. The Company shall deliver a notice of prepayment in accordance with Section 10.2 to be received by the Agent not later than 10:00 a.m. (Chicago time) on the prepayment date. Such notice of prepayment shall specify the date and amount of such prepayment. Such notice shall not thereafter be revocable by the Company. The Agent will promptly notify each Lender of its receipt of any such notice, and of such Lender's share of such prepayment (ratably in accordance with each Lender's aggregate principal amount of Committed Loans outstanding). If such notice is given by the Company, the Company shall make such prepayment and the payment amount specified in such notice shall be due and payable on the date specified therein. 2.5.2 Mandatory Prepayments. (a) If on any date the Total Outstandings exceed the aggregate amount of the Commitments minus the Unusable Amount, the Company shall immediately prepay Loans in an amount equal to such excess. (b) Upon receipt of Net Disposition Proceeds or Net Debt Proceeds, the Company shall prepay the Loans by an amount equal to the amount payable to the Lenders under the Intercreditor Agreement. (c) Within 90 days after each fiscal year (beginning with the fiscal year ending on or about December 31, 2002), the Company shall prepay the Loans by an amount equal to the portion of Excess Cash Flow payable to the Lenders under the Intercreditor Agreement. (d) Within one Business Day after receipt, the Company shall prepay the Loans by an amount equal to the portion of proceeds of the Lumber Note payable to the Lenders under the Intercreditor Agreement. The Company agrees that at any time the Agent may give notice, pursuant to the Lumber Note Notice, to the payor on the Lumber Note to make payments directly to the Collateral Agent. (e) The Company shall immediately prepay the Loans by an amount equal to the excess of the principal amount of the outstanding Loans over the Borrowing Base. 2.6 Repayment. The Company shall repay all Loans on the Termination Date. 2.7 Interest. (a) Beginning February 28, 2002, each Loan shall bear interest on the outstanding principal amount thereof from the applicable Borrowing Date at a rate per annum equal to the sum of the Base Rate as in effect from time to time plus 3.25%. 26 (b) Interest on each Loan shall be paid in arrears on each Interest Payment Date. During the existence of any Event of Default, interest shall be paid on demand of the Agent at the request or with the consent of the Required Lenders. (c) Notwithstanding subsection (a) of this Section, while any Event of Default exists, the Company shall pay interest (after as well as before entry of judgment thereon to the extent permitted by law) on the principal amount of all outstanding Loans and, to the extent permitted by applicable law, on any other amount payable hereunder or under any other Loan Document, at a rate per annum equal to the Base Rate plus 6.25%. All such interest shall be payable on demand. (d) Anything herein to the contrary notwithstanding, the obligations of the Company to any Lender hereunder shall be subject to the limitation that payments of interest shall not be required for any period for which interest is computed hereunder, to the extent (but only to the extent) that contracting for or receiving such payment by such Lender would be contrary to the provisions of any law applicable to such Lender limiting the highest rate of interest that may be lawfully contracted for, charged or received by such Lender, and in such event the Company shall pay such Lender interest at the highest rate permitted by applicable law. 2.8 Fees. (a) Certain Fees. The Company shall pay certain fees to the Agent and the Arranger for their own respective accounts at the times and in the amounts required by the letter agreement (the "Agent's Fee Letter") among the Company, the Agent and the Arranger dated January 4, 2002. (b) Commitment Fees. The Company shall pay to the Agent for the account of each Lender a commitment fee in such Lender's Pro Rata Share of the unused amount of the combined Commitments, as calculated by the Agent on a quarterly basis in arrears on each Interest Payment Date and on the Termination Date, at 0.75% per annum. Such commitment fees shall accrue from the Effective Date to the Termination Date and shall be due and payable quarterly in arrears on the last Business Day of each calendar quarter and on the Termination Date. The commitment fees shall accrue at all times after February 28, 2002, including at any time during which one or more conditions in Article IV are not met. For purposes of calculating commitment fees, Swing Line Loans shall not be deemed to constitute usage of the Commitments. (c) Supplemental Funding Fees. The Company shall pay to the Agent for the account of each Lender a quarterly supplemental funding fee equal to 0.4375% of the daily average of the unpaid principal amount of such Lender's Loans for each quarter. Such supplemental funding fees shall accrue from February 28, 2002 to the Termination Date and shall be due and payable quarterly in arrears on each Interest Payment Date; provided that the first such supplemental funding fee shall accrue from February 28, 2002 through the Closing Date and shall be payable on the Closing Date. (d) Annual Fee. On each anniversary of the date of this Agreement until the Obligations shall have been paid in full and the Agreement terminated, the Company shall pay 27 each Lender a fee of 0.50% of such Lender's Commitment on such date; provided that if the Scheduled Termination Date is less than 12 months after any such anniversary date, such annual fee shall be prorated for the period from such anniversary date through the Scheduled Termination Date. 2.9 Computation of Fees and Interest. (a) All computations of interest when the Base Rate is determined by BofA's "prime rate" shall be made on the basis of a year of 365 or 366 days, as the case may be, and actual days elapsed. All other computations of interest and fees shall be made on the basis of a 360-day year and actual days elapsed. Interest and fees shall accrue during each period during which such interest or such fees are computed from the first day thereof to the last day thereof. (b) Each determination of an interest rate by the Agent shall be conclusive and binding on the Company and the Lenders in the absence of manifest error. The Agent will, at the request of the Company or any Lender, deliver to the Company or such Lender, as the case may be, a statement showing the quotations used by the Agent in determining any interest rate. 2.10 Payments by the Company. (a) All payments to be made by the Company shall be made without set-off, recoupment or counterclaim. Except as otherwise expressly provided herein, all payments by the Company shall be made to the Agent for the account of the Lenders at the Agent's Payment Office or the Collateral Agent pursuant to the Intercreditor Agreement, if applicable, and shall be made in Dollars. Such payments shall be made in Same Day Funds and no later than 11:00 a.m. (Chicago time) on the date specified herein. The Agent will promptly (a) distribute to each Lender its Pro Rata Share (or other applicable share as expressly provided herein) of any payment received by the Agent in like funds as received or (b) make such payment to the Collateral Agent to the extent such payment is required to be paid to the Collateral Agent pursuant to the Intercreditor Agreement. Any payment received by the Agent later than the time specified above shall be deemed to have been received on the following Business Day and any applicable interest or fee shall continue to accrue. (b) Whenever any payment is due on a day other than a Business Day, such payment shall be made on the following Business Day, and such extension of time shall in such case be included in the computation of interest or fees, as the case may be. (c) Unless the Agent receives notice from the Company prior to the date on which any payment is due to the Lenders that the Company will not make such payment in full as and when required, the Agent may assume that the Company has made such payment in full to the Agent on such date in Same Day Funds and the Agent may (but shall not be so required), in reliance upon such assumption, distribute to each Lender on such due date an amount equal to the amount then due such Lender. If and to the extent the Company has not made such payment in full to the Agent, each Lender shall repay to the Agent on demand such amount distributed to such Lender, together with interest thereon at the Federal Funds Rate for each day from the date such amount is distributed to such Lender until the date repaid. 2.11 Payments by the Lenders to the Agent. (a) Unless the Agent receives notice from a Lender on or prior to the Closing Date or, with respect to any Borrowing after the Closing Date, at least one Business Day prior to the date of a Borrowing that such Lender will not make 28 available as and when required hereunder to the Agent for the account of the Company the amount of such Lender's Pro Rata Share of such Borrowing, the Agent may assume that such Lender has made such amount available to the Agent in Same Day Funds on the Borrowing Date and the Agent may (but shall not be so required), in reliance upon such assumption, make available to the Company on such date a corresponding amount. If and to the extent any Lender shall not have made its full amount available to the Agent in Same Day Funds and the Agent in such circumstances has made available to the Company such amount, such Lender shall on the Business Day following such Borrowing Date make such amount available to the Agent, together with interest at the Federal Funds Rate. A notice of the Agent submitted to any Lender with respect to amounts owing under this subsection (a) shall be conclusive, absent manifest error. If such amount is so made available, such payment to the Agent shall constitute such Lender's Committed Loan on the date of Borrowing for all purposes of this Agreement. If such amount is not made available to the Agent on the Business Day following the Borrowing Date, the Agent will notify the Company of such failure to fund and, upon demand by the Agent, the Company shall pay such amount to the Agent for the Agent's account, together with interest thereon for each day elapsed since the date of such Borrowing, at a rate per annum equal to the interest rate applicable at the time to the Committed Loans comprising such Borrowing. (b) The failure of any Lender to make any Loan on any Borrowing Date shall not relieve any other Lender of any obligation hereunder to make a Loan on such Borrowing Date, but no Lender shall be responsible for the failure of any other Lender to make the Loan to be made by such other Lender on any Borrowing Date. 2.12 Sharing of Payments, Etc. (a) Whenever any payment received by the Agent to be distributed to the Lenders is insufficient to pay in full the amounts then due and payable to the Lenders, such payment shall be distributed to the Lenders (and for purposes of this Agreement shall be deemed to have been applied by the Lenders, notwithstanding the fact that any Lender may have made a different application in its books and records) in the following order: first, to the payment of the principal amount of the Loans which is then due and payable, ratably among the Lenders (including the Swing Line Lender) in accordance with the aggregate amount of such Obligations owed to each Lender; second, to the payment of interest then due and payable on the Loans ratably among the Lenders (including the Swing Line Lender) in accordance with the aggregate amount of interest owed to each Lender; third, to the payment of the fees payable under subsection 2.8, ratably among the Lenders in accordance with their respective Pro Rata Shares; and fourth, to the payment of any other amount payable under this Agreement, ratably among the Lenders in accordance with the aggregate amount owed to each Lender. (b) If, other than as expressly provided elsewhere herein, any Lender shall obtain any payment or other recovery (whether voluntary, involuntary, through the exercise of any right of set-off, or otherwise) on account of principal of or interest on any Loan or any other amount payable hereunder, in excess of the share of payments and other recoveries such Lender would have received if such payment or other recovery had been distributed pursuant to the provisions of subsection 2.12(a), such Lender shall immediately (i) notify the Agent of such fact and (ii) purchase from the other Lenders such participations in the Loans made by (or other Obligations owed to) them as shall be necessary to cause such purchasing Lender to share the excess payment or other recovery pro rata with each of them in accordance with the order of payments set forth in subsection 2.12(a); provided that if all or any portion of such excess 29 payment or other recovery is thereafter recovered from the purchasing Lender, such purchase shall to that extent be rescinded and each other Lender shall repay to the purchasing Lender the purchase price paid therefor, together with an amount equal to such paying Lender's ratable share (according to the proportion of (A) the amount of such paying Lender's required repayment to (B) the total amount so recovered from the purchasing Lender) of any interest or other amount paid or payable by the purchasing Lender in respect of the total amount so recovered. The Company agrees that any Lender so purchasing a participation from another Lender may, to the fullest extent permitted by law, exercise all its rights of payment (including the right of set-off, but subject to Section 10.10) with respect to such participation as fully as if such Lender were the direct creditor of the Company in the amount of such participation. The Agent will keep records (which shall be conclusive and binding in the absence of manifest error) of participations purchased under this Section and will in each case notify the Lenders following any such purchases or repayments. 2.13 Swing Line Commitment. Subject to the terms and conditions of this Agreement, the Swing Line Lender agrees to make loans to the Company on a revolving basis (each such loan, a "Swing Line Loan") from time to time on any Business Day during the period from the Closing Date to the Termination Date in an aggregate principal amount at any one time outstanding not to exceed $30,000,000; provided, however, that, after giving effect to any proposed Swing Line Loan, the Total Outstandings shall not exceed the lesser of (i) the combined Commitments minus the Unusable Amount and (ii) the Borrowing Base. 2.14 Borrowing Procedures for Swing Line Loans. The Company shall provide a Notice of Borrowing or telephonic notice (followed by a confirming Notice of Borrowing) to the Agent and the Swing Line Lender of each proposed borrowing pursuant to Section 2.13 not later than 12:00 noon (Chicago time) on the proposed Borrowing Date. Each such notice shall be effective upon receipt by the Agent and the Swing Line Lender and shall specify the date and the principal amount of borrowing. Unless the Swing Line Lender has received written notice prior to 11:00 a.m. (Chicago time) on the proposed Borrowing Date from the Agent or any Lender that one or more of the conditions precedent set forth in Article IV with respect to such borrowing is not then satisfied, the Swing Line Lender shall pay over the requested principal amount to the Company on the requested Borrowing Date in Same Day Funds. Each Swing Line Loan shall be made on a Business Day and shall be in the amount of at least $500,000 and an integral multiple of $100,000. The Swing Line Lender will promptly notify the Agent of the making and amount of each Swing Line Loan. 2.15 Prepayment or Refunding of Swing Line Loans. (a) The Company may, at any time and from time to time, prepay any Swing Line Loan in whole or in part, in an amount of at least $500,000 and an integral multiple of $100,000. The Company shall deliver a notice of prepayment to the Agent and the Swing Line Lender not later than 11:00 a.m. (Chicago time) on the Business Day of such prepayment, specifying the date and amount of such prepayment. If such notice is given by the Company, the payment amount specified in such notice shall be due and payable on the date specified therein. The Company shall pay in full all outstanding Swing Line Loans no later than 11:00 a.m. (Chicago time) on Friday of each week. (b) The Swing Line Lender will on Friday of each week and may, at any other time in its sole and absolute discretion, on behalf of the Company (which hereby irrevocably 30 directs the Swing Line Lender to act on its behalf), request each Lender to make a Committed Loan in an amount equal to such Lender's Unused Commitment Share of the principal amount of the Swing Line Loans outstanding on the date such notice is given. Unless any of the events described in subsection 8.1(g), (h), (i) or (j) shall have occurred (in which event the procedures of Section 2.16 shall apply), and regardless of whether the conditions precedent set forth in this Agreement to the making of a Committed Loan are then satisfied or the aggregate amount of such Committed Loans is not in the minimum or integral amount otherwise required hereunder, each Lender shall make the proceeds of its Committed Loan available to the Agent for the account of the Swing Line Lender at the Agent's Payment Office prior to 12:00 noon (Chicago time) in Same Day Funds on the Business Day next succeeding the date such notice is given. The proceeds of such Committed Loans shall be immediately applied to repay the outstanding Swing Line Loans. 2.16 Participations in Swing Line Loans. (a) If an event described in subsection 8.1(g), (h), (i) or (j) occurs (or for any reason the Lenders may not make Committed Loans pursuant to Section 2.15), each Lender will, upon notice from the Agent, purchase from the Swing Line Lender (and the Swing Line Lender will sell to each Lender) an undivided participation interest in all outstanding Swing Line Loans in an amount equal to such Lender's Unused Commitment Share of the outstanding principal amount of the Swing Line Loans (and each Lender will immediately transfer to the Agent, for the account of the Swing Line Lender, in immediately available funds, the amount of its participation). (b) Whenever, at any time after the Swing Line Lender has received payment for any Lender's participation interest in the Swing Line Loans pursuant to subsection 2.16(a), the Swing Line Lender receives any payment on account thereof, the Swing Line Lender will distribute to the Agent for the account of such Lender its participation interest in such amount (appropriately adjusted, in the case of interest payments, to reflect the period of time during which such Lender's participation interest was outstanding and funded) in like funds as received; provided, however, that in the event that such payment received by the Swing Line Lender is required to be returned, such Lender will return to the Agent for the account of the Swing Line Lender any portion thereof previously distributed by the Swing Line Lender to it in like funds as such payment is required to be returned by the Swing Line Lender. 2.17 Participation Obligations Unconditional. (a) Each Lender's obligation to make Committed Loans pursuant to Section 2.15 and/or to purchase participation interests in Swing Line Loans pursuant to Section 2.16 shall be absolute and unconditional and shall not be affected by any circumstance whatsoever, including (a) any set-off, counterclaim, recoupment, defense or other right which such Lender may have against the Swing Line Lender, the Company or any other Person for any reason whatsoever; (b) the occurrence or continuance of an Event of Default; (c) any adverse change in the condition (financial or otherwise) of the Company or any other Person; (d) any breach of this Agreement or any other Loan Document by the Company or any other Lender; (e) any inability of the Company to satisfy the conditions precedent to borrowing set forth in this Agreement on the date upon which any Loan is to be refunded or any participation interest therein is to be purchased; or (f) any other circumstance, happening or event whatsoever, whether or not similar to any of the foregoing. 31 (a) Notwithstanding the provisions of subsection 2.17(a), no Lender shall be required to make any Committed Loan to the Company to refund a Swing Line Loan pursuant to Section 2.15 or to purchase a participation interest in a Swing Line Loan pursuant to Section 2.16 if, prior to the making by the Swing Line Lender of such Swing Line Loan, the Swing Line Lender received written notice from any Lender specifying that such Lender believes in good faith that one or more of the conditions precedent to the making of such Swing Line Loan were not satisfied and, in fact, such conditions precedent were not satisfied at the time of the making of such Swing Line Loan; provided that the obligation of such Lender to make such Committed Loan and to purchase such participation interest shall be reinstated upon the earlier to occur of (i) the date on which such Lender notifies the Swing Line Lender that its prior notice has been withdrawn and (ii) the date on which all conditions precedent to the making of such Swing Line Loan have been satisfied (or waived by the Required Lenders or all Lenders, as applicable). 2.18 Conditions to Swing Line Loans. Notwithstanding any other provision of this Agreement, the Swing Line Lender shall not be obligated to make any Swing Line Loan if an Event of Default or Unmatured Event of Default exists or would result therefrom. ARTICLE III TAXES AND YIELD PROTECTION AND ILLEGALITY 3.1 Taxes. (a) Any and all payments by the Company to each Lender and each Agent under this Agreement and any other Loan Document shall be made free and clear of, and without deduction or withholding for, any Taxes. In addition, the Company shall pay all Other Taxes. (b) If the Company shall be required by law to deduct or withhold any Taxes, Other Taxes or Further Taxes from or in respect of any sum payable hereunder to any Lender or the Agent, then: (i) the sum payable shall be increased as necessary so that, after making all required deductions and withholdings (including deductions and withholdings applicable to additional sums payable under this Section), such Lender or the Agent, as the case may be, receives and retains an amount equal to the sum it would have received and retained had no such deductions or withholdings been made; (ii) the Company shall make such deductions and withholdings; (iii) the Company shall pay the full amount deducted or withheld to the relevant taxing authority or other authority in accordance with applicable law; and (iv) the Company shall also pay to the Agent for the account of any applicable Lender or the Agent, at the time interest is paid, all additional amounts which such Lender or the Agent specifies as necessary to preserve the after-tax yield such Lender or Agent would have received if such Taxes, Other Taxes or Further Taxes had not been imposed. (c) The Company agrees to indemnify and hold harmless each Lender and the Agent for the full amount of Taxes, Other Taxes and Further Taxes in the amount that such 32 Lender or the Agent specifies as necessary to preserve the after-tax yield such Lender would have received if such Taxes, Other Taxes or Further Taxes had not been imposed, and any liability (including penalties, interest, additions to tax and reasonable expenses) arising therefrom or with respect thereto, whether or not such Taxes, Other Taxes or Further Taxes were correctly or legally asserted. Payment under this indemnification shall be made within 30 days after the date the Company receives written demand therefor from such Lender or the Agent. (d) Within 30 days after the date of any payment by the Company of Taxes, Other Taxes or Further Taxes, the Company shall furnish to each Lender and the Agent the original or a certified copy of a receipt evidencing payment thereof, or other evidence of payment satisfactory to such Lender or the Agent. (e) If the Company is required to pay any amount to any Lender or the Agent pursuant to subsection (b) or (c) of this Section, then such Lender or the Agent shall use reasonable efforts (consistent with legal and regulatory restrictions) to change the jurisdiction of its Lending Office or other relevant office so as to eliminate any such additional payment by the Company which may thereafter accrue, if such change in the good faith judgment of such Lender or the Agent is not otherwise disadvantageous to such Lender or the Agent. 3.2 Increased Costs and Reduction of Return. (a) If after the date hereof any Lender shall have determined that (i) the introduction of any Capital Adequacy Regulation, (ii) any change in any Capital Adequacy Regulation, (iii) any change in the interpretation or administration of any Capital Adequacy Regulation by any central bank or other Governmental Authority charged with the interpretation or administration thereof, or (iv) compliance by the Lender (or its Lending Office) or any corporation controlling the Lender with any Capital Adequacy Regulation, affects or would affect the amount of capital required or expected to be maintained by the Lender or any corporation controlling the Lender and (taking into consideration such Lender's or such corporation's policies with respect to capital adequacy and such Lender's desired return on capital) determines that the amount of such capital is increased as a consequence of its Commitment, loans, credits or obligations under this Agreement, then, upon demand of such Lender to the Company through the Agent, the Company shall pay to the Lender, from time to time as specified by the Lender, additional amounts sufficient to compensate the Lender for such increase. (b) Notwithstanding the foregoing Section 3.2(a) if any Lender fails to notify the Company of any event which will entitle such Lender to compensation pursuant to this Section 3.2 within 180 days after such Lender obtains knowledge of such event, then such Lender shall not be entitled to any compensation from the Company for any such increased cost or reduction of return arising prior to the date which is 180 days before the date on which such Lender notifies the Company of such event. 3.3 Certificates of Lenders. Any Lender claiming reimbursement or compensation under this Article III shall deliver to the Company (with a copy to the Agent) a certificate setting forth in reasonable detail the amount payable to the Lender hereunder and such certificate shall be conclusive and binding on the Company in the absence of manifest error. 33 3.4 Substitution of Lenders. Upon the receipt by the Company from any Lender (an "Affected Lender") of a claim for compensation under Section 3.1 or 3.2 (which claim results from circumstances applicable to such Lender and not Lenders generally) the Company may: (i) request the Affected Lender to use its best efforts to obtain a replacement bank or financial institution satisfactory to the Company to acquire and assume all or a ratable part of all of such Affected Lender's Loans and Commitment (a "Replacement Lender"); (ii) request one more of the other Lenders to acquire and assume all or part of such Affected Lender's Loans and Commitment; or (iii) designate a Replacement Lender. Any such designation of a Replacement Lender under clause (i) or (iii) shall be subject to the prior written consent of the Agent and the Swing Line Lender (which consents shall not be unreasonably withheld). 3.5 Survival. The agreements and obligations of the Company in this Article III shall survive the payment of all other Obligations and the termination of this Agreement. ARTICLE IV CONDITIONS PRECEDENT 4.1 Conditions to Effectiveness. This Agreement shall become effective, all loans outstanding under the Original Agreement shall be deemed to be Loans made hereunder, and all accrued interest and fees payable under the Original Agreement shall be payable hereunder, on the date on which the Agent has received the following (the "Effective Date"): (a) Agreement. This Agreement executed by the Company and the Lenders. (b) Resolutions; Incumbency; Certificate of Incorporation; Bylaws. (i) Copies of the resolutions of the board of directors of the Company and each Guarantor authorizing the transactions contemplated hereby, certified as of the Effective Date by the Secretary or an Assistant Secretary of the Company or such Guarantor; (ii) a certificate of the Secretary or Assistant Secretary of the Company and each Guarantor certifying the names and true signatures of the officers of the Company and each Guarantor authorized to execute and deliver this Agreement, the Intercreditor Agreement and all other Loan Documents to be delivered by it hereunder; and (iii) copies of the certificate of incorporation and by-laws (or other Organizational Documents) of the Company and each Guarantor, certified by the Secretary or an Assistant Secretary of the Company or such Guarantor. (c) Good Standing. A copy of a good standing certificate as of a recent date for the Company and each Guarantor from the Secretary of State (or similar, applicable Governmental Authority) of its respective state of incorporation. (d) Legal Opinion. An opinion of counsel to the Company and the Guarantors in form and substance reasonably acceptable to the Agent. 34 (e) Payment of Fees. (i) Evidence of payment by the Company of all accrued and unpaid fees, costs and reasonable expenses to the extent then due and payable on the Effective Date, together with Attorney Costs of the Agent to the extent invoiced prior to or on the Effective Date, plus such additional amounts of Attorney Costs as shall constitute the Agent's reasonable estimate of Attorney Costs incurred or to be incurred by it through the closing proceedings (provided that such estimate shall not thereafter preclude final settling of accounts between the Company and the Agent), including any such costs, fees and reasonable expenses arising under or referenced in Sections 2.8 and 10.4; and (ii) Evidence of payment by the Company of an up-front fee for the account of each Lender in an amount set forth in a separate agreement between the Company and the Lenders. (f) Certificate. A certificate signed by a Responsible Officer, dated as of the Closing Date, stating that: (i) the representations and warranties contained in Article V are true and correct on and as of such date, as though made on and as of such date; (ii) no Event of Default or Unmatured Event of Default exists or would result from the execution and delivery of this Agreement and the other Loan Documents; and (iii) since December 31, 2000, no event or circumstance has occurred that has resulted or could reasonably be expected to result in a Material Adverse Effect, except as set forth on Schedule 4.1(f). (g) Consent. The Consent, signed by each Guarantor. (h) First Amendment to Security Agreement. The First Amendment to Security Agreement signed by the Company and each Guarantor. (i) Intercreditor Agreement. The Intercreditor Agreement, signed by the parties thereto and consented to by the Company and the Guarantors. (j) Amendment of Certain Agreements. Evidence, satisfactory to the Agent, that each of the "Operative Documents" as defined in the Synthetic Lease Guaranty, the Shelf Agreement and each Senior Note Agreement (each as defined in the Intercreditor Agreement) has been amended to conform in all material respects with the representations, warranties, covenants and defaults contained in this Agreement. (k) Fleet Blocked Account Agreement. A blocked account agreement with Fleet National Bank satisfactory to the Administrative Agent. (l) Other Documents. Such other approvals, opinions, documents or materials as the Agent or any Lender may reasonably request. 35 4.2 Other Condition to Effectiveness; Prepayment of Loans under Original Agreement. All proceeds received by the Collateral Agent from the prepayment of the indebtedness under the Original Agreement shall have been applied as set forth under the Intercreditor Agreement. 4.3 Conditions to All Credit Extensions. The obligation of each Lender to make any Credit Extension to be made by it is subject to the satisfaction of the following conditions precedent on the date of such Credit Extension: (a) Notice. The Agent (and, in the case of a Swing Line Loan, the Swing Line Lender) shall have received a Notice of Borrowing. (b) Continuation of Representations and Warranties. The representations and warranties in Article V shall be true and correct in all material respects on and as of the date of such Credit Extension with the same effect as if made on and as of such date (except to the extent such representations and warranties expressly refer to an earlier date, in which case they shall have been true and correct in all material respects as of such earlier date). (c) No Existing Default. No Event of Default or Unmatured Event of Default shall exist or shall result from such Credit Extension (after giving effect to this Agreement and the amendments referred to in Section 4.1(j)). Each Notice of Borrowing submitted by the Company hereunder shall constitute a representation and warranty by the Company that, as of the date of such notice or request and as of the date of the applicable Credit Extension, the conditions in this Section 4.3 are satisfied. ARTICLE V REPRESENTATIONS AND WARRANTIES The Company represents and warrants to the Agent and each Lender as follows: 5.1 Organization; Subsidiary Preferred Stock. The Company is a corporation duly organized and existing in good standing under the laws of the State of Delaware, each Subsidiary is duly organized and existing in good standing under the laws of the jurisdiction in which it is formed, and the Company has and each Subsidiary has the power to own its respective property and to carry on its respective business as now being conducted. No Subsidiary has outstanding any shares of stock of a class which has priority over any other class as to dividends or in liquidation. 5.2 Financial Statements. The audited consolidated financial statements of the Company and its Subsidiaries as at December 31, 2000 and the unaudited consolidated financial statements of the Company and its Subsidiaries as at September 30, 2001, copies of each of which have been delivered to each Lender, were prepared in accordance with GAAP (subject, in the case of such unaudited statements, to the absence of footnotes and to normal year-end adjustments) and present fairly the consolidated financial condition of the Company and its Subsidiaries as at such dates and the results of their operations for the periods then ended. 36 5.3 Actions Pending. Except as specified on Schedule 5.3, there is no action, suit, investigation or proceeding pending or, to the knowledge of the Company, threatened against the Company or any of its Subsidiaries, or any properties or rights of the Company or any of its Subsidiaries, by or before any court, arbitrator or administrative or governmental body which could be reasonably expected to result in any material adverse change in the business, property or assets, condition (financial or otherwise) or operations of the Company and its Subsidiaries taken as a whole or the ability of the Company to perform its obligations under this Agreement. 5.4 Outstanding Debt. Neither the Company nor any of its Subsidiaries has outstanding any Debt except as permitted by Section 7.3. There exists no default under the provisions of any instrument (as defined in the UCC) or agreement evidencing Debt of the Company or any of its Subsidiaries in an amount greater than $250,000 or of any agreement relating thereto (it being understood that the representation and warranty in this sentence is made after giving effect to the effectiveness of this Agreement and the amendments referred to in subsection 4.1(j)). 5.5 Title to Properties. The Company has and each of its Subsidiaries has good and marketable title to its respective real properties (other than properties which it leases) and good title to all of its other respective properties and assets, including the properties and assets reflected in the most recent audited balance sheet referred to in Section 5.2 (other than properties and assets disposed of in the ordinary course of business), subject to no Lien of any kind except Liens permitted by Section 7.2. All leases necessary in any material respect for the conduct of the respective businesses of the Company and its Subsidiaries are valid and subsisting and are in full force and effect. Attached as Schedule 5.5 is a list of all real estate owned or leased by the Company and its Subsidiaries. 5.6 Taxes. The Company has and each of its Subsidiaries has filed all federal, state and other income tax returns which, to the best knowledge of the officers of the Company and its Subsidiaries, are required to be filed, and each has paid all taxes as shown on such returns and on all assessments received by it to the extent that such taxes have become due, except such taxes (i) as are being contested in good faith by appropriate proceedings for which adequate reserves have been established in accordance with GAAP or (ii) the non-payment of which (a) could not be reasonably expected to have a material adverse effect on the business, condition (financial or otherwise) or operations of the Company and its Subsidiaries taken as a whole and (b) does not result in the creation of any Lien other than Liens permitted by Section 7.2. 5.7 Conflicting Agreements and Other Matters. Neither the Company nor any of its Subsidiaries is a party to any contract or agreement or subject to any charter or other corporate restriction which materially and adversely affects its business, property or assets, condition (financial or otherwise) or operations. None of the execution and delivery of this Agreement or any other Loan Document, the making of the Loans or the fulfillment of or compliance with the terms and provisions hereof and of the other Loan Documents will conflict with, or result in a breach of the terms, conditions or provisions of, or constitute a default under, or result in any violation of, or result in the creation of any Lien upon any of the properties or assets of the Company or any of its Subsidiaries pursuant to, the charter or by-laws of the Company or any of its Subsidiaries, any award of any arbitrator or any agreement (including any agreement with stockholders), instrument, order, judgment, decree, statute, law, rule or regulation to which the 37 Company or any of its Subsidiaries is subject. Neither the Company nor any of its Subsidiaries is a party to, or otherwise subject to any provision contained in, any instrument evidencing Indebtedness of the Company or such Subsidiary, any agreement relating thereto or any other contract or agreement (including its charter) which limits the amount of, or otherwise imposes restrictions on the incurring of, Debt of the Company of the type that the Obligations constitute except as set forth in the agreements listed in Schedule 5.7 attached hereto (as such Schedule 5.7 may have been modified from time to time by written supplements thereto delivered by the Company and accepted in writing by the Required Lenders). 5.8 Use of Proceeds. None of the proceeds of any Loan will be used, directly or indirectly, for the purpose, whether immediate, incidental or ultimate, of purchasing or carrying any "margin stock" as defined in Regulation U of the FRB (herein called "margin stock") or for the purpose of maintaining, reducing or retiring any Indebtedness which was originally incurred to purchase or carry any stock that is then currently a margin stock or for any other purpose which might constitute the transactions contemplated hereby a "purpose credit" within the meaning of such Regulation U. Neither the Company nor any agent acting on its behalf has taken or will take any action which might cause this Agreement or the Loans to violate Regulation T, Regulation U or any other regulation of the FRB or to violate the Exchange Act, in each case as in effect now or as the same may hereafter be in effect. 5.9 ERISA. No accumulated funding deficiency (as defined in section 302 of ERISA and section 412 of the Code), whether or not waived, exists with respect to any Plan (other than a Multiemployer Plan). No liability to the PBGC has been or is expected by the Company or any ERISA Affiliate to be incurred with respect to any Plan (other than a Multiemployer Plan) by the Company, any Subsidiary or any ERISA Affiliate which is or would be materially adverse to the business, property or assets, condition (financial or otherwise) or operations of the Company and its Subsidiaries taken as a whole. Neither the Company, any Subsidiary nor any ERISA Affiliate has incurred or presently expects to incur any withdrawal liability under Title IV of ERISA with respect to any Multiemployer Plan which is or would be materially adverse to the business, property or assets, condition (financial or otherwise) or operations of the Company and its Subsidiaries taken as a whole. The execution and delivery of this Agreement and the making of Loans will be exempt from or will not involve any transaction which is subject to the prohibitions of section 406 of ERISA and will not involve any transaction in connection with which a penalty could be imposed under section 502(i) of ERISA or a tax could be imposed pursuant to section 4975 of the Code. 5.10 Governmental Consent. Neither the nature of the Company or of any Subsidiary, nor any of their respective businesses or properties, nor any relationship between the Company or any Subsidiary and any other Person, nor any circumstance in connection with the making of the Loans is such as to require any authorization, consent, approval, exemption or any action by or notice to or filing with any court or administrative or governmental body (other than routine filings after the Closing Date with the SEC and/or state Blue Sky authorities) in connection with the execution and delivery of this Agreement, the making of the Loans, or the fulfillment of or compliance with the terms and provisions of the Loan Documents. 5.11 Environmental Compliance. The Company and its Subsidiaries and all of their respective properties and facilities have complied at all times and in all respects with all 38 applicable foreign, federal, state, local and regional statutes, laws, ordinances and judicial or administrative orders, judgments, rulings and regulations relating to protection of the environment except, in any such case, where failure to so comply could not reasonably be expected to result in a material adverse effect on the business, condition (financial or otherwise) or operations of the Company and its Subsidiaries taken as a whole or the ability of the Company to perform its obligations under this Agreement. 5.12 Disclosure. Neither this Agreement nor any other document, certificate or statement furnished to the Agent or any Lender by or on behalf of the Company in connection herewith contains any untrue statement of a material fact or omits to state a material fact necessary in order to make the statements contained herein and therein not misleading in light of the circumstances in which they were made. 5.13 Priority of Obligations. The Obligations constitute "Superior Indebtedness" as such term is defined in the Company's Promissory (subordinated) Notes, the form of which is attached hereto as Exhibit I, and the Subordinated Debt is subordinated to the Obligations. ARTICLE VI AFFIRMATIVE COVENANTS So long as any Lender shall have any Commitment hereunder or any Loan or other Obligation shall remain unpaid or unsatisfied, unless the Required Lenders waive compliance in writing: 6.1 Financial Statements. The Company shall deliver to the Agent, in form and detail reasonably satisfactory to the Agent and the Required Lenders, with sufficient copies for each Lender: (a) as soon as available, but not later than 120 days after the end of each fiscal year, a copy of the audited consolidated balance sheet of the Company and its Subsidiaries as at the end of such year and the related consolidated statements of income or operations, shareholders' equity and cash flows for such year, setting forth in each case in comparative form the figures for the previous fiscal year, and accompanied by the opinion of PriceWaterhouseCoopers LLP or another nationally-recognized independent public accounting firm ("Independent Auditor") which report (x) shall state that such consolidated financial statements present fairly the financial position for the periods indicated in conformity with GAAP applied on a basis consistent with prior years and (y) shall not be qualified or limited because of a restricted or limited examination by the Independent Auditor of any material portion of the Company's or any Subsidiary's records; (b) as soon as available, but not later than 60 days after the end of each of the first three fiscal quarters of each fiscal year, a copy of the unaudited consolidated balance sheet of the Company and its Subsidiaries as of the end of such quarter and the related consolidated statements of income, shareholders' equity and cash flows for the period commencing on the first day and ending on the last day of such quarter, and certified by a Responsible Officer as fairly presenting, in accordance with GAAP (subject to the absence of footnotes and ordinary, 39 good faith year-end audit adjustments), the financial position and the results of operations of the Company and the Subsidiaries; and (c) as soon as available, but not later than 30 days after the end of each fiscal month (or 60 days after the end of December of each year), a copy of the financial report delivered to the Board of Directors of the Company (or, if no such report is delivered to the Board of Directors of the Company for any month, a copy of a substantially similar financial report for such month), including unaudited consolidated balance sheet of the Company and its Subsidiaries as of the end of such month and the related consolidated statements of income and cash flows for the period commencing on the first day and ending on the last day of such month, and certified by a Responsible Officer as fairly presenting, in accordance with GAAP (subject to the absence of footnotes and ordinary, good faith year-end audit adjustments), the financial position and the results of operations of the Company and the Subsidiaries. 6.2 Certificates; Other Information. The Company shall furnish to the Agent, with sufficient copies for each Lender: (a) concurrently with the delivery of the financial statements referred to in subsection 6.1(a) for the year ended December 31, 2002 and each year thereafter, to the extent not prohibited by applicable accounting guidelines, a certificate of the Independent Auditor stating that in making the examination necessary therefor no knowledge was obtained of any Event of Default or Unmatured Event of Default, except as specified in such certificate; (b) concurrently with the delivery of the financial statements referred to in subsections 6.1(a), (b) and (c), a Compliance Certificate executed by a Responsible Officer, together with calculations necessary to demonstrate compliance with Sections 7.1, 7.12, 7.14, 7.15, 7.16 and 7.17; (c) promptly, copies of all financial statements and reports that the Company sends to its shareholders, and copies of all financial statements and regular, periodical or special reports (including Forms 10K, 10Q and 8K) that the Company or any Subsidiary may make to, or file with, the SEC; (d) within 90 days after the end of each fiscal year, a calculation in reasonable detail of Excess Cash Flow for such fiscal year, substantially in the form of Exhibit Q; (e) within three Business Days after the end of each week (or more frequently at the request of the Agent), a detail of the Borrowing Base Certificate; (f) within three Business Days after the 15th and last day of each month, an Accounts Receivable aging report as of such day; (g) no later than 45 days after the end of each fiscal quarter, a 12-month forecast (to include forecasted consolidated balance sheets, income statements and cash flow statements) for the Company and its Subsidiaries in fiscal quarter periods; 40 (h) concurrently with the execution of any amendment to the Synthetic Lease Guaranty, the Senior Note Agreements or the Shelf Note Agreement (each as defined in the Intercreditor Agreement), a copy of such executed amendment; (i) as soon as available, but not later than 15 days after delivery of the financial report described in Section 6.1(c), and at the Company's expense, a report from Zolfo Cooper (or another consultant acceptable to the Agent and the Required Lenders) on the performance of the Company as set forth in such financial report against the Business Plan; (j) simultaneously with the delivery thereof under the Senior Note Agreements (as defined in the Intercreditor Agreement), copies of all information and notices required to be given by the Company pursuant to paragraph 5A thereof (or any successor provision thereto) or any other notice, report or other written information delivered to any noteholder under the Senior Note Agreements; and (k) promptly, such additional information regarding the business, financial or corporate affairs of the Company or any Subsidiary as the Agent, at the request of any Lender, may from time to time request. 6.3 Notices. The Company shall promptly notify the Agent promptly after a Responsible Officer obtains knowledge of: (a) the occurrence of any Event of Default or Unmatured Event of Default; (b) any of the following matters that has resulted or may reasonably be expected to result in a Material Adverse Effect: (i) any breach or non-performance of, or any default under, a Contractual Obligation of the Company or any Subsidiary; (ii) any dispute, litigation, investigation, proceeding or suspension between the Company or any Subsidiary and any Governmental Authority; or (iii) the commencement of, or any material development in, any litigation or proceeding affecting the Company or any Subsidiary including pursuant to any applicable Environmental Law; (c) the occurrence of any of the following events affecting the Company or any ERISA Affiliate (but in no event more than 10 days after a Responsible Officer obtains knowledge of such event; provided that the Company shall notify the Agent and each Lender not less than 10 days before the occurrence of any event described in clause (ii) below), and deliver to the Agent a copy of any notice with respect to such event that is filed with a Governmental Authority and any notice delivered by a Governmental Authority to the Company or any ERISA Affiliate with respect to such event: (i) an ERISA Event; (ii) a contribution failure with respect to a Pension Plan sufficient to give rise to a Lien under Section 302(f) of ERISA; (iii) a material increase in the Unfunded Pension Liability of any Pension Plan; 41 (iv) the adoption of, or the commencement of contributions to, any Plan subject to Section 412 of the Code by the Company or any ERISA Affiliate; or (v) the adoption of any amendment to a Plan subject to Section 412 of the Code, if such amendment results in a material increase in contributions or Unfunded Pension Liability; and (d) any material change in accounting policies or financial reporting practices by the Company or any of its consolidated Subsidiaries. Each notice under this Section shall be accompanied by a written statement by a Responsible Officer setting forth details of the occurrence referred to therein, and stating what action the Company or any affected Subsidiary proposes to take with respect thereto and at what time. Each notice under subsection 6.3(a) shall describe with particularity any and all clauses or provisions of this Agreement or any other Loan Document that have been breached or violated. 6.4 Preservation of Corporate Existence, Etc. The Company shall, and shall cause each Subsidiary to: (a) preserve and maintain in full force and effect its corporate existence and good standing under the laws of its state or jurisdiction of incorporation; (b) preserve and maintain in full force and effect all governmental rights, privileges, qualifications, permits, licenses and franchises necessary or desirable in the normal conduct of its business except (i) in connection with transactions permitted by Section 7.6 and sales of assets permitted by Section 7.5 and (ii) to the extent the non-preservation or non-maintenance thereof could not reasonably be expected to have a Material Adverse Effect; (c) use reasonable efforts, in the ordinary course of business, to preserve its business organization and goodwill; and (d) preserve or renew all of its registered patents, trademarks, trade names and service marks, the non-preservation of which could reasonably be expected to have a Material Adverse Effect. Notwithstanding the provisions of this Section 6.4, the Company may dissolve or liquidate any Inactive Subsidiary or any Canadian Subsidiary. 6.5 Maintenance of Property. The Company shall, and shall cause each Subsidiary to, maintain and preserve all its property which is used or useful in its business in good working order and condition, ordinary wear and tear excepted and make all necessary repairs thereto and renewals and replacements thereof except where the failure to do so could not reasonably be expected to have a Material Adverse Effect. The Company and each Subsidiary shall use the standard of care typical in the industry in the operation and maintenance of its facilities. 6.6 Insurance. The Company shall, and shall cause each Subsidiary to, maintain with financially sound and reputable insurers, insurance in such amounts and against such liabilities and hazards as customarily maintained by the Company in accordance with its practices, policies 42 and procedures prior to the Closing Date. Together with each delivery of financial statements under subsection 6.1(a), the Company will, upon the request of the Agent, deliver a certificate of a Responsible Officer specifying the details of such insurance in effect. 6.7 Payment of Obligations. The Company shall, and shall cause each Subsidiary to, pay and discharge as the same shall become due and payable all their respective obligations and liabilities, including: (a) all material tax liabilities, assessments and governmental charges or levies upon it or its properties or assets, unless the same are being contested in good faith by appropriate proceedings and adequate reserves in accordance with GAAP are being maintained by the Company or such Subsidiary; (b) all lawful claims which, if unpaid, would by law become a Lien upon its property; and (c) all Debt, as and when due and payable, but subject to any subordination provisions contained in any instrument or agreement evidencing such Debt. 6.8 Compliance with Laws. The Company shall, and shall cause each Subsidiary to, comply in all material respects with all Requirements of Law of any Governmental Authority having jurisdiction over it or its business (including the Federal Fair Labor Standards Act), except such as may be contested in good faith or as to which a bona fide dispute may exist. 6.9 Compliance with ERISA. The Company shall, and shall cause each of its ERISA Affiliates to: (a) maintain each Plan in compliance in all material respects with the applicable provisions of ERISA, the Code and other federal or state law; (b) cause each Plan which is qualified under Section 401(a) of the Code to maintain such qualification; and (c) make all required contributions to any Plan subject to Section 412 of the Code. 6.10 Inspection of Property and Books and Records. The Company shall, and shall cause each Subsidiary to, maintain proper books of record and account, in which full, true and correct entries in conformity with GAAP consistently applied shall be made of all financial transactions and matters involving the assets and business of the Company and such Subsidiary. The Company shall, and shall cause each Subsidiary to, permit representatives and independent contractors of the Agent or any Lender to visit and inspect any of their respective properties, to examine their respective corporate, financial and operating records, and make copies thereof or abstracts therefrom, and to discuss their respective affairs, finances and accounts with their respective directors, officers, and independent public accountants, all at the reasonable expense of the Company and at such reasonable times during normal business hours and as often as may be reasonably desired, upon reasonable advance notice to the Company; provided that when an Event of Default exists the Agent or any Lender may do any of the foregoing at the reasonable expense of the Company at any time during normal business hours without advance notice. 6.11 Environmental Laws. The Company shall, and shall cause each Subsidiary to, conduct its operations and keep and maintain its property in material compliance with all material Environmental Laws. 43 6.12 Use of Proceeds. The Company shall use the proceeds of the Loans for working capital and other general corporate purposes not in contravention of any applicable Requirement of Law or of any Loan Document. 6.13 Covenant to Secure Obligations Equally. The Company covenants that, if it or any Subsidiary shall create or assume any Lien upon any of its property or assets, whether now owned or hereafter acquired, other than Liens permitted by the provisions of Section 7.2 (unless prior written consent to the creation or assumption thereof shall have been obtained pursuant to Section 10.1), it will make or cause to be made effective provision whereby the Obligations will be secured by such Lien equally and ratably with any and all other Debt thereby secured so long as any such other Debt shall be so secured. 6.14 Cooperative Status. The Company covenants that it will at all times maintain its status as a cooperative for purposes of Subchapter T of the Code; provided, however, in the event that the Code or other applicable law is modified after the date hereof and as a result of such modification the Company is unable to satisfy its obligations under this Section, then the Required Lenders and the Company shall agree, or in good faith negotiate to agree, to amend the covenants contained in this Agreement so that the application of such covenants (following such modification of the Code or other applicable law and the effect thereof on the Company) will be substantially the same as prior thereto. 6.15 Further Assurances. The Company shall (a) cause all Subsidiaries to guarantee the obligations of the Company hereunder pursuant to the Guaranty (and in furtherance of the foregoing, immediately upon the creation or acquisition of any Subsidiary, cause such Subsidiary to execute and deliver a counterpart of the Guaranty, together with such other documents, including resolutions and opinions of counsel, as the Agent or any Lender may reasonably request), provided that (i) none of TruServ Specialty Company, LLC nor any Foreign Subsidiary shall have an obligation to execute a counterpart of the Guaranty and (ii) neither of Advocate Services, Inc. nor Servistar Paint Company shall have an obligation to execute a counterpart of the Guaranty prior to the date which is 180 days following the Closing Date; and (b) take, and cause each of Guarantors to take, such actions as are necessary or as the Agent or the Required Lenders may reasonably request from time to time (including the execution and delivery of security agreements, pledge agreements, financing statements, mortgages, deeds of trust and other documents, the filing or recording of any of the foregoing, the delivery of stock certificates and other collateral with respect to which perfection is obtained solely by possession, the notation of the Collateral Agent's Liens on certificates of title for vehicles and the delivery of opinions of counsel) to ensure that the obligations of the Company and each Guarantor hereunder and under the Guaranty, as applicable, are secured by perfected security interests in substantially all of the personal property of each such entity, and provided further that neither the Company nor any Guarantor shall be required to pledge more than 65% of the stock of any Foreign Subsidiary. 6.16 Insurance and Condemnation Proceeds. The Company shall promptly notify the Agent of any loss, damage, or destruction to any of the Collateral (as defined in the applicable Collateral Document), whether or not covered by insurance. Subject to the Intercreditor Agreement, the Agent is hereby authorized to collect all insurance and condemnation proceeds in respect of Collateral directly and to apply or remit them as follows: 44 (i) With respect to insurance and condemnation proceeds relating to Collateral other than real estate, machinery and equipment, after deducting from such proceeds the reasonable expenses, if any, incurred by the Agent in the collection or handling thereof, the Agent shall apply such proceeds, ratably, to the reduction of the Obligations. (ii) With respect to insurance and condemnation proceeds relating to Collateral consisting of real estate, machinery and equipment, the Agent shall permit or require the Company to use such proceeds, or any part thereof, to replace, repair, restore or rebuild the relevant real estate, machinery and equipment in a diligent and expeditious manner with materials and workmanship of substantially the same quality as existed before the loss, damage or destruction so long as (1) no Event of Default or Unmatured Event of Default has occurred and is continuing, (2) the aggregate proceeds with respect to any such loss do not exceed $1,000,000 and (3) the Company demonstrates to the reasonable satisfaction of the Agent that the funds available to it will be sufficient to complete such project. In all other circumstances, the Agent shall apply such insurance and condemnation proceeds, ratably, to the reduction of the Obligations. ARTICLE VII NEGATIVE COVENANTS So long as any Lender shall have any Commitment hereunder, any Loan or other Obligation shall remain unpaid or unsatisfied, unless the Required Lenders waive compliance in writing: 7.1 Fixed Charge Coverage Ratio. The Company will not permit the Fixed Charge Coverage Ratio as of the end of any fiscal quarter to be less than the applicable ratio set forth below:
Fiscal quarter ending on or about Ratio --------------------------------- ----- March 31, 2002 0.80 to 1 June 30, 2002 0.90 to 1 September 30, 2002 0.90 to 1 December 31, 2002 0.70 to 1 March 31, 2003 0.70 to 1 June 30, 2003 0.70 to 1 September 30, 2003 0.60 to 1 December 31, 2003 0.75 to 1 March 31, 2004 0.70 to 1 June 30, 2004 0.65 to 1
The provisions of this Section shall be subject to change, upon the sale of the Paint Business (if sold prior to June 30, 2003) or other asset sales not presently disclosed to the Lenders, upon the mutual agreement of the Company and the Required Lenders. 45 7.2 Lien Restrictions. The Company will not and will not permit any Subsidiary to create, assume or suffer to exist any Lien upon any of its property or assets, whether now owned or hereafter acquired (whether or not provision is made for the equal and ratable securing of the Obligations in accordance with the provisions of Section 6.13), except: (a) Liens for taxes not yet due or which are being actively contested in good faith by appropriate proceedings and with respect to which the Company or the applicable Subsidiary maintains adequate reserves, (b) Liens incidental to the conduct of its business or the ownership of its property and assets which were not incurred in connection with the borrowing of money or the obtaining of advances or credit, (c) Liens on property or assets of a Subsidiary to secure obligations of such Subsidiary to the Company or another Subsidiary, (d) Liens in existence on the Closing Date and described on Schedule 7.2(d), (e) Liens in respect of capital leases entered into in connection with, or any Lien arising in connection with, the acquisition of property, after the date hereof and attaching only to the property being acquired, if the Indebtedness secured thereby does not exceed 100% of the lesser of (i) the fair market value of the property acquired at the time of acquisition thereof and (ii) the total purchase price of the property so acquired, (f) other Liens (including Liens arising under capital leases), in addition to the Liens permitted by clauses (a) through (e) above and clauses (g) through (m) below, securing Indebtedness of the Company or any Subsidiary (other than Indebtedness that constitutes Subordinated Debt); provided, however, that (i) such Indebtedness is permitted by the provisions of Section 7.3 and (ii) the aggregate outstanding principal amount of all such Indebtedness (other than Indebtedness listed on Schedule 7.2(f)) does not at any time exceed $25,000,000, (g) Liens in favor of the Collateral Agent, (h) any interest or title of a lessor in property subject to any lease other than (i) except as permitted by clauses (e) and (f) above, a capital lease, (ii) a lease entered into as part of a sale and leaseback transaction or (iii) except as permitted by clause (d) above, a Synthetic Lease, (i) any interest of a lessee or a sublessee in property owned or leased by the Company or any Subsidiary, (j) any escrow, holdback or similar arrangement in connection with any sale, lease, transfer or other disposition of any asset not prohibited hereunder (including any sale of the Paint Business), (k) Liens in favor of Bank of America on cash collateral securing obligations of the Company or any Subsidiary under letters of credit issued by, or with respect to cash management services provided by, Bank of America, 46 (l) Liens in respect of mortgages on properties listed on Schedule 7.2(l) (the "Specified Facilities"), and (m) Liens in favor of Fleet National Bank on cash collateral securing obligations of the Company or any Subsidiary with respect to cash management services provided by Fleet National Bank. 7.3 Debt Restrictions. The Company will not and will not permit any Subsidiary to create, incur, assume or suffer to exist any Debt, except: (a) Senior Funded Debt, (b) Subordinated Debt, (c) Debt under the Guaranty, and (d) Short Term Debt of the Company. 7.4 Sale of Assets. The Company will not and will not permit any Subsidiary to sell, lease or transfer or otherwise dispose of any assets of the Company or any Subsidiary other than in the ordinary course of business; provided that the Company and its Subsidiaries may sell, lease, transfer or otherwise dispose of assets (a) to the extent that such sale, lease, transfer or disposition relates to a Designated Permitted Asset Sale, (b) in connection with the sale and leaseback of distribution centers owned by the Company or any Subsidiary, (c) in connection with the dissolution of any Subsidiary permitted by Section 6.4 and (d) outside the ordinary course of business so long as (i) the aggregate amount of all assets sold, leased, transferred or otherwise disposed of outside the ordinary course of business for the 36 months preceding such proposed sale when added together, without duplication, with (x) any shares of stock or Debt of any Subsidiary sold or otherwise disposed of, or with respect to which the Company or any Subsidiary has parted control of, except to the Company or another Subsidiary, during such period and (y) any assets then proposed to be sold outside of the ordinary course of business do not constitute more than 10% of the consolidated total assets of the Company as of the end of the most recent fiscal quarter for which the Company has delivered financial statements pursuant to Section 6.1 and (ii) any such sale of assets is not in excess of $2,500,000 per such sale; and provided, further, that in the case of clauses (a) through (d) above, all such assets have been sold, leased, transferred or otherwise disposed of for fair market value and the Net Disposition Proceeds from such sales shall be paid to the Collateral Agent for distribution in accordance with the Intercreditor Agreement or Section 2.5.2. 7.5 Merger. The Company will not and will not permit any Subsidiary to merge or consolidate with any other Person, except that Subsidiaries may be merged or consolidated with or into the Company or any other Subsidiary. 7.6 Restrictions on Transactions with Affiliates and Stockholders. The Company will not and will not permit any Subsidiary to directly or indirectly, purchase, acquire or lease any property from, or sell, transfer or lease any property (other than shares of stock of the Company) to, or otherwise deal with (i) any Affiliate or Substantial Stockholder, or (ii) any corporation in which an Affiliate, Substantial Stockholder or the Company (either directly or through 47 Subsidiaries) owns 5% or more of the outstanding voting stock, except that (a) any such Affiliate or Substantial Stockholder may be a director, officer or employee of the Company or any Subsidiary and may be paid reasonable compensation in connection therewith, (b) the Company and its Subsidiaries may perform or engage in any of the foregoing in the ordinary course of business upon terms no less favorable to the Company or such Subsidiary (as the case may be) than if no such relationship described in clauses (i) and (ii) above existed and (c) the Company may sell to or purchase from any such Person shares of the Company's stock subject to the provisions of Section 7.11. 7.7 Issuance of Stock by Subsidiaries. The Company will not permit any Subsidiary to (either directly, or indirectly by the issuance of rights or options for, or securities convertible into, such shares) issue, sell or otherwise dispose of any shares of any class of its stock (other than directors' qualifying shares) except to the Company or another Subsidiary. 7.8 Compliance with ERISA. The Company will not and will not permit any Subsidiary to (i) engage in any transaction in connection with which the Company or any Subsidiary could be subject to either a civil penalty assessed pursuant to section 502(i) of ERISA or a tax imposed by section 4975 of the Code, terminate or withdraw from any Plan (other than a Multiemployer Plan) in a manner, or take any other action with respect to any such Plan (including, without limitation, a substantial cessation of operations within the meaning of section 4062(e) of ERISA), which could result in any liability of the Company or any Subsidiary to the PBGC, to a trust established pursuant to section 4041(c)(3)(B)(ii) or (iii) or 4042(i) of ERISA, or to a trustee appointed under section 4042(b) or (c) of ERISA, (ii) incur any liability to the PBGC on account of a termination of a Plan under section 4064 of ERISA, (iii) fail to make full payment when due of all amounts which, under the provisions of any Plan, the Company or any Subsidiary is required to pay as contributions thereto, or (iv) permit to exist any accumulated funding deficiency, whether or not waived, with respect to any Plan (other than a Multiemployer Plan), if, in any such case, such penalty or tax or such liability, or the failure to make such payment, or the existence of such deficiency, as the case may be, could be reasonably expected to have a material adverse effect on the Company and its Subsidiaries taken as a whole. 7.9 No Change in Subordination Terms, etc. The Company will not and will not permit any Subsidiary to amend, alter or otherwise change any provision of any of the subordinated promissory notes now or hereafter issued by the Company or take any other action (or refrain from taking an action) which would have the effect of eliminating or altering in any way the effect of the subordination language appearing in such subordinated promissory notes or the rights of the Agent and the Lenders arising as a result thereof. 7.10 Nature of Business. The Company will not and will not permit any Subsidiary to engage in the business of underwriting risks for insurance purposes, or in any other aspect of insurance related business other than in the ordinary course of business in accordance with its practices as of the Closing Date; or purchase and sell real estate (other than on an agency basis) for purposes other than those relating directly to its principal business except for (i) purchases and sales of store locations in the ordinary course of business which in the aggregate for the Company and its Subsidiaries taken as a whole do not exceed $10,000,000 during any rolling consecutive five year period and (ii) sales of the Specified Facilities. 48 7.11 Restricted Investments. The Company will not and will not permit any Subsidiary to make or permit a Subsidiary to make any Investment except the Company and any Subsidiary may: (a) make or permit to remain outstanding loans or advances to any Subsidiary other than an Inactive Subsidiary, (b) acquire and own stock, obligations or securities received in settlement of debts (created in the ordinary course of business) owing to the Company or any Subsidiary, (c) own, purchase or acquire prime commercial paper, banker's acceptances and certificates of deposit in United States and Canadian commercial banks (having combined capital and surplus of not less than U.S. $100,000,000) and repurchase agreements with respect to the foregoing, in each case due within one year from the date of purchase and payable in the United States in United States dollars, obligations of the government of the United States or any agency thereof, and obligations guaranteed by the government of the United States, (d) make or permit to remain outstanding travel and other similar advances to officers and employees in the ordinary course of business, (e) permit to remain outstanding Investments existing on the Closing Date and described on Schedule 7.11, (f) maintain deposit accounts with Bank of America containing cash collateral permitted to be held under Section 7.2(k), (g) maintain deposit accounts with Fleet National Bank containing cash collateral permitted to be held under Section 7.2(m), (h) maintain other deposit accounts with financial institutions in the ordinary course of business; provided that the amount maintained in deposit accounts with financial institutions other than the Lenders shall not exceed (x) in the case of any one such account, $200,000 for more than three consecutive Business Days; and (y) in the case of all such accounts in the aggregate, $600,000 for more than two consecutive Business Days, (i) to the extent applicable, make Investments permitted under Section 7.12 below, and (j) enter into escrow, seller note, holdback or similar arrangements in connection with any sale, lease, transfer or other disposition of any asset not prohibited hereunder (including any sale of the Paint Business). Notwithstanding the foregoing, the Company will not permit the aggregate amount of Investments in TruServ Specialty Company, LLC to exceed $1,500,000 at any time. 7.12 Restricted Payments. (a) The Company will not and will not permit any Subsidiary to pay or declare cash dividends or cash patronage dividends or redeem, purchase or otherwise acquire, or make any redemptions, purchase, or other acquisition of any of its stock or apply 49 miscellaneous deductions in lieu of patronage dividends, or make or permit any Subsidiary to make any Restricted Investment (each a "Restricted Payment") except that the Company or any Subsidiary may pay cash patronage source dividends in an amount not to exceed 20% (or such greater percentage as required under the Code) of all patronage source income; provided that if Adjusted EBITDA for the fiscal year most recently ended is at least equal to the amount set forth on Schedule 7.12 for such fiscal year, the Company may pay cash patronage source dividends in an amount not to exceed 30% of the patronage source income attributable to patronage source income other than income resulting from gains on Asset Sales plus 20% of the patronage source income resulting from gains on Asset Sales; provided, however, that none of the foregoing dividends based on Adjusted EBITDA may be paid unless the Company demonstrates on a pro forma basis that it has sufficient liquidity to meet its obligations for the six months following any such proposed payment. (b) The Company may not redeem or purchase any shares of stock except for Hardship Case Payments in an amount not to exceed $2,000,000 in the aggregate in any fiscal year. 7.13 Use of Proceeds. The Company will not, and will not permit any Subsidiary to, use any portion of the proceeds of any Credit Extension, directly or indirectly, (i) to purchase or carry Margin Stock, (ii) to repay or otherwise refinance indebtedness of the Company or others incurred to purchase or carry Margin Stock, (iii) to extend credit for the purpose of purchasing or carrying any Margin Stock, or (iv) to acquire any security in any transaction that is subject to Section 13 or 14 of the Exchange Act. 7.14 Interest Coverage Ratio. The Company will not permit the Interest Coverage Ratio as of the end of any fiscal quarter to be less than the applicable ratios set forth below:
Fiscal quarter ending on or about Ratio --------------------------------- ----- March 31, 2002 1.20 to 1 June 30, 2002 1.50 to 1 September 30, 2002 1.70 to 1 December 31, 2002 1.70 to 1 March 31, 2003 1.70 to 1 June 30, 2003 1.75 to 1 September 30, 2003 1.65 to 1 December 31, 2003 1.70 to 1 March 31, 2004 1.65 to 1 June 30, 2004 1.50 to 1
The provisions of this Section shall be subject to change, upon the sale of the Paint Business (if sold prior to June 30, 2003) or other asset sales not presently disclosed to the Lenders, upon the mutual agreement of the Company and the Required Lenders. 50 7.15 Minimum Sales. The Company will not permit consolidated gross sales for the Company and its Subsidiaries to be less than the following amounts for the following fiscal periods.
Fiscal period ending on or about Amount -------------------------------- ------ March 31, 2002 $ 460,000,000 April 30, 2002 $ 625,000,000 May 31, 2002 $ 805,000,000 June 30, 2002 $ 990,000,000 July 31, 2002 $1,200,000,000 August 31, 2002 $1,340,000,000 September 30, 2002 $1,520,000,000 October 31, 2002 $1,670,000,000 November 30, 2002 $1,815,000,000 December 31, 2002 $1,975,000,000 January 31, 2003 $1,965,000,000 February 28, 2003 $1,955,000,000 March 31, 2003 $1,945,000,000 April 30, 2003 $1,930,000,000 May 31, 2003 $1,920,000,000 June 30, 2003 $1,910,000,000 July 31, 2003 $1,900,000,000 August 31, 2003 $1,890,000,000 September 30, 2003 $1,875,000,000 October 31, 2003 $1,870,000,000 November 30, 2003 $1,865,000,000 December 31, 2003 $1,860,000,000 January 31, 2004 $1,850,000,000 February 29, 2004 $1,840,000,000 March 31, 2004 $1,830,000,000 April 30, 2004 $1,820,000,000 May 31, 2004 $1,805,000,000 June 30, 2004 $1,795,000,000
The minimum consolidated gross sales for each fiscal month of 2002, beginning with March 2002, shall be calculated on a cumulative basis from January 1, 2002. The minimum consolidated gross sales for each fiscal month beginning after fiscal year 2002 shall be calculated on a prior rolling 12-month basis. The provisions of this Section shall be subject to change, upon the sale of the Paint Business (if sold prior to June 30, 2003) or other asset sales not presently disclosed to the Lenders, upon the mutual agreement of the Company and the Required Lenders. 7.16 Capital Expenditures. The Company will not permit Capital Expenditures to be greater than the following amounts in the following fiscal periods of the Company: 51
First day of applicable fiscal year through fiscal Cumulative Amount quarter ending on or about March 31, 2002 $6,400,000 June 30, 2002 $11,200,000 September 30, 2002 $13,600,000 December 31, 2002 $16,000,000 March 31, 2003 $6,400,000 June 30, 2003 $11,200,000 September 30, 2003 $13,600,000 December 31, 2003 $16,000,000 March 31, 2004 $6,400,000 June 30, 2004 $11,200,000
The provisions of this Section shall be subject to change, upon the sale of the Paint Business (if sold prior to June 30, 2003) or other asset sales not presently disclosed to the Lenders, upon the mutual agreement of the Company and the Required Lenders. 7.17 Minimum Adjusted EBITDA. The Company will not permit Adjusted EBITDA to be less than the following amounts in the following fiscal periods:
Fiscal period ending on or about Amount -------------------------------- ------ March 31, 2002 $ 20,000,000 April 30, 2002 $ 25,000,000 May 31, 2002 $ 35,000,000 June 30, 2002 $ 50,000,000 July 31, 2002 $ 60,000,000 August 31, 2002 $ 65,000,000 September 30, 2002 $ 80,000,000 October 31, 2002 $ 90,000,000 November 30, 2002 $ 95,000,000 December 31, 2002 $100,000,000 January 31, 2003 $100,000,000 February 28, 2003 $100,000,000 March 31, 2003 $100,000,000 April 30, 2003 $ 95,000,000 May 31, 2003 $ 95,000,000 June 30, 2003 $ 95,000,000 July 31, 2003 $ 90,000,000 August 31, 2003 $ 90,000,000 September 30, 2003 $ 80,000,000 October 31, 2003 $ 80,000,000 November 30, 2003 $ 80,000,000 December 31, 2003 $ 80,000,000 January 31, 2004 $ 75,000,000
52
February 29, 2004 $ 75,000,000 March 31, 2004 $ 70,000,000 April 30, 2004 $ 70,000,000 May 31, 2004 $ 65,000,000 June 30, 2004 $ 60,000,000
The minimum Adjusted EBITDA for each fiscal month of 2002, beginning with March 2002, shall be calculated on a cumulative basis from January 1, 2002. The minimum Adjusted EBITDA for each fiscal month beginning after fiscal year 2002 shall be calculated on a prior rolling 12-month basis. The provisions of this Section shall be subject to change, upon the sale of the Paint Business (if sold prior to June 30, 2003) or other asset sales not presently disclosed to the Lenders, upon the mutual agreement of the Company and the Required Lenders. 7.18 Inactive Subsidiaries. The Company will not at any time permit its Inactive Subsidiaries, taken as a whole, to have more than $200,000 of assets (based on fair market value) or to generate more than $5,000 of revenues in any fiscal quarter. 7.19 Amendments to Financing Agreements; Prepayment of Certain Indebtedness. The Company will not, and will not permit any Subsidiary to, amend, modify, supplement or restate any Financing Agreement (as defined in the Intercreditor Agreement). The Company will not, and will not permit any Subsidiary to, (a) amend, alter or otherwise change any provision of any of the notes or other instruments evidencing any Subordinated Debt now or hereafter issued by the Company or take any other action (or refrain from taking any action) which would have the effect of eliminating or altering in any way the effect of the subordination language appearing in such notes or other instruments or any agreement relating thereto or the rights of the holders of such notes or instruments arising as a result thereof, except to the extent of Hardship Case Payments, (b) make any optional or voluntary prepayment, in whole or in part, of any Subordinated Debt or (c) make any optional or voluntary prepayment, in whole or in part, of any Benefited Obligations, other than (i) optional or voluntary prepayments, in whole or in part, of the Loans and (ii) optional or voluntary prepayments, in whole or in part, of the Shelf Obligations, the Synthetic Lease Obligations and the Senior Note Obligations (each as defined in the Intercreditor Agreement) pursuant to the terms of the Shelf Agreement, the Operative Documents or the Senior Note Agreements, as applicable (each as defined in the Intercreditor Agreement). All such optional and voluntary prepayments described in clause (c) above shall be made in accordance with the terms of the Intercreditor Agreement and, in the absence thereof, in conformance with all of the other terms hereof. 7.20 Subordinated Notes. The Company will discontinue the Variable Denomination Subordinated Floating Rate Demand Notes program on or before July 31, 2002, and no new TIP Notes will be issued after the date hereof without the approval of the Agent. 7.21 Chief Executive Officer. Any appointment by the Company of a chief executive officer will be subject to the consent of the Required Lenders. 7.22 Sale of Hagerstown Facility. The Hagerstown Facility shall not be sold unless (a) the requisite Synthetic Lease Lenders (as defined in the Intercreditor Agreement) approve such 53 sale in writing and (b) the Net Disposition Proceeds of such sale are applied to reduce the balance of the Synthetic Lease Obligations (as defined in the Intercreditor Agreement) to the extent permitted by the Intercreditor Agreement. ARTICLE VIII EVENTS OF DEFAULT 8.1 Event of Default. Any of the following events which occur and are continuing for any reason whatsoever (and whether such occurrence shall be voluntary or involuntary or come about or be effected by operation of law or otherwise) shall constitute an "Event of Default": (a) The Company defaults in the payment of any principal of any Loan when the same shall become due. (b) The Company defaults in the payment of any interest, fee or other amount payable hereunder or under any other Loan Document for more than three (3) Business Days after the date due. (c) The Company or any Subsidiary defaults (whether as primary obligor or as guarantor or other surety) in any payment of principal of or interest on any other obligation for money borrowed (or any Capitalized Lease Obligation, any obligation under a conditional sale or other title retention agreement, any obligation issued or assumed as full or partial payment for property whether or not secured by a purchase money mortgage or any obligation under notes payable or drafts accepted representing extensions of credit) beyond any period of grace provided with respect thereto, or the Company or any Subsidiary fails to perform or observe any other agreement, term or condition contained in any agreement under which any obligation is created (or if any other event thereunder or under any such agreement shall occur and be continuing) and the effect of such failure or other event is to cause, or to permit the holder or holders of such obligation (or a trustee on behalf of such holder or holders) to cause, such obligation to become due (or to be repurchased by the Company or any Subsidiary) prior to any stated maturity, provided that the aggregate amount of all obligations as to which such a payment default shall occur and be continuing or such a failure or other event causing or permitting acceleration (or resale to the Company or any Subsidiary) shall occur and be continuing exceeds $5,000,000. (d) Any representation or warranty made by the Company or any Subsidiary herein or in any other Loan Document or by the Company or any Subsidiary or any of their respective officers in any writing furnished in connection with or pursuant to this Agreement or any other Loan Document shall be false in any material respect on the date as of which made. (e) The Company fails to perform or observe any agreement contained in Article VII. (f) The Company fails to perform or observe any other agreement, term or condition contained herein and such failure shall not be remedied within 15 days after any Responsible Officer obtains actual knowledge of such failure. 54 (g) The Company or any Subsidiary (other than an Inactive Subsidiary or a Canadian Subsidiary) makes an assignment for the benefit of creditors or is generally not paying its debts as such debts become due. (h) Any decree or order for relief in respect of the Company or any Subsidiary (other than an Inactive Subsidiary or a Canadian Subsidiary) is entered under any bankruptcy, reorganization, compromise, arrangement, insolvency, readjustment of debt, dissolution or liquidation or similar law, whether now or hereafter in effect (herein called a "Bankruptcy Law"), of any jurisdiction. (i) The Company or any Subsidiary (other than an Inactive Subsidiary or a Canadian Subsidiary) petitions or applies to any tribunal for, or consents to, the appointment of, or taking possession by, a trustee, receiver, custodian, liquidator or similar official of the Company or such Subsidiary, or of any substantial part of the assets of the Company or such Subsidiary, or commences a voluntary case under the Bankruptcy Law of the United States or any proceedings (other than proceedings for the voluntary liquidation and dissolution of a Subsidiary) relating to the Company or such Subsidiary under the Bankruptcy Law of any other jurisdiction. (j) Any such petition or application is filed, or any such proceedings are commenced, against the Company or any Subsidiary (other than an Inactive Subsidiary or a Canadian Subsidiary) and the Company or such Subsidiary by any act indicates its approval thereof, consent thereto or acquiescence therein, or an order, judgment or decree is entered appointing any such trustee, receiver, custodian, liquidator or similar official, or approving the petition in any such proceedings, and such order, judgment or decree remains unstayed and in effect for more than 30 days. (k) Any order, judgment or decree is entered in any proceedings against the Company decreeing the dissolution of the Company and such order, judgment or decree remains unstayed and in effect for more than 60 days. (l) Any order, judgment or decree is entered in any proceedings against the Company or any Subsidiary decreeing a split-up of the Company or such Subsidiary which requires the divestiture of assets representing a substantial part, or the divestiture of the stock of a Subsidiary whose assets represent a substantial part, of the consolidated assets of the Company and its Subsidiaries (determined in accordance with GAAP) or which requires the divestiture of assets, or stock of a Subsidiary, which shall have contributed a substantial part of the consolidated net income of the Company and its Subsidiaries (determined in accordance with GAAP) for any of the three fiscal years then most recently ended, and such order, judgment or decree remains unstayed and in effect for more than 60 days. (m) A final judgment in an amount in excess of $5,000,000 is rendered against the Company or any Subsidiary and, within 60 days after entry thereof, such judgment is not discharged or execution thereof stayed pending appeal, or within 60 days after the expiration of any such stay, such judgment is not discharged. 55 (n) An Event of Default exists under and as defined in the Intercreditor Agreement. (o) The Guaranty shall cease to be in full force and effect with respect to any Guarantor (other than as a result of a transaction permitted hereunder), any Guarantor shall fail (subject to any applicable grace period) to comply with or to perform any applicable provision of the Guaranty, or any Guarantor (or any Person by, through or on behalf of such Guarantor) shall contest in any manner the validity, binding nature or enforceability of the Guaranty with respect to such Guarantor. (p) Any Collateral Document shall cease to be in full force and effect with respect to the Company or any Guarantor (other than as a result of a transaction permitted hereunder), the Company or any Guarantor shall fail (subject to any applicable grace period) to comply with or to perform any applicable provision of any Collateral Document to which such entity is a party, or the Company or any Guarantor (or any Person by, through or on behalf of the Company or such Guarantor) shall contest in any manner the validity, binding nature or enforceability of any Collateral Document. (q) The Company fails retain on the Board of Directors of the Company (i) at least two outside directors prior to May 31, 2002, (ii) at least four such directors prior to September 1, 2002 and (iii) at least five such directors prior to November 1, 2002 in accordance with the internal policy of the Company designated the "Corporate Governance Policy". (r) The Company shall pay any principal amount of Subordinated Debt (other than, so long as no Event of Default exists or would result therefrom and the Company has met or exceeded its Minimum Adjusted EBITDA covenant set forth in Section 7.17 as of the most recent period for which such covenant is applicable, (i) payments of principal of the Company's variable denomination floating rate subordinated notes in an aggregate amount not greater than $2,800,000 after the date hereof and (ii) payments of principal of other Subordinated Debt in an aggregate amount not greater than (x) $24,000,000 for the period from January 1, 2002 to December 31, 2002 and (y) $14,000,000 for the period from January 1, 2003 to December 31, 2003). (s) The Intercreditor Agreement shall cease to be in full force and effect. 8.2 Remedies. If any Event of Default occurs, the Agent shall, at the request of, or may, with the consent of, the Required Lenders, do any or all of the following: (a) declare the Commitment of each Lender to make Committed Loans and the obligation of the Swing Line Lender to make Swing Line Loans to be terminated, whereupon such Commitments and obligations shall be terminated; (b) declare the unpaid principal amount of all outstanding Loans, all interest accrued and unpaid thereon, and all other amounts owing or payable hereunder or under any other Loan Document to be immediately due and payable, without presentment, demand, protest or other notice of any kind, all of which are hereby expressly waived by the Company; and 56 (c) exercise on behalf of itself and the Lenders all rights and remedies available to it and the Lenders under the Loan Documents or applicable law; provided, however, that upon the occurrence of any event specified in subsection (g), (h), (i) or (j) of Section 8.1, the obligation of each Lender to make Loans shall automatically terminate and the unpaid principal amount of all outstanding Loans and all interest and other amounts as aforesaid shall automatically become due and payable. 8.3 Rights Not Exclusive. The rights provided for in this Agreement and the other Loan Documents are cumulative and are not exclusive of any other rights, powers, privileges or remedies provided by law or in equity, or under any other instrument, document or agreement now existing or hereafter arising. The Company, the Agent and the Lenders shall retain all rights arising under federal law. ARTICLE IX THE AGENT 9.1 Appointment and Authorization; "Agent". (a) Each Lender hereby irrevocably (subject to Section 9.9) appoints, designates and authorizes the Agent to take such action on its behalf under the provisions of this Agreement and each other Loan Document and to exercise such powers and perform such duties as are expressly delegated to it by the terms of this Agreement or any other Loan Document, together with such powers as are reasonably incidental thereto. Notwithstanding any provision to the contrary contained elsewhere in this Agreement or in any other Loan Document, the Agent shall not have any duties or responsibilities, except those expressly set forth herein, nor shall the Agent have or be deemed to have any fiduciary relationship with any Lender, and no implied covenants, functions, responsibilities, duties, obligations or liabilities shall be read into this Agreement or any other Loan Document or otherwise exist against the Agent. Without limiting the generality of the foregoing sentence, the use of the term "agent" in this Agreement with reference to the Agent is not intended to connote any fiduciary or other implied (or express) obligations arising under agency doctrine of any applicable law. Instead, such term is used merely as a matter of market custom, and is intended to create or reflect only an administrative relationship between independent contracting parties. (b) The Swing Line Lender shall have all of the benefits and immunities (i) provided to the Agent in this Article IX with respect to any acts taken or omissions suffered by the Swing Line Lender in connection with Swing Line Loans made or proposed to be made by it as fully as if the term "Agent", as used in this Article IX, included the Swing Line Lender with respect to such acts or omissions and (ii) as additionally provided in this Agreement with respect to the Swing Line Lender. 9.2 Delegation of Duties. The Agent may execute any of its duties under this Agreement or any other Loan Document by or through agents, employees or attorneys-in-fact and shall be entitled to advice of counsel concerning all matters pertaining to such duties. The Agent shall not be responsible for the negligence or misconduct of any agent or attorney-in-fact that it selects with reasonable care. 57 9.3 Liability of Agent. None of the Agent-Related Persons shall (i) be liable for any action taken or omitted to be taken by any of them under or in connection with this Agreement or any other Loan Document or the transactions contemplated hereby (except for its own gross negligence or willful misconduct), or (ii) be responsible in any manner to any of the Lenders for any recital, statement, representation or warranty made by the Company or any Subsidiary or Affiliate of the Company, or any officer thereof, contained in this Agreement or in any other Loan Document, or in any certificate, report, statement or other document referred to or provided for in, or received by the Agent under or in connection with, this Agreement or any other Loan Document, or the validity, effectiveness, genuineness, enforceability or sufficiency of this Agreement or any other Loan Document, or for any failure of the Company or any other party to any Loan Document to perform its obligations hereunder or thereunder. No Agent-Related Person shall be under any obligation to any Lender to ascertain or to inquire as to the observance or performance of any of the agreements contained in, or conditions of, this Agreement or any other Loan Document, or to inspect the properties, books or records of the Company or any of the Company's Subsidiaries or Affiliates. 9.4 Reliance by Agent. (a) The Agent shall be entitled to rely, and shall be fully protected in relying, upon any writing, resolution, notice, consent, certificate, affidavit, letter, telegram, facsimile, telex or telephone message, statement or other document or conversation believed by it to be genuine and correct and to have been signed, sent or made by the proper Person or Persons, and upon advice and statements of legal counsel (including counsel to the Company), independent accountants and other experts selected by the Agent. The Agent shall be fully justified in failing or refusing to take any action under this Agreement or any other Loan Document unless it shall first receive such advice or concurrence of the Required Lenders (or, if expressly required hereunder, all Lenders) as it deems appropriate and, if it so requests, it shall first be indemnified to its satisfaction by the Lenders against any and all liability and expense which may be incurred by it by reason of taking or continuing to take any such action. The Agent shall in all cases be fully protected in acting, or in refraining from acting, under this Agreement or any other Loan Document in accordance with a request or consent of the Required Lenders and such request and any action taken or failure to act pursuant thereto shall be binding upon all of the Lenders. (b) For purposes of determining compliance with the conditions specified in Section 4.1, each Lender that has executed this Agreement shall be deemed to have consented to, approved or accepted or to be satisfied with, each document or other matter either sent by the Agent to such Lender for consent, approval, acceptance or satisfaction, or required thereunder to be consented to or approved by or acceptable or satisfactory to the Lender. 9.5 Notice of Default. The Agent shall not be deemed to have knowledge or notice of the occurrence of any Event of Default or Unmatured Event of Default, except with respect to defaults in the payment of principal, interest and fees required to be paid to the Agent for the account of the Lenders, unless the Agent shall have received written notice from a Lender or the Company referring to this Agreement, describing such Event of Default or Unmatured Event of Default and stating that such notice is a "notice of default". The Agent will notify the Lenders of its receipt of any such notice. The Agent shall take such action with respect to such Event of Default or Unmatured Event of Default as may be requested by the Required Lenders in accordance with Article VIII; provided, however, that unless and until the Agent has received 58 any such request, the Agent may (but shall not be obligated to) take such action, or refrain from taking such action, with respect to such Event of Default or Unmatured Event of Default as it shall deem advisable or in the best interest of the Lenders. 9.6 Credit Decision. Each Lender acknowledges that none of the Agent-Related Persons has made any representation or warranty to it, and that no act by the Agent hereinafter taken, including any review of the affairs of the Company and its Subsidiaries, shall be deemed to constitute any representation or warranty by any Agent-Related Person to any Lender. Each Lender represents to the Agent that it has, independently and without reliance upon any Agent-Related Person and based on such documents and information as it has deemed appropriate, made its own appraisal of and investigation into the business, prospects, operations, property, financial and other condition and creditworthiness of the Company and its Subsidiaries, and all applicable bank regulatory laws relating to the transactions contemplated hereby, and made its own decision to enter into this Agreement and to extend credit to the Company hereunder. Each Lender also represents that it will, independently and without reliance upon any Agent-Related Person and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit analysis, appraisals and decisions in taking or not taking action under this Agreement and the other Loan Documents, and to make such investigations as it deems necessary to inform itself as to the business, prospects, operations, property, financial and other condition and creditworthiness of the Company. Except for notices, reports and other documents expressly herein required to be furnished to the Lenders by the Agent, the Agent shall not have any duty or responsibility to provide any Lender with any credit or other information concerning the business, prospects, operations, property, financial and other condition or creditworthiness of the Company which may come into the possession of any of the Agent-Related Persons. 9.7 Indemnification of Agent. Whether or not the transactions contemplated hereby are consummated, the Lenders shall indemnify upon demand the Agent-Related Persons (to the extent not reimbursed by or on behalf of the Company and without limiting the obligation of the Company to do so), pro rata, from and against any and all Indemnified Liabilities; provided, however, that no Lender shall be liable for the payment to any Agent-Related Person of any portion of the Indemnified Liabilities resulting solely from such Person's gross negligence or willful misconduct. Without limitation of the foregoing, each Lender shall reimburse the Agent upon demand for its ratable share of any costs or out-of-pocket expenses (including Attorney Costs) incurred by the Agent in connection with the preparation, execution, delivery, administration, modification, amendment or enforcement (whether through negotiations, legal proceedings or otherwise) of, or legal advice in respect of rights or responsibilities under, this Agreement, any other Loan Document, or any document contemplated by or referred to herein, to the extent that the Agent is not reimbursed for such expenses by or on behalf of the Company. The undertaking in this Section shall survive the payment of all Obligations hereunder and the resignation or replacement of the Agent. 9.8 Agent in Individual Capacity. BofA and its Affiliates may make loans to, issue letters of credit for the account of, accept deposits from, acquire equity interests in and generally engage in any kind of banking, trust, financial advisory, underwriting or other business with the Company and its Subsidiaries and Affiliates as though BofA were not the Agent and the Swing Line Lender hereunder, in each case without notice to or consent of the Lenders. The Lenders 59 acknowledge that, pursuant to such activities, BofA or its Affiliates may receive information regarding the Company or its Affiliates (including information that may be subject to confidentiality obligations in favor of the Company or such Subsidiary) and acknowledge that the Agent shall be under no obligation to provide such information to them. With respect to its Loans, BofA and any Affiliate thereof shall have the same rights and powers under this Agreement as any other Lender and may exercise the same as though BofA were not the Agent or the Swing Line Lender. 9.9 Successor Agent. The Agent may, and at the request of the Required Lenders shall, resign as Agent upon 30 days' notice to the Lenders and the Company. If the Agent resigns under this Agreement, the Required Lenders (with, if no Event of Default and Unmatured Event of Default then exists, the consent of the Company, not to be unreasonably withheld) shall appoint from among the Lenders a successor agent for the Lenders. If no successor agent is appointed prior to the effective date of the resignation of the Agent, the Agent may appoint, after consulting with the Lenders and the Company, a successor agent from among the Lenders. Upon the acceptance of its appointment as successor agent hereunder, such successor agent shall succeed to all the rights, powers and duties of the retiring Agent and the term "Agent" shall mean such successor agent and the retiring Agent's appointment, powers and duties as Agent shall be terminated. After any retiring Agent's resignation hereunder as Agent, the provisions of this Article IX and Sections 10.4 and 10.5 shall inure to its benefit as to any actions taken or omitted to be taken by it while it was Agent under this Agreement. If no successor agent has accepted appointment as Agent by the date which is 30 days following a retiring Agent's notice of resignation, the retiring Agent's resignation shall nevertheless thereupon become effective and the Lenders shall perform all of the duties of the Agent hereunder until such time, if any, as the Required Lenders appoint a successor agent as provided for above. Notwithstanding the foregoing, however, BofA may not be removed as the Agent at the request of the Required Lenders unless BofA or any Affiliate of BofA shall also simultaneously be replaced as "Swing Line Lender" hereunder pursuant to documentation in form and substance reasonably satisfactory to BofA and, if applicable, such Affiliate. 9.10 Withholding Tax. (a) If any Lender is a "foreign corporation, partnership or trust" within the meaning of the Code and such Lender claims exemption from, or a reduction of, U.S. withholding tax under Sections 1441 or 1442 of the Code, such Lender agrees with and in favor of the Agent, to deliver to the Agent: (i) if such Lender claims an exemption from, or a reduction of, withholding tax under a United States tax treaty, properly completed IRS Form W-8BEN before the payment of any interest in the first calendar year and before the payment of any interest in each third succeeding calendar year during which interest may be paid under this Agreement; (ii) if such Lender claims that interest paid under this Agreement is exempt from United States withholding tax because it is effectively connected with a United States trade or business of such Lender, two properly completed and executed copies of IRS Form W-8ECI before the payment of any interest is due in the first taxable year of such Lender and in each succeeding taxable year of such Lender during which interest may be paid under this Agreement, and IRS Form W-9; and 60 (iii) such other form or forms as may be required under the Code or other laws of the United States as a condition to exemption from, or reduction of, United States withholding tax. Each such Lender agrees to promptly notify the Agent of any change in circumstances which would modify or render invalid any claimed exemption or reduction. (b) If any Lender claims exemption from, or reduction of, withholding tax under a United States tax treaty by providing IRS Form W-8BEN and such Lender sells, assigns, grants a participation in, or otherwise transfers all or part of the Obligations of the Company to such Lender, such Lender agrees to notify the Agent of the percentage amount in which it is no longer the beneficial owner of Obligations of the Company to such Lender. To the extent of such percentage amount, the Agent will treat such Lender's IRS Form W-8BEN as no longer valid. (c) If any Lender claiming exemption from United States withholding tax by filing IRS Form W-8ECI with the Agent sells, assigns, grants a participation in, or otherwise transfers all or part of the Obligations of the Company to such Lender, such Lender agrees to undertake sole responsibility for complying with the withholding tax requirements imposed by Sections 1441 and 1442 of the Code. (d) If any Lender is entitled to a reduction in the applicable withholding tax, the Agent may withhold from any interest payment to such Lender an amount equivalent to the applicable withholding tax after taking into account such reduction. If the forms or other documentation required by subsection (a) of this Section are not delivered to the Agent, then the Agent may withhold from any interest payment to such Lender not providing such forms or other documentation an amount equivalent to the applicable withholding tax. (e) If the IRS or any other Governmental Authority of the United States or other jurisdiction asserts a claim that the Agent did not properly withhold tax from amounts paid to or for the account of any Lender (because the appropriate form was not delivered or was not properly executed, or because such Lender failed to notify the Agent of a change in circumstances which rendered the exemption from, or reduction of, withholding tax ineffective, or for any other reason) such Lender shall indemnify the Agent fully for all amounts paid, directly or indirectly, by the Agent as tax or otherwise, including penalties and interest, and including any taxes imposed by any jurisdiction on the amounts payable to the Agent under this Section, together with all costs and expenses (including Attorney Costs). The obligation of the Lenders under this subsection shall survive the payment of all Obligations and the resignation or replacement of the Agent. ARTICLE X MISCELLANEOUS 10.1 Amendments and Waivers. No amendment or waiver of any provision of this Agreement or any other Loan Document, and no consent with respect to any departure by the Company or any applicable Subsidiary therefrom, shall be effective unless the same shall be in 61 writing and signed by the Required Lenders (or by the Agent at the written request of the Required Lenders) and the Company and acknowledged by the Agent, and then any such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given; provided that no such waiver, amendment, or consent shall, unless in writing and signed by all the Lenders and the Company and acknowledged by the Agent, do any of the following: (a) increase or extend the Commitment of any Lender (or reinstate any Commitment terminated pursuant to Section 8.2); (b) postpone or delay any date fixed by this Agreement or any other Loan Document for any payment of principal, interest, fees or other amounts due to the Lenders (or any of them) hereunder or under any other Loan Document; (c) reduce the principal of, or the rate of interest specified herein on, any Loan, or (subject to clause (iii) below) reduce any fees or other amounts payable hereunder or under any other Loan Document; (d) change the percentage of the Commitments or of the aggregate unpaid principal amount of the Obligations which is required for the Lenders or any of them to take any action hereunder; (e) amend this Section, the definition of "Required Lenders", Section 2.8 or any provision herein providing for consent or other action by all Lenders; (f) release any Guarantor under the Guaranty, except pursuant to Section 10.21; or (g) release all or any Substantial Portion of the Collateral and, provided further, that (i) no amendment, waiver or consent shall, unless in writing and signed by the Agent in addition to the Required Lenders or all the Lenders, as the case may be, affect the rights or duties of the Agent under this Agreement or any other Loan Document, (ii) no amendment, waiver or consent shall, unless in writing and signed by the Swing Line Lender in addition to the Required Lenders or all Lenders, as the case may be, affect the rights or duties of the Swing Line Lender under this Agreement or any other Loan Document, and (iii) the Fee Letter may be amended, or rights or privileges thereunder waived, in a writing executed by the parties thereto. As used herein, "Substantial Portion" means, at any time, any Collateral consisting of assets which generated 10% or more of the consolidated revenues of the Company and its Subsidiaries in the prior fiscal year. 10.2 Notices. (a) All notices, requests and other communications shall be in writing (including, unless the context expressly otherwise provides, by facsimile transmission, provided that any matter transmitted by the Company by facsimile (i) shall be immediately confirmed by a telephone call to the recipient at the number specified on Schedule 10.2, and (ii) shall be followed promptly by delivery of a hard copy original thereof) and mailed, faxed or delivered, to the address or facsimile number specified for notices on Schedule 10.2; or, as directed to the Company or the Agent, to such other address as shall be designated by such party in a written 62 notice to the other parties, and as directed to any other party, at such other address as shall be designated by such party in a written notice to the Company and the Agent. (b) All such notices, requests and communications shall, when transmitted by overnight delivery, or faxed, be effective when delivered or transmitted in legible form by facsimile machine, respectively, or if mailed, upon the third Business Day after the date deposited into the U.S. mail, certified mail, return receipt requested; except that notices pursuant to Article II or IX to the Agent or the Swing Line Lender shall not be effective until actually received by the Agent, as the case may be. (c) Any agreement of the Agent and the Lenders herein to receive certain notices by telephone or facsimile is solely for the convenience and at the request of the Company. The Agent and the Lenders shall be entitled to rely on the authority of any Person purporting to be a Person authorized by the Company to give such notice and the Agent and the Lenders shall not have any liability to the Company or any other Person on account of any action taken or not taken by the Agent or the Lenders in reliance upon such telephonic or facsimile notice. The obligation of the Company to repay the Obligations shall not be affected in any way or to any extent by any failure by the Agent and the Lenders to receive written confirmation of any telephonic or facsimile notice or the receipt by the Agent and the Lenders of a confirmation which is at variance with the terms understood by the Agent and the Lenders to be contained in the telephonic or facsimile notice. 10.3 No Waiver; Cumulative Remedies. No failure to exercise and no delay in exercising, on the part of the Agent or any Lender, any right, remedy, power or privilege hereunder, shall operate as a waiver thereof; nor shall any single or partial exercise of any right, remedy, power or privilege hereunder preclude any other or further exercise thereof or the exercise of any other right, remedy, power or privilege. 10.4 Costs and Expenses. The Company shall: (a) whether or not the transactions contemplated hereby are consummated, pay or reimburse the Agent and the Swing Line Lender within five Business Days after demand (subject to subsection 4.1(e)) for all reasonable costs and expenses incurred by the Agent and the Swing Line Lender in connection with the development, preparation, delivery, administration and execution of, and any amendment, supplement, waiver or modification to (in each case, whether or not consummated), this Agreement, any other Loan Document and any other documents prepared in connection herewith or therewith, and the consummation of the transactions contemplated hereby and thereby, including (i) reasonable Attorney Costs incurred by the Agent and the Swing Line Lender with respect thereto and (ii) the reasonable fees and charges of any financial advisor retained by the Agent or by counsel to the Agent (but without duplication of fees and charges of any financial advisor retained by the Collateral Agent or its counsel); and (b) pay or reimburse the Agent and each Lender within five Business Days after demand (subject to subsection 4.1(e)) for all reasonable costs and expenses (including Attorney Costs) incurred by them in connection with the enforcement, attempted enforcement, or preservation of any rights or remedies under this Agreement or any other Loan Document during 63 the existence of an Event of Default or after acceleration of the Loans and other Obligations (including in connection with any "workout" or restructuring regarding the Loans and other Obligations, and including in any Insolvency Proceeding or appellate proceeding); provided that the Company shall not be obligated to pay or reimburse the Agent or any Lender in respect of any suit or proceeding in which the Company is adverse to the Agent or such Lender and final nonappealable judgment is rendered by a court of competent jurisdiction in favor of the Company on all counts. 10.5 Company Indemnification. Whether or not the transactions contemplated hereby are consummated, the Company shall indemnify and hold the Agent-Related Persons, and each Lender and each of their respective officers, directors, employees, counsel, agents and attorneys-in-fact (each an "Indemnified Person") harmless from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, charges, expenses and disbursements (including Attorney Costs) of any kind or nature whatsoever which may at any time (including at any time following repayment of the Obligations and the termination, resignation or replacement of the Agent or replacement of any Lender) be imposed on, incurred by or asserted against any such Person in any way relating to or arising out of this Agreement or any document contemplated by or referred to herein, or the transactions contemplated hereby or thereby, or any action taken or omitted by any such Person under or in connection with any of the foregoing, including with respect to any investigation, litigation or proceeding (including any Insolvency Proceeding or appellate proceeding) related to or arising out of this Agreement or the Loans or the use of the proceeds thereof, whether or not any Indemnified Person is a party thereto (all the foregoing, collectively, the "Indemnified Liabilities"); provided that the Company shall have no obligation hereunder to any Indemnified Person with respect to Indemnified Liabilities resulting solely from the gross negligence or willful misconduct of such Indemnified Person. The agreements in this Section shall survive payment of all other Obligations and the termination of this Agreement. 10.6 Payments Set Aside. To the extent that the Company makes a payment to the Agent or any Lender, or the Agent or any Lender exercises its right of set-off, and such payment or the proceeds of such set-off or any part thereof are subsequently invalidated, declared to be fraudulent or preferential, set aside or required (including pursuant to any settlement entered into by the Agent or such Lender in its discretion) to be repaid to a trustee, receiver, or any other party, in connection with any Insolvency Proceeding or otherwise, then (a) to the extent of such recovery the obligation or part thereof originally intended to be satisfied shall be revived and continued in full force and effect as if such payment had not been made or such set-off had not occurred and (b) each Lender severally agrees to pay to the Agent upon demand its pro rata share of any amount so recovered from or repaid by the Agent or any Lender. 10.7 Successors and Assigns. The provisions of this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns, except that the Company may not assign or transfer any of its rights or obligations under this Agreement without the prior written consent of the Agent and each Lender. 10.8 Assignments, Participations, etc. (a) Any Lender may, with the written consent of the Swing Line Lender and the Agent, which consents shall not be unreasonably withheld, at any time assign and delegate to one or more Persons (provided that no written consent of the Swing 64 Line Lender or the Agent shall be required in connection with any assignment and delegation by a Lender to an Affiliate of such Lender) (each an "Assignee") all, or any ratable part of all, of the Loans, the Commitment and the other rights and obligations of such Lender hereunder, in a minimum amount of $10,000,000 (or, if less, all of such Lender's remaining rights and obligations hereunder); provided, however, that (x) no assignment and delegation may be made to any Person if, at the time of such assignment and delegation, (i) the Company would be obligated to pay any greater amount under Article III to the Assignee than the Company is then obligated to pay to the assigning Lender under such Article (and if any assignment is made in violation of the foregoing, the Company will not be required to pay the incremental amounts) and (ii) the Assignee has not presented evidence reasonably satisfactory to the Agent and the Company that the Assignee is exempt from withholding taxes and (y) the Company, the Swing Line Lender and the Agent may continue to deal solely and directly with such Lender in connection with the interest so assigned to an Assignee until (i) written notice of such assignment, together with payment instructions, addresses and related information with respect to the Assignee, shall have been given to the Company and the Agent by such Lender and the Assignee; (ii) such Lender and its Assignee shall have delivered to the Company and the Agent an Assignment and Acceptance in the form of Exhibit G ("Assignment and Acceptance") together with any Note or Notes subject to such assignment and (iii) the assignor Lender or Assignee has paid to the Agent a processing fee in the amount of $5,000. (b) From and after the date that the Agent notifies the assignor Lender that it has received and provided its consent (and received the consent of the Swing Line Lender) with respect to an executed Assignment and Acceptance and payment of the above-referenced processing fee, (i) the Assignee thereunder shall be a party hereto and, to the extent that rights and obligations hereunder have been assigned to it pursuant to such Assignment and Acceptance, shall have the rights and obligations of a Lender under the Loan Documents, and (ii) the assignor Lender shall, to the extent that rights and obligations hereunder and under the other Loan Documents have been assigned by it pursuant to such Assignment and Acceptance, relinquish its rights and be released from its obligations under the Loan Documents. (c) Any Lender may at any time sell to one or more Persons not Affiliates of the Company (a "Participant") participating interests in any Loans, the Commitment of such Lender and the other interests of such Lender (the "originating Lender") hereunder and under the other Loan Documents; provided, however, that (i) the originating Lender's obligations under this Agreement shall remain unchanged, (ii) the originating Lender shall remain solely responsible for the performance of such obligations, (iii) the Company, the Agent and the Swing Line Lender shall continue to deal solely and directly with the originating Lender in connection with the originating Lender's rights and obligations under this Agreement and the other Loan Documents, and (iv) no Lender shall transfer or grant any participating interest under which the Participant has rights to approve any amendment to, or any consent or waiver with respect to, this Agreement or any other Loan Document, except to the extent such amendment, consent or waiver would require unanimous consent of the Lenders as described in the first proviso to Section 10.1. In the case of any such participation, the Participant shall be entitled to the benefit of Sections 3.1, 3.2 and 10.5 as though it were also a Lender hereunder (provided that no Participant shall receive any greater amount pursuant to Article III than would have been paid to the participating Lender if no participation had been sold), and if amounts outstanding under this Agreement are due and unpaid, or shall have been declared or shall have become due and 65 payable upon the occurrence of an Event of Default, each Participant shall be deemed to have the right of set-off in respect of its participating interest in amounts owing under this Agreement to the same extent as if the amount of its participating interest were owing directly to it as a Lender under this Agreement. Notwithstanding any other provision of this Section, sales of participations required under the Intercreditor Agreement shall be permitted. (d) Notwithstanding any other provision in this Agreement, any Lender may at any time create a security interest in, or pledge, all or any portion of its rights under and interest in this Agreement and any Note held by it in favor of any Federal Reserve Bank in accordance with Regulation A of the FRB or U.S. Treasury Regulation 31 CFR Section 203.14, and such Federal Reserve Bank may enforce such pledge or security interest in any manner permitted under applicable law. 10.9 Confidentiality. Each Lender agrees to take and to cause its Affiliates to take normal and reasonable precautions and exercise due care to maintain the confidentiality of all information provided to it by the Company or any Subsidiary, or by the Agent on the Company's or such Subsidiary's behalf, under this Agreement or any other Loan Document, and neither such Lender nor any of its Affiliates shall use any such information other than in connection with or in enforcement of this Agreement and the other Loan Documents or in connection with other business now or hereafter existing or contemplated with the Company or any Subsidiary; except to the extent such information (i) was or becomes generally available to the public other than as a result of disclosure by such Lender, or (ii) was or becomes available on a non-confidential basis from a source other than the Company, provided that such source is not bound by a confidentiality agreement with the Company or any Subsidiary known to such Lender; provided, however, that any Lender may disclose such information (A) at the request or pursuant to any requirement of any Governmental Authority to which such Lender is subject or in connection with an examination of such Lender by any such authority; (B) pursuant to subpoena or other court process; (C) when required to do so in accordance with the provisions of any applicable Requirement of Law; (D) to the extent reasonably required in connection with any litigation or proceeding to which the Agent or any Lender or any of their respective Affiliates may be party; (E) to the extent reasonably required in connection with the exercise of any remedy hereunder or under any other Loan Document; (F) to such Lender's independent auditors and other professional advisors; (G) to any Participant or Assignee, actual or potential, provided that such Person agrees in writing to keep such information confidential to the same extent required of the Lenders hereunder; (H) as to any Lender or its Affiliate, as expressly permitted under the terms of any other document or agreement regarding confidentiality to which the Company or any Subsidiary is party or is deemed party with such Lender or such Affiliate; and (I) to its Affiliates. Each Lender shall, to the extent permitted by applicable law, use reasonable efforts to give the Company timely notice of any event described in clause (B) or (C) of the preceding sentence which may require disclosure of confidential information so that the Company will have an opportunity to seek a protective order. 10.10 Set-off. In addition to any rights and remedies of the Lenders provided by law, if an Event of Default exists, or the Obligations have been accelerated, each Lender is authorized at any time and from time to time, without prior notice to the Company, any such notice being waived by the Company to the fullest extent permitted by law, to set off and apply any and all deposits (general or special, time or demand, provisional or final) at any time held by, and other 66 indebtedness at any time owing by, such Lender to or for the credit or the account of the Company against any and all Obligations owing to such Lender, now or hereafter existing, irrespective of whether or not the Agent or such Lender shall have made demand under this Agreement or any other Loan Document and although such Obligations may be contingent or unmatured. Each Lender agrees promptly to notify the Company and the Agent after any such set-off and application made by such Lender; provided that the failure to give such notice shall not affect the validity of such set-off and application. 10.11 Automatic Debits of Fees. With respect to any non-use fee, arrangement fee or other fee, or any other cost or expense (including Attorney Costs) due and payable to the Agent, the Swing Line Lender or BofA under the Loan Documents, the Company hereby irrevocably authorizes BofA to debit any deposit account of the Company with BofA in an amount such that the aggregate amount debited from all such deposit accounts does not exceed such fee or other cost or expense. If there are insufficient funds in such deposit accounts to cover the amount of the fee or other cost or expense then due, such debits will be reversed (in whole or in part, in BofA's sole discretion) and such amount not debited shall be deemed to be unpaid. No such debit under this Section shall be deemed a set-off. 10.12 Notification of Addresses, Lending Offices, Etc. Each Lender shall notify the Agent in writing of any change in the address to which notices to such Lender should be directed, of addresses of any Lending Office, of payment instructions in respect of all payments to be made to it hereunder and of such other administrative information as the Agent shall reasonably request. 10.13 Counterparts. This Agreement may be executed in any number of separate counterparts, each of which, when so executed, shall be deemed an original, and all of which taken together shall be deemed to constitute but one and the same instrument. 10.14 Severability. The illegality or unenforceability of any provision of this Agreement or any instrument or agreement required hereunder shall not in any way affect or impair the legality or enforceability of the remaining provisions of this Agreement or such instrument or agreement. 10.15 No Third Parties Benefited. This Agreement is made and entered into for the sole protection and legal benefit of the Company, the Lenders, the Agent, the Agent-Related Persons and the Indemnified Persons, and their respective permitted successors and assigns, and no other Person shall be a direct or indirect legal beneficiary of, or have any direct or indirect cause of action or claim in connection with, this Agreement or any other Loan Document. 10.16 Governing Law and Jurisdiction. (a) THIS AGREEMENT AND ANY NOTES SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAW OF THE STATE OF ILLINOIS. (b) ANY LEGAL ACTION OR PROCEEDING WITH RESPECT TO THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT MAY BE BROUGHT IN THE COURTS OF THE STATE OF ILLINOIS OR OF THE UNITED STATES FOR THE NORTHERN DISTRICT OF ILLINOIS, AND BY EXECUTION AND DELIVERY OF THIS 67 AGREEMENT, EACH OF THE COMPANY, THE AGENT AND THE LENDERS CONSENTS, FOR ITSELF AND IN RESPECT OF ITS PROPERTY, TO THE NON-EXCLUSIVE JURISDICTION OF SUCH COURTS. EACH OF THE COMPANY, THE AGENT AND THE LENDERS IRREVOCABLY WAIVES ANY OBJECTION, INCLUDING ANY OBJECTION TO THE LAYING OF VENUE OR BASED ON THE GROUNDS OF FORUM NON CONVENIENS, WHICH IT MAY NOW OR HEREAFTER HAVE TO THE BRINGING OF ANY ACTION OR PROCEEDING IN SUCH JURISDICTION IN RESPECT OF THIS AGREEMENT OR ANY DOCUMENT RELATED HERETO. THE COMPANY, THE AGENT AND THE LENDERS EACH WAIVE PERSONAL SERVICE OF ANY SUMMONS, COMPLAINT OR OTHER PROCESS, WHICH MAY BE MADE BY ANY OTHER MEANS PERMITTED BY ILLINOIS LAW. 10.17 Waiver of Jury Trial. THE COMPANY, THE LENDERS AND THE AGENT EACH WAIVE THEIR RESPECTIVE RIGHTS TO A TRIAL BY JURY OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF OR RELATED TO THIS AGREEMENT, THE OTHER LOAN DOCUMENTS, OR THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY, IN ANY ACTION, PROCEEDING OR OTHER LITIGATION OF ANY TYPE BROUGHT BY ANY OF THE PARTIES AGAINST ANY OTHER PARTY OR ANY AGENT-RELATED PERSON OR INDEMNIFIED PERSON, PARTICIPANT OR ASSIGNEE, WHETHER WITH RESPECT TO CONTRACT CLAIMS, TORT CLAIMS, OR OTHERWISE. THE COMPANY, THE LENDERS AND THE AGENT EACH AGREE THAT ANY SUCH CLAIM OR CAUSE OF ACTION SHALL BE TRIED BY A COURT TRIAL WITHOUT A JURY. WITHOUT LIMITING THE FOREGOING, THE PARTIES FURTHER AGREE THAT THEIR RESPECTIVE RIGHT TO A TRIAL BY JURY IS WAIVED BY OPERATION OF THIS SECTION AS TO ANY ACTION, COUNTERCLAIM OR OTHER PROCEEDING WHICH SEEKS, IN WHOLE OR IN PART, TO CHALLENGE THE VALIDITY OR ENFORCEABILITY OF THIS AGREEMENT OR THE OTHER LOAN DOCUMENTS OR ANY PROVISION HEREOF OR THEREOF. THIS WAIVER SHALL APPLY TO ANY SUBSEQUENT AMENDMENT, RENEWAL, SUPPLEMENT OR MODIFICATION TO THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS. 10.18 Judgment. If, for the purposes of obtaining judgment in any court, it is necessary to convert a sum due hereunder or any other Loan Document in one currency into another currency, the rate of exchange used shall be that at which in accordance with normal banking procedures the Agent could purchase the first currency with such other currency on the Business Day preceding that on which final judgment is given. The obligation of the Company in respect of any such sum due from it to the Agent hereunder or under any other Loan Document shall, notwithstanding any judgment in a currency (the "Judgment Currency") other than that in which such sum is denominated in accordance with the applicable provisions of this Agreement (the "Agreement Currency"), be discharged only to the extent that on the Business Day following receipt by the Agent of any sum adjudged to be so due in the Judgment Currency, the Agent may in accordance with normal banking procedures purchase the Agreement Currency with the Judgment Currency. If the amount of the Agreement Currency so purchased is less than the sum originally due to the Agent in the Agreement Currency, the Company agrees, as a separate obligation and notwithstanding any such judgment, to indemnify the Agent or the Person to whom such obligation was owing against such loss. If the amount of the Agreement Currency so 68 purchased is greater than the sum originally due to the Agent in such currency, the Agent agrees to return the amount of any excess to the Company (or to any other Person who may be entitled thereto under applicable law). 10.19 Entire Agreement. This Agreement, together with the other Loan Documents, embodies the entire agreement and understanding among the Company, the Lenders and the Agent, and supersedes all prior or contemporaneous agreements and understandings of such Persons, verbal or written, relating to the subject matter hereof and thereof. 10.20 Amendment and Restatement. This Agreement amends and restates the Original Agreement in its entirety and, after the Effective Date the Original Agreement shall be of no further force or effect (except for any provision thereof which by its terms survives termination thereof). 10.21 Collateral Matters. The Lenders irrevocably authorize the Collateral Agent, at its option and in its discretion, (i) to release any Lien on any property granted to or held by the Collateral Agent under any Collateral Document (x) upon termination of the Commitments and payment in full of all Loans and all other obligations of the Company hereunder; (y) which is sold or to be sold or disposed of as part of or in connection with any disposition permitted hereunder or (z) if approved, authorized or ratified in writing by the Required Lenders; (ii) to subordinate any Lien on any property granted to or held by the Collateral Agent under any Collateral Document to the holder of any Lien on such property which is permitted by Section 7.2 hereof; and (iii) to release any Guarantor from its obligations under the Guaranty if such entity ceases to be a Subsidiary as a result of a transaction permitted hereunder. Upon request by the Collateral Agent at any time, the Required Lenders will confirm in writing the Collateral Agent' s authority to release or subordinate its interest in particular types or items of property, or to release any Guarantor from its obligations under the Guaranty, pursuant to this Section 10.21. 69 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and delivered by their proper and duly authorized officers as of the day and year first above written. TRUSERV CORPORATION By /s/ BARBARA L. WAGNER -------------------------- Title: Vice President -------------------------- 1 BANK OF AMERICA, N.A., as Agent By: /s/ RONALD PRINCE -------------------------- Title: Senior Vice President -------------------------- BANK OF AMERICA, N.A., as a Lender By: /s/ RONALD PRINCE -------------------------- Title: Senior Vice President -------------------------- 2 BANK OF MONTREAL, as a Lender By: /s/ HEATHER L. TURF -------------------------- Title: Director -------------------------- 3 BANK ONE, NA (Main Office Chicago), as a Lender By: /s/ RICHARD BABCOCK -------------------------- Title: First Vice President -------------------------- 4 PNC BANK, NATIONAL ASSOCIATION, as a Lender By: /s/ J. WILLIAM BREHM -------------------------- Title: Vice President -------------------------- 5 WACHOVIA BANK, N.A., as a Lender By: /s/ JAMES BARWIS -------------------------- Title: Director -------------------------- 6 THE NORTHERN TRUST COMPANY, as a Lender By: /s/ OLGA GEORGIEV -------------------------- Title: Vice President -------------------------- 7 ABN AMRO BANK N.V., as a Lender By: /s/ WILLIAM J. TERESKY, JR. -------------------------- Title: Group Vice President -------------------------- By: /s/ NEIL J. BIVONA -------------------------- Title: Group Vice President -------------------------- 8 NATIONAL CONSUMER COOPERATIVE BANK, as a Lender By: /s/ MARK W. HILTZ -------------------------- Title: Managing Director -------------------------- 9 UMB BANK, N.A. By: /s/ TERRY DIERKS -------------------------- Title: Senior Vice President -------------------------- 10 EXHIBIT A FORM OF NOTICE OF BORROWING Date:______ To: Bank of America, N.A., as Agent under the Second Amended and Restated Credit Agreement dated as of April 11, 2002 (as renewed, amended, restated, supplemented or otherwise modified from time to time, the "Credit Agreement") among TruServ Corporation, various financial institutions and Bank of America, N.A., as Agent. Ladies and Gentlemen: The undersigned, TruServ Corporation (the "Company"), refers to the Credit Agreement (terms defined therein being used herein as therein defined) and hereby gives you notice irrevocably, pursuant to Section [2.3/2.14] of the Credit Agreement, of the [Borrowing of Committed Loans/Swing Line Loans] specified below: (a) The Business Day of the proposed [Borrowing/Swing Line Loans] is __________, ____ . (b) The aggregate amount of the proposed [Borrowing/Swing Line Loans] is $___________. The Company certifies that the following statements are true on the date hereof, and will be true on the date of the proposed [Borrowing/Swing Line Loans], before and after giving effect thereto and to the application of the proceeds therefrom: (a) the representations and warranties contained in Article V of the Credit Agreement are true and correct in all material respects as though made on and as of such date (except to the extent such representations and warranties expressly relate to an earlier date, in which case they are true and correct as of such date); (b) no Event of Default or Unmatured Event of Default has occurred and is continuing or will result from such proposed [Borrowing/Swing Line Loans]; and (c) the proposed [Borrowing/Swing Line Loans] will not cause the Total Outstandings to exceed the combined Commitments of all Lenders. TRUSERV CORPORATION By: -------------------------- Title: -------------------------- 1 EXHIBIT C FORM OF CONSENT CONSENT Each of the undersigned hereby consents to the Second Amended and Restated Credit Agreement dated as of April 11, 2002 (as renewed, amended, restated, supplemented or otherwise modified from time to time, the "Credit Agreement") among TruServ Corporation, various financial institutions and Bank of America, N.A., as Agent. All capitalized terms used in this Consent will have the respective meanings set forth in the Credit Agreement unless otherwise defined or the context otherwise requires. Each of the undersigned agrees that all Loan Documents delivered by it pursuant to the Existing Credit Agreement shall remain in full force and effect. IN WITNESS WHEREOF, the undersigned have executed this Consent this 11th day of April, 2002. TRUSERV CORPORATION By: ---------------------------------- Name Printed: ------------------------ Title: ------------------------------- TRUSERV ACCEPTANCE COMPANY By: ---------------------------------- Name Printed: ------------------------ Title: ------------------------------- TRUSERV LOGISTICS COMPANY By: ---------------------------------- Name Printed: ------------------------ Title: ------------------------------- 1 GENERAL PAINT & MANUFACTURING COMPANY By: ---------------------------------- Name Printed: ------------------------ Title: ------------------------------- MARY GREEN, LLC By: ---------------------------------- Name Printed: ------------------------ Title: ------------------------------- TRUE VALUE.COM CORPORATION By: ---------------------------------- Name Printed: ------------------------ Title: ------------------------------- 2 EXHIBIT E FORM OF COMPLIANCE CERTIFICATE To: Bank of America, N.A., as Agent, and the Lenders which are parties to the Credit Agreement referred to below Reference is made to the Second Amended and Restated Credit Agreement dated as of April 11, 2002 (as renewed, amended, restated, supplemented or otherwise modified from time to time, the "Credit Agreement") among TruServ Corporation (the "Company"), various financial institutions and Bank of America, N.A., as Agent. Terms used but not otherwise defined herein are used herein as defined in the Credit Agreement. 1. Report. Enclosed herewith is a copy of the [annual audit/quarterly] report of the Company as at ____________, ____ (the "Computation Date"), which report fairly presents the consolidated financial position of the Company and its Subsidiaries, as of the Computation Date. 2. Financial Tests. The Company hereby certifies and warrants to you that the attached is a true and correct computation as at the Computation Date of the ratios and/or financial restrictions contained in the Credit Agreement. 3. Defaults. The Company hereby further certifies and warrants to you that no Event of Default or Unmatured Event of Default has occurred and is continuing. IN WITNESS WHEREOF, the Company has caused this Certificate to be executed and delivered by its duly authorized officer this _________________ day of _____________, ____. TRUSERV CORPORATION By: ---------------------------------- Title: ------------------------------- 3 FINANCIAL COVENANTS For Period Ended ______________ I. Fixed Charge Coverage Ratio (Section 7.1) 1. Consolidated Net Earnings for the period of four $________________________ consecutive fiscal quarters ending __________ 2. Interest expense (including rent expense with respect to Synthetic $________________________ Leases), taxes, depreciation and amortization (to the extent deducted in determining Consolidated Net Earnings for such period) 3. Restructuring Charges to the extent taken in such period $________________________ 4. Gains from Asset Sales realized during such period (to the extent $________________________ included in determining Consolidated Net Earnings for such period) 5. Losses from Asset Sales realized during such period (to the extent $________________________ deducted in determining Consolidated Net Earnings for such period) 6. Line I-1 plus Line I-2 plus Line I-3 minus Line I-4 plus Line I-5(1) $________________________ 7. Scheduled payments of principal with respect to the Senior Notes and $________________________ Shelf Notes during such period 8. Interest expense during such period (including rent expense with $________________________ respect to Synthetic Leases but excluding interest with respect to Make-Whole Obligations and new Make-Whole obligations of principal arising in such period) 9. Capital expenditures during such period $________________________ 10. Line I-7 plus Line I-8 plus Line I-9(1) $________________________ 11. Ratio of Line I-6 to Line I-10 ________________________ 12. Applicable Ratio(2) ________________________
- --------- (1) To be calculated for the period ending (x) March 31, 2002 based upon such period and then multiplied by four, (y) June 30, 2002 based upon the period of two consecutive fiscal quarters ending on such date and then multiplied by two and (z) September 30, 2002 based upon the period of three consecutive fiscal quarters ending on such date and then multiplied by one and one-third. (2) This calculation is subject to change, upon the sale of the Paint Business (if sold prior to June 30, 2003) or other asset sales not presently disclosed to the Lenders, upon the mutual agreement of the Company and the Required Lenders. 1 II. Interest Coverage Ratio (Section 7.14)(3) 1. Line I-6 from Section I $________________________ 2. Interest Expense for such period (including rent expense with respect $________________________ to Synthetic Leases but excluding interest expense with respect to Make-Whole Obligations and Make-Whole Obligations of principal arising in such period)4 3. Ratio of Line II-1 to Line II-2 _______________ 4. Applicable Ratio _______________ III. Sales (Section 7.15)(4) 1. Sales for the period of four consecutive fiscal quarters ending __________ $________________________ 2. Minimum Sales required $________________________ IV. Capital Expenditures (Section 7.16)4 1. Capital Expenditures made in current fiscal year $________________________ 2. Maximum Capital Expenditures permitted $________________________ V. Adjusted EBITDA (Section 7.17)4 1. Adjusted EBITDA for fiscal period ending _____________ $________________________ 2. Minimum Adjusted EBITDA required $________________________
- ----------- (3) To be calculated for the period ending (x) March 31, 2002 based upon such period and then multiplied by four, (y) June 30, 2002 based upon the period of two consecutive fiscal quarters ending on such date and then multiplied by two and (z) September 30, 2002 based upon the period of three consecutive fiscal quarters ending on such date and then multiplied by one and one-third. (4) This calculation is subject to change, upon the sale of the Paint Business (if sold prior to June 30, 2003) or other asset sales not presently disclosed to the Lenders, upon the mutual agreement of the Company and the Required Lenders. 2 EXHIBIT F April 11, 2002 To Each Addressee Listed on Schedule I hereto Re: TruServ Corporation Ladies and Gentlemen: We have acted as special counsel to TruServ Corporation, a Delaware corporation (the "COMPANY"), and each subsidiary of the Company listed on Schedule II hereto (the "SUBSIDIARY OPINION PARTIES", and together with the Company, the "OPINION PARTIES"), in connection with the preparation, execution and delivery of the Second Amended and Restated Credit Agreement, dated as of April 11, 2002 (the "CREDIT AGREEMENT"), among the Company, the financial institutions from time to time party thereto (the "LENDERS") and Bank of America, N.A., as agent for the Lenders (in such capacity, the "AGENT"), and certain other agreements, instruments and documents related to the Credit Agreement. This opinion is being delivered pursuant to Section 4.1(d) of the Credit Agreement. In our examination we have assumed the genuineness of all signatures including endorsements, the legal capacity of natural persons, the authenticity of all documents submitted to us as originals, the conformity to original documents of all documents submitted to us as facsimile, electronic, certified or photostatic copies, and the authenticity of the originals of such copies. As to any facts material to this opinion which we did not independently establish or verify, we have relied upon statements and representations of the Company and its officers and other representatives and of public officials, including the facts and conclusions set forth therein. In rendering the opinions set forth herein, we have examined and relied on originals or copies of the following: (a) the Credit Agreement; (b) each of the promissory notes listed on Schedule III hereto (collectively, the "NOTES"); Each Addressee Listed on Schedule I hereto April 11, 2002 Page 2 (c) the First Amendment, dated as of April 11, 2002, by the Company, each of the Subsidiary Opinion Parties and certain other Subsidiaries of the Company named therein (collectively, the "DEBTORS"), in favor of Bank of America, N.A. (the "COLLATERAL AGENT"), as Collateral Agent (the "SECURITY AGREEMENT AMENDMENT"), which amends the Security Agreement, dated as of April 14, 2000, by and among the Debtors and the Collateral Agent; (d) the First Amended and Restated Intercreditor Agreement, dated as of April 11, 2002, by and among the Agent, the Lenders, The Prudential Insurance Company of America ("PRUDENTIAL") and certain of its affiliates, the Company, each of the Subsidiary Opinion Parties, the holders of certain notes issued by the Company named therein, Wilmington Trust Company, in its individual capacity and as owner trustee (the "OWNER TRUSTEE"), BMO Global Capital Solutions, Inc., a Delaware corporation formerly known as BMO Leasing (U.S.), Inc. ("BMO GLOBAL"), Bank of Montreal, a Canadian banking organization ("BMO"), in its capacity as administrative agent, and the Collateral Agent (the "AMENDED AND RESTATED INTERCREDITOR AGREEMENT"); (e) the certificate of Barbara L. Wagner, Vice President & Treasurer of each of the Opinion Parties, dated the date hereof, a copy of which is attached as Exhibit A hereto (the "COMPANY'S CERTIFICATE"); and (f) such other documents as we have deemed necessary or appropriate as a basis for the opinions set forth below. We express no opinion as to the laws of any jurisdiction other than (i) the Applicable Laws of the State of Illinois and (ii) the Applicable Laws of the United States of America. Capitalized terms used herein and not otherwise defined herein shall have the same meanings as ascribed thereto in the Credit Agreement. The Credit Agreement, the Notes, the Security Agreement Amendment and the Amended and Restated Intercreditor Agreement shall hereinafter be referred to collectively as the "Transaction Agreements." "Applicable Laws" shall mean those laws, rules and regulations which, in our experience, are normally applicable to transactions of the type contemplated by the Transaction Agreements, without our having made any special Each Addressee Listed on Schedule I hereto April 11, 2002 Page 3 investigation as to the applicability of any specific law, rule or regulation, and which are not the subject of a specific opinion herein referring expressly to a particular law or laws. "Governmental Approval" means any consent, approval, license, authorization or validation of, or filing, recording or registration with, any governmental authority pursuant to the Applicable Laws of the State of Illinois or the Applicable Laws of the United States of America. Based upon the foregoing and subject to the limitations, qualifications, exceptions and assumptions set forth herein, we are of the opinion that: 1. Each of the Transaction Agreements constitutes the valid and binding obligation of each Opinion Party party thereto enforceable against each such Opinion Party in accordance with its terms under the Applicable Laws of the State of Illinois. 2. Neither the execution, delivery or performance by each Opinion Party of the Transaction Agreements to which it is a party nor the compliance by each such Opinion Party with the terms and provisions thereof will contravene any provision of any Applicable Law of the State of Illinois or any Applicable Law of the United States of America. 3. No Governmental Approval, which has not been obtained or taken and is not in full force and effect, is required to authorize, or is required in connection with, the execution or delivery of any of the Transaction Agreements by any Opinion Party party thereto or the enforceability of any of the Transaction Agreements against any Opinion Party party thereto. Our opinions are subject to the following assumptions and qualifications: (a) enforcement may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting creditors' rights generally and by general principles of equity (regardless of whether enforcement is sought in equity or at law); (b) we have assumed that each of the Transaction Agreements (other than the Amended and Restated Intercreditor Agreement) constitutes the valid and binding obligation of each party to such Transaction Agreement (other than the Opinion Parties) enforceable against such other party in accordance with its terms; Each Addressee Listed on Schedule I hereto April 11, 2002 Page 4 (c) we have assumed that the Amended and Restated Intercreditor Agreement constitutes the valid and binding obligation of each Benefited Party (as defined in the Amended and Restated Intercreditor Agreement) signatory to the Amended and Restated Intercreditor Agreement enforceable against such Benefited Party in accordance with its terms; (d) we express no opinion as to the effect on the opinions expressed herein of (i) the compliance or non-compliance of any party (other than the Opinion Parties to the extent expressly set forth herein) to the Transaction Agreements with any state, federal or other laws or regulations applicable to them or (ii) the legal or regulatory status or the nature of the business of any such party (other than the Opinion Parties to the extent expressly set forth herein); (e) we express no opinion as to the enforceability of any rights to contribution or indemnification provided for in the Transaction Agreements which are violative of the public policy underlying any law, rule or regulation (including any federal or state securities law, rule or regulation); (f) we express no opinion as to the applicability or effect of any fraudulent transfer or similar law on the Transaction Agreements or any transactions contemplated thereby; (g) we express no opinion as to the applicability or effect of any preference or similar law on the Transaction Agreements or any transaction contemplated thereby; (h) we express no opinion with respect to the enforceability of any provision of any Transaction Agreement to the extent it provides for interest on interest; (i) we express no opinion on the enforceability of any provision in any Transaction Agreement purporting to prohibit, restrict or condition the assignment of such Transaction Agreement to the extent such restriction on assignability is governed by sections 9-406 through 9-409 of the Uniform Commercial Code; (j) our opinion with respect to the enforceability of the choice of Illinois law and choice of Illinois forum provisions of the Transaction Agreements is rendered in reliance upon Section 735 ILCS 105/5-5 (the "ACT") and is subject to the qualifica- Each Addressee Listed on Schedule I hereto April 11, 2002 Page 5 tions that such enforceability may be limited by public policy considerations of any jurisdiction, other than the courts of the State of Illinois, in which enforcement of such provisions, or of a judgment upon an agreement containing such provisions, is sought; (k) with respect to any portion of the Transaction Agreements subject to the Uniform Commercial Code, we express no opinion with respect to the enforceability of any provision that purports to select a governing law in conflict with mandatory choice of law rules set forth in the Uniform Commercial Code; (l) we express no opinion as to the enforceability of any provision of any Transaction Agreement to the extent that (a) it provides that provisions of the Transaction Agreements may only be waived in writing, (b) any recovery of attorneys' fees is not limited to reasonable attorneys' fees or (c) it purports to waive any objection a person may have that a suit, action or proceeding has been brought in an inconvenient forum; (m) we express no opinion with respect to any provision of the Credit Agreement to the extent it authorizes or permits any purchaser of a participation interest to set-off or apply any deposit, property or indebtedness with respect to any participation interest (n) we express no opinion as to whether the consent of 100% of each of the parties to that certain Intercreditor Agreement (as amended, restated, supplemented or otherwise modified prior to the date hereof, the "ORIGINAL INTERCREDITOR AGREEMENT"), dated April 14, 2000, by and among the Agent, the financial institutions then party thereto, Prudential and certain of its affiliates, the Owner Trustee, BMO Global, BMO, in its capacity as administrative agent, and the Collateral Agent is required for the amendment and restatement of the Original Intercreditor Agreement; and (o) in rendering this opinion, we call to your attention that the termination of the Amended and Restated Intercreditor Agreement requires the consent of the Company, which consent we assume will not be given prior to the indefeasible payment in full of all Benefited Obligations (as defined in the Amended and Restated Intercreditor Agreement), and we assume that at all times prior to the indefeasible payment in full of all Benefited Obligations, there will be a Collateral Agent under the Amended and Restated Intercreditor Agreement. Each Addressee Listed on Schedule I hereto April 11, 2002 Page 6 In rendering the foregoing opinions, we have assumed, with your consent, that: (a) each of the Opinion Parties is validly existing and in good standing as a corporation or limited liability company under the laws of its jurisdiction of organization; (b) each of the Opinion Parties has the power and authority to execute, deliver and perform all of its obligations under each of the Transaction Agreements to which it is a party and the execution and delivery of each such Transaction Agreement and the consummation by each such Opinion Party of the transactions contemplated thereby have been duly authorized by all requisite action on the part of each such Opinion Party. Each of the Transaction Agreements has been duly authorized, executed and delivered by each Opinion Party party thereto; (c) the execution, delivery and performance by each Opinion Party of any of its obligations under the Transaction Agreements to which it is a party does not and will not conflict with, contravene, violate or constitute a default under (i) the articles or certificate of incorporation, certificate of formation, by-laws or operating agreement (or similar organizational or governing documents) of such Opinion Party; (ii) any lease, indenture, instrument or other agreement to which such Opinion Party or its property is subject, (iii) any rule, law or regulation to which such Opinion Party is subject (other than Applicable Laws of the State of Illinois and Applicable Laws of the United States of America as to which we express our opinion in paragraph 2 herein) or (iv) any judicial or administrative order or decree of any governmental authority; and (d) no authorization, consent or other approval of, notice to or filing with any court, governmental authority or regulatory body (other than Governmental Approvals as to which we express our opinion in paragraph 3 herein) is required to authorize or is required in connection with the execution, delivery or performance by any Opinion Party of any Transaction Agreement to which it is a party or the transactions contemplated thereby. We understand that you are separately receiving an opinion, with respect to certain of the foregoing assumptions from Diane T. Nauer, Assistant General Counsel to the Company, and we are advised that such opinion contains qualifications. Our opinions herein stated are based on the assumptions specified above and we express no Each Addressee Listed on Schedule I hereto April 11, 2002 Page 7 opinion as to the effect on the opinions herein stated of the qualifications contained in such other opinion. This opinion is being furnished only to you in connection with the Transaction Agreements and is solely for your benefit and is not to be used, circulated, quoted or otherwise referred to for any other purpose or relied upon by any other person or entity for any purpose without our prior written consent, except that any person who becomes party as a Lender to the Credit Agreement pursuant to Section 10.8 of the Credit Agreement may rely on this opinion as though it had been addressed to such person and delivered to such person on the date hereof. Very truly yours, Schedule I to SASM&F (Illinois) Opinion (Credit Agreement) Addressees of SASM&F (Illinois) Opinion Bank of America, N.A. Bank of Montreal Bank One, NA PNC Bank, National Association Wachovia Bank, N.A. The Northern Trust Company ABN AMRO Bank N.V. National Consumer Cooperative Bank UMB Bank Schedule I - 1 Schedule II to SASM&F (Illinois) Opinion (Credit Agreement) Subsidiary Opinion Parties General Paint and Manufacturing Company, an Illinois corporation MaryGreen, LLC, a Delaware limited liability company TruServ Acceptance Company, an Illinois corporation TruServ Logistics Company, an Illinois corporation TrueValue.com Corporation, a Delaware corporation Schedule II - 1 Schedule III to SASM&F (Illinois) Opinion (Credit Agreement) Notes 1. That certain Series A Note dated April 11, 2002 and issued by the Company in favor of Bank of America, N.A. for its Pro Rata Share of the original maximum principal amount of $169,130,000. 2. That certain Series B Note dated April 11, 2002 and issued by the Company in favor of Bank of America, N.A. for its Pro Rata Share of the original maximum principal amount of $30,870,000. 3. That certain Series A Note dated April 11, 2002 and issued by the Company in favor of Bank of Montreal for its Pro Rata Share of the original maximum principal amount of $169,130,000. 4. That certain Series B Note dated April 11, 2002 and issued by the Company in favor of Bank of Montreal for its Pro Rata Share of the original maximum principal amount of $30,870,000. 5. That certain Series A Note dated April 11, 2002 and issued by the Company in favor of Bank One, NA for its Pro Rata Share of the original maximum principal amount of $169,130,000. 6. That certain Series B Note dated April 11, 2002 and issued by the Company in favor of Bank One, NA for its Pro Rata Share of the original maximum principal amount of $30,870,000. 7. That certain Series A Note dated April 11, 2002 and issued by the Company in favor of PNC Bank, National Association for its Pro Rata Share of the original maximum principal amount of $169,130,000. 8. That certain Series B Note dated April 11, 2002 and issued by the Company in favor of PNC Bank, National Association for its Pro Rata Share of the original maximum principal amount of $30,870,000. 9. That certain Series A Note dated April 11, 2002 and issued by the Company in favor of Wachovia Bank, N.A. for its Pro Rata Share of the original maximum principal amount of $169,130,000. Schedule III- 1 10. That certain Series B Note dated April 11, 2002 and issued by the Company in favor of Wachovia Bank, N.A. for its Pro Rata Share of the original maximum principal amount of $30,870,000. 11. That certain Series A Note dated April 11, 2002 and issued by the Company in favor of The Northern Trust Company for its Pro Rata Share of the original maximum principal amount of $169,130,000. 12. That certain Series B Note dated April 11, 2002 and issued by the Company in favor of The Northern Trust Company for its Pro Rata Share of the original maximum principal amount of $30,870,000. 13. That certain Series A Note dated April 11, 2002 and issued by the Company in favor of ABN AMRO Bank N.V. for its Pro Rata Share of the original maximum principal amount of $169,130,000. 14. That certain Series B Note dated April 11, 2002 and issued by the Company in favor of ABN AMRO Bank N.V. for its Pro Rata Share of the original maximum principal amount of $30,870,000. 15. That certain Series A Note dated April 11, 2002 and issued by the Company in favor of National Consumer Cooperative Bank for its Pro Rata Share of the original maximum principal amount of $169,130,000. 16. That certain Series B Note dated April 11, 2002 and issued by the Company in favor of National Consumer Cooperative Bank for its Pro Rata Share of the original maximum principal amount of $30,870,000. 17. That certain Series A Note dated April 11, 2002 and issued by the Company in favor of UMB Bank for its Pro Rata Share of the original maximum principal amount of $169,130,000. 18. That certain Series B Note dated April 11, 2002 and issued by the Company in favor of UMB Bank for its Pro Rata Share of the original maximum principal amount of $30,870,000. Schedule III-2 Exhibit A to SASM&F (Illinois) Opinion (Credit Agreement) Officer's Certificate I, Barbara L. Wagner, am the duly elected, qualified and acting Vice President & Treasurer of TruServ Corporation, a Delaware corporation (the "Borrower") and am the duly elected, qualified and acting Vice President & Treasurer of each of General Paint and Manufacturing Company, an Illinois corporation, MaryGreen, LLC, a Delaware limited liability company, TruServ Acceptance Company, an Illinois corporation, TruServ Logistics Company, an Illinois corporation and TruValue.com Corporation, a Delaware corporation (collectively, with the Borrower, the "Opinion Parties" and each of the foregoing and the Borrower, individually, an "Opinion Party"). I understand that pursuant to Section 4.1(d) of the Second Amended and Restated Credit Agreement, dated as of April 11, 2002 (the "Credit Agreement"), among the Borrower, the financial institutions from time to time party thereto (the "Lenders") and Bank of America, N.A., as agent for the Lenders, Skadden, Arps, Slate, Meagher & Flom (Illinois) ("SASM&F") is rendering an opinion (the "Opinion") to the addressees listed on Schedule I thereto. Capitalized terms used herein but not otherwise defined herein shall have the meanings assigned to such terms as set forth in the Opinion. I further understand that SASM&F is relying on this officer's certificate and the statements made herein in rendering such Opinion. With regard to the foregoing, on behalf of the Opinion Parties, I hereby certify that: 1. I am familiar with the business of each of the Opinion Parties and its respective subsidiaries, and due inquiry has been made of all persons deemed necessary or appropriate to verify or confirm the statements contained herein. 1. SASM&F may rely on the respective representations and warranties that the Opinion Parties have made in the Credit Agreement, each of the other Transaction Agreements and each of the certificates delivered pursuant thereto. I have made a careful review of each of such representations and warranties and hereby confirm, to the best of my knowledge and belief, that such representations and warranties are true, correct and complete on and as of the date of this certificate. 2. Less than twenty-five percent (25%) of the assets of each of the Opinion Parties and its respective subsidiaries on a consolidated basis and on an unconsolidated basis consist of Margin Stock. Exhibit A-1 3. Each of the Opinion Parties is primarily engaged directly, or indirectly through Majority-Owned Subsidiaries, in the business of wholesale distribution of hardware and related merchandise, manufacturing of paint and paint applicators and/or providing additional services to the Borrower's cooperative members; and each of the Opinion Parties (i) is not and does not hold itself out as being engaged primarily, nor does it propose to engage primarily, in the business of investing, reinvesting or trading in Securities, (ii) has not and is not engaged in, and does not propose to engage in, the business of issuing Face-Amount Certificates of the Installment Type and has no such certificate outstanding and (iii) does not own or propose to acquire Investment Securities having a Value exceeding forty percent (40%) of the Value of the total assets of the respective Opinion Party (exclusive of Government Securities and cash items) on an unconsolidated basis. 4. None of the Opinion Parties owns or operates facilities used for the generation, transmission, or distribution of electric energy for sale ("Electric Utility Facilities"). 5. None of the Opinion Parties owns or operates facilities used for the distribution of natural or manufactured gas for heat, light, or power ("Gas Utility Facilities"). 6. None of the Opinion Parties nor any of their respective subsidiaries, directly or indirectly, or through one or more intermediary Companies, owns, controls, or holds with power to vote (a) ten percent (10%) or more of the outstanding Voting Securities of any Company that owns or operates any Electric Utility Facilities or Gas Utility Facilities, or (b) any other interest, directly or indirectly, or through one or more intermediary entities, in (i) any Company that owns or operates any Electric Utility Facilities or Gas Utility Facilities, or (ii) any of the foregoing types of entities that have received notice of the sort described in paragraph 8 below. 7. None of the Opinion Parties nor any of their respective subsidiaries has received notice that the Securities and Exchange Commission has determined, or may determine, that such Opinion Party or any of its subsidiaries exercises a controlling influence over the management or direction of the policies of a gas utility company or an electric utility company as to make it subject to the obligations, duties and liabilities imposed on holding companies by the Public Utility Holding Company Act of 1935, as amended ("PUHCA"). 8. To the best of my knowledge, no Company that has registered with the Securities and Exchange Commission as a public utility holding company under PUHCA owns, directly or indirectly, through one or more intermediary entities, ten Exhibit A-2 percent (10%) or more of the outstanding Voting Securities (as defined below) of any of the Opinion Parties. 9. All of the outstanding Securities of TruServ Acceptance Corporation, an Illinois corporation, are owned, directly or indirectly, by the Borrower. 10. As used in paragraph 3 of this certificate, the following term shall have the following meaning: "Margin Stock" means: (i) any equity security registered or having unlisted trading privileges on a national securities exchange; (ii) any OTC security designated as qualified for trading in the National Market System under a designation plan approved by the Securities and Exchange Commission; (iii) any debt security convertible into a margin stock or carrying a warrant or right to subscribe to or purchase a margin stock; (iv) any warrant or right to subscribe to or purchase a margin stock; or (v) any security issued by an investment company registered under Section 8 of the Investment Company Act of 1940. 11. As used in paragraphs 4, 10 and 12 of this certificate, the following terms shall have the following meanings: "Exempt Fund" means a company that is excluded from treatment as an investment company solely by section 3(c)(1) or 3(c)(7) of the Investment Company Act of 1940 (applicable to certain privately offered investment funds). "Face-Amount Certificate of the Installment Type" means any certificate, investment contract, or other Security that represents an obligation on the part of its issuer to pay a stated or determinable sum or sums at a fixed or determinable date or dates more than 24 months after the date of issuance, in consideration of the payment of periodic installments of a stated or determinable amount. "Government Securities" means all Securities issued or guaranteed as to principal or interest by the United States, or by a person controlled or supervised by and acting as an instrumentality of the government of the United States pursuant to authority granted by the Congress of the United States; or any certificate of deposit for any of the foregoing. "Investment Securities" includes all Securities except (A) Government Securities, (B) Securities issued by companies the only shareholders in which are employees and former employees of a company and its subsidiaries, members of the families of such persons and the company and its subsidiaries and (C) Securities issued by Majority-Owned Subsidiaries of the Borrower which are not engaged and do not Exhibit A-3 propose to be engaged in activities within the scope of clause (i), (ii) or (iii) of paragraph 4 of this Certificate or which are exempted or excepted from treatment as an investment company by statute, rule or governmental order (other than Exempt Funds). "Majority-Owned Subsidiary" of a person means a company fifty percent (50%) or more of the outstanding Voting Securities of which are owned by such person, or by a company which, within the meaning of this paragraph, is a Majority-Owned Subsidiary of such person. "Security" means any note, stock, treasury stock, bond, debenture, evidence of indebtedness, certificate of interest or participation in any profit-sharing agreement, collateral-trust certificate, preorganization certificate or subscription, transferable share, investment contract, voting-trust certificate, certificate of deposit for a security, fractional undivided interest in oil, gas, or other mineral rights, any put, call, straddle, option, or privilege on any security (including a certificate of deposit) or on any group or index of securities (including any interest therein or based on the value thereof), or any put, call, straddle, option, or privilege entered into on a national securities exchange relating to foreign currency, or, in general, any interest or instrument commonly known as a "security," or any certificate of interest or participation in, temporary or interim certificate for, receipt for, guarantee of, or warrant or right to subscribe to or purchase, any of the foregoing. "Value" means (i) with respect to Securities owned at the end of the last preceding fiscal quarter for which market quotations are readily available, the market value at the end of such quarter; (ii) with respect to other Securities and assets owned at the end of the last preceding fiscal quarter, fair value at the end of such quarter, as determined in good faith by or under the direction of the board of directors; and (iii) with respect to securities and other assets acquired after the end of the last preceding fiscal quarter, the cost thereof. "Voting Security" means any security presently entitling the owner or holder thereof to vote for the election of directors of a company (or its equivalent, e.g., general partner or manager of a limited liability company). 12. As used in paragraphs 7, 9 and 13 of this certificate, the following terms shall have the following meanings: "Company" means a corporation, limited liability company, partnership, association, joint-stock company, joint venture, trust, or any receiver, trustee, or other liquidating agent of any of the foregoing in its capacity as such. "Security" or "Securities" means any note, draft, stock, treasury stock, bond, debenture, limited liability company interest, certificate of interest or participation Exhibit A-4 in any profit-sharing agreement or in any oil, gas, other mineral royalty or lease, any collateral-trust certificate, preorganization certificate or subscription, transferable share, investment contract, voting-trust certificate, certificate of deposit for a security, receiver's or trustee's certificate, or, in general, any instrument commonly known as a "security"; or any certificate of interest or participation in, temporary or interim certificate for, receipt for, guaranty of, assumption of liability on, or warrant or right to subscribe to or purchase, any of the foregoing. "Voting Security" or "Voting Securities" means any Security presently entitling the owner or holder thereof to vote in the direction or management of the affairs of a Company, or any Security issued under or pursuant to any trust, agreement, or arrangement whereby a trustee or trustees or agent or agents for the owner or holder of such Security are presently entitled to vote in the direction or management of the affairs of a Company; and a specified per centum of the outstanding Voting Securities of a Company means such amount of the outstanding Voting Securities of such Company as entitles the holder or holders thereof to cast said specified per centum of the aggregate votes which the holders of all the outstanding Voting Securities of such Company are entitled to cast in the direction or management of the affairs of such Company. [Signature Page Follows] Exhibit A-5 Credit Agreement Opinion Certificate IN WITNESS WHEREOF, I have executed this certificate this ___ day of April, 2002. TRUSERV CORPORATION GENERAL PAINT AND MANUFACTURING COMPANY MARYGREEN, LLC TRUSERV ACCEPTANCE COMPANY TRUSERV LOGISTICS COMPANY TRUEVALUE.COM CORPORATION By: __________________________________ Barbara L. Wagner Vice President & Treasurer Exhibit A-6 EXHIBIT G FORM OF ASSIGNMENT AND ACCEPTANCE AGREEMENT This ASSIGNMENT AND ACCEPTANCE AGREEMENT (this "Assignment and Acceptance") dated as of __________, ____ is made between ______________________________ (the "Assignor") and __________________________ (the "Assignee"). RECITALS The Assignor is party to the Second Amended and Restated Credit Agreement dated as of April 11, 2002 (as renewed, amended, restated, supplemented or otherwise modified from time to time, the "Credit Agreement") among TruServ Corporation (the "Company"), various financial institutions (including the Assignor, the "Lenders") and Bank of America, N.A., as Agent. Terms defined in the Credit Agreement and not defined in this Assignment and Acceptance are used herein as defined in the Credit Agreement. The Assignor wishes to assign to the Assignee [part of the] [all] rights and obligations of the Assignor under the Credit Agreement in respect of the Assignor's Commitment, the Loans, the obligations to participate in Swing Line Loans and the other rights and obligations of the Assignor thereunder, and the Assignee wishes to accept assignment of such rights and to assume such obligations from the Assignor, in each case on the terms and subject to the conditions of this Assignment and Acceptance. NOW, THEREFORE, in consideration of the foregoing and the mutual agreements contained herein, the parties hereto agree as follows: 1. Assignment and Acceptance. (a) Subject to the terms and conditions of this Assignment and Acceptance (and effective on the Effective Date (as defined below), (i) the Assignor hereby sells, transfers and assigns to the Assignee, and (ii) the Assignee hereby purchases, assumes and undertakes from the Assignor, without recourse and without representation or warranty (except as provided in this Assignment and Acceptance), (i) ___% of the Assignor's Commitment, together with a corresponding portion of the Assignor's outstanding Loans and of the Assignor's obligations to participate in Swing Line Loans, as set forth on Annex I; and (ii) all related rights, benefits, obligations, liabilities and indemnities of the Assignor under and in connection with the Credit Agreement and the other Loan Documents (all of the foregoing being herein called the "Assigned Rights and Obligations"). 1 (b) With effect on and after the Effective Date, the Assignee shall be a party to the Credit Agreement and succeed to all of the rights and be obligated to perform all of the obligations of a Lender under the Credit Agreement, including the requirements concerning confidentiality and the payment of indemnification, with a Pro Rata Share equal to _______%. The Assignee agrees that it will perform in accordance with their terms all of the obligations which by the terms of the Credit Agreement are required to be performed by it as a Lender. It is the intent of the parties hereto that (i) as of the Effective Date, the Pro Rata Share of the Assignor shall be reduced to _______%, and (ii) the Assignor shall relinquish its rights and be released from its obligations under the Credit Agreement to the extent such obligations have been assumed by the Assignee; provided, however, that the Assignor shall not relinquish its rights under Article III or Sections 10.4 or 10.5 of the Credit Agreement in respect of the Assigned Rights and Obligations to the extent such rights relate to the time prior to the Effective Date. (c) After giving effect to the assignment and assumption set forth herein, on the Effective Date the Assignee's Commitment and the Assignor's Commitment will be as set forth on Annex I. 2. Payments. (a) As consideration for the sale, assignment and transfer contemplated in Section 1 hereof, the Assignee shall pay to the Assignor on the Effective Date in immediately available funds an amount equal to $__________, representing the principal amount of all outstanding and funded Loans included within the Assigned Rights and Obligations. (b) The [Assignor] [Assignee] further agrees to pay to the Agent a processing fee in the amount specified in Section 10.8(a) of the Credit Agreement. 3. Reallocation of Payments. Any interest, fees and other payments accrued to the Effective Date with respect to the Assigned Rights and Obligations shall be for the account of the Assignor. Any interest, fees and other payments accrued on and after the Effective Date with respect to the Assigned Rights and Obligations shall be for the account of the Assignee. Each of the Assignor and the Assignee agrees that it will hold in trust for the other party any interest, fees and other amounts which it may receive to which the other party is entitled pursuant to the preceding two sentences and pay to the other party any such amounts which it may receive promptly upon receipt. 4. Independent Credit Decision. The Assignee (a) acknowledges that it has received a copy of the Credit Agreement and the Schedules and Exhibits thereto, together with copies of the most recent financial statements referred to in Section 6.1 of the Credit Agreement, and such other documents and information as it has deemed appropriate to make its own credit and legal analysis and decision to enter into this Assignment and Acceptance; and (b) agrees that it will, independently and without reliance upon the Assignor, the Agent or any other Lender and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit and legal decisions in taking or not taking action under the Credit Agreement. 2 5. Effective Date; Notices. (a) As between the Assignor and the Assignee, the effective date for this Assignment and Acceptance shall be ______________ (the "Effective Date"); provided that the following conditions precedent have been satisfied on or before the Effective Date: (i) this Assignment and Acceptance shall be executed and delivered by the Assignor and the Assignee; (ii) the consent of the Company, the Swing Line Lender and the Agent, if required for an effective assignment of the Assigned Rights and Obligations by the Assignor to the Assignee under Section 10.8(a) of the Credit Agreement, shall have been duly obtained and shall be in full force and effect as of the Effective Date; (iii) the Assignee shall pay to the Assignor all amounts due to the Assignor under this Assignment and Acceptance; (iv) the Assignee has presented evidence reasonably satisfactory to the Agent and the Company that the Assignee is exempt from withholding taxes; and (v) the processing fee referred to in Section 2(b) hereof shall have been paid to the Agent. (b) Promptly following the execution of this Assignment and Acceptance, the Assignor shall deliver to the Company, the Swing Line Lender and the Agent, for acknowledgment by the Company, the Swing Line Lender and the Agent, a Notice of Assignment substantially in the form attached hereto as Schedule 1. [INCLUDE ONLY IF ASSIGNOR IS THE AGENT] (c) The Assignee hereby appoints and authorizes the Assignor to take such action as agent on its behalf and to exercise such powers under the Credit Agreement as are delegated to the Agent by the Lenders pursuant to the terms of the Credit Agreement. (d) The Assignee shall assume no duties or obligations held by the Assignor in its capacity as Agent under the Credit Agreement.] 6. Representations and Warranties. (a) The Assignor represents and warrants that (i) it is the legal and beneficial owner of the interest being assigned by it hereunder and that such interest is free and clear of any Lien or other adverse claim; (ii) it is duly organized and existing and it has the full power and authority to take, and has taken, all action necessary to execute and deliver this Assignment and Acceptance and any other documents required or permitted to be executed or delivered by it in connection with this Assignment and Acceptance and to fulfill its obligations hereunder; (iii) no notices to, or consents, authorizations or approvals of, any Person are required (other than any already given or obtained) for its due execution, delivery and performance of this Assignment and Acceptance, and apart from any agreements or undertakings or filings required by the Credit 3 Agreement, no further action by, or notice to, or filing with, any Person is required of it for such execution, delivery or performance; and (iv) this Assignment and Acceptance has been duly executed and delivered by it and constitutes the legal, valid and binding obligation of the Assignor, enforceable against the Assignor in accordance with the terms hereof, subject, as to enforcement, to bankruptcy, insolvency, moratorium, reorganization and other laws of general application relating to or affecting creditors' rights and to general equitable principles. (b) The Assignor makes no representation or warranty and assumes no responsibility with respect to any statements, warranties or representations made in or in connection with the Credit Agreement or the execution, legality, validity, enforceability, genuineness, sufficiency or value of the Credit Agreement or any other instrument or document furnished pursuant thereto. The Assignor makes no representation or warranty in connection with, and assumes no responsibility with respect to, the solvency, financial condition or statements of the Company or the performance or observance by the Company of any of its obligations under the Credit Agreement or any other instrument or document furnished in connection therewith. (c) The Assignee represents and warrants that (i) it is duly organized and existing and it has full power and authority to take, and has taken, all action necessary to execute and deliver this Assignment and Acceptance and any other documents required or permitted to be executed or delivered by it in connection with this Assignment and Acceptance, and to fulfill its obligations hereunder; (ii) no notices to, or consents, authorizations or approvals of, any Person are required (other than any already given or obtained) for its due execution, delivery and performance of this Assignment and Acceptance; and apart from any agreements or undertakings or filings required by the Credit Agreement, no further action by, or notice to, or filing with, any Person is required of it for such execution, delivery or performance; and (iii) this Assignment and Acceptance has been duly executed and delivered by it and constitutes the legal, valid and binding obligation of the Assignee, enforceable against the Assignee in accordance with the terms hereof, subject, as to enforcement, to bankruptcy, insolvency, moratorium, reorganization and other laws of general application relating to or affecting creditors' rights and to general equitable principles. 7. Further Assurances. The Assignor and the Assignee each hereby agree to execute and deliver such other instruments, and take such other action, as either party may reasonably request in connection with the transactions contemplated by this Assignment and Acceptance, including the delivery of any notices or other documents or instruments to the Company, the Swing Line Lender or the Agent which may be required in connection with the assignment and assumption contemplated hereby. 8. Miscellaneous. (a) Any amendment or waiver of any provision of this Assignment and Acceptance shall be in writing and signed by the parties hereto. No failure or delay by either party hereto in exercising any right, power or privilege hereunder shall operate as a waiver thereof and any waiver of any breach of the provisions of this Assignment and Acceptance shall be without prejudice to any rights with respect to any other or further breach thereof. 4 (b) All payments made hereunder shall be made without any set-off or counterclaim. (c) The Assignor and the Assignee shall each pay its own costs and expenses incurred in connection with the negotiation, preparation, execution and performance of this Assignment and Acceptance. (d) This Assignment and Acceptance may be executed in any number of counterparts and all of such counterparts taken together shall be deemed to constitute one and the same instrument. (e) THIS ASSIGNMENT AND ACCEPTANCE SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAW OF THE STATE OF ILLINOIS. The Assignor and the Assignee irrevocably submit to the non-exclusive jurisdiction of any State or Federal court sitting in the State of Illinois over any suit, action or proceeding arising out of or relating to this Assignment and Acceptance and irrevocably agree that all claims in respect of such action or proceeding may be heard and determined in such Illinois State or Federal court. Each party to this Assignment and Acceptance hereby irrevocably waives, to the fullest extent it may effectively do so, the defense of an inconvenient forum to the maintenance of such action or proceeding. (f) THE ASSIGNOR AND THE ASSIGNEE EACH HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVES ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION BASED HEREON, OR ARISING OUT OF, UNDER, OR IN CONNECTION WITH THIS ASSIGNMENT AND ACCEPTANCE, THE CREDIT AGREEMENT, ANY RELATED DOCUMENT OR AGREEMENT OR ANY COURSE OF CONDUCT, COURSE OF DEALING OR STATEMENT (WHETHER ORAL OR WRITTEN). IN WITNESS WHEREOF, the Assignor and the Assignee have caused this Assignment and Acceptance to be executed and delivered by their duly authorized officers as of the date first above written. [ASSIGNOR] By: ---------------------------------- Title: ------------------------------- Address: [ASSIGNEE] By: ---------------------------------- Title: ------------------------------- Address: 5 ANNEX I
IMMEDIATELY BEFORE EFFECTIVE DATE: COMMITMENT PRO RATA SHARE ---------- -------------- Assignor: $________ _______% Assignee: $________ _______% On and after Effective Date: Assignor: $________ _______% Assignee: $________ _______%
The Assigned Rights and Obligations include:
Amount Loan ------ ----
SCHEDULE 1 NOTICE OF ASSIGNMENT AND ACCEPTANCE _______________, ____ Bank of America, N.A., as Agent 231 South LaSalle Street Chicago, Illinois 60697 Attn: ___________________ TruServ Corporation 8600 West Bryn Mawr Avenue Chicago, IL 60631-3505 Attn:_________________ Ladies and Gentlemen: We refer to the Second Amended and Restated Credit Agreement dated as of April 11, 2002 (as renewed, amended, restated, supplemented or otherwise modified from time to time, the "Credit Agreement") among TruServ Corporation (the "Company"), various financial institutions and Bank of America, N.A., as Agent. Terms defined in the Credit Agreement are used herein as therein defined. 1. We hereby give you notice of, and request your consent to, the assignment by __________________ (the "Assignor") to _______________ (the "Assignee") pursuant to the Assignment and Acceptance Agreement attached hereto (the "Assignment and Acceptance") of: (i) ___% of the Assignor's Commitment, together with a corresponding portion of the Assignor's outstanding Loans and the Assignor's obligation to participate in Swing Line Loans, and (ii) all related rights, benefits, obligations, liabilities and indemnities of the Assignor under and in connection with the Credit Agreement and the other Loan Documents. After giving effect to such assignment, the Assignee shall have a Pro Rata Share equal to _______%, and the Pro Rata Share of the Assignor shall be reduced to _______%. 2. The Assignee agrees that, upon receiving the consent, if applicable, of the Agent, the Swing Line Lender and the Company to such assignment, the Assignee will (effective on the Effective Date) be bound by the terms of the Credit Agreement as fully and to the same extent as if the Assignee were the Lender originally holding such interest in the Credit Agreement. 3. The following administrative details apply to the Assignee: (A) Notice Address: Assignee name: Address: _________________________________ _________________________________ _________________________________ Attention: _________________________________ Telephone: (___)____________________________ Telecopier: (___)____________________________ Telex (Answerback): _________________________ (B) Payment Instructions: Account No.:_________________________________ At: _________________________________ _________________________________ _________________________________ Reference: _________________________________ Attention: _________________________________ 4. You are entitled to rely upon the representations, warranties and covenants of each of the Assignor and the Assignee contained in the Assignment and Acceptance. 2 IN WITNESS WHEREOF, the Assignor and the Assignee have caused this Notice of Assignment and Acceptance to be executed by their respective duly authorized officials, officers or agents as of the date first above mentioned. Very truly yours, [NAME OF ASSIGNOR] By: ___________________________________ Title:___________________________________ By: ___________________________________ Title:___________________________________ [NAME OF ASSIGNEE] By: ________________________ Title:________________________ By: ________________________ Title:________________________ ACKNOWLEDGED AND ASSIGNMENT CONSENTED TO: TRUSERV CORPORATION By: __________________________ Its:__________________________ BANK OF AMERICA, N.A., as Swing Line Lender and Agent By: __________________________ Its:__________________________ 3 EXHIBIT H-1 FORM OF SERIES A NOTE _____________, 200_ FOR VALUE RECEIVED, the undersigned, TruServ Corporation, a Delaware corporation (the "Company"), hereby promises to pay to the order of _____________ (the "Lender") such Lender's Pro Rata Share of $169,130,000 (or, if less, such Lender's Pro Rata Share of the aggregate unpaid principal amount of all Loans evidenced by Series A Notes) on the dates and in the amounts provided in the Second Amended and Restated Credit Agreement dated as of April 11, 2002 (as renewed, amended, restated, supplemented or otherwise modified from time to time, the "Credit Agreement") among the Company, various financial institutions (including the Lender) and Bank of America, N.A., as Agent. The Company further promises to pay interest on the unpaid principal amount of the Loans evidenced hereby from time to time at the rates, on the dates, and otherwise as provided in the Credit Agreement. The Lender is authorized to endorse the amount and the date on which each Loan is made and each payment of principal with respect thereto on the schedules annexed hereto and made a part hereof, or on continuations thereof which shall be attached hereto and made a part hereof; provided that any failure to endorse such information on such schedule or continuation thereof shall not in any manner affect any obligation of the Company under the Credit Agreement and this Note. The Loans evidenced by this Note may only be assigned as provided in the Credit Agreement. This Note is one of the Series A Notes referred to in, and is entitled to the benefits of, the Credit Agreement, which Credit Agreement, among other things, contains provisions for acceleration of the maturity hereof upon the happening of certain stated events and also for prepayments on account of principal hereof prior to the maturity hereof upon the terms and conditions therein specified. Terms defined in the Credit Agreement are used herein with their defined meanings therein unless otherwise defined herein. THIS NOTE SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF ILLINOIS. TRUSERV CORPORATION By:______________________________________ Title:___________________________________ Schedule to Series A Note LOANS AND REPAYMENTS OF LOANS
Date Amount of Loan Amount of Loan Repaid Notation Made By ---- -------------- --------------------- ----------------
EXHIBIT H-2 FORM OF SERIES B NOTE _____________, 200_ FOR VALUE RECEIVED, the undersigned, TruServ Corporation, a Delaware corporation (the "Company"), hereby promises to pay to the order of _____________ (the "Lender") such Lender's Pro Rata Share of $30,870,000 (or, if less, such Lender's Pro Rata Share of the aggregate unpaid principal amount of all Loans evidenced by Series B Notes) on the dates and in the amounts provided in the Second Amended and Restated Credit Agreement dated as of April 11, 2002 (as renewed, amended, restated, supplemented or otherwise modified from time to time, the "Credit Agreement") among the Company, various financial institutions (including the Lender) and Bank of America, N.A., as Agent. The Company further promises to pay interest on the unpaid principal amount of the Loans evidenced hereby from time to time at the rates, on the dates, and otherwise as provided in the Credit Agreement. The Lender is authorized to endorse the amount and the date on which each Loan is made and each payment of principal with respect thereto on the schedules annexed hereto and made a part hereof, or on continuations thereof which shall be attached hereto and made a part hereof; provided that any failure to endorse such information on such schedule or continuation thereof shall not in any manner affect any obligation of the Company under the Credit Agreement and this Note. The Loans evidenced by this Note may only be assigned as provided in the Credit Agreement. This Note is one of the Series B Notes referred to in, and is entitled to the benefits of, the Credit Agreement, which Credit Agreement, among other things, contains provisions for acceleration of the maturity hereof upon the happening of certain stated events and also for prepayments on account of principal hereof prior to the maturity hereof upon the terms and conditions therein specified. Terms defined in the Credit Agreement are used herein with their defined meanings therein unless otherwise defined herein. THIS NOTE SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF ILLINOIS. TRUSERV CORPORATION By:______________________________________ Title:___________________________________ Schedule to Series B Note LOANS AND REPAYMENTS OF LOANS
Date Amount of Loan Amount of Loan Repaid Notation Made By ---- -------------- --------------------- ----------------
EXHIBIT J TRADEMARK SECURITY AGREEMENT THIS TRADEMARK SECURITY AGREEMENT dated as of April 14, 2000 (this "Agreement") is between TRUSERV CORPORATION, a Delaware corporation (the "Company"), and BANK OF AMERICA, N.A. ("Bank of America"), as Collateral Agent (as defined below) for the Benefited Parties (as defined in the Intercreditor Agreement referred to below). W I T N E S S E T H : WHEREAS, pursuant to an Intercreditor Agreement dated as of the date hereof (as amended, restated or otherwise modified from time to time, the "Intercreditor Agreement"), certain creditors of the Company and Bank of America, as Collateral Agent (in such capacity, together with any successor in such capacity, the "Collateral Agent"), have agreed that (i) the Benefited Obligations (as defined in the Intercreditor Agreement) shall be secured and guaranteed as set forth in the Intercreditor Agreement and (ii) Bank of America shall act as collateral agent for the Benefited Parties; and WHEREAS, the Company has entered into a security agreement dated as of the date hereof with the Collateral Agent for the benefit of itself and the other Benefited Parties (as the same may be amended, supplemented, restated or replaced from time to time, the "Security Agreement"); NOW, THEREFORE, for and in consideration of the premises, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: SECTION 1. Definitions. Unless otherwise defined herein or the context otherwise requires, terms used in this Agreement, including its preamble and recitals, have the meanings provided in the Intercreditor Agreement. SECTION 2. Grant of Security Interest. For good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, and to secure payment of all of the Benefited Obligations, the Company hereby mortgages, pledges and hypothecates to the Collateral Agent, and grants to the Collateral Agent a security interest in, for its benefit and the benefit of each other Benefited Party, all of the following property (the "Trademark Collateral"), whether now owned or hereafter acquired or existing: (a) all trademarks, trade names, corporate names, company names, business names, fictitious business names, trade styles, service marks, certification marks, collective marks, logos, other source of business identifiers, prints and labels on which any of the foregoing have appeared or appear, designs and general intangibles of a like nature (all of the foregoing items in this clause (a) being collectively called a "Trademark"), now existing anywhere in the world or hereafter adopted or acquired, whether currently in use or not, all registrations and recordings thereof and all applications in connection therewith, whether pending or in preparation for filing, including registrations, recordings and applications in the United States Patent and Trademark Office or in any office or agency of the United States of America or any State thereof or any foreign country, including those referred to in Attachment 1 hereto; (b) all Trademark licenses, including each Trademark license referred to in Attachment 2 hereto; (c) all reissues, extensions or renewals of any of the items described in clauses (a) and (b); (d) all of the goodwill of the business connected with the use of, and symbolized by the items described in, clauses (a) and (b); and (e) all proceeds of, and rights associated with, the foregoing, including any claim by the Company against third parties for past, present, or future infringement or dilution of any Trademark, Trademark registration or Trademark license, including any Trademark, Trademark registration or Trademark license referred to in Attachment 1 or 2 hereto, or for any injury to the goodwill associated with the use of any Trademark or for breach or enforcement of any Trademark license. SECTION 3. Security Agreement. This Agreement has been executed and delivered by the Company for the purpose of registering the security interest of the Collateral Agent in the Trademark Collateral with the United States Patent and Trademark Office and corresponding offices in other countries of the world. The security interest granted hereby has been granted as a supplement to, and not in limitation of, the security interest granted to the Collateral Agent for its benefit and the benefit of each other Benefited Party. The Security Agreement (and all rights and remedies of the Collateral Agent and each other Benefited Party thereunder) shall remain in full force and effect in accordance with its terms. SECTION 4. Release of Security Interest. Upon payment in full of all Benefited Obligations and the termination of all commitments to create Benefited Obligations, the Collateral Agent shall, at the Company"s expense, execute and deliver to the Company all instruments and other documents as may be necessary or proper to release the lien on and security interest in the Trademark Collateral which has been granted hereunder. SECTION 5. Acknowledgment. The Company hereby further acknowledges and affirms that the rights and remedies of the Collateral Agent with respect to the security interest in the Trademark Collateral granted hereby are more fully set forth in the Security Agreement, the terms and provisions of which (including the remedies provided for therein) are incorporated by reference herein as if fully set forth herein. 2 SECTION 6. Counterparts. This Agreement may be executed by the parties hereto in several counterparts, each of which shall be deemed to be an original and all of which shall constitute together but one and the same agreement. 3 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and delivered by their respective officers thereunto duly authorized as of the day and year first above written. TRUSERV CORPORATION Address: By: ________________________________ 8600 West Bryn Mawr Avenue Name Printed:_________________________ Chicago, Illinois 60631-3505 Title:________________________________ Attention: Frank Hashimoto Facsimile: (773) 695-6568 BANK OF AMERICA, N.A., as Collateral Agent Address: By: _________________________________ 231 South LaSalle Street Name Printed:_________________________ Chicago, Illinois 60697 Title:________________________________ Attention: David Johanson Facsimile: (312) 974-9102 S-1 ATTACHMENT 1 to Trademark Security Agreement Registered Trademarks --------------------- Country Trademark Registration No. Registration Date - ------- --------- ---------------- ----------------- SEE SCHEDULE A ATTACHED HERETO Pending Trademark Applications ------------------------------ Country Trademark Serial No. Filing Date - ------- --------- ---------- ----------- SEE SCHEDULE B ATTACHED HERETO Trademark Applications in Preparation ------------------------------------- Expected Products/ Country Trademark Docket No. Filing Date Services - ------- --------- ---------- ----------- -------- NONE ATTACHMENT 2 to Trademark Security Agreement Trademark Licenses
Country or Effective Expiration Territory Trademark Licensor Licensee Date Date ----------- --------- -------- -------- ---- ---- US Prestige TruServ Corporation Trio Industries, Ltd. 1/11/00 30 days' notice by either party US True Value TruServ Corporation Network Food Services 4/11/00 4/11/01 Coffee Stop Incorporated
S-3 EXHIBIT K GUARANTY THIS GUARANTY dated as of April 14, 2000 is executed in favor of BANK OF AMERICA, N.A. ("Bank of America"), individually as a Benefited Party (as defined in the Intercreditor Agreement referred to below) and as Collateral Agent (as defined below), and the other Benefited Parties. W I T N E S S E T H: WHEREAS, various parties have made loans to, purchased notes from, issued letters of credit for the account of or made other financial accommodations to TruServ Corporation (the "Company"); WHEREAS, pursuant to an Intercreditor Agreement dated as of the date hereof (as amended, restated or otherwise modified from time to time, the "Intercreditor Agreement"; capitalized terms used but not defined herein have the respective meanings given thereto in the Intercreditor Agreement), certain creditors of the Company and Bank of America, as Collateral Agent (in such capacity, together with any successor in such capacity, the "Collateral Agent"), have agreed that (i) the Benefited Obligations shall be secured and guaranteed as set forth in the Intercreditor Agreement and (ii) Bank of America shall act as collateral agent for the holders of the Benefited Obligations; and WHEREAS, each of the undersigned has agreed to guaranty the Liabilities (as defined below) as hereinafter set forth; NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, each of the undersigned agrees as follows: Each of the undersigned hereby jointly and severally, unconditionally and irrevocably, as primary obligor and not merely as surety, guarantees the full and prompt payment when due, whether by acceleration or otherwise, and at all times thereafter, of (a) all obligations of the Company to the Collateral Agent and each other Benefited Party under or in connection with each Financing Agreement, in each case howsoever created, arising or evidenced, whether direct or indirect, absolute or contingent, now or hereafter existing, or due or to become due, in each case as the same may be amended, modified, extended or renewed from time to time, plus (b) all costs and expenses paid or incurred by the Collateral Agent or any other Benefited Party in enforcing this Guaranty against such undersigned (all such obligations being herein collectively called the "Liabilities"); provided, however, that the liability of each of the undersigned hereunder shall be limited to the maximum amount of the Liabilities which such undersigned may guaranty without violating any fraudulent conveyance or fraudulent transfer law. Each of the undersigned agrees that, in the event of the occurrence of any Event of Default under Sections 8.1(g) through (j) of the Credit Agreement, Sections 7A(vii) through (x) of any of the Senior Note Agreements, Sections 7A(vii) through (x) of the Shelf Agreement, or the comparable provision of any other Financing Agreement, and if such event shall occur at a time when any of the Liabilities may not then be due and payable, such undersigned will pay to the Collateral Agent for the account of the Benefited Parties forthwith the full amount which would be payable hereunder by such undersigned if all Liabilities were then due and payable. To secure all obligations of each of the undersigned hereunder, the Collateral Agent and each Benefited Party shall have a lien on and security interest in (and may, without demand or notice of any kind, at any time and from time to time when any amount shall be due and payable by such undersigned hereunder, appropriate and apply toward the payment of such amount) any and all balances, credits, deposits, accounts or moneys of or in the name of such undersigned now or hereafter with the Collateral Agent or such Benefited Party and any and all property of every kind or description of or in the name of such undersigned now or hereafter, for any reason or purpose whatsoever, in the possession or control of, or in transit to, the Collateral Agent or such Benefited Party or any agent or bailee for the Collateral Agent or such Benefited Party. This Guaranty shall in all respects be a continuing, irrevocable, absolute and unconditional guaranty of payment and performance and not only collectibility, and shall remain in full force and effect (notwithstanding, without limitation, the dissolution of any of the undersigned, that at any time or from time to time no Liabilities are outstanding or any other circumstance) until all Liabilities have been paid in full and all commitments to create Liabilities have been terminated. The undersigned further agree that if at any time all or any part of any payment theretofore applied by the Collateral Agent or any other Benefited Party to any of the Liabilities is or must be rescinded or returned by the Collateral Agent or such Benefited Party for any reason whatsoever (including, without limitation, the insolvency, bankruptcy or reorganization of the Company or any of the undersigned), such Liabilities shall, for the purposes of this Guaranty, to the extent that such payment is or must be rescinded or returned, be deemed to have continued in existence, notwithstanding such application by the Collateral Agent or such Benefited Party, and this Guaranty shall continue to be effective or be reinstated, as the case may be, as to such Liabilities, all as though such application by the Collateral Agent or such Benefited Party had not been made. The obligations of each of the undersigned shall be unconditional and absolute and, without limiting the generality of the foregoing, shall not be released, discharged or otherwise affected by: (1) any event referred to in the immediately succeeding paragraph; 2 (i) any extension, renewal, settlement, compromise, waiver or release in respect of any obligation of the Company under any Financing Agreement, by operation of law or otherwise; (ii) any modification or amendment of or supplement to any Financing Agreement; (iii) any release, non-perfection or invalidity of any direct or indirect security for any obligation of the Company under any Financing Agreement; (iv) any change in the corporate existence, structure or ownership of the Company, or any insolvency, bankruptcy, reorganization or other similar proceeding affecting the Company or its assets or any resulting release or discharge of any obligation of the Company contained in any Financing Agreement; (v) the existence of any claim, set-off or other right which any of the undersigned may have at any time against the Company, any Benefited Party or any other Person, whether in connection herewith or any unrelated transaction, provided that nothing herein shall prevent the assertion of any such claim by separate suit or compulsory counterclaim; (vi) any invalidity or unenforceability relating to or against the Company for any reason of any Financing Agreement, or any provision of applicable law or regulation purporting to prohibit the payment by the Company of the principal of or any interest on any Benefited Obligation or any other amount payable by the Company under any Financing Agreement; or (vii) any other act or omission to act or delay of any kind by the Company, the Collateral Agent, any other Benefited Party or any other Person or any other circumstance whatsoever which might, but for the provisions of this paragraph, constitute a legal or equitable discharge of any of the obligations of such undersigned under this Guaranty. The Collateral Agent or any Benefited Party may, from time to time, at its sole discretion and without notice to the undersigned (or any of them), take any or all of the following actions: (a) retain or obtain a security interest in any property to secure any of the Liabilities or any obligation hereunder, (b) retain or obtain the primary or secondary obligation of any obligor or obligors, in addition to the undersigned, with respect to any of the Liabilities, (c) extend or renew any of the Liabilities for one or more periods (whether or not longer than the original period), amend, modify, release, compromise, alter or exchange any of the Liabilities, or amend, modify, release, compromise, alter or exchange any obligation of any of the undersigned hereunder or any obligation of any nature of any other obligor with respect to any of the Liabilities, (d) release its security interest in, or surrender, release or permit any substitution or exchange for, all or any part of any property securing any of the Liabilities or any obligation hereunder, or extend or renew for one or more periods (whether or not longer than the original period) or amend, modify, release, compromise, alter or exchange any obligations of any nature of any obligor with respect to any such property, and (e) resort to the undersigned (or any of them) for payment of any of the 3 Liabilities when due, whether or not the Collateral Agent or any other Benefited Party shall have resorted to any property securing any of the Liabilities or any obligation hereunder or shall have proceeded against any other of the undersigned or any other obligor primarily or secondarily obligated with respect to any of the Liabilities. Notwithstanding any payment made by or for the account of any of the undersigned pursuant to this Guaranty, the undersigned shall not be subrogated to any rights of the Collateral Agent or any other Benefited Party until such time as this Guaranty shall have been discontinued as to all of the undersigned and the Collateral Agent and the other Benefited Parties shall have received payment of the full amount of all Liabilities. The undersigned hereby expressly waive: (a) notice of the acceptance by the Collateral Agent or any other Benefited Party of this Guaranty, (b) notice of the existence or creation or non-payment of all or any of the Liabilities, (c) presentment, demand, notice of dishonor, protest, and all other notices whatsoever, and (d) all diligence in collection or protection of or realization upon any Liabilities or any security for or guaranty of any Liabilities. Each of the undersigned hereby represents, warrants and covenants as to itself that: (i) It is a corporation or limited liability company duly organized and existing in good standing under the laws of the state of its formation and has the power to own its property and to carry on its business as now being conducted. It does not have outstanding any shares of stock of a class which has priority over any other class as to dividends or in liquidation. (ii) It has the power to own its properties and to carry on its businesses as now being conducted. It has the power and authority to execute and deliver this Guaranty and all other Financing Agreements to which it is a party and to perform the provisions hereof and thereof. (iii) This Guaranty and all other Financing Agreements to which it is a party have been duly authorized by all necessary action on its part and this Guaranty and all other Financing Agreements to which it is a party constitute a legal, valid and binding obligation of the undersigned enforceable against it in accordance with its terms, except as such enforceability may be limited by (A) applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting the enforcement of creditors" rights generally and (B) general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law). (iv) There is no action, suit, investigation or proceeding pending or, to its knowledge, threatened against the Company or any of the undersigned, or any of the properties or rights of the Company or any of the undersigned, by or before any court, arbitrator or administrative or governmental body which could be reasonably expected to result in any material adverse change in the business, property or assets, condition (financial or otherwise) or operations of the 4 Company and the undersigned taken as a whole or the ability of the undersigned to perform its obligations under this Guaranty or any other Financing Agreement to which it is a party. (v) It is not party to any contract or agreement or subject to any charter or other corporate restriction which materially and adversely affects its business, property or assets, condition (financial or otherwise) or operations. None of the execution and delivery of this Guaranty or any other Financing Agreement will conflict with, or result in a breach of the terms, conditions or provisions of, or constitute a default under, or result in any violation of, or result in the creation of any Lien (other than the Liens created by the Collateral Documents) upon any of the properties or assets of the Company or any of the undersigned pursuant to, the charter or by-laws of the Company or any of the undersigned, any award of any arbitrator or any agreement (including any agreement with stockholders), instrument, order, judgment, decree, statute, law, rule or regulation to which the Company or any of the undersigned is subject. (vi) Neither the nature of the undersigned, nor any of its businesses or properties, nor any relationship between the undersigned and any other Person, is such as to require any authorization, consent, approval, exemption or any action by or notice to or filing with any court or administrative or governmental body in connection with the execution and delivery of this Guaranty or any other Financing Agreement to which it is a party or the fulfillment of or compliance with the terms and provisions hereof or thereof. (vii) It is not an "investment company" within the meaning of the Investment Company Act of 1940, as amended. It is not a "holding company" or a "subsidiary" or an "affiliate" or a "holding company" or a "public utility" within the meaning of the Public Utility Holding Company Act of 1935, as amended. Each of the undersigned further agrees to pay all expenses (including reasonable attorneys' fees and legal expenses) paid or incurred by the Collateral Agent or any other Benefited Party in endeavoring to collect the Liabilities of such undersigned, or any part thereof, and in enforcing this Guaranty against such undersigned. The creation or existence from time to time of additional Liabilities to the Collateral Agent or any Benefited Party or any of them is hereby authorized, without notice to the undersigned (or any of them), and shall in no way affect or impair the rights of the Collateral Agent or any Benefited Party or the obligations of the undersigned under this Guaranty. This Guaranty shall inure to the benefit of the Collateral Agent and each other Benefited Party and their respective successors and assigns. The Collateral Agent and any other Benefited Party may from time to time, without notice to the undersigned (or any of them), assign or transfer any or all of the Liabilities or any interest therein; and, notwithstanding any such assignment or transfer or any subsequent assignment or transfer thereof, such Liabilities shall be and remain Liabilities for the purposes of this Guaranty, and each and every immediate and successive assignee or transferee of any of the Liabilities or of any interest therein shall, to the 5 extent of the interest of such assignee or transferee in the Liabilities, be entitled to the benefits of this Guaranty to the same extent as if such assignee or transferee were a Benefited Party. No delay on the part of the Collateral Agent or any other Benefited Party in the exercise of any right or remedy shall operate as a waiver thereof, and no single or partial exercise by the Collateral Agent or any other Benefited Party of any right or remedy shall preclude other or further exercise thereof or the exercise of any other right or remedy; nor shall any modification or waiver of any provision of this Guaranty be binding upon the Collateral Agent or any other Benefited Party except as expressly set forth in a writing duly signed and delivered on behalf of the Collateral Agent (or, if at any time there is no Collateral Agent, the Required Benefited Parties). No action of the Collateral Agent or any other Benefited Party permitted hereunder shall in any way affect or impair the rights of the Collateral Agent or any other Benefited Party or the obligations of the undersigned under this Guaranty. For purposes of this Guaranty, Liabilities shall include all obligations of the Company to the Collateral Agent or any other Benefited Party arising under or in connection with any Financing Agreement, notwithstanding any right or power of the Company or anyone else to assert any claim or defense as to the invalidity or unenforceability of any obligation, and no such claim or defense shall affect or impair the obligations of the undersigned hereunder. Pursuant to the Intercreditor Agreement, (a) this Guaranty has been delivered to the Collateral Agent and (b) the Collateral Agent has been authorized to enforce this Guaranty on behalf of itself and each of the other Benefited Parties. All payments by the undersigned pursuant to this Guaranty shall be made to the Collateral Agent for application as set forth in the Intercreditor Agreement or, if there is no Collateral Agent, to the Benefited Parties for their ratable benefit. This Guaranty shall be binding upon the undersigned and the successors and assigns of the undersigned, provided that none of the undersigned may assign its obligations hereunder without the prior written consent of the Collateral Agent. To the extent that the Company or any of the undersigned is either a partnership, corporation, limited liability company or other entity, all references herein to the Company and to the undersigned, respectively, shall be deemed to include any successor or successors, whether immediate or remote, to such entity. The term "undersigned" as used herein shall mean all parties executing this Guaranty and each of them, and all such parties shall be jointly and severally obligated hereunder. This Guaranty has been delivered at Chicago, Illinois, and shall be construed in accordance with and governed by the internal laws of the State of Illinois. Wherever possible each provision of this Guaranty shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Guaranty shall be prohibited by or invalid under such law, such provision shall be ineffective to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this Guaranty. 6 This Guaranty may be executed in any number of counterparts and by the different parties hereto on separate counterparts, and each such counterpart shall be deemed to be an original but all such counterparts shall together constitute one and the same Guaranty. At any time after the date of this Guaranty, one or more additional Persons may become parties hereto by executing and delivering to the Collateral Agent a counterpart of this Guaranty. Immediately upon such execution and delivery (and without any further action), each such additional Person will become a party to, and will be bound by all of the terms of, this Guaranty. This Guaranty is secured pursuant to a Security Agreement dated as of even date herewith (as amended or otherwise modified from time to time) and may be secured by one or more other agreements (including, without limitation, one or more pledge agreements, mortgages, deeds of trust or other similar documents). ANY LITIGATION BASED HEREON, OR ARISING OUT OF, UNDER OR IN CONNECTION WITH THIS GUARANTY SHALL BE BROUGHT AND MAINTAINED EXCLUSIVELY IN THE COURTS OF THE STATE OF ILLINOIS OR IN THE UNITED STATES DISTRICT COURT FOR THE NORTHERN DISTRICT OF ILLINOIS; PROVIDED THAT ANY SUIT SEEKING ENFORCEMENT AGAINST ANY COLLATERAL OR OTHER PROPERTY MAY BE BROUGHT, AT THE COLLATERAL AGENT'S OPTION, IN THE COURTS OF ANY JURISDICTION WHERE SUCH COLLATERAL OR OTHER PROPERTY MAY BE FOUND. EACH OF THE UNDERSIGNED HEREBY EXPRESSLY AND IRREVOCABLY SUBMITS TO THE JURISDICTION OF THE COURTS OF THE STATE OF ILLINOIS AND OF THE UNITED STATES DISTRICT COURT FOR THE NORTHERN DISTRICT OF ILLINOIS FOR THE PURPOSE OF ANY SUCH LITIGATION AS SET FORTH ABOVE. EACH OF THE UNDERSIGNED FURTHER IRREVOCABLY CONSENTS TO THE SERVICE OF PROCESS BY REGISTERED MAIL, POSTAGE PREPAID, TO THE ADDRESS SET FORTH UNDER ITS NAME ON SCHEDULE I HERETO (OR SUCH OTHER ADDRESS AS IT SHALL HAVE SPECIFIED IN WRITING TO THE COLLATERAL AGENT AS ITS ADDRESS FOR NOTICES HEREUNDER) OR BY PERSONAL SERVICE WITHIN OR WITHOUT THE STATE OF ILLINOIS. EACH OF THE UNDERSIGNED HEREBY EXPRESSLY AND IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW, ANY OBJECTION WHICH IT MAY NOW OR HEREAFTER HAVE TO THE LAYING OF VENUE OF ANY SUCH LITIGATION BROUGHT IN ANY SUCH COURT REFERRED TO ABOVE AND ANY CLAIM THAT ANY SUCH LITIGATION HAS BEEN BROUGHT IN AN INCONVENIENT FORUM. EACH OF THE UNDERSIGNED, AND (BY ACCEPTING THE BENEFITS HEREOF) EACH OF THE COLLATERAL AGENT AND EACH OTHER BENEFITED PARTY, HEREBY WAIVES ANY RIGHT TO A TRIAL BY JURY IN ANY ACTION OR PROCEEDING TO ENFORCE OR DEFEND ANY RIGHTS UNDER THIS GUARANTY, OR ANY OTHER FINANCING AGREEMENT AND ANY AMENDMENT, 7 INSTRUMENT, DOCUMENT OR AGREEMENT DELIVERED OR WHICH MAY IN THE FUTURE BE DELIVERED IN CONNECTION HEREWITH OR THEREWITH OR ARISING FROM ANY FINANCING RELATIONSHIP EXISTING IN CONNECTION WITH ANY OF THE FOREGOING, AND AGREES THAT ANY SUCH ACTION OR PROCEEDING SHALL BE TRIED BEFORE A COURT AND NOT BEFORE A JURY. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] 8 IN WITNESS WHEREOF, this Guaranty has been duly executed and delivered as of the day and year first above written. TRUSERV ACCEPTANCE COMPANY By: ----------------------------------------- Name Printed: ------------------------------- Title: -------------------------------------- TRUSERV LOGISTICS COMPANY By: ----------------------------------------- Name Printed: ------------------------------- Title: -------------------------------------- GENERAL PAINT & MANUFACTURING COMPANY By: ----------------------------------------- Name Printed: ------------------------------- Title: -------------------------------------- MARYGREEN, LLC By: ----------------------------------------- Name Printed: ------------------------------- Title: -------------------------------------- TRUE VALUE.COM CORPORATION By: ----------------------------------------- Name Printed: ------------------------------- Title: -------------------------------------- S-1 COTTER CANADA HARDWARE & VARIETY COMPANY, INC. By: ----------------------------------------- Name Printed: ------------------------------- Title: -------------------------------------- S-2 Signature page for the Guaranty dated as of April 14, 2000 issued by various subsidiaries of TruServ Corporation. Each of the undersigned is executing a counterpart hereof for purposes of becoming a party hereto: TRUSERV REAL ESTATE AGENCY, INC. ADVOCATE SERVICES INCORPORATED By: _______________________________________ Name: _____________________________________ Title: ____________________________________ S-3 Signature page for the Guaranty dated as of April 14, 2000 issued by various subsidiaries of TruServ Corporation. The undersigned is executing a counterpart hereof for purposes of becoming a party hereto: [NAME OF SUBSIDIARY] By: _______________________________________ Name: _____________________________________ Title: ____________________________________ S-4 SCHEDULE I TO GUARANTY ADDRESSES Truserv Acceptance Company 8600 West Bryn Mawr Avenue Chicago, Illinois 60631 Truserv Logistics Company 8600 West Bryn Mawr Avenue Chicago, Illinois 60631 General Paint & Manufacturing Company 8600 West Bryn Mawr Avenue Chicago, Illinois 60631 MaryGreen, LLC 16500 Hunters Green Parkway Hagerstown, Maryland 21740 True Value.com Corporation 8600 West Bryn Mawr Avenue Chicago, Illinois 60631 Cotter Canada Hardware and Variety Company Inc. EXHIBIT L PLEDGE AGREEMENT THIS PLEDGE AGREEMENT (this "Agreement") dated as of April 14, 2000 is among TRUSERV CORPORATION, a Delaware corporation (the "Company"), any subsidiary of the Company which from time to time becomes party hereto (collectively, including the Company, the "Pledgors" and each individually a "Pledgor") and BANK OF AMERICA, N.A. ("Bank of America"), as Collateral Agent (as defined below) for the Benefited Parties (as defined below). W I T N E S S E T H: - - - - - - - - - - WHEREAS, pursuant to an Intercreditor Agreement dated as of the date hereof (as amended, restated or otherwise modified from time to time, the "Intercreditor Agreement"; capitalized terms used but not defined herein have the respective meanings given thereto in the Intercreditor Agreement), certain creditors of the Company and Bank of America, as Collateral Agent (in such capacity, together with any successor in such capacity, the "Collateral Agent"), have agreed that (i) the Benefited Obligations shall be secured and guaranteed as set forth in the Intercreditor Agreement and (ii) Bank of America shall act as collateral agent for the Benefited Parties; WHEREAS, each of the other Pledgors has guarantied all obligations of the Company under each Financing Agreement; and WHEREAS, the Benefited Obligations of each Pledgor are to be secured pursuant to this Agreement; NOW, THEREFORE, for and in consideration of the premises and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: 1. Definitions. When used herein, (a) the terms Benefited Obligations, Benefited Parties, Event of Default, Financing Agreement and Person shall have the respective meanings assigned thereto in the Intercreditor Agreement, and (b) the following terms have the following meanings (such meanings to be applicable to both the singular and plural forms of such terms): Agreement - see the introductory paragraph. Bank of America - see the introductory paragraph. Collateral - see Section 2. Collateral Agent - see the recitals. 1 Company - see the introductory paragraph. Default means the occurrence of any of the following events: (i) any Event of Default or (ii) any warranty of any Pledgor herein is untrue or misleading in any material respect and, as a result thereof, the Collateral Agent's security interest for the benefit of the Benefited Parties in any material portion of the Collateral is not perfected or the Collateral Agent's rights and remedies with respect to any material portion of the Collateral are materially impaired or otherwise materially adversely affected. Foreign Issuer means each Issuer designated as a "Foreign Issuer" on Schedule I hereto. Intercreditor Agreement - see the recitals. Issuer means the issuer of any of the shares of stock or other securities representing all or any of the Collateral. Liabilities means, as to each Pledgor, all Benefited Obligations of such Pledgor. 2. Pledge. As security for the payment of all Liabilities, each Pledgor hereby pledges to the Collateral Agent for the benefit of the Benefited Parties, and grants to the Collateral Agent for the benefit of the Benefited Parties a continuing security interest in, all of the following: A. All of the shares of stock and other securities set forth under such Pledgor's name on Schedule I hereto, all of the certificates and/or instruments representing such shares of stock and other securities, and all cash, securities, dividends, rights and other property at any time and from time to time received, receivable or otherwise distributed in respect of or in exchange for any or all of such shares or other securities; B. All additional shares of stock of any of the Issuers listed in Schedule I hereto at any time and from time to time acquired by such Pledgor in any manner, all of the certificates representing such additional shares, and all cash, securities, dividends, rights and other property at any time and from time to time received, receivable or otherwise distributed in respect of or in exchange for any or all of such shares; provided, however, that in the case of any Foreign Issuer (other than Cotter Canada Hardware and Variety Company, Inc.), the Collateral Agent's security interest hereunder shall not at any time extend to more than 65% of the outstanding shares of any class of stock of such Foreign Issuer; C. All other property hereafter delivered to the Collateral Agent in substitution for or in addition to any of the foregoing, all certificates and instruments 2 representing or evidencing such property, and all cash, securities, interest, dividends, rights and other property at any time and from time to time received, receivable or otherwise distributed in respect of or in exchange for any or all thereof; and D. All products and proceeds of all of the foregoing. For purposes of this Agreement, all of the foregoing are herein collectively called the "Collateral". Each Pledgor agrees to deliver to the Collateral Agent, promptly upon receipt and in due form for transfer (i.e., endorsed in blank or accompanied by stock or bond powers executed in blank), any Collateral (other than dividends which such Pledgor is entitled to receive and retain pursuant to Section 5 hereof) which may at any time or from time to time be in or come into the possession or control of such Pledgor; and prior to the delivery thereof to the Collateral Agent, such Collateral shall be held by such Pledgor separate and apart from its other property and in express trust for the Collateral Agent for the benefit of the Benefited Parties. The security interests granted hereby are granted as security only and shall not subject the Collateral Agent or any other Benefited Party to, or transfer or in any way affect or modify, any obligation of any Pledgor with respect to the Collateral or any transaction in connection therewith. 3. Warranties; Further Assurances. Each Pledgor warrants to the Collateral Agent for the benefit of each Benefited Party that: (a) such Pledgor is (or at the time of any future delivery, pledge, assignment or transfer thereof will be) the legal and equitable owner of such Pledgor's Collateral free and clear of all liens, security interests and encumbrances of every description whatsoever other than the security interest created hereunder; (b) the pledge and delivery of the Collateral pursuant to this Agreement, together with stock or bond powers executed in blank, will create a valid perfected security interest in the Collateral in favor of the Collateral Agent, subject to no prior lien or encumbrance; (c) all shares of stock referred to in Schedule I hereto are duly authorized, validly issued, fully paid and non-assessable, and none of such shares is subject to any option to purchase or similar right of any Person; (d) as to each Issuer whose name appears in Schedule I hereto, such Pledgor's Collateral represents on the date hereof not less than the applicable percent (as shown in Schedule I hereto) of the total shares of capital stock issued and outstanding of such Issuer; (e) the information contained in Schedule I hereto with respect to such Pledgor is true and accurate in all respects; (f) such Pledgor has not performed any acts which might prevent the Collateral Agent from enforcing any of the terms and conditions of this Agreement or would limit the Collateral Agent in any such enforcement; and (g) such Pledgor is not a party to or otherwise bound by any agreement, other than this Agreement, which restricts in any manner the rights of any present or future holder of any of the Collateral with respect thereto. 3 So long as any of the Liabilities shall be outstanding or any commitment shall exist on the part of any Benefited Party with respect to the creation of any Liabilities, each Pledgor (i) shall not, except as permitted by each of the Financing Agreements or with the express prior written consent of the Collateral Agent, sell, assign, exchange, pledge or otherwise transfer, encumber, or grant any option, warrant or other right to purchase the stock of any Issuer which is pledged hereunder, or otherwise diminish or impair any of its rights in, to or under any of the Collateral; (ii) shall not perform any acts which would prevent the Collateral Agent from enforcing any of the terms and conditions of this Agreement or would limit the Collateral Agent in any such enforcement; (iii) shall not become a party to or otherwise bound by any agreement, other than this Agreement, which restricts in any manner the rights of any present or future holder of any of the Collateral with respect thereto; (iv) shall execute such Uniform Commercial Code financing statements and other documents (and pay the costs of filing and recording the same in all public offices reasonably deemed necessary or appropriate by the Collateral Agent) and do such other acts and things, all as the Collateral Agent may from time to time reasonably request, to establish and maintain a valid, perfected security interest in the Collateral (free of all other liens, claims and rights of third parties whatsoever, other than the security interest hereunder and liens and claims permitted by each of the Financing Agreements) to secure the performance and payment of the Liabilities; (v) will execute and deliver to the Collateral Agent such stock powers and similar documents relating to such Pledgor's Collateral, satisfactory in form and substance to the Collateral Agent, as the Collateral Agent may reasonably request; and (vi) will furnish the Collateral Agent or any other Benefited Party such information concerning such Pledgor's Collateral as the Collateral Agent or such other Benefited Party may from time to time reasonably request, and will permit the Collateral Agent or any other Benefited Party or any designee of the Collateral Agent or such Benefited Party, from time to time at reasonable times and on reasonable notice (or at any time without notice during the existence of a Default), to inspect, audit and make copies of and extracts from all records and all other papers in the possession of such Pledgor which pertain to such Pledgor's Collateral, and will, upon request of the Collateral Agent during the existence of a Default, deliver to the Collateral Agent all of such records and papers. 4. Holding in Name of Collateral Agent, etc. The Collateral Agent may from time to time during the existence of a Default, without notice to any Pledgor, take all or any of the following actions: (a) transfer all or any part of the Collateral into the name of the Collateral Agent or any nominee or sub-agent for the Collateral Agent, with or without disclosing that such Collateral is subject to the lien and security interest hereunder, (b) appoint one or more sub-agents or nominees for the purpose of retaining physical possession of the Collateral, (c) notify the parties obligated on any of the Collateral to make payment to the Collateral Agent of any amounts due or to become due thereunder, (d) endorse any checks, drafts or other writings in the name of the applicable Pledgor to allow collection of the Collateral, (e) enforce collection of any of the Collateral by suit or otherwise, and surrender, release or exchange all or any part thereof, or compromise or renew for any period 4 (whether or not longer than the original period) any obligations of any nature of any party with respect thereto, and (f) take control of any proceeds of the Collateral. 5. Voting Rights, Dividends, etc. (a) Notwithstanding certain provisions of Section 4 hereof, so long as the Collateral Agent has not given the notice referred to in paragraph (b) below: A. The Pledgors shall be entitled to exercise any and all voting or consensual rights and powers and stock purchase or subscription rights (but any such exercise by any Pledgor of stock purchase or subscription rights may be made only from funds of such Pledgor not comprising part of the Collateral) relating or pertaining to the Collateral or any part thereof for any purpose; provided that each Pledgor agrees that it will not exercise any such right or power in any manner which would have a material adverse effect on the value of the Collateral or any part thereof. B. The Pledgors shall be entitled to receive and retain any and all lawful dividends payable in respect of the Collateral which are paid in cash by any Issuer if such dividends are permitted by the Financing Agreements, but all dividends and distributions in respect of the Collateral or any part thereof made in shares of stock or securities or other property or representing any return of capital, whether resulting from a subdivision, combination or reclassification of Collateral or any part thereof or received in exchange for Collateral or any part thereof or as a result of any merger, consolidation, acquisition or other exchange of assets to which any Issuer may be a party or otherwise or as a result of any exercise of any stock purchase or subscription right, shall be and become part of the Collateral hereunder and, if received by any Pledgor, shall be forthwith delivered to the Collateral Agent in due form for transfer (i.e., endorsed in blank or accompanied by stock or bond powers executed in blank) to be held for the purposes of this Agreement. C. The Collateral Agent shall execute and deliver, or cause to be executed and delivered, to the applicable Pledgor, all such proxies, powers of attorney, dividend orders and other instruments as such Pledgor may request for the purpose of enabling such Pledgor to exercise the rights and powers which it is entitled to exercise pursuant to clause (A) above and to receive the dividends which it is authorized to retain pursuant to clause (B) above. (b) Upon notice from the Collateral Agent during the existence of a Default, and so long as the same shall be continuing, all rights and powers which the Pledgors are entitled to exercise pursuant to Section 5(a)(A) hereof, and all rights of the Pledgors to receive and retain dividends pursuant to Section 5(a)(B) hereof, shall forthwith cease, and all such rights and powers shall thereupon become vested in the Collateral Agent which shall have, during the existence of such Default, the sole and exclusive authority to exercise such rights and powers and to receive such dividends. Any and all money and other property paid over to 5 or received by the Collateral Agent pursuant to this paragraph (b) shall be retained by the Collateral Agent as additional Collateral hereunder and applied in accordance with the provisions hereof and the Intercreditor Agreement. 6. Remedies. Whenever a Default exists, the Collateral Agent may exercise from time to time any rights and remedies available to it under the Uniform Commercial Code as in effect in Illinois or otherwise available to it. Without limiting the foregoing, whenever a Default exists the Collateral Agent (a) may, to the fullest extent permitted by applicable law, without notice, advertisement, hearing or process of law of any kind, (i) sell any or all of the Collateral, free of all rights and claims of the Pledgors therein and thereto, at any public or private sale or brokers" board and (ii) bid for and purchase any or all of the Collateral at any such public sale and (b) shall have the right, for and in the name, place and stead of the applicable Pledgor, to execute endorsements, assignments, stock powers and other instruments of conveyance or transfer with respect to all or any of the Collateral. Each Pledgor hereby expressly waives, to the fullest extent permitted by applicable law, any and all notices, advertisements, hearings or process of law in connection with the exercise by the Collateral Agent of any of its rights and remedies during the existence of a Default. Any notification of intended disposition of any of the Collateral shall be deemed reasonably and properly given if given at least ten (10) days before such disposition. Any proceeds of any of the Collateral may be applied by the Collateral Agent to the payment of expenses in connection with the Collateral, including, without limitation, reasonable attorneys" fees and legal expenses, and any balance of such proceeds shall be applied by the Collateral Agent in accordance with the terms of the Intercreditor Agreement. The Collateral Agent is hereby authorized to comply with, and each Pledgor shall execute and delivery any such documents and take any such actions as the Collateral Agent shall request to enable it to comply with, any limitation or restriction in connection with any sale of Collateral as it may be advised by counsel is necessary in order to (a) avoid any violation of applicable law (including, without limitation, compliance with such procedures as may restrict the number of prospective bidders and purchasers and/or further restrict such prospective bidders or purchasers to persons or entities who will represent and agree that they are purchasing for their own account for investment and not with a view to the distribution or resale of such Collateral) or (b) obtain any required approval of the sale or of the purchase by any governmental regulatory authority or official, and each Pledgor agrees that such compliance shall not result in such sale being considered or deemed not to have been made in a commercially reasonable manner and that the Collateral Agent shall not be liable or accountable to any Pledgor for any discount allowed by reason of the fact that such Collateral is sold in compliance with any such limitation or restriction. 7. General. The Collateral Agent shall be deemed to have exercised reasonable care in the custody and preservation of the Collateral if it takes such action for that purpose as the applicable Pledgor shall request in writing, but failure of the Collateral Agent to comply with any such request shall not of itself be deemed a failure to exercise reasonable care, and no 6 failure of the Collateral Agent to preserve or protect any rights with respect to the Collateral against prior parties, or to do any act with respect to preservation of the Collateral not so requested by any Pledgor, shall be deemed a failure to exercise reasonable care in the custody or preservation of any Collateral. No delay on the part of the Collateral Agent in exercising any right, power or remedy shall operate as a waiver thereof, and no single or partial exercise of any such right, power or remedy shall preclude any other or further exercise thereof, or the exercise of any other right, power or remedy. No amendment, modification or waiver of, or consent with respect to, any provision of this Agreement shall be effective unless the same shall be in writing and signed and delivered by the Collateral Agent, and then such amendment, modification, waiver or consent shall be effective only in the specific instance and for the specific purpose for which given. All obligations of the Pledgors and all rights, powers and remedies of the Collateral Agent and the other Benefited Parties expressed herein are in addition to all other rights, powers and remedies possessed by them, including, without limitation, those provided by applicable law or in any other written instrument or agreement relating to any of the Liabilities or any security therefor. This Agreement has been delivered at Chicago, Illinois, and shall be construed in accordance with and governed by the internal laws of the State of Illinois. Wherever possible each provision of this Agreement shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement shall be prohibited by or invalid under such law, such provision shall be ineffective to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this Agreement. All notices hereunder shall be in writing (including facsimile transmission) and shall be sent to the applicable party at its address shown opposite its signature hereto or at such other address as such party may, by written notice to the other party, have designated as its address for such purpose. Notices sent by facsimile transmission shall be deemed to have been given when sent with confirmation of receipt; notices sent by mail shall be deemed to have been given five Business Days after the date when sent by registered or certified mail, postage prepaid; and notices sent by hand delivery or overnight courier shall be deemed to have been given when received. This Agreement shall be binding upon the Pledgors and the Collateral Agent and their respective successors and assigns (provided that no Pledgor may assign its obligations hereunder without the prior written consent of the Collateral Agent) and shall inure to the benefit of each Pledgor and the Collateral Agent and the successors and assigns of the Collateral Agent. 7 This Agreement may be executed in any number of counterparts and by the different parties hereto on separate counterparts, and each such counterpart shall be deemed an original but all such counterparts shall together constitute but one and the same Agreement. At any time after the date of this Agreement, one or more additional persons or entities may become parties hereto by executing and delivering to the Collateral Agent a counterpart of this Agreement (together with a supplement Schedule I hereto). Immediately upon such execution and delivery (and without any further action), each such additional person or entity will become a party to, and will be bound by all of the terms of, this Agreement. ANY LITIGATION BASED HEREON, OR ARISING OUT OF, UNDER OR IN CONNECTION WITH THIS AGREEMENT, SHALL BE BROUGHT AND MAINTAINED EXCLUSIVELY IN THE COURTS OF THE STATE OF ILLINOIS OR IN THE UNITED STATES DISTRICT COURT FOR THE NORTHERN DISTRICT OF ILLINOIS; PROVIDED THAT ANY SUIT SEEKING ENFORCEMENT AGAINST ANY COLLATERAL OR OTHER PROPERTY MAY BE BROUGHT, AT THE COLLATERAL AGENT'S OPTION, IN THE COURTS OF ANY JURISDICTION WHERE SUCH COLLATERAL OR OTHER PROPERTY MAY BE FOUND. EACH PLEDGOR HEREBY EXPRESSLY AND IRREVOCABLY SUBMITS TO THE JURISDICTION OF THE COURTS OF THE STATE OF ILLINOIS AND OF THE UNITED STATES DISTRICT COURT FOR THE NORTHERN DISTRICT OF ILLINOIS FOR THE PURPOSE OF ANY SUCH LITIGATION AS SET FORTH ABOVE. EACH PLEDGOR FURTHER IRREVOCABLY CONSENTS TO THE SERVICE OF PROCESS BY REGISTERED MAIL, POSTAGE PREPAID, TO THE ADDRESS OF SUCH PLEDGOR SET ACROSS FROM ITS SIGNATURE HERETO (OR SUCH OTHER ADDRESS AS IT SHALL HAVE SPECIFIED IN WRITING TO THE COLLATERAL AGENT AS ITS ADDRESS FOR NOTICES HEREUNDER) OR BY PERSONAL SERVICE WITHIN OR WITHOUT THE STATE OF ILLINOIS. EACH PLEDGOR HEREBY EXPRESSLY AND IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW, ANY OBJECTION WHICH IT MAY NOW OR HEREAFTER HAVE TO THE LAYING OF VENUE OF ANY SUCH LITIGATION BROUGHT IN ANY SUCH COURT REFERRED TO ABOVE AND ANY CLAIM THAT ANY SUCH LITIGATION HAS BEEN BROUGHT IN AN INCONVENIENT FORUM. EACH PLEDGOR, THE COLLATERAL AGENT AND (BY ACCEPTING THE BENEFITS HEREOF) EACH OTHER BENEFITED PARTY HEREBY WAIVES ANY RIGHT TO A TRIAL BY JURY IN ANY ACTION OR PROCEEDING TO ENFORCE OR DEFEND ANY RIGHTS UNDER THIS AGREEMENT OR ANY OTHER FINANCING AGREEMENT AND ANY AMENDMENT, INSTRUMENT, DOCUMENT OR AGREEMENT DELIVERED OR WHICH MAY IN THE FUTURE BE DELIVERED IN CONNECTION HEREWITH OR THEREWITH OR ARISING FROM ANY FINANCING RELATIONSHIP 8 EXISTING IN CONNECTION WITH ANY OF THE FOREGOING, AND AGREES THAT ANY SUCH ACTION OR PROCEEDING SHALL BE TRIED BEFORE A COURT AND NOT BEFORE A JURY. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] 9 IN WITNESS WHEREOF, this Agreement has been duly executed and delivered as of the day and year first written above. TRUSERV CORPORATION Address: By: _______________________________ 8600 West Bryn Mawr Avenue Name Printed: _____________________ Chicago, Illinois 60631-3505 Title: ____________________________ Attention: Frank Hashimoto Facsimile: (773) 695-6568 BANK OF AMERICA, N.A., as Collateral Agent Address: By: _______________________________ 231 South LaSalle Street Name Printed: _____________________ Chicago, Illinois 60697 Title: ____________________________ Attention: David Johanson Facsimile: (312) 974-9102 S-1 Signature page for the Pledge Agreement dated as of April 14, 2000 issued by TruServ Corporation (the "Company") and various subsidiaries of the Company. The undersigned is executing a counterpart hereof for purposes of becoming a party hereto: [NAME OF SUBSIDIARY] By: __________________________________________________ Name: ________________________________________________ Title: _______________________________________________ S-2 SCHEDULE I TO PLEDGE AGREEMENT STOCK
Certificate No. --------------- Pledgor Issuer No. of Pledged Shares ------- ------ --------------------- - ------------------------------------------------------------------------------------------------------------------------ TruServ Corporation Advocate Services, Inc. 5 200 TruServ Corporation Servistar Paint Company 4 10 TruServ Corporation TruServ Real Estate Agency, Inc. 3 25,000 TruServ Corporation Cotter Canada Hardware and Variety C3 7,500,000 Company Inc. TruServ Corporation True Value.com Corporation 1 1,500 TruServ Corporation TruServ Logistics Company 6 1,000 TruServ Corporation General Paint & Manufacturing 1 25,000 Company TruServ Corporation General Paint & Manufacturing 6 25,000 Company TruServ Corporation TruServ Acceptance Company 5 8,000 Pledged Shares as % of Total Shares Issued and Total Shares of Issuer Pledgor Issuer Outstanding Outstanding ------- ------ ----------- ----------- - ------------------------------------------------------------------------------------------------------------------------ TruServ Corporation Advocate Services, Inc. 100% 200 TruServ Corporation Servistar Paint Company 100% 10 TruServ Corporation TruServ Real Estate Agency, Inc. 100% 25,000 TruServ Corporation Cotter Canada Hardware and Variety 100% 7,500,000 TruServ Corporation True Value.com Corporation 100% 1,500 TruServ Corporation TruServ Logistics Company 100% 1,000 TruServ Corporation General Paint & Manufacturing 50% 50,000 Company TruServ Corporation General Paint & Manufacturing 50% 50,000 Company TruServ Corporation TruServ Acceptance Company 100% 8,000
*Denotes Foreign Issuer EXHIBIT M SECURITY AGREEMENT THIS SECURITY AGREEMENT (this "Agreement") dated as of April 14, 2000 is among TRUSERV CORPORATION (the "Company"), each subsidiary of the Company listed on the signature pages hereof, each other person or entity which from time to time becomes a party hereto (collectively, including the Company, the "Debtors" and individually each a "Debtor") and BANK OF AMERICA, N.A. ("Bank of America"), as Collateral Agent (as defined below) for the Benefited Parties (as defined in the Intercreditor Agreement referred to below). W I T N E S S E T H: WHEREAS, pursuant to an Intercreditor Agreement dated as of the date hereof (as amended, restated or otherwise modified from time to time, the "Intercreditor Agreement"; capitalized terms used but not defined herein have the respective meanings given thereto in the Intercreditor Agreement), certain creditors of the Company and Bank of America, as Collateral Agent (in such capacity, together with any successor in such capacity, the "Collateral Agent"), have agreed that (i) the Benefited Obligations shall be secured and guaranteed as set forth in the Intercreditor Agreement and (ii) Bank of America shall act as collateral agent for the Benefited Parties; WHEREAS, each of the other Debtors has guaranteed all obligations of the Company under each Financing Agreement; and WHEREAS, the Benefited Obligations of each Debtor are to be secured pursuant to this Agreement; NOW, THEREFORE, for and in consideration of the premises, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: 1. Definitions. When used herein, (a) the terms Account, Account Debtor, Certificated Security, Chattel Paper, Commodity Account, Commodity Contract, Investment Property, Security Entitlement, Securities Account, Deposit Account, Document, Equipment, Fixture, Goods, Inventory, Instrument, Security and Uncertificated Security shall have the respective meanings assigned to such terms in the UCC (as defined below), (b) capitalized terms used but not defined have the meanings assigned to such terms in the Intercreditor Agreement and (c) the following terms have the following meanings (such definitions to be applicable to both the singular and plural forms of such terms): Agreement - see the introductory paragraph. Assignee Deposit Account - see Section 4. Bank of America - see the introductory paragraph. Business Day means any day on which Bank of America is open for commercial banking business in Chicago and Charlotte. Collateral means, with respect to any Debtor, all property and rights of such Debtor in which a security interest is granted hereunder. Collateral Agent - see the recitals. Company - see the introductory paragraph. Computer Hardware and Software means, with respect to any Debtor, (i) all computer and other electronic data processing hardware, whether now or hereafter owned, licensed or leased by such Debtor, including, without limitation, all integrated computer systems, central processing units, memory units, display terminals, printers, features, computer elements, card readers, tape drives, hard and soft disk drives, cables, electrical supply hardware, generators, power equalizers, accessories and all peripheral devices and other related computer hardware; (ii) all software programs, whether now or hereafter owned, licensed or leased by such Debtor, designed for use on the computers and electronic data processing hardware described in clause (i) above, including, without limitation, all operating system software, utilities and application programs in whatsoever form (source code and object code in magnetic tape, disk or hard copy format or any other listings whatsoever); (iii) all firmware associated therewith, whether now or hereafter owned, licensed or leased by such Debtor; and (iv) all documentation for such hardware, software and firmware described in the preceding clauses (i), (ii) and (iii), whether now or hereafter owned, licensed or leased by such Debtor, including, without limitation, flow charts, logic diagrams, manuals, specifications, training materials, charts and pseudo codes. Debtor - see the introductory paragraph. Default means the occurrence of any of the following events: (i) any Event of Default or (ii) any warranty of any Debtor herein is untrue or misleading in any material respect and, as a result thereof, the Collateral Agent's security interest for the benefit of the Benefited Parties in any material portion of the Collateral is not perfected or the Collateral Agent's rights and remedies with respect to any material portion of the Collateral are materially impaired or otherwise materially adversely affected. 2 General Intangibles means, with respect to any Debtor, all of such Debtor's "general intangibles" as defined in the UCC and, in any event, includes (without limitation) all of such Debtor's licenses, franchises, tax refund claims, guarantee claims, security interests and rights to indemnification, and all of such Debtor's interests in any partnership, limited liability company or similar entity. Intellectual Property means all past, present and future: trade secrets and other proprietary information; customer lists; trademarks, service marks, business names, trade names; designs, logos, indicia, and/or other source and/or business identifiers and the goodwill of the business relating thereto and all registrations or applications for registrations which have heretofore been or may hereafter be issued thereon throughout the world; copyrights (including, without limitation, copyrights for computer programs) and copyright registrations or applications for registrations which have heretofore been or may hereafter be issued throughout the world and all tangible property embodying the copyrights; inventions (whether or not patentable); patent applications and patents; industrial designs, industrial design applications and registered industrial designs; license agreements related to any of the foregoing and income therefrom; mask works; books, records, writings, computer tapes or disks, flow diagrams, specification sheets, source codes, object codes and other physical manifestations, embodiments or incorporations of any of the foregoing; the right to sue for all past, present and future infringements of any of the foregoing; and all common law and other rights in and to all of the foregoing. Intercreditor Agreement - see the recitals. Liabilities means, as to each Debtor, all Benefited Obligations of such Debtor. Non-Tangible Collateral means, with respect to any Debtor, collectively, such Debtor's Accounts and General Intangibles. Permitted Liens - see Section 3. UCC means the Uniform Commercial Code as in effect from time to time in the State of Illinois. 2. Grant of Security Interest. As security for the payment of all Liabilities, each Debtor hereby assigns to the Collateral Agent for the benefit of the Benefited Parties, and grants to the Collateral Agent for the benefit of the Benefited Parties a continuing security interest in, the following, whether now or hereafter existing or acquired: All of such Debtor's: (1) Accounts; 3 (2) Chattel Paper; (3) Computer Hardware and Software and all rights with respect thereto, including, without limitation, any and all licenses, options, warranties, service contracts, program services, test rights, maintenance rights, support rights, improvement rights, renewal rights and indemnifications, and any substitutions, replacements, additions or model conversions of any of the foregoing; (4) Deposit Accounts; (5) Documents; (6) General Intangibles; (7) Goods (including, without limitation, all its Equipment, Fixtures and Inventory), together with all accessions, additions, attachments, improvements, substitutions and replacements thereto and therefor; (8) Instruments; (9) Intellectual Property; (10) money (of every jurisdiction whatsoever); (11) Investment Property (including Commodity Accounts, Commodity Contracts, Securities (whether Certificated Securities or Uncertificated Securities), Security Entitlements and Securities Accounts; and (12) to the extent not included in the foregoing, other personal property of any kind or description; together with all books, records, writings, data bases, information and other property relating to, used or useful in connection with, evidencing, embodying, incorporating or referring to any of the foregoing, all claims and/or insurance proceeds arising out of the loss, nonconformity or any interference with the use of, or any defects or infringements of rights in, or damage to, any of the foregoing, and all proceeds, products, offspring, rents, issues, profits and returns of and from, and all distributions on and rights arising out of, any of the foregoing. 3. Warranties. Each Debtor warrants, as to itself and its own Collateral, that: (i) no financing statement (other than any which may have been filed on behalf of the Collateral Agent or in connection with Permitted Liens (as defined below)) covering any of the Collateral is on file 4 in any public office; (ii) such Debtor is and will be the lawful owner of all Collateral, free of all liens and claims whatsoever, other than the security interest hereunder and liens and claims expressly permitted by each of the Financing Agreements ("Permitted Liens"), with full power and authority to execute and deliver this Agreement, to perform such Debtor's obligations hereunder and to subject the Collateral to the security interest hereunder; (iii) all information with respect to the Collateral and Account Debtors set forth in any schedule, certificate or other writing at any time heretofore or hereafter furnished by such Debtor to the Collateral Agent or any other Benefited Party and all other written information heretofore or hereafter furnished by such Debtor to the Collateral Agent or any other Benefited Party in connection with any Financing Agreement will be true and correct in all material respects as of the date furnished; (iv) such Debtor's true legal name as registered in the jurisdiction in which such Debtor is organized or incorporated, jurisdiction of organization or incorporation, federal employer identification number, organizational identification number, if any, as designated by the state of its organization or incorporation, chief executive office and principal place of business are as set forth on Schedule I hereto (and such Debtor has not maintained its chief executive office and principal place of business at any other location at any time after November 1, 1999); (v) each other location where such Debtor maintains a place of business or has any Goods is set forth on Schedule II hereto; (vi) except as disclosed on Schedule III, such Debtor is not now known and during the five years preceding the date hereof has not previously been known by any trade name; (vii) except as disclosed on Schedule III, during the five years preceding the date hereof such Debtor has not been known by any legal name different from the one set forth on the signature page of this Agreement nor has such Debtor been the subject of any merger or other corporate reorganization; (viii) Schedule IV hereto contains a complete listing of all of such Debtor's Intellectual Property which has been registered under any registration statute; (ix) such Debtor is a corporation duly organized, validly existing and in good standing under the laws of the state of its incorporation; (x) the execution and delivery of this Agreement and the performance by such Debtor of its obligations hereunder are within such Debtor's corporate powers, have been duly authorized by all necessary corporate action, have received all necessary governmental approval (if any shall be required), and do not and will not contravene or conflict with any provision of law or of the charter or by-laws of such Debtor or of any material agreement, indenture, instrument or other document, or any material judgment, order or decree, which is binding upon such Debtor; (xi) this Agreement is a legal, valid, binding and enforceable obligation of such Debtor, except that the enforceability of this Agreement may be limited by bankruptcy, insolvency, fraudulent conveyance, fraudulent transfer, reorganization, moratorium or other similar laws now or hereafter in effect relating to creditors' rights generally and by general principles of equity (regardless of whether enforcement is sought in a proceeding in equity or at law); (xii) such Debtor has not performed any acts which might prevent the Collateral Agent from enforcing any of the terms of this Agreement or which could limit the Collateral Agent in any such enforcement; (xiii) no Collateral is in the possession of any Person (other than such Debtor) asserting any claim thereto or security interest therein, except that the Collateral Agent or its designee may have possession of Collateral as contemplated hereby; and (xiv) such Debtor is in compliance with the requirements of all applicable laws (including, without limitation, the provisions of the Fair Labor Standards Act), rules, regulations and orders of every governmental 5 authority, the non-compliance with which would materially adversely affect the business, properties, assets, operations, prospects or condition (financial or otherwise) of the Company and its Subsidiaries taken as a whole or the value of the Collateral or the worth of the Collateral as collateral security. 4. Collections, etc. Until such time during the existence of a Default as the Collateral Agent shall notify such Debtor of the revocation of such power and authority, each Debtor (a) may, in the ordinary course of its business, at its own expense, sell, lease or furnish under contracts of service any of the Inventory normally held by such Debtor for such purpose, use and consume, in the ordinary course of its business, any raw materials, work in process or materials normally held by such Debtor for such purpose, and use, in the ordinary course of its business (but subject to the terms of the Financing Agreements), the cash proceeds of Collateral and other money which constitutes Collateral, (b) will, at its own expense, endeavor to collect, as and when due, all amounts due under any of the Non-Tangible Collateral, including the taking of such action with respect to such collection as the Collateral Agent may reasonably request or, in the absence of such request, as such Debtor may deem advisable, and (c) may grant, in the ordinary course of business, to any party obligated on any of the Non-Tangible Collateral, any rebate, refund or allowance to which such party may be lawfully entitled, and may accept, in connection therewith, the return of Goods, the sale or lease of which shall have given rise to such Non-Tangible Collateral. The Collateral Agent, however, may, at any time that a Default exists, whether before or after any revocation of such power and authority or the maturity of any of the Liabilities, notify any parties obligated on any of the Non-Tangible Collateral to make payment to the Collateral Agent of any amounts due or to become due thereunder and enforce collection of any of the Non-Tangible Collateral by suit or otherwise and surrender, release or exchange all or any part thereof, or compromise or extend or renew for any period (whether or not longer than the original period) any indebtedness thereunder or evidenced thereby. Upon request of the Collateral Agent during the existence of a Default, each Debtor will, at its own expense, notify any parties obligated on any of the Non-Tangible Collateral to make payment to the Collateral Agent of any amounts due or to become due thereunder. Upon request by the Collateral Agent during the existence of a Default, each Debtor will forthwith, upon receipt, transmit and deliver to the Collateral Agent, in the form received, all cash, checks, drafts and other instruments or writings for the payment of money (properly endorsed, where required, so that such items may be collected by the Collateral Agent) which may be received by such Debtor at any time in full or partial payment or otherwise as proceeds of any of the Collateral. Except as the Collateral Agent may otherwise consent in writing, any such items which may be so received by any Debtor during the existence of a Default will not be commingled with any other of its funds or property, but will be held separate and apart from its own funds or property and upon express trust for the Collateral Agent for the benefit of the Benefited Parties until delivery is made to the Collateral Agent. Each Debtor will comply with the terms and conditions of any consent given by the Collateral Agent pursuant to the foregoing sentence. 6 During the existence of a Default, all items or amounts which are delivered by any Debtor to the Collateral Agent on account of partial or full payment or otherwise as proceeds of any of the Collateral shall be deposited to the credit of a deposit account (each an "Assignee Deposit Account") of such Debtor with the Collateral Agent, as security for payment of the Liabilities. No Debtor shall have any right to withdraw any funds deposited in the applicable Assignee Deposit Account. The Collateral Agent may, from time to time, in its discretion, and shall upon request of the applicable Debtor made not more than once in any week or upon the request of the Required Benefited Parties in accordance with the Intercreditor Agreement, apply all or any of the then balance, representing collected funds, in the Assignee Deposit Account, toward payment of the Liabilities (whether or not then due if such request is made by the applicable Debtor, but only to amounts then due if such request is made by the Required Benefited Parties) in the order of application set forth in the Intercreditor Agreement, and the Collateral Agent may, from time to time, release all or any of such balance to the applicable Debtor so long as such release is permitted by the Intercreditor Agreement. During the existence of a Default, the Collateral Agent is authorized to endorse, in the name of the applicable Debtor, any item, howsoever received by the Collateral Agent, representing any payment on or other proceeds of any of the Collateral. From and after July 1, 2001, no Debtor shall maintain any Deposit Account or deposit any item or amount in any Deposit Account, except (i) Deposit Accounts maintained with the Collateral Agent and (ii) Deposit Accounts as to which such Debtor, the Collateral Agent and the depository bank have entered into an agreement that the depositary bank will comply with instructions originated by the Collateral Agent directing disposition of the funds in the account without further consent by such Debtor. 5. Certificates, Schedules and Reports. Each Debtor will from time to time deliver to the Collateral Agent such schedules, certificates and reports respecting all or any of the Collateral at the time subject to the security interest hereunder, and the items or amounts received by such Debtor in full or partial payment of any of the Collateral, as the Collateral Agent may reasonably request. Any such schedule, certificate or report shall be executed by a duly authorized officer of such Debtor and shall be in such form and detail as the Collateral Agent may specify. Each Debtor shall immediately notify the Collateral Agent of the occurrence of any event causing any loss or depreciation in the value of its Inventory or other Goods which is material to the Company and its Subsidiaries taken as a whole, and such notice shall specify the amount of such loss or depreciation. 6. Agreements of the Debtors. Each Debtor (a) will, upon request of the Collateral Agent, execute such financing statements and other documents (and pay the cost of filing or recording the same in all public offices reasonably deemed appropriate by the Collateral Agent) and do such other acts and things (including, without limitation, delivery to the Collateral Agent of any Instruments or Certificated Securities which constitute Collateral), all as the Collateral 7 Agent may from time to time reasonably request, to establish and maintain a valid security interest in the Collateral (free of all other liens, claims and rights of third parties whatsoever, other than Permitted Liens) to secure the payment of the Liabilities (and each Debtor hereby authorizes the Collateral Agent to file any financing statement without its signature, to the extent permitted by applicable law, and/or to file a copy of this Agreement as a financing statement in any jurisdiction, it being understood that the Collateral Agent will use reasonable efforts to notify the applicable Debtor of any such filing and the details thereof, but failure to do so shall not affect the effectiveness thereof or impose any liability on the Collateral Agent); (b) will keep all its Inventory at, and will not maintain any place of business at any location other than, its address(es) shown on Schedules I and II hereto or at such other addresses of which such Debtor shall have given the Collateral Agent not less than 10 days' prior written notice; (c) will not change its state of organization or incorporation or its name, identity or corporate structure such that any financing statement filed to perfect the Collateral Agent's interests under this Agreement would become seriously misleading, unless such Debtor shall have given the Collateral Agent not less than 30 days' prior notice of such change (provided that this Section 6(c) shall not be deemed to authorize any change or transaction prohibited under any Financing Agreement); (d) will keep its records concerning the Non-Tangible Collateral in such a manner as will enable the Collateral Agent or its designees to determine at any time the status of the Non-Tangible Collateral; (e) will furnish the Collateral Agent such information concerning such Debtor, the Collateral and the Account Debtors as the Collateral Agent may from time to time reasonably request; (f) will permit the Collateral Agent and its designees, from time to time, on reasonable notice and at reasonable times and intervals during normal business hours (or at any time without notice during the existence of a Default) to inspect such Debtor's Inventory and other Goods, and to inspect, audit and make copies of and extracts from all records and all other papers in the possession of such Debtor pertaining to the Collateral and the Account Debtors, and will, upon request of the Collateral Agent during the existence of a Default, deliver to the Collateral Agent all of such records and papers; (g) will, upon request of the Collateral Agent, stamp on its records concerning the Collateral and add on all Chattel Paper constituting a portion of the Collateral, a notation, in form satisfactory to the Collateral Agent, of the security interest of the Collateral Agent hereunder; (h) except as permitted by each of the Financing Agreements, will not sell, lease, assign or create or permit to exist any lien on or security interest in any Collateral other than Permitted Liens and liens and security interests in favor of the Collateral Agent; (i) will at all times keep all its Inventory and other Goods insured under policies maintained with reputable, financially sound insurance companies against loss, damage, theft and other risks to such extent as is customarily maintained by companies similarly situated, and cause all such policies to provide that loss thereunder shall be payable to the Collateral Agent as its interest may appear (it being understood that (A) so long as no Default exists, the Collateral Agent shall deliver any proceeds of such insurance which may be received by it to such Debtor and (B) whenever a Default exists, the Collateral Agent shall apply any proceeds of such insurance which may be received by it toward payment of the Liabilities, whether or not due, in the order of application set forth in the Intercreditor Agreement) and such policies or certificates thereof shall, if the Collateral Agent so requests, be deposited with or furnished to the Collateral Agent; (j) will take such actions as are reasonably necessary to keep its Inventory in good repair 8 and condition, ordinary wear and tear excepted; (k) will take such actions as are reasonably necessary to keep its Equipment (other than obsolete Equipment) in good repair and condition and in good working or running order, ordinary wear and tear excepted; (l) will promptly pay when due all license fees, registration fees, taxes, assessments and other charges which may be levied upon or assessed against the ownership, operation, possession, maintenance or use of its Equipment and other Goods (as applicable); provided, however, that such Debtor shall not be required to pay any such fee, tax, assessment or other charge if the validity, accuracy or applicability thereof is being contested by such Debtor in good faith by appropriate proceedings, so long as forfeiture of any substantial part of its Equipment or other Goods will not result from the failure of such Debtor to pay any such fee, tax, assessment or other charge during the period of such contest; (m) will, upon request of the Collateral Agent, (A) cause to be noted on the applicable certificate, in the event any of its Equipment is covered by a certificate of title, the security interest of the Collateral Agent in the Equipment covered thereby and (B) deliver all such certificates to the Collateral Agent or its designees; (n) will take all steps reasonably necessary to protect, preserve and maintain all of its rights in the Collateral; (o) will keep all of the tangible Collateral in the United States; and (p) will reimburse the Collateral Agent for all expenses, including reasonable attorneys' fees and legal expenses, incurred by the Collateral Agent in seeking to collect or enforce any rights in respect of such Debtor's Collateral. Any expenses incurred in protecting, preserving and maintaining any Collateral shall be borne by the applicable Debtor. Whenever a Default exists, the Collateral Agent shall have the right to bring suit to enforce any or all of the Intellectual Property or licenses thereunder, in which event the applicable Debtor shall at the request of the Collateral Agent do any and all lawful acts and execute any and all proper documents required by the Collateral Agent in aid of such enforcement and such Debtor shall promptly, upon demand, reimburse and indemnify the Collateral Agent for all reasonable costs and expenses incurred by the Collateral Agent in the exercise of its rights under this Section 6, except to the extent any of the foregoing result from the gross negligence or willful misconduct of the Collateral Agent. Notwithstanding the foregoing, neither the Collateral Agent nor any other Benefited Party shall have any obligations or liabilities regarding any of the Collateral by reason of, or arising out of, this Agreement, except the duties to exercise reasonable care and not to commit waste. 7. Default. (a) Whenever a Default exists, the Collateral Agent may exercise from time to time any rights and remedies available to it under applicable law. (b) Each Debtor agrees, at the request of the Collateral Agent during the existence of a Default, (i) to assemble, at its expense, all its Inventory and other Goods (other than Fixtures) at a convenient place or places acceptable to the Collateral Agent, and (ii) to execute all such documents and do all such other things which may be necessary or desirable in order to enable the Collateral Agent or its nominee to be registered as owner of the Intellectual Property with any competent registration authority. 9 (c) Notice of the intended disposition of any Collateral may be given by first-class mail, hand-delivery (through a delivery service or otherwise), facsimile or E-mail, and shall be deemed to have been "sent" upon deposit in the U.S. mails with adequate postage properly affixed, upon delivery to an express delivery service or upon the electronic submission through telephonic or Internet services (receipt confirmed), as applicable. Each Debtor hereby agrees and acknowledges that (i) with respect to Collateral that is: (A) perishable or threatens to decline speedily in value or (B) is of a type customarily sold on a recognized market (including Investment Property), no notice of disposition need be given; and (ii) with respect to Collateral not described in clause (i) above, notification sent after default and ten days before any proposed disposition provides notice with a reasonable time before disposition. (d) Each Debtor hereby agrees and acknowledges that a commercially reasonable disposition of Inventory, Equipment, Computer Hardware and Software or Intellectual Property may be by lease or license of, in addition to the sale of, such Collateral. Each Debtor further agrees and acknowledges that a disposition (i) made in the usual manner on any recognized market, (ii) at the price current in any recognized market at the time of disposition or (iii) in conformity with reasonable commercial practices among dealers in the type of property subject to the disposition shall, in each case, be deemed commercially reasonable. (e) Any cash proceeds of any disposition by the Collateral Agent of any of the Collateral shall be applied by the Collateral Agent to payment of expenses in connection with the Collateral, including reasonable attorneys' fees and legal expenses, and thereafter to the payment of any and all of the Liabilities in the order of application set forth in the Intercreditor Agreement, and thereafter any surplus will be paid to the applicable Debtor or as a court of competent jurisdiction shall direct. The Collateral Agent need not apply or pay over for application noncash proceeds of collection and enforcement unless (i) the failure to do so would be commercially unreasonable and (ii) the applicable Debtor has provided the Collateral Agent with a written demand to apply or pay over such noncash proceeds on such basis. 8. General. The Collateral Agent shall be deemed to have exercised reasonable care in the custody and preservation of any of the Collateral in its possession if it takes such action for that purpose as any applicable Debtor requests in writing, but failure of the Collateral Agent to comply with any such request shall not of itself be deemed a failure to exercise reasonable care, and no failure of the Collateral Agent to preserve or protect any rights with respect to such Collateral against prior parties, or to do any act with respect to the preservation of such Collateral not so requested by any Debtor, shall be deemed a failure to exercise reasonable care in the custody or preservation of such Collateral. All notices and requests hereunder shall be in writing (including facsimile transmission) and shall be sent (i) if to the Collateral Agent, to its address underneath its signature hereto or such other address as it may, by written notice to the Company, have designated as its address for such purpose and (ii) if to any Debtor, to its address shown on Schedule I hereto or to such other address as such Debtor may, by written notice to the Collateral Agent, have designated as its 10 address for such purpose. Notices sent by facsimile transmission shall be deemed to have been given when sent (receipt confirmed); notices sent by mail shall be deemed to have been given five Business Days after the date when sent by registered or certified mail, postage prepaid; and notices sent by hand delivery or overnight courier shall be deemed to have been given when received. Each of the Debtors agrees to pay all expenses (including reasonable attorney's fees and legal expenses) paid or incurred by the Collateral Agent or any other Benefited Party in endeavoring to collect the Liabilities of such Debtor, or any part thereof, and in enforcing this Agreement against such Debtor, and such obligations will themselves be Liabilities. No delay on the part of the Collateral Agent in the exercise of any right or remedy shall operate as a waiver thereof, and no single or partial exercise by the Collateral Agent of any right or remedy shall preclude other or further exercise thereof or the exercise of any other right or remedy. Unless released in writing by the Collateral Agent, this Security Agreement shall remain in full force and effect until all Liabilities have been paid in full and all commitments to create Liabilities have terminated. If at any time all or any part of any payment theretofore applied by the Collateral Agent or any other Benefited Party to any of the Liabilities is or must be rescinded or returned by the Collateral Agent or any other Benefited Party for any reason whatsoever (including, without limitation, the insolvency, bankruptcy or reorganization of any Debtor), such Liabilities shall, for the purposes of this Agreement, to the extent that such payment is or must be rescinded or returned, be deemed to have continued in existence, notwithstanding such application by the Collateral Agent or such other Benefited Party, and this Agreement shall continue to be effective or be reinstated, as the case may be, as to such Liabilities, all as though such application by the Collateral Agent or such other Benefited Party had not been made. This Agreement shall be construed in accordance with and governed by the internal laws of the State of Illinois, subject, however, to the applicability of the Uniform Commercial Code of any jurisdiction in which any Goods of any Debtor may be located at any given time. Whenever possible, each provision of this Agreement shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement shall be prohibited by or invalid under applicable law, such provision shall be ineffective to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this Agreement. The rights and privileges of the Collateral Agent hereunder shall inure to the benefit of its successors and assigns. This Agreement may be executed in any number of counterparts and by the different parties hereto on separate counterparts, and each such counterpart shall be deemed to be an original, but all such counterparts shall together constitute one and the same Agreement. At any 11 time after the date of this Agreement, one or more additional persons or entities may become parties hereto by executing and delivering to the Collateral Agent a counterpart of this Agreement (including supplements to the Schedules hereto). Immediately upon such execution and delivery (and without any further action), each such additional person or entity will become a party to, and will be bound by all the terms of, this Agreement. ANY LITIGATION BASED HEREON, OR ARISING OUT OF, UNDER OR IN CONNECTION WITH THIS AGREEMENT, SHALL BE BROUGHT AND MAINTAINED EXCLUSIVELY IN THE COURTS OF THE STATE OF ILLINOIS OR IN THE UNITED STATES DISTRICT COURT FOR THE NORTHERN DISTRICT OF ILLINOIS; PROVIDED, HOWEVER, THAT ANY SUIT SEEKING ENFORCEMENT AGAINST ANY COLLATERAL OR OTHER PROPERTY MAY BE BROUGHT, AT THE COLLATERAL AGENT'S OPTION, IN THE COURTS OF ANY JURISDICTION WHERE SUCH COLLATERAL OR OTHER PROPERTY MAY BE FOUND. EACH DEBTOR HEREBY EXPRESSLY AND IRREVOCABLY SUBMITS TO THE JURISDICTION OF THE COURTS OF THE STATE OF ILLINOIS AND OF THE UNITED STATES DISTRICT COURT FOR THE NORTHERN DISTRICT OF ILLINOIS FOR THE PURPOSE OF ANY SUCH LITIGATION AS SET FORTH ABOVE. EACH DEBTOR FURTHER IRREVOCABLY CONSENTS TO THE SERVICE OF PROCESS BY REGISTERED MAIL, POSTAGE PREPAID, TO THE ADDRESS SET FORTH ON SCHEDULE I HERETO (OR SUCH OTHER ADDRESS AS IT SHALL HAVE SPECIFIED IN WRITING TO THE COLLATERAL AGENT AS ITS ADDRESS FOR NOTICES HEREUNDER) OR BY PERSONAL SERVICE WITHIN OR WITHOUT THE STATE OF ILLINOIS. EACH DEBTOR HEREBY EXPRESSLY AND IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW, ANY OBJECTION WHICH IT MAY NOW OR HEREAFTER HAVE TO THE LAYING OF VENUE OF ANY SUCH LITIGATION BROUGHT IN ANY SUCH COURT REFERRED TO ABOVE AND ANY CLAIM THAT ANY SUCH LITIGATION HAS BEEN BROUGHT IN AN INCONVENIENT FORUM. EACH OF EACH DEBTOR, THE COLLATERAL AGENT AND (BY ACCEPTING THE BENEFITS HEREOF) EACH OTHER BENEFITED PARTY HEREBY WAIVES ANY RIGHT TO A TRIAL BY JURY IN ANY ACTION OR PROCEEDING TO ENFORCE OR DEFEND ANY RIGHTS UNDER THIS AGREEMENT OR ANY OTHER FINANCING AGREEMENT AND ANY AMENDMENT, INSTRUMENT, DOCUMENT OR AGREEMENT DELIVERED OR WHICH MAY IN THE FUTURE BE DELIVERED IN CONNECTION HEREWITH OR THEREWITH OR ARISING FROM ANY FINANCING RELATIONSHIP EXISTING IN CONNECTION WITH ANY OF THE FOREGOING, AND AGREES THAT ANY SUCH ACTION OR PROCEEDING SHALL BE TRIED BEFORE A COURT AND NOT BEFORE A JURY. 12 IN WITNESS WHEREOF, this Agreement has been duly executed as of the day and year first above written. TRUSERV CORPORATION By: ----------------------------------------- Name Printed: ------------------------------- Title: -------------------------------------- TRUSERV ACCEPTANCE COMPANY By: ----------------------------------------- Name Printed: ------------------------------- Title: -------------------------------------- TRUSERV LOGISTICS COMPANY By: ----------------------------------------- Name Printed: ------------------------------- Title: -------------------------------------- GENERAL PAINT & MANUFACTURING COMPANY By: ----------------------------------------- Name Printed: ------------------------------- Title: -------------------------------------- MARYGREEN, LLC By: ----------------------------------------- Name Printed: ------------------------------- Title: -------------------------------------- S-1 TRUE VALUE.COM CORPORATION By: ----------------------------------------- Name Printed: ------------------------------- Title: -------------------------------------- BANK OF AMERICA, N.A., as Collateral Agent By: ----------------------------------------- Name Printed: ------------------------------- Title: -------------------------------------- S-2 Signature page for the Security Agreement dated as of April 14, 2000 issued by TruServ Corporation (the "Company") and various subsidiaries of the Company in favor of Bank of America, N.A., as Collateral Agent. Each of the undersigned is executing a counterpart hereof for purposes of becoming a party hereto: TRUSERV REAL ESTATE AGENCY, INC. ADVOCATE SERVICES INCORPORATED By: _______________________________________ Name: _____________________________________ Title: ____________________________________ S-3 Signature page for the Security Agreement dated as of April 14, 2000 issued by TruServ Corporation (the "Company") and various subsidiaries of the Company in favor of Bank of America, N.A., as Collateral Agent. The undersigned is executing a counterpart hereof for purposes of becoming a party hereto: [NAME OF SUBSIDIARY] By: _______________________________________ Name: _____________________________________ Title: ____________________________________ S-4 SCHEDULE I TO SECURITY AGREEMENT ORGANIZATIONAL INFORMATION Debtor's federal employment identification number: Debtor's state employment identification number: Debtor's state of incorporation/organization Debtor's true and correct name as registered in its state of incorporation/organization: Chief Executive Office of All Debtors Principal Place of Business SCHEDULE II TO SECURITY AGREEMENT ADDRESSES OF OTHER LOCATIONS SCHEDULE III TO SECURITY AGREEMENT TRADE NAMES SCHEDULE IV TO SECURITY AGREEMENT LIST OF INTELLECTUAL PROPERTY EXHIBIT O FORM OF BORROWING BASE CERTIFICATE Bank of America, N.A., as Agent 231 South LaSalle Street Chicago, Illinois 60697 Attention: _______________ Re: Second Amended and Restated Credit Agreement, dated as of April 11, 2002 (as renewed, amended, restated, supplemented or otherwise modified from time to time, the "Credit Agreement"), among TruServ Corporation, various financial institutions (the "Lenders") and Bank of America, N.A., as Agent. Ladies/Gentlemen: Terms to which meanings are ascribed in the Credit Agreement are used in this Borrowing Base Certificate with such meanings. The Company hereby certifies that the Outstanding Obligations (as set forth in item VII-5 on Schedule I hereto) on _______________ did not exceed the Borrowing Base. The related computations are set forth in Schedule 1 hereto. IN WITNESS WHEREOF, the Company has caused this Borrowing Base Certificate to be executed and delivered by its Responsible Officer on the ____ day of _______________, _______. TRUSERV CORPORATION By:______________________________________ Title:___________________________________ SCHEDULE I I. NET ACCOUNTS RECEIVABLE 1. Total Accounts Receivable $______________ 2. Accounts Receivable described on Annex 1 (ineligible Accounts $______________ Receivable) 3. Eligible Accounts Receivable to be included $______________ in the Borrowing Base ((line I-1 minus line I-2) multiplied by 85%) II. INVENTORY 1. Total Inventory $______________ 2. Inventory described on Annex 2 (ineligible Inventory) $______________ 3. Eligible Inventory to be included in total margined assets ((line II-1 $______________ minus line II-2) multiplied by 50%) III. REAL ESTATE 1. Total Real Estate $______________ 2. Real Estate described on Annex 3 (ineligible Real Estate) $______________ 3. Eligible Real Estate to be included in the Borrowing Base ((line III-1 $______________ minus line III-2) multiplied by 60%) IV. MACHINERY AND EQUIPMENT 1. Total Machinery and Equipment $______________ 2. Machinery and Equipment described on Annex 4 (ineligible Machinery and Equipment) $______________ 3. Eligible Machinery and Equipment to be included in the Borrowing Base $______________ ((line IV-1 minus line IV-2) multiplied by 50%) V. TOTAL MARGINED ASSETS 1. (line I-3 plus line II-3 plus line III-3 plus line IV-3) $______________ VI. TOTAL BORROWING BASE 1. Line V-1 $______________ 2. Overadvance Amount $______________ 3. Aggregate amount of Reserves $______________ 4. Total Borrowing Base (line VI-1 plus line VI-2 minus line VI-3) $______________
1 VII. OUTSTANDING OBLIGATIONS 1. Total Outstandings $______________ 2. Shelf Obligations minus all Make-Whole Obligations (each as defined in $______________ the Intercreditor Agreement) 3. Senior Note Obligations minus all Make-Whole Obligations (each as $______________ defined in the Intercreditor Agreement) 4. Synthetic Maximum Shortfall (as defined in the Intercreditor Agreement)1 $______________ 5. Line VII-1 plus line VII-2 plus line VII-3 plus (if applicable) line $______________ VII-4 VIII. Net Availability/Deficiency (line VI-4 minus line VII-5) $______________
- -------- (1) To be included following the sale of the Hagerstown Facility 2 EXHIBIT P FORM OF LUMBER NOTE NOTICE [Date] [Purchaser of Lumber Business] Re: TruServ Corporation Ladies/Gentlemen: Please refer to the [Promissory Note] dated _________, 200__ (as amended or otherwise modified from time to time, the "Lumber Note") issued by you to TruServ Corporation ("TruServ") in connection with your purchase of various assets relating to TruServ's lumber business. The undersigned hereby directs you, until such time as the undersigned otherwise notifies you in writing, to make all payments under the Lumber Note to Bank of America, N.A., as Collateral Agent, pursuant to the wire instructions set forth on Annex 1. Very truly yours, BANK OF AMERICA, N.A., as Agent By:______________________________ Name:____________________________ Title:___________________________ 3 ANNEX 1 WIRE INSTRUCTIONS 4 EXHIBIT Q EXCESS CASH FLOW CALCULATION 1. Adjusted Cash Flow $_______________ 2. Negative Adjusted Working Capital Change $_______________ 3. Positive Adjusted Working Capital Change $_______________ 4. Excess Cash Flow ((line 1 + line 2 minus line 3) multiplied by 80%) $_______________
5 EX-4.M 5 c66649ex4-m.txt SECURITY AGREEMENT DATED 4/14/00 EXHIBIT 4-M SECURITY AGREEMENT THIS SECURITY AGREEMENT (this "Agreement") dated as of April 14, 2000 is among TRUSERV CORPORATION (the "Company"), each subsidiary of the Company listed on the signature pages hereof, each other person or entity which from time to time becomes a party hereto (collectively, including the Company, the "Debtors" and individually each a "Debtor") and BANK OF AMERICA, N.A. ("Bank of America"), as Collateral Agent (as defined below) for the Benefited Parties (as defined in the Intercreditor Agreement referred to below). WITNESSETH: WHEREAS, pursuant to an Intercreditor Agreement dated as of the date hereof (as amended, restated or otherwise modified from time to time, the "Intercreditor Agreement"; capitalized terms used but not defined herein have the respective meanings given thereto in the Intercreditor Agreement), certain creditors of the Company and Bank of America, as Collateral Agent (in such capacity, together with any successor in such capacity, the "Collateral Agent"), have agreed that (i) the Benefited Obligations shall be secured and guaranteed as set forth in the Intercreditor Agreement and (ii) Bank of America shall act as collateral agent for the Benefited Parties; WHEREAS, each of the other Debtors has guaranteed all obligations of the Company under each Financing Agreement; and WHEREAS, the Benefited Obligations of each Debtor are to be secured pursuant to this Agreement; NOW, THEREFORE, for and in consideration of the premises, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: 1. Definitions. When used herein, (a) the terms Account, Account Debtor, Certificated Security, Chattel Paper, Commodity Account, Commodity Contract, Investment Property, Security Entitlement, Securities Account, Deposit Account, Document, Equipment, Fixture, Goods, Inventory, Instrument, Security and Uncertificated Security shall have the respective meanings assigned to such terms in the UCC (as defined below), (b) capitalized terms used but not defined have the meanings assigned to such terms in the Intercreditor Agreement and (c) the following terms have the following meanings (such definitions to be applicable to both the singular and plural forms of such terms): Agreement - see the introductory paragraph. Assignee Deposit Account - see Section 4. Bank of America - see the introductory paragraph. Business Day means any day on which Bank of America is open for commercial banking business in Chicago and Charlotte. Collateral means, with respect to any Debtor, all property and rights of such Debtor in which a security interest is granted hereunder. Collateral Agent - see the recitals. Company - see the introductory paragraph. Computer Hardware and Software means, with respect to any Debtor, (i) all computer and other electronic data processing hardware, whether now or hereafter owned, licensed or leased by such Debtor, including, without limitation, all integrated computer systems, central processing units, memory units, display terminals, printers, features, computer elements, card readers, tape drives, hard and soft disk drives, cables, electrical supply hardware, generators, power equalizers, accessories and all peripheral devices and other related computer hardware; (ii) all software programs, whether now or hereafter owned, licensed or leased by such Debtor, designed for use on the computers and electronic data processing hardware described in clause (i) above, including, without limitation, all operating system software, utilities and application programs in whatsoever form (source code and object code in magnetic tape, disk or hard copy format or any other listings whatsoever); (iii) all firmware associated therewith, whether now or hereafter owned, licensed or leased by such Debtor; and (iv) all documentation for such hardware, software and firmware described in the preceding clauses (i), (ii) and (iii), whether now or hereafter owned, licensed or leased by such Debtor, including, without limitation, flow charts, logic diagrams, manuals, specifications, training materials, charts and pseudo codes. Debtor - see the introductory paragraph. Default means the occurrence of any of the following events: (i) any Event of Default or (ii) any warranty of any Debtor herein is untrue or misleading in any material respect and, as a result thereof, the Collateral Agent's security interest for the benefit of the Benefited Parties in any material portion of the collateral is not perfected or the Collateral Agent's rights and remedies with respect to any material portion of the collateral are materially impaired or otherwise materially adversely affected. General Intangibles means, with respect to any Debtor, all of such Debtor's "general intangibles" as defined in the UCC and, in any event, includes (without limitation) all of such Debtor's licenses, franchises, tax refund claims, guarantee claims, security interests and rights to indemnification, and all of such Debtor's interests in any partnership, limited liability company or similar entity. 2 Intellectual Property means all past, present and future; trade secrets and other proprietary information; customer lists; trademarks, service marks, business names, trade names; designs, logos, indicia, and/or other source and/or business identifiers and the goodwill of the business relating thereto and all registrations or applications for registrations which have heretofore been or may hereafter be issued thereon throughout the world; copyrights (including, without limitation, copyrights for computer programs) and copyright registrations or applications for registrations which have heretofore been or may hereafter be issued throughout the world and all tangible property embodying the copyrights; inventions (whether or not patentable); patent applications and patents; industrial designs; industrial design applications and registered industrial designs; license agreements related to any of the foregoing and income therefrom; mask works; books, records, writings, computer tapes or disks, flow diagrams, specification sheets, source codes, object codes and other physical manifestations, embodiments or incorporations of any of the foregoing; the right to sue for all past, present and future infringements of any of the foregoing; and all common law and other rights in and to all of the foregoing. Intercreditor Agreement - see the recitals. Liabilities means, as to each Debtor, all Benefited Obligations of such Debtor. Non-Tangible Collateral means, with respect to any Debtor, collectively, such Debtor's Accounts and General Intangibles. Permitted Liens - see Section 3. UCC means the Uniform Commercial Code as in effect from time to time in the State of Illinois. 2. Grant of Security Interest. As security for the payment of all Liabilities, each Debtor hereby assigns to the Collateral Agent for the benefit of the Benefited Parties, and grants to the Collateral Agent for the benefit of the Benefited Parties a continuing security interest in, the following, whether now or hereafter existing or acquired: All of such Debtor's: (i) Accounts; (ii) Chattel Paper; (iii) Computer Hardware and Software and all rights with respect thereto, including, without limitation, any and all licenses, options, warranties, service contracts, program services, test rights, maintenance rights, support rights, improvement rights, renewal rights and indemnifications, and any substitutions, replacements, additions or model conversions of any of the foregoing; 3 (iv) Deposit Accounts; (v) Documents; (vi) General Intangibles; (vii) Goods (including, without limitation, all its Equipment, Fixtures and Inventory), together with all accessions, additions, attachments, improvements, substitutions and replacements thereto and therefor; (viii) Instruments; (ix) Intellectual Property; (x) money (of every jurisdiction whatsoever); (xi) Investment Property (including Commodity Accounts, Commodity Contracts, Securities (whether Certificated Securities or Uncertificated Securities), Security Entitlements and Securities Accounts; and (xii) to the extent not included in the foregoing, other personal property of any kind or description; together with all books, records, writings, data bases, information and other property relating to, used or useful in connection with, evidencing, embodying, incorporating or referring to any of the foregoing, all claims and/or insurance proceeds arising out of the loss, nonconformity or any interference with the use of, or any defects or infringements of rights in, or damage to, any of the foregoing, and all proceeds, products, offspring, rents, issues, profits and returns of and from, and all distributions on and rights arising out of, any of the foregoing. 3. Warranties. Each Debtor warrants, as to itself and its own collateral, that: (i) no financing statement (other than any which may have been filed on behalf of the Collateral Agent or in connection with Permitted Liens (as defined below)) covering any of the Collateral is on file in any public office; (ii) such Debtor is and will be the lawful owner of all Collateral, free of all liens and claims whatsoever, other than the security interest hereunder and liens and claims expressly permitted by each of the Financial Agreements ("Permitted Liens"), with full power and authority to execute and deliver this Agreement, to perform such Debtor's obligations hereunder and to subject the Collateral to the security interest hereunder; (iii) all information with respect to the Collateral and Account Debtors set forth in any schedule, certificate or other writing at any time heretofore or hereafter furnished by such Debtor to the Collateral Agent or any other Benefited Party and all other written information heretofore or hereafter furnished by such Debtor to the Collateral Agent or any other Benefited Party in connection with any 4 Financing Agreement will be true and correct in all material respects as of the date furnished; (iv) such Debtor's true legal name as registered in the jurisdiction in which such Debtor is organized or incorporated, jurisdiction of organization or incorporation, federal employer identification number, organizational identification number, if any, as designated by the state of its organization or incorporation, chief executive office and principal place of business are as set forth on Schedule I hereto (and such Debtor has not maintained its chief executive office and principal place of business at any other location at any time after November 1, 1999); (v) each other location where such Debtor maintains a place of business or has any Goods is set forth on Schedule II hereto; (vi) except as disclosed on Schedule III, such Debtor is not now known and during the five years preceding the date hereof has not previously been known by any trade name; (vii) except as disclosed on Schedule III, during the five years preceding the date hereof such Debtor has not been known by any legal name different from the one set forth on the signature page of this Agreement nor has such Debtor been the subject of any merger or other corporate reorganization; (viii) Schedule IV hereto contains a complete listing of all of such Debtor's Intellectual Property which has been registered under any registration statute; (ix) such Debtor is a corporation duly organized, validly existing and in good standing under the laws of the state of its incorporation; (x) the execution and delivery of this Agreement and the performance by such Debtor of its obligations hereunder are within such Debtor's corporate powers, have been duly authorized by all necessary corporate action, have received all necessary governmental approval (if any shall be required), and do not and will not contravene or conflict with any provision of law or of the charter or by-laws of such Debtor or of any material agreement, indenture, instrument or other document, or any material judgment, order or decree, which is binding upon such Debtor; (xi) this Agreement is a legal, valid, binding and enforceable obligation of such Debtor, except that the enforceability of this Agreement may be limited by bankruptcy, insolvency, fraudulent conveyance, fraudulent transfer, reorganization, moratorium or other similar laws now or hereafter in effect relating to creditors' rights generally and by general principles of equity (regardless of whether enforcement is sought in a proceeding in equity or at law); (xii) such Debtor has not performed any acts which might prevent the Collateral Agent from enforcing any of the terms of this Agreement or which could limit the Collateral Agent in such enforcement; (xiii) no Collateral is in the possession of any Person (other than such Debtor) asserting any claim thereto or security interest therein, except that the Collateral Agent or its designee may have possession of Collateral as contemplated hereby; and (xiv) such Debtor is in compliance with the requirements of all applicable laws (including, without limitation, the provisions of the Fair Labor Standards Act), rules, regulations and orders of every governmental authority, the non-compliance with which would materially adversely affect the business, properties, assets, operations, prospects or condition (financial or otherwise) of the Company and its Subsidiaries taken as a whole or the value of the Collateral or the worth of the Collateral as collateral security. 4. Collections, etc. Until such time during the existence of a Default as the Collateral Agent shall notify such Debtor of the revocation of such power and authority, each Debtor (a) may, in the ordinary course of its business, at its own expense, sell, lease or furnish under contracts of service any of the Inventory normally held by such Debtor for such purpose, use and consume, in the ordinary course of its business, any raw materials, work in process or 5 materials normally held by such Debtor for such purpose, and use, in the ordinary course of its business (but subject to the terms of the Financing Agreements), the cash proceeds of Collateral and other money which constitutes Collateral, (b) will, at its own expense, endeavor to collect, as and when due, all amounts due under any of the Non-Tangible Collateral, including the taking of such action with respect to such collection as the Collateral Agent may reasonably request or, in the absence of such request, as such Debtor may deem advisable, and (c) may grant, in the ordinary course of business, to any party obligated on any of the Non-Tangible Collateral, any rebate, refund or allowance to which such party may be lawfully entitled, and may accept, in connection therewith, the return of Goods, the sale or lease of which shall have given rise to such Non-Tangible Collateral. The Collateral Agent, however, may, at any time that a Default exists, whether before or after any revocation of such power and authority or the maturity of any of the Liabilities, notify any parties obligated on any of the Non-Tangible Collateral to make payment to the Collateral Agent of any amounts due or to become due thereunder and enforce collection of any of the Non-Tangible Collateral by suit or otherwise and surrender, release or exchange all or any part thereof, or compromise or extend or renew for any period (whether or not longer than the original period) any indebtedness thereunder or evidenced thereby. Upon request of the Collateral Agent during the existence of a Default, each Debtor will, at its own expense, notify any parties obligated on any of the Non-Tangible Collateral to make payment to the Collateral Agent of any amounts due or to become due thereunder. Upon request by the Collateral Agent during the existence of a Default, each Debtor will forthwith, upon receipt, transmit and deliver to the Collateral Agent, in the form received, all cash, checks, drafts and other instruments or writings for the payment of money (properly endorsed, where required, so that such items may be collected by the Collateral Agent) which may be received by such Debtor at any time in full or partial payment or otherwise as proceeds of any of the Collateral. Except as the Collateral Agent may otherwise consent in writing, any such items which may be so received by any Debtor during the existence of a Default will not be commingled with any other of its funds or property, but will be held separate and apart from its own funds or property and upon express trust for the Collateral Agent for the benefit of the Benefited Parties until delivery is made to the Collateral Agent. Each Debtor will comply with the terms and conditions of any consent given by the Collateral Agent pursuant to the foregoing sentence. During the existence of a Default, all items or amounts which are delivered by any Debtor to the Collateral Agent on account of partial or full payment or otherwise as proceeds of any of the Collateral shall be deposited to the credit of a deposit account (each an "Assignee Deposit Account") of such Debtor with the Collateral Agent, as security for payment of the Liabilities. No Debtor shall have any right to withdraw any funds deposited in the applicable Assignee Deposit Account. The Collateral Agent may, from time to time, in its discretion, and shall upon request of the applicable Debtor made not more than once in any week or upon the request of the Required Benefited Parties in accordance with the Intercreditor Agreement, apply all or any of the then balance, representing collected funds, in the Assignee Deposit Account, toward payment of the Liabilities (whether or not then due if such request is made by the applicable Debtor, but only to amounts then due if such request is made by the Required 6 Benefited Parties) in the order of application set forth in the Intercreditor Agreement, and the Collateral Agent may, from time to time, release all or any of such balance to the applicable Debtor so long as such release is permitted by the Intercreditor Agreement. During the existence of a Default, the Collateral Agent is authorized to endorse, in the name of the applicable Debtor, any item, howsoever received by the Collateral Agent, representing any payment on or other proceeds of any of the Collateral. From and after July 1, 2001, no Debtor shall maintain any Deposit Account or deposit any item or amount in any Deposit Account, except (i) Deposit Accounts maintained with the Collateral Agent and (ii) Deposit Accounts as to which such Debtor, the Collateral Agent and the depository bank have entered into an agreement that the depositary bank will comply with instructions originated by the Collateral Agent directing disposition of the funds in the account without further consent by such Debtor. 5. Certificates, Schedules and Reports. Each Debtor will from time to time deliver to the Collateral Agent such schedules, certificates and reports respecting all or any of the Collateral at the time subject to the security interest hereunder, and the items or amounts received by such Debtor in full or partial payment of any of the Collateral, as the Collateral Agent may reasonably request. Any such schedule, certificate or report shall be executed by a duly authorized officer of such Debtor and shall be in such form and detail as the Collateral Agent may specify. Each Debtor shall immediately notify the Collateral Agent of the occurrence of any event causing any loss or depreciation in the value of its Inventory or other Goods which is material to the Company and its Subsidiaries taken as a whole, and such notice shall specify the amount of such loss or depreciation. 6. Agreements of the Debtors. Each Debtor (a) will, upon request of the Collateral Agent, execute such financing statements and other documents (and pay the cost of filing or recording the same in all public offices reasonably deemed appropriate by the Collateral Agent) and do such other acts and things (including, without limitation, delivery to the Collateral Agent of any Instruments or Certificated Securities which constitute Collateral), all as the Collateral Agent may from time to time reasonably request, to establish and maintain a valid security interest in the Collateral (free of all other liens, claims and rights of third parties whatsoever, other than Permitted Liens) to secure the payment of the Liabilities (and each Debtor hereby authorizes the Collateral Agent to file any financing statement without its signature, to the extent permitted by applicable law, and/or to file a copy of this Agreement as a financing statement in any jurisdiction, it being understood that the Collateral Agent will use reasonable efforts to notify the applicable Debtor of any such filing and the details thereof, but failure to do so shall not affect the effectiveness thereof or impose any liability on the Collateral Agent); (b) will keep all its Inventory at, and will not maintain any place of business at any location other than, its address(es) shown of Schedules I and II hereto or at such other addresses of which such Debtor shall have given the Collateral Agent not less than 10 days' prior written notice; (c) will not change its state of organization or incorporation or its name, identity or 7 corporate structure such that any financing statement filed to perfect the Collateral Agent's interests under this Agreement would become seriously misleading, unless such Debtor shall have given the Collateral Agent not less than 30 days' prior notice of such change (provided that this Section 6(c) shall not be deemed to authorize any change or transaction prohibited under any Financing Agreement); (d) will keep its records concerning the Non-Tangible Collateral in such a manner as will enable the Collateral Agent or its designees to determine at any time the status of the Non-Tangible Collateral; (e) will furnish the Collateral Agent such information concerning such Debtor, the Collateral and the Account Debtors as the Collateral Agent may from time to time reasonably request; (f) will permit the Collateral Agent and its designees, from time to time, on reasonable notice and at reasonable times and intervals during normal business hours (or at any time without notice during the existence of a Default) to inspect such Debtor's Inventory and other Goods, and to inspect, audit and make copies of and extracts from all records and all other papers in the possession of such Debtor pertaining to the Collateral and the Account Debtors, and will, upon request of the Collateral Agent during the existence of a Default, deliver to the Collateral Agent all of such records and papers; (g) will, upon request of the Collateral Agent, stamp on its records concerning the Collateral and add on all Chattel Paper constituting a portion of the Collateral, a notation, in form satisfactory to the Collateral Agent, of the security interest of the Collateral Agent hereunder; (h) except as permitted by each of the Financing Agreements, will note sell, lease, assign or create or permit to exist any lien on or security interest in any Collateral other than Permitted Liens and liens and security interests in favor of the Collateral Agent; (i) will at all times keep all its Inventory and other Goods insured under policies maintained with reputable, financially sound insurance companies against loss, damage, theft and other risks to such extent as is customarily maintained by companies similarly situated, and cause all such policies to provide that loss thereunder shall be payable to the Collateral Agent as its interest may appear (it being understood that (A) so long as no Default exists, the Collateral Agent shall deliver any proceeds of such insurance which may be received by it to such Debtor and (B) whenever a Default exists, the Collateral Agent shall apply any proceeds of such insurance which may be received by it toward payment of the Liabilities, whether or not due, in the order of application set forth in the Intercreditor Agreement) and such policies or certificates thereof shall, if the Collateral Agent so requests, be deposited with or furnished to the Collateral Agent; (j) will take such actions as are reasonably necessary to keep its Inventory in good repair and condition, ordinary wear and tear excepted; (k) will take such actions as are reasonably necessary to keep its Equipment (other than obsolete Equipment) in good repair and condition and in good working or running order, ordinary wear and tear excepted; (l) will promptly pay when due all license fees, registration fees, taxes, assessments and other charges which may be levied upon or assessed against the ownership, operation, possession, maintenance or use of its Equipment and other Goods (as applicable); provided, however, that such Debtor shall not be required to pay any such fee, tax, assessment or other charge if the validity, accuracy or applicability thereof is being contested by such Debtor in good faith by appropriate proceedings, so long as forfeiture of any substantial part of its Equipment or other Goods will not result from the failure of such Debtor to pay any such fee, tax, assessment or other charge during the period of such contest; (m) will, upon request of the Collateral Agent, (A) cause to be noted on the applicable certificate, in the event any of its Equipment is covered by a certificate of title, the security interest of the Collateral Agent in the Equipment covered 8 thereby and (B) deliver all such certificates to the Collateral Agent or its designees; (n) will take all steps reasonably necessary to protect, preserve and maintain all of its rights in the Collateral; (o) will keep all of the tangible Collateral in the United States; and (p) will reimburse the Collateral Agent for all expenses, including reasonable attorneys' fees and legal expenses, incurred by the Collateral Agent in seeking to collect or enforce any rights in respect of such Debtor's Collateral. Any expenses incurred in protecting, preserving and maintaining any Collateral shall be borne by the applicable Debtor. Whenever a Default exits, the Collateral Agent shall have the right to bring suit to enforce any or all of the Intellectual Property or licenses thereunder, in which event the applicable Debtor shall at the request of the Collateral Agent do any and all lawful acts and execute any and all proper documents required by the Collateral Agent in aid of such enforcement and such Debtor shall promptly, upon demand, reimburse and indemnify the Collateral Agent for all reasonable costs and expenses incurred by the Collateral Agent in the exercise of its rights under this Section 6, except to the extent any of the foregoing result from the gross negligence or willful misconduct of the Collateral Agent. Notwithstanding the foregoing, neither the Collateral Agent nor any other Benefited Party shall have any obligations or liabilities regarding any of the Collateral by reason of, or arising out of, this Agreement, except the duties to exercise reasonable care and not to commit waste. 7. Default. (a) Whenever a Default exists, the Collateral Agent may exercise from time to time any rights and remedies available to it under applicable law. (b) Each Debtor agrees, at the request of the Collateral Agent during the existence of a Default, (i) to assemble, at its expense, all its Inventory and other Goods (other than Fixtures) at a convenient place or places acceptable to the Collateral Agents, and (ii) to execute all such documents and do all such other things which may be necessary or desirable in order to enable the Collateral Agent or its nominee to be registered as owner of the Intellectual Property with any competent registration authority. (c) Notice of the intended disposition of any Collateral may be given by first-class mail, hand-delivery (through a delivery service or otherwise), facsimile or E-mail, and shall be deemed to have been "sent" upon deposit in the U.S. mails with adequate postage properly affixed, upon delivery to an express delivery service or upon the electronic submission through telephone or Internet services (receipt confirmed), as applicable. Each Debtor hereby agrees and acknowledges that (i) with respect to Collateral that is: (A) perishable or threatens to decline speedily in value or (B) is of a type customarily sold on a recognized market (including Investment Property), no notice of disposition need be given; and (ii) with respect to Collateral not described in clause (i) above, notification sent after default and ten days before any proposed disposition provides notice with a reasonable time before disposition. (d) Each Debtor hereby agrees and acknowledges that a commercially reasonable disposition of Inventory, Equipment, Computer Hardware and Software or Intellectual Property may be by lease or license of, in addition to the sale of, such Collateral. Each 9 Debtor further agrees and acknowledges that a disposition (i) made in the usual manner on any recognized market, (ii) at the price current in any recognized market at the time of disposition or (iii) in conformity with reasonable commercial practices among dealers in the type of property subject to the disposition shall, in each case, be deemed commercially reasonable. (e) Any cash proceeds of any disposition by the Collateral Agent of any of the Collateral shall be applied by the Collateral Agent to payment of expenses in connection with the Collateral, including reasonable attorneys' fees and legal expenses, and thereafter to the payment of any and all of the Liabilities in the order of application set forth in the Intercreditor Agreement, and thereafter any surplus will be paid to the applicable Debtor or as a court of competent jurisdiction shall direct. The Collateral Agent need not apply or pay over for application noncash proceeds of collection and enforcement unless (i) the failure to do so would be commercially unreasonable and (ii) the applicable Debtor has provided the Collateral Agent with a written demand to apply or pay over such noncash proceeds on such basis. 8. General. The Collateral Agent shall be deemed to have exercised reasonable care in the custody and preservation of any of the Collateral in its possession if it takes such action for that purpose as any applicable Debtor requests in writing, but failure of the Collateral Agent to comply with any such request shall not of itself be deemed a failure to exercise reasonable care, and no failure of the Collateral Agent to preserve or protect any rights with respect to such Collateral against prior parties, or to do any act with respect to the preservation of such Collateral not so requested by any Debtor, shall be deemed a failure to exercise reasonable care in the custody or preservation of such Collateral. All notices and requests hereunder shall be in writing (including facsimile transmission) and shall be sent (i) if to the Collateral Agent, to its address underneath its signature hereto or such other address as it may, by written notice to the Company, have designated as its address for such purpose and (ii) if to any Debtor, to its address shown on Schedule I hereto or to such other address as such Debtor may, by written notice to the Collateral Agent, have designated as its address for such purpose. Notices sent by facsimile transmission shall be deemed to have been given when sent (receipt confirmed); notices sent by mail shall be deemed to have been given five Business Days after the date when sent by registered or certified mail, postage prepaid; and notices sent by hand delivery or overnight courier shall be deemed to have been given when received. Each of the Debtors agrees to pay all expenses (including reasonable attorney's fees and legal expenses) paid or incurred by the Collateral Agent or any other Benefited Party in endeavoring to collect the Liabilities of such Debtor, or any part thereof, and in enforcing this Agreement against such Debtor, and such obligations will themselves be Liabilities. No delay on the part of the Collateral Agent in the exercise of any right or remedy shall operate as a waiver thereof, and no single or partial exercise by the Collateral Agent of any right 10 or remedy shall preclude other or further exercise thereof or the exercise of any other right or remedy. Unless released in writing by the Collateral Agent, this Security Agreement shall remain in full force and effect until all Liabilities have been paid in full and all commitments to create Liabilities have terminated. If at any time all or any part of any payment theretofore applied by the Collateral Agent or any other Benefited Party to any of the Liabilities is or must be rescinded or returned by the Collateral Agent or any other Benefited Party for any reason whatsoever (including, without limitation, the insolvency, bankruptcy or reorganization of any Debtor), such Liabilities shall, for the purposes of this Agreement, to the extent that such payment is or must be rescinded or returned, be deemed to have continued in existence, notwithstanding such application by the Collateral Agent or such other Benefited Party, and this Agreement shall continue to be effective or be reinstated, as the case may be, as to such Liabilities, all as though such application by the Collateral Agent or such other Benefited Party had not been made. This Agreement shall be construed in accordance with and governed by the internal laws of the State of Illinois, subject, however, to the applicability of the Uniform Commercial Code of any jurisdiction in which any Goods of any Debtor may be located at any given time. Whenever possible, each provision of this Agreement shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement shall be prohibited by or invalid under applicable law, such provision shall be ineffective to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this Agreement. The rights and privileges of the Collateral Agent hereunder shall inure to the benefit of its successors and assigns. This Agreement may be executed in any number of counterparts and by the different parties hereto on separate counterparts, and each such counterpart shall be deemed to be an original, but all such counterparts shall together constitute one and the same Agreement. At any time after the date of this Agreement, one or more additional persons or entities may become parties hereto by executing and delivering to the Collateral Agent a counterpart of this Agreement (including supplements to the Schedules hereto). Immediately upon such execution and delivery (and without any further action), each such additional person or entity will become a party to, and will be bound by all the terms of, this Agreement. ANY LITIGATION BASED HEREON, OR ARISING OUT OF, UNDER OR IN CONNECTION WITH THIS AGREEMENT, SHALL BE BROUGHT AND MAINTAINED EXCLUSIVELY IN THE COURTS OF THE STATE OF ILLINOIS OR IN THE UNITED STATES DISTRICT COURT FOR THE NORTHERN DISTRICT OF ILLINOIS; PROVIDED, HOWEVER, THAT ANY SUIT SEEKING ENFORCEMENT AGAINST ANY COLLATERAL OR OTHER PROPERTY MAY BE BROUGHT, AT THE COLLATERAL AGENT'S OPTION, IN THE COURTS OF ANY JURISDICTION WHERE SUCH COLLATERAL OR OTHER PROPERTY MAY BE FOUND. EACH 11 DEBTOR HEREBY EXPRESSLY AND IRREVOCABLY SUBMITS TO THE JURISDICTION OF THE COURTS OF THE STATE OF ILLINOIS AND OF THE UNITED STATES DISTRICT COURT FOR THE NORTHERN DISTRICT OF ILLINOIS FOR THE PURPOSE OF ANY SUCH LITIGATION AS SET FORTH ABOVE. EACH DEBTOR FURTHER IRREVOCABLY CONSENTS TO THE SERVICE OF PROCESS BY REGISTERED MAIL, POSTAGE PREPAID, TO THE ADDRESS SET FORTH ON SCHEDULE I HERETO (OR SUCH OTHER ADDRESS AS IT SHALL HAVE SPECIFIED IN WRITING TO THE COLLATERAL AGENT AS ITS ADDRESS FOR NOTICES HEREUNDER) OR BY PERSONAL SERVICE WITHIN OR WITHOUT THE STATE OF ILLINOIS. EACH DEBTOR HEREBY EXPRESSLY AND IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW, ANY OBJECTION WHICH IT MAY NOW OR HEREAFTER HAVE TO THE LAYING OF VENUE OF ANY SUCH LITIGATION BROUGHT IN ANY SUCH COURT REFERRED TO ABOVE AND ANY CLAIM THAT ANY SUCH LITIGATION HAS BEEN BROUGHT IN ANY INCONVENIENT FORUM. EACH OF EACH DEBTOR, THE COLLATERAL AGENT AND (BY ACCEPTING THE BENEFITS HEREOF) EACH OTHER BENEFITED PARTY HEREBY WAIVES ANY RIGHT TO A TRIAL BY JURY IN ANY ACTION OR PROCEEDING TO ENFORCE OR DEFEND ANY RIGHTS UNDER THIS AGREEMENT OR ANY OTHER FINANCING AGREEMENT AND ANY AMENDMENT, INSTRUMENT, DOCUMENT OR AGREEMENT DELIVERED OR WHICH MAY IN THE FUTURE BE DELIVERED IN CONNECTION HEREWITH OR THEREWITH OR ARISING FROM ANY FINANCING RELATIONSHIP EXISTING IN CONNECTION WITH ANY OF THE FOREGOING, AND AGREES THAT ANY SUCH ACTION OR PROCEEDING SHALL BE TRIED BEFORE A COURT AND NOT BEFORE A JURY. 12 IN WITNESS WHEREOF, this Agreement has been duly executed as of the day and year first above written. TRUSERV CORPORATION By: /s/ MICHAEL T. QUANE ------------------------------ Name Printed: Michael T. Quane -------------------- Title: Treasurer --------------------------- TRUSERV ACCEPTANCE COMPANY By: /s/ DIANE T. NAUER ------------------------------ Name Printed: Diane T. Nauer -------------------- Title: Vice-President --------------------------- TRUSERV LOGISTICS COMPANY By: /s/ DIANE T. NAUER ------------------------------ Name Printed: Diane T. Nauer -------------------- Title: Vice-President --------------------------- GENERAL PAINT & MANUFACTURING COMPANY By: /s/ DIANE T. NAUER ------------------------------ Name Printed: Diane T. Nauer -------------------- Title: Vice-President --------------------------- MARYGREEN, LLC By: /s/ DIANE T. NAUER ------------------------------ Name Printed: Diane T. Nauer -------------------- Title: Vice-President --------------------------- S-1 TRUE VALUE.COM CORPORATION By: /s/ DIANE T. NAUER ------------------------------ Name Printed: Diane T. Nauer -------------------- Title: Vice-President --------------------------- BANK OF AMERICA, N.A., as Collateral Agent By: /s/ DAVID A. JOHANSON ------------------------------ Name Printed: David A. Johanson -------------------- Title: Vice President --------------------------- S-2 Signature page for the Security Agreement dated as of April 14, 2000 issued by TruServ Corporation (the "Company") and various subsidiaries of the Company in favor of Bank of America, N.A., as Collateral Agent. The undersigned is executing a counterpart hereof for purposes of becoming a party hereto: [NAME OF SUBSIDIARY] By: -------------------------------------- Name: ------------------------------------ Title: ----------------------------------- S-3 EX-4.N 6 c66649ex4-n.txt FIRST AMENDMENT TO THE SECURITY AGREEMENT Exhibit 4-N FIRST AMENDMENT THIS FIRST AMENDMENT dated as of April 11, 2002 (this "Amendment") amends the Security Agreement dated as of April 14, 2000 (the "Security Agreement") among TruServ Corporation (the "Company"), various subsidiaries of the Company (together with the Company, the "Debtors") and Bank of America, N.A., as Collateral Agent (in such capacity, the "Collateral Agent"). Terms defined in the Security Agreement are, unless otherwise defined herein or the context otherwise requires, used herein as defined therein. WHEREAS, the Debtors and the Collateral Agent have entered into the Security Agreement; and WHEREAS, the parties hereto desire to amend the Security Agreement in certain respects as more fully set forth herein; NOW, THEREFORE, the parties hereto agree as follows: SECTION 1 Amendments. Subject to the satisfaction of the conditions precedent set forth in Section 3, the Security Agreement shall be amended as follows: 1.1 Amendment to Section 1. Section 1 is amended as follows: (a) The definition of "Assignee Deposit Account" is deleted in its entirety. (b) The following new definitions are added to Section 1 in proper sequence: "Blocked Account Agreement" - see Section 4. "Clearing Bank" - see Section 4. "Payment Account" - see Section 4. 1.2 Amendment to Section 4. Section 4 is amended by deleting the second, third and fourth paragraphs thereof and substituting the following therefor: "Until the Collateral Agent notifies the Debtors to the contrary, the Debtors shall make collection of all Accounts and other Collateral for the Collateral Agent, shall receive all payments as the Collateral Agent's trustee, and shall immediately (or, any in any event, not later than the next Business Day following receipt of any such payment) deliver all payments in their original form duly endorsed in blank into an account (the "Payment Account") established for the account of the Debtors (in the name of the Collateral Agent or the Debtors, at the option of the Collateral Agent) at a financial institution reasonably acceptable to the Collateral Agent (the "Clearing Bank"), subject to an account control agreement reasonably acceptable to the Collateral Agent (a "Blocked Account Agreement"). On or prior to the date hereof, the Debtors shall establish a lock-box service for collections of Accounts at the Clearing Bank and subject to a Blocked Account Agreement and other documentation reasonably acceptable to the Collateral Agent. The Debtors shall instruct all Account Debtors to make all payments directly to the address established for such service. If, notwithstanding such instructions, any Debtor receives any proceeds of Accounts, it shall receive such payments as the Collateral Agent's trustee, and shall immediately (or, in any event, not later than the next Business Day following receipt of any such payment) deliver such payments to the Collateral Agent in their original form duly endorsed in blank or deposit them into the Payment Account, as the Collateral Agent may direct. All collections received in any lock-box or the Payment Account or directly by a Debtor or the Collateral Agent, and all funds in the Payment Account or any other account to which such collections are deposited shall be subject to the Collateral Agent's sole control and withdrawals by any Debtor shall not be permitted. The Collateral Agent or the Collateral Agent's designee may, at any time after the occurrence of a Default, notify Account Debtors that the Accounts have been assigned to the Collateral Agent and of the Collateral Agent's security interest therein, and may collect them directly and charge the collection costs and expenses to the Payment Account as a Committed Loan. So long as a Default has occurred and is continuing, each Debtor, at the Collateral Agent's request, shall execute and deliver to the Collateral Agent such documents as the Collateral Agent shall reasonably require to grant the Collateral Agent access to any post office box in which collections of Accounts are received. If sales of Inventory are made or services are rendered for cash, the applicable Debtor shall immediately deliver to the Collateral Agent, or deposit into the Payment Account, the cash which such Debtor receives. All payments (including immediately available funds received by the Collateral Agent at a bank account designated by it) will be the Collateral Agent's sole property for its benefit and the ratable benefit of the Lenders; provided that payments (a) received following the receipt of written notice by the Collateral Agent from a Benefited Party that a Final True-Up Event has occurred or (b) which constitute Interim Proceeds will be held by the Collateral Agent for the ratable benefit of the Benefited Parties to be applied as set forth in Section 4 of the Intercreditor Agreement. Each Debtor authorizes the Collateral Agent to, and the Collateral Agent will on each Business Day, subject to the terms of the Intercreditor Agreement, apply the whole or any part of any amounts received by the Collateral Agent (whether deposited in the Payment Account or otherwise received by the 2 Collateral Agent) from the collection of items of payment and proceeds of any Collateral (other than payments described in the proviso in the preceding paragraph) against the Credit Agreement Obligations, whether or not then due, in accordance with the terms of the Intercreditor Agreement; provided that no check, draft or other instrument received by the Collateral Agent or any Lender shall constitute final payment to the Collateral Agent for the account of the Lenders unless and until such item of payment has actually been collected. Upon written request by the Company, so long as no Event of Default exists, the Collateral Agent will release to the Company all or any of the balance in the Payment Account (other than amounts which will be applied to the Credit Agreement Obligations or the other Benefited Obligations) within three days following receipt of such request." 1.3 Amendment to Section 6. Clause (i)(A) of Section 6 is amended in its entirety to read as follows: "(A) So long as no Default exists, subject to the terms of the Intercreditor Agreement and the Credit Agreement, the Collateral Agent shall deliver any proceeds of such insurance which may be received by it to such Debtor". 1.4 Amendments to Schedules. Schedules I, II, III and IV are amended in their entirety to read as set forth as Schedules I, II, III and IV hereto. SECTION 2 Representations and Warranties. Each Debtor represents and warrants to the Collateral Agent for the benefit of the Benefited Parties that, after giving effect to the effectiveness hereof, (a) each warranty set forth in Section 3 of the Security Agreement is true and correct as of the date of the execution and delivery of this Amendment by the Debtors, with the same effect as if made on such date (except to the extent such warranty expressly relates to an earlier date, in which case it was true and correct as of such earlier date) and (b) no Default exists. SECTION 3 Effectiveness. The amendments set forth in Section 1 above shall become effective on the date when the Collateral Agent shall have received counterparts of this Amendment executed by the Debtors. SECTION 4 Miscellaneous. 4.1 Continuing Effectiveness, etc. As herein amended, the Security Agreement shall remain in full force and effect and is hereby ratified and confirmed in all respects. After the effectiveness of this Amendment, all references in the Security Agreement, the Collateral Documents and the Financing Agreements to "Security Agreement" or similar terms shall refer to the Security Agreement as amended hereby. 3 4.2 Counterparts. This Amendment may be executed in any number of counterparts and by the different parties on separate counterparts, and each such counterpart shall be deemed to be an original but all such counterparts shall together constitute one and the same Amendment. 4.3 Governing Law. This Amendment shall be a contract made under and governed by the laws of the State of Illinois. 4.4 Successors and Assigns. This Amendment shall be binding upon the Debtors, the Benefited Parties and the Collateral Agent and their respective successors and assigns, and shall inure to the benefit of the Debtors, the Benefited Parties and the Collateral Agent and the respective successors and assigns of the Benefited Parties and the Collateral Agent. 4 Delivered as of the day and year first above written. TRUSERV CORPORATION By: /s/ BARBARA L. WAGNER Name Printed: Barbara L. Wagner Title: Vice President TRUSERV ACCEPTANCE COMPANY TRUSERV LOGISTICS COMPANY GENERAL PAINT & MANUFACTURING COMPANY MARYGREEN, LLC TRUE VALUE.COM CORPORATION By: /s/ BARBARA L. WAGNER Name Printed: Barbara L. Wagner Title: Vice President BANK OF AMERICA, N.A., as Collateral Agent By: /s/ DAVID A. JOHANSON Name Printed: David A. Johanson Title: Vice President S-1 EX-4.P 7 c66649ex4-p.txt FOURTH AMENDMENT TO THE PARTICIPATION AGREEMENT FOURTH AMENDMENT TO PARTICIPATION AGREEMENT, SECOND AMENDMENT TO MASTER LEASE AND LOAN AGREEMENT THIS FOURTH AMENDMENT dated as of April 11, 2002 (this "Amendment") amends the Participation Agreement dated as of April 30, 1998 (as previously amended, the "Participation Agreement") by and among MARYGREEN, LLC, a Delaware limited liability company, as the Lessee (together with any permitted successors and assigns, the "Lessee"); TRUSERV CORPORATION, a Delaware corporation, as the Lessee Agent, Construction Agent and Guarantor (in its capacity as Lessee Agent, the "Lessee Agent"; in its capacity as Construction Agent, the "Construction Agent"; and in its capacity as Guarantor, the "Guarantor"); TRUSERV 1998 TRUST, a Delaware business trust, as the Lessor Trust (the "Lessor Trust"); WILMINGTON TRUST COMPANY, a Delaware banking corporation, individually as set forth herein and as Trustee under the Lessor Trust ("Owner Trustee"); BMO GLOBAL CAPITAL SOLUTIONS, INC., a Delaware corporation formerly known as BMO Leasing (U.S.), Inc., as a Certificate Holder (together with any permitted successors and assigns thereto, each a "Certificate Holder" and collectively the "Certificate Holders"); BMO GLOBAL CAPITAL SOLUTIONS, INC., a Delaware corporation formerly known as BMO Leasing (U.S.), Inc., as Agent Certificate Holder for the Certificate Holders (in such capacity, the "Agent Certificate Holder"); BANK OF MONTREAL, a Canadian banking organization ("BMO"), and the other various financial institutions as are or may from time to time become lenders (the "Lenders") under the Loan Agreement; and BMO as Administrative Agent (in such capacity, the "Administrative Agent") for the Lenders and as Arranger (in such capacity, the "Arranger"). Terms defined in the Participation Agreement are, unless otherwise defined herein or the context otherwise requires, used herein as defined therein. WHEREAS, the Lessee, the Guarantor, the Lessor Trust, the Owner Trustee, the Certificate Holders, the Agent Certificate Holder, the Lenders, the Administrative Agent and the Arranger have entered into the Participation Agreement; and WHEREAS, the Lessee and Lessor Trust have entered into the Master Lease and a prior amendment thereto; and WHEREAS, the Lessor Trust, the Lenders and the Administrative Agent have entered into the Loan Agreement and a prior amendment thereto; and WHEREAS, the parties hereto desire to amend the Participation Agreement, Appendix A to the Participation Agreement, the Master Lease and the Loan Agreement as more fully set forth herein; NOW, THEREFORE, the parties hereto agree as follows: Section 1. Amendment to Participation Agreement and Appendix A. Effective on (and subject to the occurrence of) the Amendment Effective Date (as defined below), the Participation Agreement and Appendix A shall be amended in accordance with this Section: Section 1.1. Amended and Restatement of Appendix A. Appendix A is hereby amended and restated in its entirety to read as set forth on Appendix A attached hereto. Section 1.2. Adjusted Eurodollar Rate. All references to Adjusted Eurodollar Rate in the Participation Agreement are hereby deleted and specifically (i) Section 3.5 shall be amended by placing a period after "Base Rate" and deleting the remainder of such Section, (ii) Sections 3.6, 13.7, 13.8, 13.9, and 13.10 are hereby deleted and "Intentionally Deleted" inserted in their place and (iii) Section 4.1 is hereby amended by deleting the first sentence thereof and replacing it with: "The amount of the Certificate Holder Amounts outstanding from time to time shall accrue yield ("Yield") at the Yield Rate, calculated using the actual number of days elapsed and a 365/366 day year basis." Section 1.3. Mandatory Prepayments. The following Subsection is hereby added to the end of Section 4.3(b): "(iii) Upon receipt of any amounts from the Intercreditor Agreement, such amounts shall be applied in accordance with Article VII hereof. Notwithstanding the foregoing provisions of this Section 4.3(b), any payment required to be made by lessee pursuant to this Section 4.3(b) shall be subject to the provisions of the Intercreditor Agreement." Section 1.4. Fees. The following Subsections are hereby added to the end of Section 4.4: "(e) Supplemental Funding Fees. The Guarantor shall pay to the Administrative Agent for the account of each Participant a quarterly supplemental funding fee equal to 0.4375% of the average daily unpaid principal amount of such Participant's Loans and Certificate Holder Amount for each quarter. Such supplemental funding fees shall accrue from February 28, 2002 to the Termination Date and shall be due and payable quarterly in arrears on each Scheduled Payment Date; provided that the first such supplemental funding fee shall accrue from February 28, 2002 through the Closing Date and shall be payable on the Closing Date. (f) Annual Fee. On each anniversary of the Amendment Effective Date until the Obligations shall have been paid in full and the Participation Agreement terminated, the Company shall pay each Participant a fee of 0.50% of such Participant's Loans and Certificate Holder Amount on such date; provided that if the Termination Date is less than 12 months after any such anniversary date, such annual fee shall be prorated for the period from such anniversary date through the Termination Date." Section 1.5. Section 8.2(b) is amended to (i) insert "or limited liability company" immediately after the word "corporate" on line three of such Section 8.2(b) and (ii) insert "or member" immediately after the word "stockholder" on the fourth line of such Section 8.2(b). Section 1.6. Section 8.2(e) shall be amended and restated in its entirety to read as follows: "(e) Financial Statements. The audited consolidated financial statements of the Guarantor and its Subsidiaries as at December 31, 2000 and the unaudited consolidated -2- financial statements of the Guarantor and its Subsidiaries as at September 30, 2001, copies of each of which have been delivered to each Participant, were prepared in accordance with GAAP (subject, in the case of such unaudited statements, to the absence of footnotes and to normal year-end adjustments) and present fairly the consolidated financial condition of the Guarantor and its Subsidiaries as at such dates and the results of their operations for the periods then ended. Section 1.7. The following clause shall be added to the end of Sections 8.2(f) and 8.2(x): "(it being understood that the representation and warranty in this sentence is made after giving effect to the effectiveness of this Amendment and the amendments referenced in the Existing Credit Agreement)." Section 1.8. The following clause shall be added at the beginning of Section 8.2(f) and the capital "T" in "There" shall be made lower case: "Except as specified on Schedule 8.2(f)," Section 1.9. Section 8.2(g) is amended to add the sentence "Attached hereto as Schedule 8.2(g) is a list of all real estate owned or leased by Guarantor and its Subsidiaries as of April 11, 2002". Section 1.10. The following clause shall be added to Section 8.2(i), and the capital "T" in "There" shall be made lower-case: "Except as specified on Schedule 8.2(i)," Section 1.11. Section 8.2(n) shall be amended and restated in its entirety to read as follows: "(n) Disclosure. Neither this Agreement nor any Operative Document nor any other document, certificate or statement furnished to the Administrative Agent or any Participant by or on behalf of the Guarantor in connection herewith contains any untrue statement of a material fact or omits to state a material fact necessary in order to make the statements contained herein and therein not misleading in light of the circumstances in which they were made." -3- Section 1.12. Section 8.2(y) is amended by deleting "except as set forth in the Agreements listed in schedule IV attached hereto (as such Schedule IV) may have been modified from time to time by written supplements thereto delivered by the Guarantor and accepted in writing by the Required Participants)" inserting "except as set forth in the agreements listed in Schedule 8.2(y) attached hereto (as such Schedule 8.2(y) may have been modified from time to time by written supplements thereto delivered by Guarantor and accepted in writing by the Required Participants)" immediately after the word "constitute". Section 1.13. Section 8.2(z) shall be deleted in its entirety and replaced with the following: "Intentionally deleted." Section 1.14. Amendment to Sections 10.1 and 10.2. Sections 10.1 and 10.2 of the Participation Agreement are amended in their entirety to read as follows: "Section 10.1. Affirmative Covenants of the Guarantor. The Lessee Agent covenants and agrees with the Arranger, the Agent Certificate Holder, Lessor Trust, Owner Trustee, the Administrative Agent, the Certificate Holders and the Lenders that, so long as this Participation Agreement shall remain in effect or the principal or interest on any Loan, any Certificate Holder Amount or Yield thereon, or any fees or any other expenses or amounts payable under any Operative Document shall be unpaid, and until all Commitments shall have been permanently terminated, unless the Required Participants shall otherwise consent in writing, the Lessee Agent will: (a) Financial Statements. The Guarantor shall deliver to the Administrative Agent, in form and detail reasonably satisfactory to the Administrative Agent and the Required Participants, with sufficient copies for each Participant: (i) as soon as available, but not later than one hundred twenty (120) days after the end of each fiscal year, a copy of the audited consolidated balance sheet of the Guarantor and its Subsidiaries as at the end of such year and the related consolidated statements of income or operations, shareholders' equity and cash flows for such year, setting forth in each case in comparative form the figures for the previous fiscal year, and accompanied by the opinion of Price WaterhouseCoopers LLP or another nationally-recognized independent public accounting firm ("Independent Auditor") which report (x) shall state that such consolidated financial statements present fairly the financial position for the periods indicated in conformity with GAAP applied on a basis consistent with prior years and (y) shall not be qualified or limited because of a restricted or limited examination by the Independent Auditor of any material portion of the Guarantor's or any Subsidiary's records; (ii) as soon as available, but not later than sixty (60) days after the end of each of the first three fiscal quarters of each fiscal year, a copy of the unaudited consolidated balance sheet of the Guarantor and its Subsidiaries as of the end of -4- such quarter and the related consolidated statements of income, shareholders' equity and cash flows for the period commencing on the first day and ending on the last day of such quarter, and certified by a Responsible Officer as fairly presenting, in accordance with GAAP (subject to the absence of footnotes and ordinary, good faith year-end audit adjustments), the financial position and the results of operations of the Guarantor and the Subsidiaries; and (iii) as soon as available, but not later than 30 days after the end of each fiscal month (or 60 days after the end of December of each year), a copy of the financial report delivered to the Board of Directors of the Guarantor (or, if no such report is delivered to the Board of Directors of the Guarantor for any month, a copy of a substantially similar financial report for such month), including unaudited consolidated balance sheet of the Guarantor and its Subsidiaries as of the end of such month and the related consolidated statements of income and cash flows for the period commencing on the first day and ending on the last day of each month, and certified by a Responsible Officer as fairly presenting, in accordance with GAAP (subject to the absence of footnotes and ordinary, good faith year-end audit adjustments), the financial position and the results of operations of the Guarantor and the Subsidiaries. (b) Certificates; Other Information. The Guarantor shall furnish to the Administrative Agent, with sufficient copies for each Participant: (i) concurrently with the delivery of the financial statements referred to in subsection 10.1(a)(i), for the year ended December 31, 2002 and each year thereafter, to the extent not prohibited by applicable accounting guidelines a certificate of the Independent Auditor stating that in making the examination necessary therefor no knowledge was obtained of any Event of Default or Unmatured Event of Default, except as specified in such certificate; (ii) concurrently with the delivery of the financial statements referred to in subsections 10.1(a)(i), (ii) and (iii), a Compliance Certificate executed by a Responsible Officer together with the calculations necessary to demonstrate compliance with Sections 10.2(a), 10.2(l), 10.2(n), 10.2(o), 10.2(p) and 10.2(q); (iii) promptly, copies of all financial statements and reports that the Guarantor sends to its shareholders, and copies of all financial statements and regular, periodical or special reports (including Forms 10K, 10Q and 8K) that the Guarantor or any Subsidiary may make to, or file with, the SEC; (iv) within 90 days after the end of each fiscal year, a calculation in reasonable detail of Excess Cash Flow for such fiscal year, substantially in the form of Exhibit O; -5- (v) within three Business days after the end of each week (or more frequently at the request of the Administrative Agent), a detail of the Borrowing Base Certificate; (vi) within three Business Days after the 15th and last day of each month, an Accounts Receivable aging report as of such day; (vii) no later than 45 days after the end of each fiscal quarter, a 12-month forecast (to include forecasted consolidated balance sheets, income statements and cash flow statements) for the Guarantor and its Subsidiaries in fiscal quarter periods; (viii) concurrently with the execution of any amendment to the Existing Credit Agreement, the Senior Note Agreements or the Shelf Note Agreement (each as defined in the Intercreditor Agreement), a copy of such executed amendment; (ix) as soon as available, but not later than 15 days after delivery of the financial report described in Section 10.1(a)(iii) and at the Guarantor's expense, a report from Zolfo Cooper (or another consultant acceptable to the Administrative Agent and the Required Participants) on the performance of the Guarantor as set forth in such financial report against the Business Plan; (x) simultaneously with the delivery thereof under the Senior Note Agreements (as defined in the Intercreditor Agreement), copies of all information and notices required to be given by the Guarantor pursuant to paragraph 5A thereof (or any successor provision thereto) or any other notice, report or other written information delivered to any noteholder under the Senior Note Agreements; and (xi) promptly, such additional information regarding the business, financial or corporate affairs of the Guarantor or any Subsidiary as the Administrative Agent, at the request of any Participant, may from time to time request. (c) Notices. The Guarantor shall promptly notify the Administrative Agent promptly after a Responsible Officer obtains knowledge of: (i) the occurrence of any Event of Default or Unmatured Event of Default; (ii) any of the following matters that has resulted or may reasonably be expected to result in a Material Adverse Effect: (A) any breach or non-performance of, or any default under, a Contractual Obligation of the Guarantor or any Subsidiary; (B) any dispute, litigation, investigation, proceeding or suspension between the Guarantor or any Subsidiary and any Governmental -6- Authority; or (C) the commencement of, or any material development in, any litigation or proceeding affecting the Guarantor or any Subsidiary including pursuant to any applicable Environmental Law; (iii) the occurrence of any of the following events affecting the Guarantor or any ERISA Affiliate (but in no event more than ten (10) days after a Responsible Officer obtains knowledge of such event; provided that the Guarantor shall notify the Administrative Agent and each Participant not less than ten (10) days before the occurrence of any event described in clause (B) below), and deliver to the Administrative Agent a copy of any notice with respect to such event that is filed with a Governmental Authority and any notice delivered by a Governmental Authority to the Guarantor or any ERISA Affiliate with respect to such event: (A) an ERISA Event; (B) a contribution failure with respect to a Pension Plan sufficient to give rise to a Lien under Section 302(f) of ERISA; (C) a material increase in the Unfunded Pension Liability of any Pension Plan; (D) the adoption of, or the commencement of contributions to, any Plan subject to Section 412 of the Code by the Guarantor or any ERISA Affiliate; or (E) the adoption of any amendment to a Plan subject to Section 412 of the Code, if such amendment results in a material increase in contributions or Unfunded Pension Liability; and (iv) any material change in accounting policies or financial reporting practices by the Guarantor or any of its consolidated Subsidiaries. Each notice under this Section shall be accompanied by a written statement by a Responsible Officer setting forth details of the occurrence referred to therein, and stating what action the Guarantor or any affected Subsidiary proposes to take with respect thereto and at what time. Each notice under subsection 10.1(c)(i) shall describe with particularity any and all clauses or provisions of this Participation Agreement or any other Operative Document that have been breached or violated. (d) Preservation of Corporate Existence Etc. The Guarantor shall, and shall cause each Subsidiary to: (i) preserve and maintain in full force and effect its corporate existence and good standing under the laws of its state or jurisdiction of incorporation or formation; provided, however, that, subject at all times to the -7- limits set forth in Section 10.2(d) hereof, the Guarantor shall be permitted to dissolve any Subsidiary that is not a Material Subsidiary; (ii) preserve and maintain in full force and effect all governmental rights, privileges, qualifications, permits, licenses and franchises necessary or desirable in the normal conduct of its business except (A) in connection with transactions permitted by Section 10.2(e) and sales of assets permitted by Section 10.2(d) and (B) to the extent the non-preservation or non-maintenance thereof could not reasonably be expected to have a Material Adverse Effect; (iii) use reasonable efforts, in the ordinary course of business, to preserve its business organization and goodwill; and (iv) preserve or renew all of its registered patents, trademarks, trade names and service marks, the non-preservation of which could reasonably be expected to have a Material Adverse Effect. Notwithstanding the provisions of this Section 10.1(d), the Guarantor may dissolve or liquidate any Inactive Subsidiary or any Canadian Subsidiary. (e) Maintenance of Property. The Guarantor shall, and shall cause each Subsidiary to, maintain and preserve all its property which is used or useful in its business in good working order and condition, ordinary wear and tear excepted and make all necessary repairs thereto and renewals and replacements thereof except where the failure to do so could not reasonably be expected to have a Material Adverse Effect. The Guarantor and each Subsidiary shall use the standard of care typical in the industry in the operation and maintenance of its facilities. (f) Insurance. The Guarantor shall, and shall cause each Subsidiary to, maintain with financially sound and reputable insurers, insurance in such amounts and against such liabilities and hazards as customarily maintained by the Guarantor in accordance with its practices, policies and procedures prior to the Documentation Date. Together with each delivery of financial statements under subsection 10.1(a)(i), the Guarantor will, upon the request of the Administrative Agent, deliver a certificate of a Responsible Officer specifying the details of such insurance in effect. (g) Payment of Obligations. The Guarantor shall, and shall cause each Subsidiary to, pay and discharge as the same shall become due and payable all their respective obligations and liabilities, including: (i) all material tax liabilities, assessments and governmental charges or levies upon it or its properties or assets, unless the same are being contested in good faith by appropriate proceedings and adequate reserves in accordance with GAAP are being maintained by the Guarantor or such Subsidiary; -8- (ii) all lawful claims which, if unpaid, would by law become a Lien upon its property; and (iii) all Debt, as and when due and payable, but subject to any subordination provisions contained in any instrument or agreement evidencing such Debt. (h) Compliance with Laws. The Guarantor shall, and shall cause each Subsidiary to, comply in all material respects with all Requirements of Law of any Governmental Authority having jurisdiction over it or its business (including the Federal Fair Labor Standards Act), except such as may be contested in good faith or as to which a bona fide dispute may exist. (i) Compliance with ERISA. The Guarantor shall, and shall cause each of its ERISA Affiliates to: (a) maintain each Plan in compliance in all material respects with the applicable provisions of ERISA, the Code and other federal or state law; (b) cause each Plan which is qualified under Section 401(a) of the Code to maintain such qualification; and (c) make all required contributions to any Plan subject to Section 412 of the Code. (j) Inspection of Property and Books and Records. The Guarantor shall, and shall cause each Subsidiary to, maintain proper books of record and account, in which full, true and correct entries in conformity with GAAP consistently applied shall be made of all financial transactions and matters involving the assets and business of the Guarantor and such Subsidiary. The Guarantor shall, and shall cause each Subsidiary to, permit representatives and independent contractors of the Administrative Agent or any Lender to visit and inspect any of their respective properties, to examine their respective corporate, financial and operating records, and make copies thereof or abstracts therefrom, and to discuss their respective affairs, finances and accounts with their respective directors, officers, and independent public accountants, all at the reasonable expense of the Guarantor and at such reasonable times during normal business hours and as often as may be reasonably desired, upon reasonable advance notice to the Guarantor; provided that when an Event of Default exists the Administrative Agent or any Lender may do any of the foregoing at the reasonable expense of the Guarantor at any time during normal business hours without advance notice. (k) Environmental Laws. The Guarantor shall, and shall cause each Subsidiary to, conduct its operations and keep and maintain its property in material compliance with all material Environmental Laws. (l) Use of Proceeds. The Guarantor shall use the proceeds of the Loans to acquire the Property and to fund Construction of Improvements. (m) Covenant to Secure Obligations Equally. The Guarantor covenants that, if it or any Subsidiary shall create or assume any Lien upon any of its property or assets, whether now owned or hereafter acquired, other than Liens permitted by the provisions of -9- Section 10.2(b) (unless prior written consent to the creation or assumption thereof shall have been obtained pursuant to Section 15.5 hereof), it will make or cause to be made effective provision whereby the Obligations will be secured by such Lien equally and ratably with any and all other Debt thereby secured so long as any such other Debt shall be so secured. (n) Cooperative Status. The Guarantor covenants that it will at all times maintain its status as a cooperative for purposes of Subchapter T of the Code; provided, however, in the event that the Code or other applicable law is modified after the date hereof and as a result of such modification the Guarantor is unable to satisfy its obligations under this Section, then the Required Participants and the Guarantor shall agree, or in good faith negotiate to agree, to amend the covenants contained in this Participation Agreement so that the application of such covenants (following such modification of the Code or other applicable law and the effect thereof on the Guarantor) will be substantially the same as prior thereto. (o) Further Assurances. The Guarantor shall (a) cause all Subsidiaries to guarantee the obligations of the Guarantor hereunder pursuant to the Additional Guaranty (and in furtherance of the foregoing, immediately upon the creation or acquisition of any Subsidiary, cause such Subsidiary to execute and deliver a counterpart of the Additional Guaranty together with such other documents, including resolutions and opinions of counsel, as Administrative Agent or any Participant may reasonably request) provided that (i) none of TruServ Specialty Company, LLC nor any Foreign Subsidiary shall have an obligation to execute a counterpart of the Additional Guaranty and (ii) neither of Advocate Services, Inc. nor Servistar Paint Company shall have an obligation to execute a counterpart of the Additional Guaranty prior to the date which is 180 days following April 11, 2002; and (b) take, and cause each of the Additional Guarantors to take, such actions as are necessary or as the Administrative Agent or the Required Participants may reasonably request from time to time (including the execution an delivery of security agreements, pledge agreements, financing statements, mortgages, deeds of trust and other documents, the filing or recording of any for the foregoing, the delivery of stock certificates and other collateral with respect to which perfection is obtained solely by possession, the notation of the Collateral Agent's Liens on certificates of title for vehicles and the delivery of opinions of counsel) to ensure that the obligations of the Guarantor and each Additional Guarantor hereunder and under the Additional Guaranty, as applicable, are secured by perfected security interests in substantially all of the personal property of each such entity, and provided further that neither the Guarantor nor any Additional Guarantor shall be required to pledge more than 65% of the stock of any Foreign Subsidiary. (p) Insurance and Condemnation Proceeds. The Guarantor shall promptly notify the Administrative Agent of any loss, damage, or destruction to the Collateral, whether or not covered by insurance. Section 10.2. Negative Covenants of the Guarantor. The Guarantor covenants and agrees with the Arranger, the Agent Certificate Holder, Lessor Trust, Owner Trustee, -10- the Administrative Agent, the Certificate Holders and the Lenders that, so long as this Participation Agreement shall remain in effect or the principal or interest on any Loan, any Certificate Holder Amount or Yield thereon, or any fees or any other expenses or amounts payable under any Operative Document shall be unpaid, and until all Commitments shall have been permanently terminated, unless the Required Participants shall otherwise consent in writing: (a) Fixed Charge Coverage Ratio. The Guarantor will not permit the Fixed Charge Coverage Ratio as of the end of any fiscal quarter to be less than the applicable ratio set forth below:
FISCAL QUARTER ENDING ON OR ABOUT RATIO --------------------------------- ----- March 31, 2002 0.80 to 1 June 30, 2002 0.90 to 1 September 30, 2002 0.90 to 1 December 31, 2002 0.70 to 1 March 31, 2003 0.70 to 1 June 30, 2003 0.70 to 1 September 30, 2003 0.60 to 1 December 31, 2003 0.75 to 1 March 31, 2004 0.70 to 1 June 30, 2004 0.65 to 1
The provisions of this Section shall be subject to change, upon the sale of the Paint Business (if sold prior to June 30, 2003) or other asset sales not previously disclosed to the Participants, upon the mutual agreement of the Guarantor and the Required Participants. (b) Lien Restrictions. The Guarantor will not and will not permit any Subsidiary to create, assume or suffer to exist any Lien upon any of its property or assets, whether now owned or hereafter acquired (whether or not provision is made for the equal and ratable securing of the Obligations in accordance with the provisions of Section 10.1(m)), except: (i) Liens for taxes not yet due or which are being actively contested in good faith by appropriate proceedings and with respect to which the Guarantor or the applicable Subsidiary maintains adequate reserves, (ii) Liens incidental to the conduct of its business or the ownership of its property and assets which were not incurred in connection with the borrowing of money or the obtaining of advances or credit, (iii) Liens on property or assets of a Subsidiary to secure obligations of such Subsidiary to the Guarantor or another Subsidiary, -11- (iv) Liens in existence on the Amendment Effective Date and described on Schedule VI, (v) Liens in respect of capital leases entered into in connection with, or any Lien arising in connection with, the acquisition of property, after the date hereof and attaching only to the property being acquired, if the Indebtedness secured thereby does not exceed one hundred percent (100%) of the lesser of (i) the fair market value of the property acquired at the time of acquisition thereof and (ii) the total purchase price of the property so acquired, (vi) other Liens (including Liens arising under capital leases), in addition to the Liens permitted by clauses (i) through (iv) above and clauses (vii) through (xi) below, securing Indebtedness of the Guarantor or any Subsidiary (other than Indebtedness that constitutes Subordinated Debt); provided, however, that (i) such Indebtedness is permitted by the provisions of Section 10.2(c) and (ii) the aggregate outstanding principal amount of all such Indebtedness (other than Indebtedness listed on Schedule 10.2(b)(vi)) does not at any time exceed $25,000,000, (vii) Liens in favor of the Collateral Agent. (viii) any interest or title of a lessor in property subject to any lease other than (A) subject to clause (i) above, a capital lease, (B) a lease entered into as part of a sale and leaseback transaction or (C) except for the transaction contemplated by the Operative Documents or as permitted by clause (iv) above, a Synthetic Lease, (ix) any interest of a lessee or a sublessee in property owned or leased by the Guarantor or any Subsidiary, (x) any escrow, holdback or similar arrangement in connection with any sale, lease, transfer or other disposition of any asset not prohibited hereunder (including any sale of the Paint Business), (xi) Liens in favor of Bank of America on cash collateral securing obligations of the Guarantor or any Subsidiary under letters of credit issued by, or with respect to cash management services provided by, Bank of America, (xii) Liens in respect of mortgages on properties listed on Schedule 10.2(b) (the "Specified Facilities"), and (xiii) Liens in favor of Fleet National Bank on cash collateral securing obligations of the Guarantor or any Subsidiary with respect to cash management services provided by Fleet National Bank. -12- (c) Debt Restrictions. The Guarantor will not and will not permit any Subsidiary to create, incur, assume or suffer to exist any Debt, except: (i) Senior Funded Debt, (ii) Subordinated Debt, (iii) Debt under the Guaranty, (iv) Short Term Debt of the Guarantor. (d) Sale of Assets. The Guarantor will not and will not permit any Subsidiary to sell, lease or transfer or otherwise dispose of any assets of the Guarantor or any Subsidiary other than in the ordinary course of business; provided that the Guarantor and its Subsidiaries may sell, lease, transfer or otherwise dispose of assets (i) to the extent that such sale, lease, transfer or disposition relates to a Designated Permitted Asset Sale, (ii) in connection with the sale and leaseback of distribution centers owned by the Guarantor or any Subsidiary, (iii) in connection with the dissolution of any Subsidiary permitted by Section 10.1(d) and (iv) outside the ordinary course of business so long as (x) the aggregate amount of all assets sold, leased, transferred or otherwise disposed of outside the ordinary course of business for the 36 months preceding such proposed sale when added together, without duplication, with (1) any shares of stock or Debt of any Subsidiary sold or otherwise disposed of, or with respect to which the Guarantor or any Subsidiary has parted control of, except to the Guarantor or another Subsidiary, during such period and (2) any assets then proposed to be sold outside of the ordinary course of business do not constitute more than ten percent (10%) of the consolidated total assets of the Guarantor as of the end of the most recent fiscal quarter for which the Guarantor has delivered financial statements pursuant to Section 10.1(a) and (y) any such sale of assets is not in excess of $2,500,000 per such sale; and provided, further, that in the case of clauses (i) through (iv) above, all such assets have been sold, leased, transferred or otherwise disposed of for fair market value and the Net Disposition Proceeds from such sales shall be paid to the Collateral Agent for distribution in accordance with the Intercreditor Agreement. (e) Merger. The Guarantor will not and will not permit any Subsidiary to merge or consolidate with any other Person, except that Subsidiaries may be merged or consolidated with or into the Guarantor or any other Subsidiary. (f) Restrictions on Transactions with Affiliates and Stockholders. The Guarantor will not and will not permit any Subsidiary to directly or indirectly, purchase, acquire or lease any property from, or sell, transfer or lease any property (other than shares of stock of the Guarantor) to, or otherwise deal with (i) any Affiliate or Substantial Stockholder, or (ii) any corporation in which an Affiliate, Substantial Stockholder or the Guarantor (either directly or through Subsidiaries) owns five percent (5%) or more of the outstanding voting stock, except that (A) any such Affiliate or Substantial Stockholder may be -13- a director, officer or employee of the Guarantor or any Subsidiary and may be paid reasonable compensation in connection therewith, (B) the Guarantor and its Subsidiaries may perform or engage in any of the foregoing in the ordinary course of business upon terms no less favorable to the Guarantor or such Subsidiary (as the case may be) than if no such relationship described in clauses (i) and (ii) above existed and (C) the Guarantor may sell to or purchase from any such Person shares of the Guarantor's stock subject to the provisions of Section 10.2. (g) Issuance of Stock by Subsidiaries. The Guarantor will not permit any Subsidiary to (either directly, or indirectly by the issuance of rights or options for, or securities convertible into, such shares) issue, sell or otherwise dispose of any shares of any class of its stock (other than directors' qualifying shares) except to the Guarantor or another Subsidiary. (h) Compliance with ERISA. The Guarantor will not and will not permit any Subsidiary to (i) engage in any transaction in connection with which the Guarantor or any Subsidiary could be subject to either a civil penalty assessed pursuant to section 502(i) of ERISA or a tax imposed by section 4975 of the Code, terminate or withdraw from any Plan (other than a Multiemployer Plan) in a manner, or take any other action with respect to any such Plan (including, without limitation, a substantial cessation of operations within the meaning of section 4062(e) of ERISA), which could result in any liability of the Guarantor or any Subsidiary to the PBGC, to a trust established pursuant to section 4041(c)(3)(B)(ii) or (iii) or 4042(i) of ERISA, or to a trustee appointed under section 4042(b) or (c) of ERISA, (ii) incur any liability to the PBGC on account of a termination of a Plan under section 4064 of ERISA, (iii) fail to make full payment when due of all amounts which, under the provisions of any Plan, the Guarantor or any Subsidiary is required to pay as contributions thereto, or (iv) permit to exist any accumulated funding deficiency, whether or not waived, with respect to any Plan (other than a Multiemployer Plan), if, in any such case, such penalty or tax or such liability, or the failure to make such payment, or the existence of such deficiency, as the case may be, could be reasonably expected to have a material adverse effect on the Guarantor and its Subsidiaries taken as a whole. (i) No Change in Subordination Terms, etc. The Guarantor will not and will not permit any Subsidiary to amend, alter or otherwise change any provision of any of the subordinated promissory notes now or hereafter issued by the Guarantor or take any other action (or refrain from taking an action) which would have the effect of eliminating or altering in any way the effect of the subordination language appearing in such subordinated promissory notes or the rights of the Administrative Agent and the Participants arising as a result thereof. (j) Nature of Business. The Guarantor will not and will not permit any Subsidiary to engage in the business of underwriting risks for insurance purposes, or in any other aspect of insurance related business other than in the ordinary course of business in accordance with its practices as of the Amendment Effective Date; or purchase and sell real estate (other than on an agency basis) for purposes other than those relating directly to its principal business except for (i) purchases and sales of store -14- locations in the ordinary course of business which in the aggregate for the Guarantor and its Subsidiaries taken as a whole do not exceed $10,000,000 during any rolling consecutive five (5) year period and (ii) sales of the Specified Facilities. (k) Restricted Investments. The Guarantor will not and will not permit any Subsidiary to make or permit a Subsidiary to make any Investment except the Guarantor and any Subsidiary may: (i) make or permit to remain outstanding loans or advances to any Subsidiary other than an Inactive Subsidiary, (ii) acquire and own stock, obligations or securities received in settlement of debts (created in the ordinary course of business) owing to the Guarantor or any Subsidiary, (iii) own, purchase or acquire prime commercial paper, banker's acceptances and certificates of deposit in United States and Canadian commercial banks (having combined capital and surplus of not less than U.S. $100,000,000) and repurchase agreements with respect to the foregoing, in each case due within one year from the date of purchase and payable in the United States in United States Dollars, obligations of the government of the United States or any agency thereof, and obligations guaranteed by the government of the United States, (iv) make or permit to remain outstanding travel and other similar advances to officers and employees in the ordinary course of business, (v) permit to remain outstanding Investments existing on the Amendment Effective Date and described on Schedule VII, (vi) maintain deposit accounts with Bank of America containing cash collateral permitted to be held under Section 10.2(b)(xi), (vii) maintain deposit accounts with Fleet National Bank containing cash collateral permitted to be held under Section 10.2(b)(xiii), (viii) maintain other deposit accounts with financial institutions in the ordinary course of business; provided that the amount maintained in deposit accounts with financial institutions other than the Lenders under the Existing Credit Agreement shall not exceed (A) in the case of any one such account, $200,000 for more than three (3) consecutive Business Days; and (B) in the case of all such accounts in the aggregate, $600,000 for more than two (2) consecutive Business Days, (ix) to the extent applicable, make Investments permitted under Section 10.2(l) below, and -15- (x) enter into escrow, seller note, holdback or similar arrangements in connection with any sale, lease, transfer or other disposition of any asset not prohibited hereunder (including any sale of the Paint Business). Notwithstanding the foregoing, the Guarantor will not permit the aggregate amount of Investments in TruServ Specialty Company, LLC to exceed $1,500,000 at any time. (l) Restricted Payments. (i) The Guarantor will not and will not permit any Subsidiary to pay or declare cash dividends or cash patronage dividends or redeem, purchase or otherwise acquire, or make any redemptions, purchase, or other acquisition of any of its stock or apply miscellaneous deductions in lieu of patronage dividends, or make or permit any Subsidiary to make any Restricted Investment (each a "Restricted Payment") except the Guarantor or any Subsidiary may pay cash patronage source dividends in an amount not to exceed 20% (or such greater percentage as required under the Code) of all patronage source income; provided that if Adjusted EBITDA for the fiscal year most recently ended is at least equal to the amount set forth on Schedule 10.2(l) for such fiscal year, the Guarantor may pay cash patronage source dividends in an amount not to exceed 30% of the patronage source income attributable to patronage source income other than income resulting from gains on Asset Sales. (ii) The Guarantor may not redeem or purchase any shares of stock except for Hardship Case Payments in an amount not to exceed $2,000,000 in the aggregate in any fiscal year. (m) Use of Proceeds. The Guarantor shall not, and shall not permit any Subsidiary to, use any portion of the proceeds of any Loan, directly or indirectly, (i) to purchase or carry Margin Stock, (ii) to repay or otherwise refinance indebtedness of the Guarantor or others incurred to purchase or carry Margin Stock, (iii) to extend credit for the purpose of purchasing or carrying any Margin Stock, or (iv) to acquire any security in any transaction that is subject to Section 13 or 14 of the Exchange Act. (n) Interest Coverage Ratio. The Guarantor will not permit the Interest Coverage Ratio as of the end of any fiscal quarter to be less than applicable ratios set forth below:
FISCAL QUARTER ENDING ON OR ABOUT RATIO --------------------------------- ----- March 31, 2002 1.20 to 1 June 30, 2002 1.50 to 1 September 30, 2002 1.70 to 1 December 31, 2002 1.70 to 1 March 31, 2003 1.70 to 1 June 30, 2003 1.75 to 1 September 30, 2003 1.65 to 1 December 31, 2003 1.70 to 1
-16- FISCAL QUARTER ENDING ON OR ABOUT RATIO --------------------------------- ----- March 31, 2004 1.65 to 1 June 30, 2004 1.50 to 1
The provisions of this Section shall be subject to change, upon the sale of the Paint Business (if sold prior to June 30, 2003) or other asset sales not presently disclosed to the Participants, upon the mutual agreement of the Guarantor and the Required Participants. (o) Minimum Sales. The Guarantor will not permit consolidated gross sales for the Guarantor and its Subsidiaries to be less than the following amounts for the following fiscal periods.
FISCAL QUARTER ENDING ON OR ABOUT AMOUNT --------------------------------- ------ March 31, 2002 $460,000,000 April 30, 2002 $625,000,000 May 31, 2002 $805,000,000 June 30, 2002 $990,000,000 July 31, 2002 $1,200,000,000 August 31, 2002 $1,340,000,000 September 30, 2002 $1,520,000,000 October 31, 2002 $1,670,000,000 November 30, 2002 $1,815,000,000 December 31, 2002 $1,975,000,000 January 31, 2003 $1,965,000,000 February 28, 2003 $1,955,000,000 March 31, 2003 $1,945,000,000 April 30, 2003 $1,930,000,000 May 31, 2003 $1,920,000,000 June 30, 2003 $1,910,000,000 July 31, 2003 $1,900,000,000 August 31, 2003 $1,890,000,000 September 30, 2003 $1,875,000,000 October 31, 2003 $1,870,000,000 November 30, 2003 $1,865,000,000 December 31, 2003 $1,860,000,000 January 31, 2004 $1,850,000,000 February 29, 2004 $1,840,000,000 March 31, 2004 $1,830,000,000 April 30, 2004 $1,820,000,000 May 31, 2004 $1,805,000,000 June 30, 2004 $1,795,000,000
-17- The minimum consolidated gross sales for each fiscal month of 2002, beginning with March 2002, shall be calculated on a cumulative basis from January 1, 2002. The minimum consolidated gross sales for each fiscal month beginning after fiscal year 2002 shall be calculated on a prior rolling 12-month basis. The provisions of this Section shall be subject to change, upon the sale of the Paint Business (if sold prior to June 30, 2003) or other asset sales not presently disclosed to the Participants, upon the mutual agreement of the Guarantor and the Required Participants. (p) Capital Expenditures. The Guarantor will not permit Capital Expenditures to be greater than the following amounts in the following fiscal periods of the Guarantor.
FIRST DAY OF APPLICABLE FISCAL YEAR THROUGH FISCAL QUARTER ENDING ON OR ABOUT CUMULATIVE AMOUNT --------------------------------- ----------------- March 31, 2002 $6,400,000 June 30, 2002 $11,200,000 September 30, 2002 $13,600,000 December 31, 2002 $16,000,000 March 31, 2003 $6,400,000 June 30, 2003 $11,200,000 September 30, 2003 $13,600,000 December 31, 2003 $16,000,000 March 31, 2004 $6,400,000 June 30, 2004 $11,200,000
The provisions of this Section shall be subject to change, upon the sale of the Paint Business (if sold prior to June 30, 2003) or other asset sales not presently disclosed to the Participants, upon the mutual agreement of the Guarantor and the Required Participants. (q) Minimum Adjusted EBITDA. The Company will not permit Adjusted EBITDA to be less than the following amounts in the following fiscal periods:
FISCAL PERIOD ENDING ON OR ABOUT AMOUNT -------------------------------- ------ March 31, 2002 $20,000,000 April 30, 2002 $25,000,000 May 31, 2002 $35,000,000 June 30, 2002 $50,000,000 July 31, 2002 $60,000,000 August 31, 2002 $65,000,000 September 30, 2002 $80,000,000 October 31, 2002 $90,000,000 November 30, 2002 $95,000,000
-18-
FISCAL PERIOD ENDING ON OR ABOUT AMOUNT -------------------------------- ------ December 31, 2002 $100,000,000 January 31, 2003 $100,000,000 February 28, 2003 $100,000,000 March 31, 2003 $100,000,000 April 30, 2003 $95,000,000 May 31, 2003 $95,000,000 June 30, 2003 $95,000,000 July 31, 2003 $90,000,000 August 31, 2003 $90,000,000 September 30, 2003 $80,000,000 October 31, 2003 $80,000,000 November 30, 2003 $80,000,000 December 31, 2003 $80,000,000 January 31, 2004 $75,000,000 February 29, 2004 $75,000,000 March 31, 2004 $70,000,000 April 30, 2004 $70,000,000 May 31, 2004 $65,000,000 June 30, 2004 $60,000,000
The minimum Adjusted EBITDA for each fiscal month of 2002, beginning with March 2002, shall be calculated on a cumulative basis from January 1, 2002. The minimum Adjusted EBITDA for each fiscal month beginning after fiscal year 2002 shall be calculated on a prior rolling 12 month basis. The provisions of this Section shall be subject to change, upon the sale of the Paint Business (if sold prior to June 30, 2003) or other asset sales not presently disclosed to the Lenders, upon the mutual agreement of the Guarantor and the Required Participants. (r) Inactive Subsidiaries. The Guarantor will not at any time permit its Inactive Subsidiaries, taken as a whole, to have more than $200,000 of assets (based on fair market value) or to generate more than $5,000 of revenues in any fiscal quarter. (s) Amendments to Financing Agreements; Prepayment of Certain Indebtedness. The Guarantor will not, and will not permit any Subsidiary to, amend, modify, supplement or restate any Financing Agreement (as defined in the Intercreditor Agreement). The Guarantor will not, and will not permit any Subsidiary to, (i) amend, alter or otherwise change any provision of any of the notes or other instruments evidencing any Subordinated Debt now or hereafter issued by the Guarantor or take any other action (or refrain from taking any action) which would have the effect of eliminating or altering In any way the effect of the subordination language appearing in such notes or other instruments or any agreement relating thereto or the rights of the holders of such notes or instruments arising as a result thereof except to the extent of Hardship Case Payments, (ii) make any optional or voluntary prepayment, in whole or in part, of any Subordinated Debt, or (iii) make any optional or voluntary prepayment, in -19- whole or in part, of any Benefited Obligations, other than (x) optional or voluntary prepayments, in whole or in part, of the Loans under the Credit Agreement and (y) optional or voluntary prepayments, in whole or in part, of the Shelf Obligations, the Obligations and the Senior Note Obligations, (each as defined in the Intercreditor Agreement) pursuant to the terms of the Shelf Agreement, the Operative Documents or the Senior Note Agreements, as applicable (each as defined in the Intercreditor Agreement). All such optional and voluntary prepayments described in clause (iii) above shall be made in accordance with the terms of the Intercreditor Agreement and, in the absence thereof, in conformance with all of the other terms hereof. (t) Subordinated Notes. The Guarantor will discontinue the Variable Denomination Subordinated Floating Rate Demand Notes program on or before July 31, 2002, and no new TIP Notes will be issued after the date hereof without the approval of the Administrative Agent. (u) Chief Executive Officer. Any appointment by the Guarantor of a chief executive officer will be subject to the consent of the Required Participants." Section 1.8. Schedule III, Schedule IV and Exhibit N are hereby deleted in their entirety and Exhibit O, Schedule 8.2(f), Schedule 8.2(g), Schedule 8.2(i), Schedule 8.2(y), Schedule 10.2(b), Schedule 10.2(l), Schedule VI and Schedule VII are hereby added to the Agreement in the form attached hereto. Section 2. Amendment to Master Lease. Effective on (and subject to the occurrence of) the Amendment Effective Date, the Master Lease shall be amended in accordance with this Section: Section 2.1. Section 16.1(d) shall be amended and restated in its entirety as follows: "Guarantor shall fail to observe or perform any term, covenant or condition applicable to it under Section 10.2 of the Participation Agreement or Article XX of this Agreement; or" Section 2.2. Section 16.1(e) shall be amended by replacing "thirty (30)" with "fifteen (15)". Section 2.3. Section 16.1(i) shall be amended by adding the phrase "or any Subsidiary other than an Inactive Subsidiary or a Canadian Subsidiary" after the following phrase "Guarantor or the Lessee" every time such phrase occurs. Section 2.4 Section 16.1(m) shall be amended by replacing "$7,000,000" with "$5,000,000". Section 2.5 Article IX shall be amended by adding the following Sections 16.1(r) and 16.1(s) thereto: -20- "(r) The Guarantor shall pay any principal amount of Subordinated Debt (other than, so long as no Event of Default exists or would result therefrom and the Guarantor has met or exceeded its Minimum Adjusted EBITDA covenant set forth in Section 10.2(q) of the Participation Agreement as of the most recent period for which such covenant is applicable, (i) payments of principal of the Guarantor's variable denomination floating rate subordinated notes in an aggregate amount not greater than $2,800,000 after the date hereof and (ii) payments of principal of other Subordinated Debt in an aggregate amount not greater than (x) $24,000,000 for the period from January 1, 2002 to December 31, 2002 and (y) $14,000,000 for the period from January 1, 2003 to December 31, 2003). (s) The Guarantor fails to retain on the Board of Directors of the Guarantor (i) at least two outside directors prior to May 31, 2002, (ii) at least four such directors prior to September 1, 2002 and (iii) at least five such directors prior to November 1, 2002 in accordance with the bylaws of the Guarantor and its internal policy designated the "Corporate Governance Policy"." Section 3. Amendment to Loan Agreement. Effective on (and subject to the occurrence of) the Amendment Effective Date, the Loan Agreement shall be amended by deleting any reference therein to "Adjusted Eurodollar Rate" and specifically (i) Section 2.4(a) shall be amended by deleting the first sentence thereof and substituting the following in its place. "Each Loan shall bear interest from the date each respective Advance is made at a rate ("Interest Rate") equal to the Base Rate." and (ii) the first sentence of Section 2.6 is hereby deleted in its entirety and replaced with the following: "Interest on the Loans shall be calculated on the basis of a 365/366 day year for the actual days elapsed." Section 4. Representations and Warranties. The Guarantor represents and warrants to the Administrative Agent and the Participants that, after giving effect hereto, (a) each representation and warranty (as amended hereby) set forth in Section 8.2 of the Participation Agreement (except for those set forth in Sections 8.2(j), 8.2(l) and 8.2(t)), is true and correct as of the date of the execution and delivery of this Amendment by the Guarantor with the same effect as if made on such date (except to the extent such representations and warranties expressly refer to an earlier date, in which case they were true and correct as of such earlier date), and (b) no Event of Default or Unmatured Event of Default exists. Section 5. Effectiveness. The amendments set forth in Section 1 above shall become effective on the date (the "Amendment Effective Date") when the Administrative Agent shall have received (a) an upfront fee equal to 1.25% of the Lease Balance and to the extent then billed, all costs and expenses of the Administrative Agent in connection with this Amendment (including reasonable attorneys' fees and charges and all costs, expenses and charges for a field examination) and (b) each of the following documents, each in form and substance satisfactory to the Administrative Agent: (a) counterparts of this Amendment executed by the Guarantor, the Lessee and the Required Participants; -21- (b) a certificate of the secretary or an assistant secretary of the Guarantor and the Lessee as to: (i) resolutions of the Board of Directors or Board of Managers authorizing the execution and delivery of this Amendment and the performance by the Guarantor and the Lessee of their respective obligations under the Participation Agreement and the Operative Documents, as amended hereby, and (ii) the incumbency and signatures of those of its officers authorized to execute and deliver this Amendment; (c) an opinion of counsel for the Guarantor and the Lessee, in form and substance satisfactory to the Administrative Agent; and (d) such other documents as the Administrative Agent or any Participant may reasonably request. Section 6. Miscellaneous. Section 6.1. Continuing Effectiveness, etc. As herein amended, the Participation Agreement shall remain in full force and effect and is hereby ratified and confirmed in all respects. After the Amendment Effective Date, all references in the Participation Agreement and the other Operative Documents to "Participation Agreement", or similar terms shall refer to the Participation Agreement, as amended hereby. Section 6.2. Counterparts. This Amendment may be executed in any number of counterparts and by the different parties on separate counterparts, and each such counterpart shall be deemed to be an original but all such counterparts shall together constitute one and the same Amendment. Section 6.3. Governing Law. This Amendment shall be a contract made under and governed by the laws of the State of Illinois. Section 6.4. Successors and Assigns. This Amendment shall be binding upon the Lessee, the Guarantor, the Lessor Trust, the Owner Trustee, the Certificate Holders, the Agent Certificate Holder, the Lenders, the Administrative Agent and the Arranger and their respective successors and assigns, and shall inure to the benefit of the Lessee, Guarantor the Lessor Trust, the Owner Trustee, the Certificate Holders, the Agent Certificate Holder, the Lenders and the Administrative Agent and the respective successors and assigns of the Lessor Trust, the Owner Trustee, the Certificate Holders, the Agent Certificate Holder, the Lenders and the Administrative Agent. Section 6.5. Participation of Guaranty. By execution of this Amendment, Guarantor hereby restates, ratifies and reaffirms in full its obligations under the Guaranty. -22- Section 7.1. Waiver. Subject to the occurrence of the Amendment Effective Date, the Administrative Agent, the Owner Trustee, the Lessor Trust, the Lenders and the Certificate Holders waive any Default or Event of Default arising from non-compliance with the financial covenants in Section 10.2 of the Participation Agreement and the Defaults and Events of Default specifically disclosed in the letter of even date herewith from the Guarantor to the Administrative Agent regarding Events of Default existing on the date hereof. Except as specifically set forth in the preceding sentence, nothing contained herein shall be construed as a waiver of or consent to any other violation of the Operative Documents or any other Default or Event of Default under the Operative Documents. -23- Delivered at Chicago, Illinois, as of the day and year first above written. TRUSERV CORPORATION, as Lessee Agent, Construction Agent and Guarantor By /s/ BARBARA L. WAGNER Its Vice President MARY GREEN, LLC, as Lessee By: TruServ Corporation, its sole member By /s/ BARBARA L. WAGNER Its Vice President BMO GLOBAL CAPITAL SOLUTIONS, INC., formerly known as BMO Leasing (U.S.), Inc., as Agent Certificate Holder and as a Certificate Holder By /s/ MICHAEL JOYCE Its President BANK OF MONTREAL, as Administrative Agent, Arranger and as a Lender By /s/ HEATHER L. TURF Its Director -24- WILMINGTON TRUSTCOMPANY, not in its individual capacity, except as expressly provided herein, but solely as Owner Trustee By /s/ C. PAGLIA Title: Senior Financial Services Officer TRUSERV 1998 TRUST, as Lessor Trust By: Wilmington Trust Company, not in its individual capacity but solely as Owner Trustee By /s/ C. PAGLIA Title: Senior Financial Services Officer -25- EXHIBIT O EXCESS CASH FLOW CALCULATION
1. Adjusted Cash Flow $_______________ 2. Negative Adjusted Working Capital Change $_______________ 3. Positive Adjusted Working Capital Change $_______________ 4. Excess Cash Flow ((line 1 + line 2 minus line 3) multiplied by 80%) $_______________
AMENDED AND RESTATED APPENDIX A TO PARTICIPATION AGREEMENT A. Interpretation. In each Operative Document, unless a clear contrary intention appears: (i) the singular number includes the plural number and vice versa; (ii) reference to any Person includes such Person's successors and assigns but, if applicable, only if such successors and assigns are permitted by the Operative Documents, and reference to a Person in a particular capacity excludes such Person in any other capacity or individually; (iii) reference to any gender includes each other gender; (iv) reference to any agreement, document or instrument (including any Operative Document) means such agreement, document or instrument as amended or modified and in effect from time to time in accordance with the terms thereof and, if applicable, the terms of the other Operative Documents, and reference to any promissory note includes any promissory note which is an extension or renewal thereof or a substitute or replacement therefor; (v) reference to any Requirement of Law means such Requirement of Law as amended, modified, codified, replaced or reenacted, in whole or in part, and in effect from time to time, including rules and regulations promulgated thereunder, and reference to any section or other provision of any Requirement of Law means that provision of such Requirement of Law from time to time in effect and constituting the substantive amendment, modification, codification, replacement or reenactment of such section or other provision; (vi) reference in any Operative Document to any Article, Section, Appendix, Schedule or Exhibit means such Article or Section thereof or Appendix, Schedule or Exhibit thereto; (vii) "hereunder," "hereof, "hereto" and words of similar import shall be deemed references to an Operative Document as a whole and not to any particular Article, Section or other provision thereof; (viii) "including" (and with correlative meaning "include") means including without limiting the generality of any description preceding such term; and (ix) with respect to any rights and obligations of the parties under the Operative Documents, all such rights and obligations shall be construed to the extent permitted by Applicable Law. -2- B. Computation of Time Periods. Unless otherwise specified in any Operative Document, for purposes of computation of periods of time under the Operative Documents, the word "from" means "from and including" and the words "to" and "until" each mean "to but excluding." C. Accounting Terms and Determinations. Unless otherwise specified herein, all accounting terms used therein shall be interpreted, all accounting determinations thereunder shall be made, and all financial statements required to be delivered thereunder shall be prepared in accordance with GAAP, applied on a basis consistent (except for changes concurred in by the Guarantor's independent public accountants) with the most recent audited consolidated financial statements of the Guarantor and its Subsidiaries delivered to the Participants. D. Conflict in Operative Documents. If there is any conflict between any Operative Documents, such Operative Documents shall be interpreted and construed, if possible, so as to avoid or minimize such conflict but, to the extent (and only to the extent) of such conflict, the Participation Agreement shall prevail and control. E. Legal Representation of the Parties. The Operative Documents were negotiated by the parties with the benefit of legal representation and any rule of construction or interpretation otherwise requiring the Operative Documents to be construed or interpreted against any party shall not apply to any construction or interpretation hereof or thereof. F. Defined Terms. Unless a clear contrary intention appears, terms defined herein have the respective indicated meanings when used in each Operative Document. G. Incorporation By Reference. Each of the terms set forth in the Existing Credit Agreement, and used in the Operative Documents, including defined terms within definitions, and not defined herein shall be incorporated herein by reference as if set forth herein, provided that (a) any reference therein to (i) Agreement shall mean Participation Agreement, (ii) Company shall mean Guarantor, and (iii) Agent and Lenders shall mean Administrative Agent and the Participants, (b) such other changes shall be deemed made therein to conform to the terms of the Operative Documents, (c) no change, modification, amendment or waiver of any such definition shall be binding upon the Administrative Agent or the Participants unless they agree thereto in writing and (d) such incorporation by reference shall survive any termination or cancellation of the Existing Credit Agreement. If there is any conflict between defined terms set forth in the Existing Credit Agreement, to the extent incorporated by reference herein, and the Operative Documents, the Existing Credit Agreement definition shall prevail. "Account" means the account identified by the Administrative Agent into which all payments by the Lessee Agent or any Lessee under the Operative Documents shall be made. The Account shall be specified on Schedule II to the Participation Agreement, as such Schedule may from time to time be amended, supplemented, amended and restated or otherwise modified. "Acquisition Date" is defined in Section 6.1 of the Participation Agreement. -3- "Additional Guaranty" shall mean the Guaranty executed by various Subsidiaries pursuant to the Existing Credit Agreement. "Administrative Agent" means BMO in its capacity as Administrative Agent, and any successors or assigns thereto in such capacity. "Advance" means an advance of funds to the Construction Agent pursuant to Article III of the Participation Agreement. "Affiliate" means, as to any Person any other Person which directly or indirectly is in control of, is controlled by, or is under common control with, such Person. A Person shall be deemed to control another Person if the controlling Person possesses, directly or indirectly, the power to direct or cause the direction of the management and policies of such other Person, whether through the ownership of voting securities, membership interests, by contract, or otherwise. A Person that is or was a Member, Substantial Stockholder or material customer shall not be deemed an Affiliate solely on account of such status. "After Tax Basis" means, with respect to any payment to be received, the amount of such payment increased so that, after deduction of the amount of all taxes required to be paid by the recipient (less any tax savings realized and the present value of any tax savings projected to be realized by the recipient as a result of the payment of the indemnified amount) with respect to the receipt by the recipient of such amounts, such increased payment (as so reduced) is equal to the payment otherwise required to be made. "Agent Certificate Holder" means BMO Leasing (U.S.), Inc., a Delaware corporation, together with its successors permitted pursuant to Section 14.12 of the Participation Agreement. "Aggregate Commitment Amount" means, on any date, $40,000,000 as such amount may be reduced from time to time pursuant to Section 4.3(a) of the Participation Agreement. "ALTA" is defined in Section 6.1(p) of the Participation Agreement. "Amendment Effective Date" is defined in Section 5 of the Fourth Amendment to Participation Agreement, Second Amendment to Master Lease and Loan Agreement. "Applicable Law" means all Federal, state, county, municipal and other governmental statutes, laws, rules, orders, regulations, ordinances, judgments, decrees and injunctions affecting the Property, the Improvements or the demolition, construction, use or alteration thereof, whether now or hereafter enacted and in force, including any that require repairs, modifications or alterations in or to the Property or in any way limited the use and enjoyment thereof (including all building, zoning and fire codes and the Americans with Disabilities Act of 1990, 42 U.S.C. S 1201 et seq. and any other similar federal, state or local laws or ordinances and the regulations promulgated thereunder) and any that may relate to environmental requirements (including all Environmental Laws), and all permits, certificates of occupancy, licenses, authorizations and regulations relating thereto, and all covenants, agreements, restrictions and encumbrances contained in any instruments which are either of record or known to the Guarantor or the Lessee -4- affecting the Property, the Appurtenant Rights and any easements, licenses or other agreements entered into pursuant to Section 11.2 of the Master Lease. "Appraisal" means an appraisal of the Fair Market Sales Value of the Property, which Appraisal complies in all material respects with all of the provisions of the Financial Institutions Reform, Recovery and Enforcement Act of 1989, as amended, the rules and regulations adopted pursuant thereto, and all other applicable Requirements of Law, and is addressed to the Administrative Agent, the Agent Certificate Holder and the Guarantor. Each Appraisal shall be prepared by an MAI appraiser selected by the Administrative Agent and the Agent Certificate Holder, and such appraiser shall be reasonably acceptable to the Guarantor. "Appraiser" means the appraiser which prepared an Appraisal of the Property or such other Person selected by the Administrative Agent and the Agent Certificate Holder. "Appurtenant Rights" means, with respect to the Land, (i) all agreements, easements, rights of way or use, rights of ingress or egress, privileges, appurtenances, tenements, and other rights and benefits at any time belonging or pertaining to the Land or the Improvements thereon, including, without limitation, the use of any streets, ways, alleys, vaults or strips of land adjoining, abutting, adjacent or contiguous to the Land and (ii) all permits, licenses and rights, whether or not of record, appurtenant to the Land. "Arranger" means BMO, in its capacity as arranger. "Arranger's Fee Letter" means that certain fee letter dated as of February 11, 2002. "As-Built Appraisal" means an Appraisal of the Property appraising the Fair Market Sales Value of the Property as built in accordance with the Plans and Specifications therefor. "Assigned Lease" is defined in Section 2(a) of the Assignment of Lease and Rent. "Assignment of Lease and Rent" means the Assignment of Lease and Rent dated as of April 30, 1998, from the Lessor Trust, as assignor, to the Administrative Agent for the benefit of the Lenders, as assignee, as the same may be amended, supplemented, amended and restated or otherwise modified from time to time. "Assignment of Lease and Rent Supplement" means each supplement to the Assignment of Lease and Rent executed by the Lessor Trust in favor of the Administrative Agent, substantially in the form of Exhibit A thereto. "Available Commitments" means the sum of the Available Loan Commitments and the Available Certificate Holder Commitments. "Available Certificate Holder Commitment" means, at any time, an amount equal to the excess, if any, of (x) the aggregate amount of the Certificate Holder Commitments, minus (y) the aggregate Certificate Holder Amounts outstanding. -5- "Available Loan Commitment" means, at any time, an amount equal to the excess, if any, of (x) the aggregate amount of the Loan Commitments, minus (y) the aggregate principal amount of all Loans outstanding. "Bankruptcy Code" is defined in Section 5.1(e) of the Loan Agreement. "Base Rate" means, for any day, the rate per annum equal to the Prime Rate plus 3.25% per annum with respect to the Interest Rate and plus 3.60% per annum with respect to Yield or Yield Rate. For purposes of determining the Base Rate for any day, changes in the Prime Rate shall be effective on the date of each such change. "Base Rate Loan/Certificate Holder Amount" means a Loan or Certificate Holder Amount, as the case may be, bearing interest at the Base Rate. "Basic Lease Term" is defined in Section 2.3 of the Master Lease. "Basic Rent" means the sum of (i) the Lender Basic Rent and (ii) the Certificate Holder Basic Rent, calculated as of the applicable date on which Basic Rent is due. "Bill of Sale" is defined in Section 6.1(j) of the Participation Agreement. "BMO" means Bank of Montreal. "Borrower Default" is defined in Section 5.3 of the Loan Agreement. "Business Day" means a day other than a Saturday, Sunday or other day on which commercial banks in Chicago, Illinois are authorized or required by law to close, except that, when used in connection with a Eurodollar Loan or Eurodollar Certificate Holder Amount, such day shall also be a day on which dealings between banks are carried on in U.S. dollar deposits in London, England. "Casualty" means any damage or destruction of all or any portion of the Property as a result of a fire, flood, earthquake or other casualty. "CERCLA" means the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, 42 U.S.C.Sections 601 et seq., as amended by the Superfund Amendments and Reauthorization Act of 1986. "Certificate" is defined in Section 10.2 of the Trust Agreement. "Certificate Holder Amount" is defined in Section 3.2 of the Participation Agreement. "Certificate Holder Balance" means, as of any date of determination, an amount equal to the sum of the outstanding Certificate Holder Amounts together with all accrued and unpaid Yield thereon. -6- "Certificate Holder Basic Rent" means the sum of (a) the amount of accrued Yield due on the Certificate Holder Amounts, determined in accordance with Section 4.1 of the Participation Agreement as of any Payment Date and excluding (i) any interest at the applicable Overdue Rate on any installment of Certificate Holder Basic Rent not paid when due and (ii) any fine, penalty, interest or cost assessed or added under any agreement with a third party for nonpayment or late payment of Certificate Holder Basic Rent and (b) any Fixed Rent due under the Lease Supplement with respect to the Certificate Holder Amounts after giving effect to any prepayment of Fixed Rent. "Certificate Holder Commitment" means the Commitment of each Certificate Holder in the amount set forth on Schedule I of the Participation Agreement, as such Schedule may be amended, supplemented, amended and restated, reduced or otherwise modified from time to time (including, without limitation, pursuant to Section 3.7 of the Participation Agreement). "Certificate Holders" means, collectively, each of the Persons that are or may from time to time become identified as a "Certificate Holder" party to the Participation Agreement. "Certificate of Amendment" means a certificate of amendment to the Certificate of Trust filed with the Delaware Secretary of State. "Certificate of Cancellation" means a certificate of cancellation of the Certificate of Trust filed with the Delaware Secretary of State. "Certificate of Trust" means the Certificate of Trust filed with the Delaware Secretary of State pursuant to which the Lessor Trust elects to be governed by the Delaware Business Trust Act. "Certifying Party" is defined in Section 22.1 of the Master Lease. "Claims" means any and all obligations, liabilities, losses, actions, suits, judgments, penalties, fines, claims, demands, settlements, costs and expenses (including, without limitation, reasonable legal fees and expenses) of any nature whatsoever. "Code" means the Internal Revenue Code of 1986 and regulations promulgated thereunder. "Commitment" means (i) as to any Lender, its Loan Commitment, and (ii) as to any Certificate Holder, its Certificate Holder Commitment. "Commitment Fees" is defined in Section 4.4(c) of the Participation Agreement. "Commitment Percentage" means, with respect to any Participant, the percentage set forth opposite such Participant's name under the heading "Commitment Percentage" on Schedule I to the Participation Agreement, as such Schedule may be amended, supplemented, amended and restated or otherwise modified from time to time (including, without limitation, pursuant to Section 3.7 of the Participation Agreement). -7- "Commitment Period" means the period from and including the Acquisition Date to but not including the date occurring on the earlier of (i) the Commitment Termination Date, (ii) the date on which the sum of the Loan Balance and the Certificate Holder Balance equals the Aggregate Commitment Amount, (iii) the date of Completion of the applicable Construction, (iv) the Outside Completion Date and (v) the date on which the Commitments shall terminate as provided in the Operative Documents; provided, however, that in the event that any Commitment Period would end after the Commitment Termination Date, such Commitment Period shall end on such Commitment Termination Date. "Commitment Termination Date" means the Interim Termination Date. "Completion" means such time as the conditions set forth in Section 6.3 of the Participation Agreement are satisfied with respect thereto. "Completion Certificate" is defined in 6.3(d) of the Participation Agreement. "Completion Date" means, the date on which Completion for the Property has occurred, as certified in the Completion Certificate. "Compliance Certificate" is attached to the Participation Agreement as Exhibit M. "Condemnation" means any condemnation, requisition, confiscation, seizure or other taking or sale of the use, access, occupancy, easement rights or title to the Property or any part thereof, wholly or partially (temporarily or permanently), by or on account of any actual or threatened eminent domain, proceeding or other taking of action by any Person having the power of eminent domain, including an action by a Governmental Authority to change the grade of, or widen the streets adjacent to, the Property or alter the pedestrian or vehicular traffic flow to the Property so as to result in change in access to the Property, or by or on account of an eviction by paramount title or any transfer made in lieu of any such proceeding or action. A "Condemnation" shall be deemed to have occurred on the earliest of the dates that use, occupancy or title vests in the condemning authority. "Construction" means, with respect to the Property, the construction and installation of all Improvements thereon contemplated by the Plans and Specifications. "Construction Agency Agreement" means the Construction Agency Agreement, dated as of April 30, 1998, between the Lessor Trust and the Construction Agent, as the same may be amended, supplemented, amended and restated or otherwise modified from time to time. "Construction Agency Agreement Assignment" means the Construction Agency Agreement Assignment, dated as of April 30, 1998, made by the Lessor Trust, as assignor, in favor of the Administrative Agent on behalf of the Lenders, as assignee, as the same may be amended, supplemented, amended and restated or otherwise modified from time to time. -8- "Construction Agency Agreement Default" means any event or condition which, with the lapse of time or the giving of notice, or both, would constitute a Construction Agency Agreement Event of Default. "Construction Agency Agreement Event of Default" is defined in Section 5.1 of the Construction Agency Agreement. "Construction Agency Agreement Supplement" means any duly executed and delivered Supplement to the Construction Agency Agreement substantially in the form attached to the Construction Agency Agreement as Exhibit A thereto. "Construction Agent" means the Lessee Agent, as construction agent under the Construction Agency Agreement. "Construction Costs" means the fees, expenses, costs and other items related to the development and construction of the Property and specified below: (a) the costs of development, architectural and engineering services related to the Property, including the costs of preparation of studies, surveys, reports, tests, plans and specifications; (b) the costs of legal, accounting and other services related to the Property; (c) the fees and charges incurred in connection with securing all Governmental Actions required to be taken, given or obtained in connection with the development, construction, ownership, financing, maintenance or operation of the Property; (d) any title fees, premiums and escrow costs and other expenses relating to title insurance and title closings contemplated by the Operative Documents; (e) all expenses relating to all Environmental Audits; (f) fees and other expenses relating to Appraisals; (g) the costs incurred in connection with the acquisition, construction, improvement, rehabilitation or extension of the Improvements comprising a part of the Property and the provision of the necessary services and utilities thereto, including the cost of Equipment; (h) interest on the Loans and Yield on the Certificate Holder Amounts during the Construction Period; (i) any sales, use, property, real or personal, tangible or intangible taxes incurred in connection with the Property; -9- (j) any other items included in the construction budget, including, to the extent included in the As-Built Appraisal, pre-opening or start-up costs prior to resident admissions for such items as labor, utilities and advertising or promotion; (k) any other costs and expenses incurred in connection with the acquisition, construction, development and equipping of the Property; and (l) such other items as the Participants may approve in writing. "Construction Documents" is defined in Section 2.5 of the Construction Agency Agreement. "Construction Documents Assignment" means the Construction Documents Assignment, dated as of April 30, 1998, made by the Construction Agent in favor of the Lessor Trust, as the same may be amended, supplemented, amended and restated or otherwise modified from time to time. "Construction Fee" means the reasonable fee of Construction Agent for supervising Construction as approved by the Participants. "Construction Period" means, with respect to the Property, the period commencing on the commencement of construction on the Property and ending on the earlier of (i) the Completion Date and (ii) the Outside Completion Date. "Contract Rents" is defined in Section 2(b) of the Assignment of Lease and Rent. "Contracts" is defined in Section 2(b) of the Assignment of Lease and Rent. "Contractual Obligation" means, as to any Person, any provision of any security issued by such Person or of any agreement, undertaking, contract, indenture, mortgage, deed of trust or other instrument, document or agreement to which such Person is a party or by which it or any of its property is bound. "Deed" means a special warranty deed with respect to the real property comprising the Property, in conformity with Applicable Law and appropriate for recording with the applicable Governmental Authorities, conveying fee simple title to such real property to the Agent Certificate Holder, subject only to Permitted Property Liens. "Default" means any Event of Default or any condition, occurrence or event which, after notice or lapse of time or both, would constitute an Event of Default. "Defaulting Participant" means, at any time, any Participant that, at such time (a) has failed to make an Advance of a Loan or Certificate Holder Amount, as the case may be, required pursuant to the terms of the Participation Agreement, (b) has failed to pay to the Administrative Agent, the Agent Certificate Holder, any Lender, or any Lessor an amount owed by such Participant pursuant to the terms of the Operative Documents, or (c) has been declared insolvent -10- or has become subject to a bankruptcy or insolvency proceeding or to a receiver, trustee or similar official. "Delaware Business Trust" means a trust that elects to be governed by the provisions of the Delaware Business Trust Act. "Delaware Business Trust Act" means the Delaware Business Trust Act, 12 Del. C.Section3801 et seq. "Documentation Date" is defined in Section 2.1 of the Participation Agreement. "Dollars" and "$" mean dollars in lawful currency of the United States of America. "Eligible Assignee" means an Eligible Certificate Holder Assignee or an Eligible Lender Assignee, as the case may be. "Eligible Certificate Holder Assignee" means any Certificate Holder or any Affiliate or Subsidiary of a Certificate Holder; and any other commercial bank, financial institution or "accredited investor" (as defined in Regulation D of the Securities and Exchange Commission) with combined capital and surplus in excess of $50,000,000. "Eligible Lender Assignee" means any Lender or any Affiliate or Subsidiary of a Lender; and any other commercial bank, financial institution or "accredited investor" (as defined in Regulation D of the Securities and Exchange Commission) with combined capital and surplus excess of $50,000,000. "End of the Term Report" is defined in Section 13.2(a) of the Participation Agreement. "Environmental Audit" means a Phase One environmental site assessment (the scope and performance of which meets or exceeds the then most current ASTM Standard Practice E1527 for Environmental Site Assessments: Phase One Environmental Site Assessment Process) of the Property. "Environmental Laws" means any and all applicable foreign, federal, state, local or municipal laws, rules, orders, regulations, statutes, ordinances, codes, permits, licenses, authorizations, decrees or other legal requirement regulating, relating to or imposing liability or standards of conduct concerning protection of human health or the environment or the use, storage, recycling, handling, disposal, discharge, transport, treatment or generation of Hazardous Materials, as now or may at any time be in effect during the Lease Term, including CERCLA, RCRA, the Clean Air Act, 42 USC Section 7401 et seq., the Toxic Substances Control Act 15 USC Section 2601 et seq. and any rules and regulations promulgated thereunder. "Environmental Violation" means, with respect to the Property, any activity, occurrence or condition that violates or results in non-compliance with any Environmental Law. -11- "Equipment" means equipment, apparatus, fittings and personal property of every kind and nature whatsoever purchased, leased or otherwise acquired by the Lessor Trust using the proceeds of the Loans and/or the Certificate Holder Amounts and now or subsequently attached to, contained in or used or usable in any way in connection with any operation or letting of the Property, including but without limiting the generality of the foregoing, all screens, awnings, shades, blinds, curtains, draperies, artwork, carpets, rugs, storm doors and windows, shelving, display cases, counters, furniture and furnishings, heating, electrical, switch gear, uninterrupted power supply, and mechanical equipment, lighting, switchboards, plumbing, ventilation, air conditioning and air-cooling apparatus, refrigerating and incinerating equipment, escalators, generators, elevators, loading and unloading equipment and systems, stoves, ranges, laundry equipment, cleaning systems (including window cleaning apparatus), communications systems (including satellite dishes and antennae), sprinkler systems and other fire prevention and extinguishing apparatus and materials, security systems, motors, engines, machinery, pipes, pumps, tanks, conduits, fittings and fixtures of every kind and description. "Equity Amount" shall have the meaning provided in Section 7.4 of the Participation Agreement. "ERISA" means the Employee Retirement Income Security Act of 1974 and regulations promulgated thereunder, as the same may be amended from time to time. "ERISA Affiliate" means any trade or business (whether or not incorporated) under common control of the Guarantor (as defined in section 3(9) of ERISA) which within the meaning of Section 414(b) or (c) of the Code (and Sections 414(m) and (o) of the Code for purposes of provisions relating to Section 412 of the Code). "ERISA Event" means (a) a Reportable Event with respect to a Pension Plan; (b) a withdrawal by the Guarantor or any ERISA Affiliate from a Pension Plan subject to Section 4063 of ERISA during a plan year in which it was a substantial employer (as defined in Section 4001(a)(2) of ERISA) or a substantial cessation of operations which is treated as such a withdrawal; (c) a complete or partial withdrawal by the Guarantor or any ERISA Affiliate from a Multiemployer Plan or notification that a Multiemployer Plan is in reorganization; (d) the filing of a notice of intent to terminate, the treatment of a Pension Plan amendment as a termination under Section 4041 or 4041A of ERISA, or the commencement of proceedings by the PBGC to terminate a Pension Plan or Multiemployer Plan; (e) an event or condition which might reasonably be expected to constitute grounds under Section 4042 of ERISA for the termination of, or the appointment of a trustee to administer, any Pension Plan or Multiemployer Plan; or (f) the imposition of any liability under Title IV of ERISA, other than PBGC premiums due but not delinquent under Section 4007 of ERISA, upon the Guarantor or any ERISA Affiliate. "Estimated Improvement Costs" means, as of the Acquisition Date, an amount equal to the aggregate amount which the Construction Agent in good faith expects to be expended in order to achieve Completion with respect to Improvements for the Property, including Construction Costs prior to or during the Construction Period. -12- "Event of Default" means a Lease Event of Default, a Construction Agency Agreement Event of Default or a Loan Agreement Event of Default. "Excepted Payments" means: (a) all indemnity payments (including indemnity payments made pursuant to Article XIII of the Participation Agreement) to which the Administrative Agent, the Arranger, the Agent Certificate Holder, any Lender, any Certificate Holder or any of their respective Affiliates, agents, officers, directors or employees is entitled; (b) any amounts (other than Basic Rent or amounts payable by Lessee Agent or any Lessee pursuant to Section 15.2 of the Master Lease or Articles XVI, XVIII or XX of the Master Lease) payable under any Operative Document to reimburse the Administrative Agent, the Arranger, the Agent Certificate Holder, any Lender, any Certificate Holder or any of their respective Affiliates (including the reasonable expenses of the Administrative Agent, the Arranger, the Agent Certificate Holder, any Lender, any Certificate Holder or such Affiliates incurred in connection with any such payment) for performing or complying with any of the obligations of Lessee Agent or any Lessee under and as permitted by any Operative Document; (c) any insurance proceeds (or payments with respect to risks self-insured or policy deductibles) under liability policies, other than such proceeds or payments payable to Agent Certificate Holder, Lessor Trust or to the Administrative Agent; (d) any insurance proceeds under policies maintained by any Participant; (e) Transaction Expenses or other amounts or expenses paid or payable to or for the benefit of the Administrative Agent, the Trust Company, the Arranger, the Agent Certificate Holder, any Lender or any Certificate Holder; and (f) any payments in respect to interest to the extent attributable to payments referred to in clauses (a) through (e) above. "Exchange Act" means the Securities Exchange Act of 1934 and regulations promulgated thereunder. "Existing Credit Agreement" means that certain Second Amended and Restated Credit Agreement dated as of April 11, 2002 among Guarantor, Bank of America, N.A., as Agent and various financial institutions. "Expiration Date" means, with respect to the Master Lease, the earlier of the date the Master Lease shall have been terminated in accordance with the provisions of the Master Lease or any of the other Operative Documents and the Maturity Date; provided, however, with respect to Article XX of the Master Lease, the Expiration Date shall be the later of (i) the Maturity Date and (ii) the Extended Expiration Date. -13- "Expiration Date Purchase Obligation" means the Lessee Agent's obligation, pursuant to Section 18.2 of the Master Lease, to purchase or cause the Lessee to purchase all (but not less than all) of the Property on the Expiration Date. "Extended Expiration Date" is defined in Section 20.3(a) of the Master Lease. "Fair Market Sales Value" means, with respect to the Property, the amount, which in any event shall not be less than zero, that would be paid in cash in an arm's-length transaction between an informed and willing purchaser and an informed and willing seller, neither of whom is under any compulsion to purchase or sell, respectively, for the ownership of the Property. The Fair Market Sales Value of the Property shall be determined based on the assumption that, except for purposes of Article XVI of the Master Lease and Section 13.2 of the Participation Agreement, the Property is in the condition and state of repair required under Section 9.1 of the Master Lease and the Lessee is in compliance with the other requirements of the Operative Documents relating to the condition of the Property. "Federal Funds Rate" means, for any day or period, as applicable, the rate per annum (rounded upwards, if necessary, to the nearest 1/100th of it) at which Federal funds in the amount equal to the principal amount of the related Loans or Certificate Holder Amounts are offered in the interbank market to BMO as of 10:00 A.M., Chicago time, on such day for such day or for such period, as applicable. "Fixed Rent" means the amounts designated as "Fixed Rent" for the Loans and Certificate Holder Amounts made in connection with the Lease Supplement, as set forth on Schedule III to the Lease Supplement (which amounts are intended to amortize the Loans and Certificate Holder Amounts as such amounts may be adjusted from time to time in accordance with the Master Lease. "Fixed Rent Payment Date" means each date set forth under the heading "Fixed Rent Payment Dates" in Schedule III to the Lease Supplement or, if any such day is not a Business Day, the next succeeding Business Day. "Force Majeure Event" means, with respect to the Construction of the Property, any event (the existence of which was not known and could not have been discovered through the exercise of due diligence by the Lessee or the Construction Agent prior to the Acquisition Date) beyond the control of the Lessee and the Construction Agent, including, but not limited to, strikes, lockouts, adverse soil conditions, acts of God, adverse weather conditions, inability to obtain labor or materials, government activities, civil commotion and enemy action; but excluding any event, cause or condition that results from the Lessee's or the Construction Agent's financial condition or failure to pay or any event, cause or condition which could have been avoided or which could be remedied through the exercise of commercially reasonable efforts or the expenditure of funds. "F.R.S. Board" means the Board of Governors of the Federal Reserve System or any successor thereto. -14- "Funding Date" means any Business Day on which Advances are made under the Participation Agreement pursuant to Section 3.4 thereof. "Funding Office" means the office of each Participant identified on Schedule II to the Participation Agreement as its funding office. "Funding Request" is defined in Section 3.4 of the Participation Agreement. "GAAP" means generally accepted accounting principles set forth from time to time in the opinions and pronouncements of the Accounting Principles Board and the American Institute of Certified Public Accountants and statements and pronouncements of the Financial Accounting Standards Board (or agencies with similar functions of comparable stature and authority within the U.S. accounting profession), which are applicable to the circumstances as of the date of determination. "Governmental Action" means all permits, authorizations, registrations, consents, approvals, waivers, exceptions, variances, orders, judgments, written interpretations, decrees, licenses, exemptions, publications, filings, notices to and declarations of or with, or required by, any Governmental Authority, or required by any Applicable Law, and shall include, without limitation, all environmental and operating permits and licenses that are required for the full use, occupancy, zoning and operation of the Property. "Governmental Authority" means any nation or government, any state or other political subdivision thereof, any central bank (or similar monetary or regulatory authority) thereof, any entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government, and any corporation or other entity owned or controlled, through stock or capital ownership or otherwise, by any of the foregoing. "Gross Remarketing Proceeds" is defined in Section 20.2(h) of the Master Lease. "Guaranteed Obligations" is defined in Section 2.1(a) of the Guaranty. "Guaranteed Parties" means the Lessor Trust, the Owner Trustee, the Lenders, the Certificate Holders, the Administrative Agent and the Agent Certificate Holder, together with their respective successors and assigns. "Guarantor" means TruServ Corporation, a Delaware corporation. "Guaranty" means the Guaranty dated as of April 30, 1998, made by the Guarantor in favor of each of the Lessor Trust, the Owner Trustee, the Agent Certificate Holder, each of the Certificate Holders, the Administrative Agent and each of the Lenders, as the same may be amended, supplemented, amended and restated or otherwise modified from time to time. "Hazardous Activity" means any activity, process, procedure or undertaking that directly or indirectly (i) produces, generates or creates any Hazardous Material; (ii) causes or results in (or threatens to cause or result in) the Release of any Hazardous Material into the environment -15- (including air, water vapor, surface water, groundwater, drinking water, land (including surface or subsurface), plant, aquatic and animal life); (iii) involves the containment or storage of any Hazardous Material; or (iv) would be regulated as hazardous waste treatment, storage or disposal within the meaning of any Environmental Law. "Hazardous Materials" means any hazardous, toxic or dangerous materials, substances, chemicals, wastes or pollutants that from time to time are defined by or pursuant to or are regulated under any Environmental Laws, including asbestos, polychlorinated biphenyls, petroleum, petroleum derivatives or by-products, other hydrocarbons, urea formaldehyde and any material, substance, pollutant or waste that is defined as a hazardous waste under RCRA or defined as a hazardous substance under CERCLA. "Impositions" means any and all liabilities, losses, expenses and costs of any kind whatsoever for fees, taxes, levies, imposts, duties, charges, assessments or withholdings of any nature whatsoever (all of the foregoing being defined as "Taxes") (including, without limitation, (i) real and personal property taxes, including personal property taxes on any property covered by the Master Lease that is classified by Governmental Authorities as personal property, and real estate or ad valorem taxes in the nature of property taxes; (ii) sales taxes, use taxes and other similar taxes (including rent taxes and intangibles taxes); (iii) any excise taxes; (iv) real estate transfer taxes, conveyance taxes, mortgage taxes, intangible taxes, stamp taxes and documentary recording taxes and fees; (v) taxes that are or are in the nature of franchise, income, value added, gross receipts, privilege and doing business taxes, license and registration fees; and (vi) assessments on the Property, including all assessments for public improvements or benefits (whether or not such improvements are commenced or completed within the Lease Term)), and in each case all interest additions to tax and penalties thereon, which at any time may be levied, assessed or imposed by any Federal, state or authority upon or with respect to (a) any Tax Indemnitee, the Property or any part thereof or interest therein, or the Lessee or any sublessee or user of the Property; (b) the financing, refinancing, demolition, construction, substitution, subleasing, assignment, control, condition, occupancy, servicing, maintenance, repair, ownership, possession, purchase, rental, lease, activity conducted on, delivery, insuring, use, operation, improvement, transfer, return or other disposition of the Property or any part thereof or interest therein; (c) the Notes or other Indebtedness with respect to the Property or any part thereof or interest therein or transfer thereof; (d) the rentals, receipts or earnings arising from the Property or any part thereof or interest therein; (e) the Operative Documents or any payment made or accrued pursuant thereto; (f) the income or other proceeds received with respect to the Property or any part thereof or interest therein upon the sale or disposition thereof; (g) any contract (including the Construction Agency Agreement) relating to the construction, acquisition or delivery of the Improvements or any part thereof or interest therein; (h) the issuance of the Notes; or (i) otherwise in connection with the transactions contemplated by the Operative Documents. Notwithstanding anything in the first paragraph of this definition (except as provided in the final paragraph of this definition) the term "Imposition" shall not mean or include: (i) Taxes and impositions (other than Taxes that are, or are in the nature of, sales, use, rental, transfer or property taxes) that are imposed by any Governmental -16- Authority and that are based upon or measured by or with respect to the net income (including, without limitation, any minimum taxes, income or capital gains taxes, withholding taxes, items of tax preference or franchise taxes) and any interest, additions to tax, penalties or other charges in respect thereof; provided that this clause (i) shall not be interpreted to prevent a payment from being made on an After Tax Basis if such payment is otherwise required to be so made; provided, further, that this clause (i) shall not apply to any Taxes imposed on the Agent Certificate Holder as a result of its compliance with the terms of Section 10.3 of the Participation Agreement following the occurrence and during the continuance of an Event of Default; (ii) any Tax or imposition for so long as, but only for so long as, it is being contested in accordance with the provisions of Section 13.5(b) of the Participation Agreement, provided that the foregoing shall not limit the Lessee's obligation under Section 13.5(b) of the Participation Agreement to advance to such Tax Indemnitee amounts with respect to Taxes that are being contested in accordance with Section 13.5(b) of the Participation Agreement or any expenses incurred by such Tax Indemnitee in connection with such contest; (iii) Taxes imposed on or with respect to or payable by a Tax Indemnitee resulting from, or that would not have been imposed but for the existence of, any Lessor Lien created by or through such Tax Indemnitee or an affiliate thereof and not caused by acts or omissions of the Lessee; (iv) any tax imposed by its express terms in lieu of or in substitution for a Tax not subject to indemnity pursuant to the provisions of Section 13.5 of the Participation Agreement. Notwithstanding the foregoing, no exclusion from the definition of Impositions set forth above shall apply to any Taxes or any increase in Taxes imposed on a Tax Indemnitee net of any decrease in taxes realized by such Tax Indemnitee, to the extent that such tax increase or decrease would not have occurred if on each Funding Date the Agent Certificate Holder had advanced funds to the Construction Agent in the form of a loan secured by the Property in an amount equal to the Property Improvement Cost funded on such Funding Date, with debt service for such loan equal to the Basic Rent payable on each Rent Payment Date and a principal balance at the maturity of such loan in an amount equal to the then outstanding amount of the Advances at the end of the term of the Master Lease, as determined by such Tax Indemnitee, which determination shall be binding absent manifest error. "Improvements" means all buildings, structures, fixtures, Equipment and other improvements of every kind existing at any time and from time to time (including those constructed pursuant to the Construction Agency Agreement and those purchased with amounts advanced by the Participants pursuant to the Participation Agreement) on or under the Land or any parcel of Land to be acquired pursuant to the terms of the Operative Documents, together with any and all appurtenances to such buildings, structures or improvements, including sidewalks, utility pipes, conduits and lines, parking areas and roadways, and including all Modifications and other additions to or changes in the Improvements at any time. -17- "Indemnitee" means the Trust Company, the Lessor Trust, each Lender, each Certificate Holder, the Administrative Agent and the Agent Certificate Holder. "Independent Auditor" is defined in Section 10.1(a) of the Participation Agreement. "Initial Construction Date" means the date of the first Advance made under the Operative Documents with respect to Construction Costs for the Property. "Initial Interest Period" is defined in Section 3.4 of the Participation Agreement. "Insurance Requirements" means all terms and conditions of any insurance policy either required by the Master Lease to be maintained by the Lessee or required by the Construction Agency Agreement to be maintained by the Construction Agent, and all requirements of the issuer of any such policy. "Intercreditor Agreement" means that certain First Amended and Restated Intercreditor Agreement in the form attached as an exhibit to the Existing Credit Agreement. "Interest Rate" is defined in Section 2.4(a) of the Loan Agreement. "Interim Lease Term" is defined in Section 2.3 Master Lease. "Interim Termination Date" means the second anniversary of the Documentation Date. "Land" means each fee interest or leasehold interest, as the case may be, in real property described on Schedule I to the Lease Supplement, and includes all Appurtenant Rights attached thereto. "Land Acquisition Cost" means the amount of the Advance made available to the Construction Agent for the purpose of acquiring the portion of the Property constituting Land, as such amount is set forth in the Funding Request relating to the acquisition of the Property. "Lease" means, collectively, the Master Lease and the Lease Supplement. "Lease Balance" means, as of any date of determination, an amount equal to the sum of the Loan Balance and the Certificate Holder Balance and all other amounts owing by the Guarantor or the Lessee under the Operative Documents (including without limitation, accrued and unpaid Rent and Supplemental Rent, if any) minus all payments of Fixed Rent made on or prior to such date, if any. "Lease Default" means any event or condition which, with the lapse of time or the giving of notice, or both, would constitute a Lease Event of Default. "Lease Event of Default" is defined in Section 16.1 of the Master Lease. "Lease Rents" is defined in Section 2(a)(i) of the Assignment of Lease and Rent. -18- "Lease Supplement" means the Lease Supplement substantially in the form of Exhibit A to the Master Lease, executed by the Lessee and the Lessor Trust, dated as of an Acquisition Date and covering the Property located on the Land identified on Schedule I thereto, as the same may be amended, supplemented, amended and restated or otherwise modified from time to time. "Lease Term" means, with respect to the Property, the period commencing on (and including) the Acquisition Date for the Property and ending on (but excluding) the Expiration Date. "Lender Basic Rent" means, as determined as of any Basic Rent Payment Date, the sum of (a) interest due on the Loans, determined in accordance with Section 2.4 of the Loan Agreement and excluding (i) any interest at the applicable Overdue Rate on any installment of Lender Basic Rent not paid when due and (ii) any fine, penalty, interest or cost assessed or added under any agreement with a third party for nonpayment or late payment of Lender Basic Rent and (b) the Fixed Rent due under the Lease Supplement with respect to the Loans after giving effect to any prepayment of Fixed Rent. "Lenders" means, collectively, the various financial institutions that are or may from time to time become parties to the Loan Agreement as Lenders. "Lessee" means Mary Green, LLC, a Delaware limited liability company, as Lessee under the Lease and the other Operative Documents. "Lessee Agent" means TruServ Corporation, a Delaware corporation. "Lessor Financing Statements" means UCC financing statements appropriately completed and executed for filing in the applicable jurisdiction in order to protect the Agent Certificate Holder's, Lessor Trust's and the Lenders' respective interests under the Master Lease and the Lease Supplement to the extent the Master Lease and Lease Supplement are security agreements. "Lessor Lien" means any Lien, true lease or sublease or disposition of title arising as a result of (a) any claim against any Participant not resulting from the transactions contemplated by the Operative Documents, (b) any act or omission of any Participant which is not required or permitted by the Operative Documents or is in violation of any of the terms of the Operative Documents, (c) any claim against any Participant, with respect to Taxes or Transaction Expenses against which Lessee Agent is not required to indemnify any Participant, in its individual capacity, pursuant to Article IX of the Participation Agreement, or (d) any claim against the Lessor Trust arising out of any transfer by the Agent Certificate Holder of all or any portion of the interest of the Lessor Trust in the Property or the Operative Documents other than the transfer of title to or possession of the Property by the Lessor Trust pursuant to and in accordance with the Master Lease, the Loan Agreement or the Participation Agreement or pursuant to the exercise of the remedies set forth in Section 16.2 of the Master Lease. -19- "Lessor Mortgage" means the Lease Supplement and any and all other security instruments in appropriate recordable form in the relevant jurisdiction sufficient to grant to the Lessor Trust a first priority Lien on the Property. "Lessor Trust" means the TruServ 1998 Trust created under and pursuant to the Trust Agreement. "Lien" means any mortgage, pledge, security interest, encumbrance, lien (statutory or otherwise) or charge of any kind (including any agreement to give any of the foregoing, any conditional sale or other title retention agreement, any lease in the nature thereof, and the filing of or agreement to give any financing statement under the Uniform Commercial Code of any jurisdiction) or any other type of preferential arrangement for the purpose, or having the effect, of protecting a creditor against loss or securing the payment or performance of an obligation. "Loan Agreement" means the Loan Agreement, dated as of April 30, 1998, among the Lessor Trust, as borrower thereunder, the Lenders, and the Administrative Agent, as the same may be amended, supplemented, amended and restated or otherwise modified from time to time. "Loan Agreement Default" means any event, act or condition which with notice or lapse of time, or both, would constitute a Loan Agreement Event of Default. "Loan Agreement Event of Default" is defined in Section 5.1 of the Loan Agreement. "Loan Balance" means, as of any date of determination, an amount equal to the sum of the outstanding Loans together with all accrued and unpaid interest thereon pursuant to the Loan Agreement. "Loan Commitment" means the Commitment of each Lender in the amount set forth on Schedule I to the Participation Agreement, as such Schedule may be amended, supplemented, amended and restated or otherwise modified from time to time (including, without limitation, pursuant to Section 3.7, the Participation Agreement). "Loan Documents" means the Loan Agreement and the Notes. "Loans" is defined in Section 2.1 of the Loan Agreement. "Margin Stock" has the meaning given such term under Regulation U of the F.R.S. Board. "Marketing Period" means the period commencing on the date 365 days prior to the Expiration Date and ending on the Expiration Date. "Master Lease" means the Master Lease and Mortgage, dated as of April 30, 1998, among the Lessor Trust, the Lessee and the Lessee Agent as the same may be amended, supplemented, amended and restated or otherwise modified from time to time. -20- "Material" and "Materially" mean material to (i) the ability of the Lessee or Guarantor to perform its obligations under the Operative Documents to which it is a party, or (ii) the value or condition of the Property. "Material Adverse Effect" means (a) a material adverse change in, or a material adverse effect upon the operations, business, properties, condition (financial or otherwise), or prospects of the Guarantor and its Subsidiaries taken as a whole, (b) material impairment of the ability of any Lessee or Guarantor to perform any of its obligations under any Operative Document to which it is or will be a party or (c) a material adverse effect upon the legality, validity, binding effect or enforceability against the Guarantor or the Lessee under any Operative Document. "Material Subsidiary" shall mean at any time any Subsidiary having at such time either (1) total net revenues (net of earnings and expenses resulting from transactions with the Guarantor or any Subsidiary) for the period of the immediately preceding four fiscal quarters equal to or greater than 5% of the consolidated total net revenues of the Guarantor and its Subsidiaries for such period determined in accordance with GAAP or (2) total assets (net of any assets that constitute obligations of the Guarantor or any Subsidiary), as of the last day of the immediately preceding fiscal quarter, equal to or greater than 5% of Consolidated Net Worth as of such date, in each case as reflected in the most recent annual or quarterly financial statements of the Guarantor and its Subsidiaries. "Maturity Date" means with respect to the Loans and the Certificate Holder Amounts, the fifth (5th) anniversary of the Documentation Date, unless such Maturity Date is extended pursuant to Section 2.7 of the Loan Agreement and Section 11.1 of the Participation Agreement. "Member" means any Person which is a stockholder of the Guarantor or has applied for stock ownership of the Guarantor. "Modifications" is defined in Section 10.1 of the Master Lease. "Mortgage Foreclosure Act" is defined in Section 16.4 of the Master Lease. "Multiemployer Plan" means any Plan which is a "multiemployer plan" (as such term is defined in section 4001(a)(3) of ERISA). "Net Proceeds" means all amounts received by the Agent Certificate Holder, the Lessor Trust or any Participant in connection with any Casualty or Condemnation or any sale of the Property pursuant to the Agent Certificate Holder's or Lessor Trust's exercise of remedies under Section 16.2 of the Master Lease or the Lessee Agent's exercise of the Remarketing Option under Article XX of the Master Lease and all interest earned thereon, less the expense of claiming and collecting such amounts, including all costs and expenses in connection therewith for which the Agent Certificate Holder or any Participant is entitled to be reimbursed pursuant to the Lease. "Non-Consenting Participant" is defined in Section 11.1(b) of the Participation Agreement. -21- "Notes" is defined in Section 2.2 of the Loan Agreement. "Obligations" means all obligations (monetary or otherwise) of the Lessee or the Guarantor arising under or in connection with any of the Operative Documents. "Operative Documents" means the following: (a) the Participation Agreement; (b) the Master Lease; (c) the Lease Supplement; (d) the Loan Agreement; (e) each Note; (f) the Assignment of Lease and Rent; (g) each Deed and ground lease; (h) the Lessor Mortgages; (i) the Lessor Financing Statements; (i) the Construction Agency Agreement; (k) the Construction Agency Agreement Assignment; (1) the Construction Documents Assignment; (m) each Construction Agency Agreement Supplement; (n) each Assignment of Lease and Rent Supplement; (o) the Arranger's Fee Letter; (p) the Guaranty; (q) the Trust Agreement; (r) each Certificate; and (s) each guaranty, security agreement, mortgage or other document executed in connection with the Intercreditor Agreement which secures or guaranties the Obligations. -22- "Original Executed Counterpart" is defined in Section 26.9 of the Master Lease. "Outside Completion Date" means the date occurring on the earlier of (a) eighteen (18) months after the date the initial Advance is made in respect of the Property and (b) the Interim Termination Date. "Overdue Rate" means, with respect to any Loan or Certificate Holder Amount, the Base Rate or the Adjusted Eurodollar Rate then in effect for such Loan or Certificate Holder Amount, as the case may be, plus three percent (3%), in addition to the percentages set forth in the definition of Base Rate. "Owner Trustee" means Wilmington Trust Company, a Delaware banking corporation. "Participant Balance" means, with respect to any Participant as of any date of determination: (i) with respect to any Lender, an amount equal to the aggregate outstanding Loans of such Lender, together with all accrued and unpaid interest thereon or (ii) with respect to any Certificate Holder, an amount equal to the aggregate outstanding Certificate Holder Amounts of such Certificate Holder, together with all amounts of accrued and unpaid Yield thereon. "Participants" means, collectively, each Lender and each Certificate Holder, and their successors and assigns. "Participation Agreement" means the Participation Agreement dated as of April 30, 1998, among the Lessee, the Lessee Agent, Construction Agent, the Guarantor, the Agent Certificate Holder, the Certificate Holder, the Lenders, the Administrative Agent, the Arranger, the Owner Trustee and the Lessor Trust as the same may be amended, supplemented, amended and restated or otherwise modified from time to time. "Payment Date" means each Scheduled Payment Date and each date on which Basic Rent is required to be paid by any Lessee. "PBGC" means the Pension Benefit Guaranty Corporation referred to and defined in ERISA. "Pension Plan" means a pension plan (as defined in Section 3(2) of ERISA) subject to Title IV of ERISA with respect to which the Guarantor or any ERISA Affiliate may have any liability. "Permitted Property Liens" means, with respect to the Property, any of the following: (i) the respective rights and interests of the parties to the Operative Documents as provided in the Operative Documents; (ii) the rights of any sublessee under a sublease permitted by the terms of the Master Lease; -23- (iii) Liens for Taxes that either are not yet subject to interest or penalties or are being contested in accordance with the provisions of Section 12.1 of the Master Lease; (iv) Liens arising by operation of law, materialmen's, mechanics', workers', repairmen's, employees', carriers', warehousemen's and other like Liens relating to the construction of the Improvements or in connection with any Modifications or arising in the ordinary course of business for amounts that either are not more than sixty (60) days past due or are being diligently contested in good faith by appropriate proceedings, so long as such proceedings satisfy the conditions for the continuation of proceedings to contest Taxes set forth in Section 12.1 of the Master Lease; (v) Liens of any of the types referred to in clause (iv) above that have been bonded for not less than the full amount in dispute (or as to which other security arrangements satisfactory to the Agent Certificate Holder have been made), which bonding (or arrangements) shall comply with applicable Requirements of Law, and has effectively stayed any execution or enforcement of such Liens; (vi) Liens arising out of judgments or awards with respect to which appeals or other proceedings for review are being prosecuted in good faith and for the payment of which adequate reserves have been provided as required by GAAP or other appropriate provisions have been made, so long as such proceedings have the effect of staying the execution of such judgments or awards and satisfy the conditions for the continuation of proceedings to contest Taxes set forth in Section 12.1 of the Master Lease; (vii) easements, rights of way and other encumbrances on title to real property pursuant to Section 11.2 of the Master Lease; (viii) Lessor Liens; (ix) Liens created by the Lessee with the consent of the Required Participants; and (x) Liens described on the title insurance policy delivered with respect to such Property pursuant to Section 6.1(q) of the Participation Agreement, other than Liens described in clause (iv) or (vi) above that are not removed within forty (40) days of their discovery by Lessee Agent or the Lessee. "Person" means any natural person, corporation, trust, joint venture, association, company, partnership or government, or any agency or political subdivision thereof. "Plan" shall mean any employee pension benefit plan (as such term is defined in section 3 of ERISA) which is or has been established or maintained, or to which contributions are or have been made, by the Guarantor or any ERISA Affiliate. -24- "Plans and Specifications" means, with respect to the Property, the plans and specifications for the Construction thereof, as more particularly described in Schedule 2 to the Construction Agency Agreement Supplement. "Prime Rate" refers to that interest rate so denominated and set by the Administrative Agent from time to time as an interest rate basis for borrowings. The Prime Rate is but one of several interest rate bases used by the Administrative Agent. The Administrative Agent lends at interest rates above and below the Prime Rate. "Property" means (i) the Lessor Trust's interest in the Land, as lessee or as owner in fee simple thereof, (ii) all of the Improvements at any time located on or under the Land and (iii) the Equipment at any time located on or under the Land. "Property Balance" means the Lease Balance. "Property Cost" means, with respect to the Property, the sum of the Land Acquisition Cost and the Property Improvement Costs for the Property. "Property Improvement Costs" means the aggregate amount of Advances made to or at the direction of the Construction Agent for the purpose of paying Construction Costs and the Transaction Expenses relating to such funding and construction, as such amount is set forth in the Funding Request relating thereto. "Purchase Notice" means an irrevocable written notice by the Lessee Agent delivered to the Agent Certificate Holder pursuant to Section 18.1 of the Master Lease, notifying the Agent Certificate Holder of the Lessee Agent's intention to exercise its option pursuant to such Section, and identifying the proposed purchase date therefor. "Purchase Option" means the Lessee Agent's option to purchase all (but not less than all) of the Property in accordance with the provisions of Section 18.1 of the Master Lease. "Purchase Option Price" is defined in Section 18.1 of the Master Lease. "Qualified Land" means each parcel of Land which has a Land Acquisition Cost that equals or exceeds 25% of the sum of (x) such Land Acquisition Cost plus (y) the Estimated Improvement Costs of the Property consisting of the Land and the Improvements thereon. "Quarterly Payment Date" means the last day of each July, October, January and April or, if any such day is not a Business Day, the next succeeding Business Day. "RCRA" means the Resource Conservation and Recovery Act of 1976, as amended by the Solid and Hazardous Waste Amendments of 1984, 42 U.S.C. Sections 6901 et seq. "Release" means any release, pumping, pouring, emptying, injecting, escaping, leaching, dumping, seepage, spill, leak, flow, discharge, disposal or emission of a Hazardous Material. -25- "Remarketing Option" is defined in Section 20.1 of the Master Lease. "Renewal Term" is defined in clause (a) of Section 11.1 of the Participation Agreement. "Rent" means, collectively, the Basic Rent and the Supplemental Rent, in each case payable under the Master Lease. "Rents" is defined in Section 2(b) of the Assignment of Lease and Rent. "Replacement Participant" is defined in Section 11.1(b) of the Participation Agreement. "Reportable Event" means any of the events described in Section 4043(c) of ERISA other than any such event for which the 30-day notice requirement under ERISA has been waived in regulations issued by the PBGC. "Requesting Party" is defined in Section 22.1 of the Master Lease. "Required Certificate Holders" means, at any time, Certificate Holders having Commitments representing at least 66-2/3% of the aggregate Certificate Holder Commitments or, for purposes of acceleration pursuant to Section 16.2 of the Master Lease or in the event that the Certificate Holder Commitments have been terminated, Certificate Holders representing at least 66-2/3% of the aggregate Certificate Holder Amount outstanding; provided however that if any Certificate Holder shall be a Defaulting Participant at such time, then there shall be excluded from the definition of "Required Certificate Holders" such Defaulting Participant's Commitments, or after termination of the Commitments, the amount of the Certificate Holder Amount owing to such Defaulting Participant. "Required Lenders" means, at any time, Lenders having Commitments representing at least 66-2/3% of the aggregate Loan Commitments or, for purposes of acceleration pursuant to Section 5.2(a)(ii)(y) of the Loan Agreement or in the event that the Loan Commitments have been terminated, Lenders representing at least 66-2/3% of the aggregate principal amount of Loans outstanding; provided, however, that if any Lender shall be a Defaulting Participant at such time, then there shall be excluded from the determination of "Required Lenders" such Defaulting Participant's Commitments, or after termination of the Commitments, the principal balance of the Loans owing to such Defaulting Participant. "Required Modification" is defined in Section 10.1 of the Master Lease. "Required Participants" means at any time Participants representing 66-2/3% of the aggregate Commitments of the Lenders and Certificate Holders, or if such Commitments shall have been terminated, Participants representing at least 66-2/3% of the aggregate of Loans and Certificate Holder Amounts outstanding; provided, however, that any Defaulting Participant's Commitments, Loans or Certificate Holder Amounts, as the case may be, shall be excluded therefrom. -26- "Requirement of Law" means, as to any Person (a) the partnership agreement, certificate of incorporation, bylaws, operating agreement or other organizational or governing documents of such Person, and (b) all Federal, state, county, municipal and other governmental statutes, laws, rules, orders, regulations, ordinances, judgments, decrees and injunctions affecting the Property, the Improvements or the demolition, Construction, use or alteration thereof, whether now or hereafter enacted and in force, including any that require repairs, modifications or alterations in or to the Property or in any way limit the use and enjoyment thereof (including all building, zoning and fire codes and the Americans with Disabilities Act of 1990, 42 U.S.C. S 1201 et seq. and any other similar federal, state or local laws or ordinances and the regulations promulgated thereunder) and any that may relate to environmental requirements (including all Environmental Laws), and all permits, certificates of occupancy, licenses, authorizations and regulations relating thereto, and all covenants, agreements, restrictions and encumbrances contained in any instruments which are either of record or known to Lessee Agent or the Lessee affecting the Property, the Appurtenant Rights and any easements, licenses or other agreements entered into pursuant to Section 11.2 of the Master Lease. "Responsible Officer" of any Person means the chief executive officer, chief operating officer, chief financial officer, treasurer or chief accounting officer of the Guarantor, general counsel of the Guarantor or any other officer of the Guarantor involved principally in its financial administration or its controllership function. "Responsible Officer's Certificate" means a certificate signed by any Responsible Officer in substantially the form of Exhibit D-5 to the Participation Agreement, which certificate shall certify as true and correct the subject matter being certified to in such certificate. "Restated Certificate of Trust" means any restated Certificate of Trust as required by Section 3810(b) or (c) of the Delaware Business Trust Act. "Restricted Investments" shall mean any Investment prohibited by Section 10.2(k). "Restricted Payment" is defined in Section 10.2(l) of the Participation Agreement. "Scheduled Payment Date" means: (a) as to any Base Rate Loan/Certificate Holder Amount, each Quarterly Payment Date and the Maturity Date; provided, however, that if any such day is not a Business Day, then the "Scheduled Payment Date" shall be the immediately succeeding Business Day; and (b) as to Fixed Rent, on each Fixed Rent Payment Date. "SEC" means the Securities and Exchange Commission or any Governmental Authority succeeding to any of its principal functions. "Securities Act" means the Securities Act of 1933, as amended from time to time. -27- "Shared Rights" is defined in Section 2(a) of the Assignment of Lease and Rent. "Shortfall Amount" means, as of the Expiration Date, an amount equal to (i) the Lease Balance, minus (ii) that portion of the Loan Balance received by the Administrative Agent from the Lessee pursuant to Section 20.2(f) of the Master Lease, minus (iii) the aggregate amount of the highest, binding, written, unconditional, irrevocable offer to purchase the Property obtained by the Lessee Agent pursuant to Section 20.2(a) of the Master Lease; provided, however, that if the sale of the Property to the Person submitting such offer is not consummated on or prior to the Expiration Date, then the term "Shortfall Amount" shall mean an amount equal to (i) the Lease Balance, minus (ii) the Loan Balance received by the Administrative Agent pursuant to Section 20.2(f) of the Master Lease. "Significant Casualty" means a Casualty that in the reasonable, good faith judgment of the Administrative Agent and the Agent Certificate Holder (a) renders the Property unsuitable for continued use as property of the type of the Property immediately prior to such Casualty, or (b) is so substantial in nature that restoration of the Property to substantially its condition as it existed immediately prior to such Casualty would be impracticable or impossible. "Significant Condemnation" means (a) a Condemnation that involves a taking of the Lessor Trust's entire title to the Land, or (b) a Condemnation that in the reasonable, good faith judgment of the Administrative Agent and the Agent Certificate Holder (i) renders the Property unsuitable for continued use as property of the type of such Property immediately prior to such Condemnation, or (b) is so substantial in nature that restoration of the related property to substantially its condition as it existed immediately prior to such Condemnation would be impracticable or impossible. "Solvent" means with respect to any Person on a particular date, that on such date (i) the fair value of the property of such Person is greater than the total amount of liabilities, including, without limitation, contingent liabilities of such Person, (ii) the present fair saleable value of the assets of such Person is not less than the amount that will be required to pay the probable liability of such Person on its debts as they become absolute and matured, (iii) such Person is able to realize upon its assets and pay its debts and other liabilities, contingent obligations and other commitments as they mature in the normal course of business, (iv) such Person does not intend to, and does not believe that it will, incur debts or liabilities beyond such Person's ability to pay as such debts and liabilities mature, and (v) such Person is not engaged in business or a transaction, and is not about to engage in business or a transaction, for which such Person's property would constitute unreasonably small capital after giving due consideration to the prevailing practice in the industry in which such Person is engaged. In computing the amount of contingent liabilities at any time, it is intended that such liabilities will be computed at the amount which, in light of all the facts and circumstances existing at such time, represents the amount that can reasonably be expected to become an actual or matured liability taking into account any subrogation and contribution rights. "Structuring and Underwriting Fee" is defined in the Arranger's Fee Letter. -28- "Supplemental Rent" means all amounts, liabilities and obligations (other than Basic Rent) which the Lessee or the Lessee Agent, as applicable, assumes or agrees to pay to the Administrative Agent, any Participant or any other Person under the Master Lease, or under any of the other Operative Documents, including, without limitation, Commitment Fees, the Certificate Holder Balance, the Loan Balance, the Shortfall Amount, amounts due pursuant to Section 13.2 of the Participation Agreement and payments pursuant to Sections 15.2 of the Master Lease and Articles XVIII and XX of the Master Lease. "Tax Indemnitee" means each Lender, each Certificate Holder, the Owner Trustee, the Lessor Trust, the Administrative Agent and the Agent Certificate Holder. "Taxes" is defined in the definition of Impositions. "Termination Date" is defined in Section 15.2 of the Master Lease. "Termination Notice" is defined in Section 15.1 of the Master Lease. "Transaction Expenses" means all costs and expenses incurred in connection with the preparation, execution and delivery of the Operative Documents and the transactions contemplated by the Operative Documents including without limitation: (a) subject to the fee letters of counsel, if applicable, the reasonable fees, out-of-pocket expenses and disbursements of Chapman and Cutler, special counsel for the Administrative Agent and Arranger, Agent Certificate Holder and Certificate Holders, and such reasonable fees, expenses and disbursements of counsel for the Lessee Agent and Owner Trustee, in negotiating the terms of the Operative Documents and the other transaction documents, preparing for the closing under, and rendering opinions in connection with, such transactions and in rendering other services customary for counsel representing parties to transactions of the types involved in the transactions contemplated by the Operative Documents; (b) the reasonable fees, out-of-pocket expenses and disbursements of special counsel for the Administrative Agent, Arranger, Owner Trustee, Agent Certificate Holder and Certificate Holders in connection with (1) the transactions contemplated to occur on each Funding Date and the Acquisition Date, (2) any amendment, supplement, waiver or consent with respect to any Operative Documents requested or approved by Lessee Agent, and (3) any enforcement of any rights or remedies against Lessee Agent, Guarantor or the Lessee in respect of the Operative Documents that arise after a Lease Event of Default; (c) any and all Taxes and fees incurred in recording, registering or filing any Operative Document or any other transaction document, any deed, declaration, mortgage, security agreement, notice or financing statement with any public office, registry or governmental agency required by the Operative Documents in connection with the transactions contemplated by the Operative Documents. -29- (d) all reasonable out-of-pocket expenses, disbursements and costs of the Administrative Agent, Arranger, Owner Trustee and the Agent Certificate Holder paid or incurred in connection with the transactions contemplated by the Operative Documents (including without limitation the transactions contemplated to occur on each Funding Date and Acquisition Date); (e) all title fees, premiums and escrow costs and other expenses relating to title insurance and the closing contemplated by the Operative Documents; (f) all reasonable expenses relating to property surveys and Environmental Audits; and (g) all reasonable fees and other expenses relating to Appraisals. "Transactions" shall mean the transactions contemplated under the Participation Agreement and each of the other Operative Documents. "Transferee" is defined in Section 12.3 of the Participation Agreement. "Trust Agreement" means the Trust Agreement dated as of April 30, 1998 between the Agent Certificate Holder and the Owner Trustee. "Trust Company" means Wilmington Trust Company in its individual capacity. "Trust Estate" is defined in Section 2.2 of the Trust Agreement. "Trust Expenses" is defined in Section 6.1 of the Trust Agreement. "Unfunded Pension Liability" means the excess of a Pension Plan's benefit liabilities under Section 4001(a)(16) of ERISA over the current value of that Plan's assets determined in accordance with the assumptions used in funding the Pension Plan pursuant to Section 412 of the Code for the applicable plan year. "Uniform Commercial Code" and "UCC" means the Uniform Commercial Code as in effect in any applicable jurisdiction. "Unmatured Event of Default" means any event or circumstance which, with the giving of notice, the lapse of time, or both, would (if not cured or otherwise remedied during such time) constitute an Event of Default. "Yield" is defined in Section 4.1(a) of the Participation Agreement. "Yield Rate" means the Base Rate. -30- EX-4.Q 8 c66649ex4-q.txt AMENDMENT TO AMENDED & RESTATED NOTE PURCH. AGMT. Exhibit 4-Q TRUSERV CORPORATION $105,000,000 AMENDED AND RESTATED SENIOR SECURED NOTES DUE 2008 ---------- AMENDMENT TO THE AMENDED AND RESTATED NOTE PURCHASE AGREEMENT DATED AS OF APRIL 11, 2002 TRUSERV CORPORATION 8600 West Bryn Mawr Avenue Chicago, Illinois 60631 April 11, 2002 To Each of the Purchasers Listed in the Attached Schedule 1 (each, a "PURCHASER") Ladies and Gentlemen: Re: AMENDMENT TO THE AMENDED AND RESTATED NOTE PURCHASE AGREEMENTS (the "APRIL 2002 MODIFICATION") The undersigned, TruServ Corporation, a Delaware corporation formerly known as Cotter & Company (herein called the "COMPANY"), hereby agrees and acknowledges that: A. The Company and each of you are parties (the "PURCHASERS") to separate Note Purchase Agreement each dated as of September 10, 1998, as each were amended by Amendment No. 1 to Note Purchase Agreements dated as of April 1, 1999 and as each were further amended and restated by the Amended and Restated Note Purchase Agreements each dated as of April 14, 2000 (collectively, the "ORIGINAL NPAS" and individually each an "ORIGINAL NPA"). B. Pursuant to the Original NPAs, the Company issued and sold to each of you $105,000,000 aggregate principal amount of its 6.85% Senior Notes due 2008 (the "NOTES"). C. Each of you and the Company desire to amend the Original NPAs as hereinafter set forth (the Original NPAs as amended by this April 2002 Modification is referred to herein collectively as the "NPAS" and individually as an "NPA"). Reference is made to the Original NPA for definitions of capitalized terms used herein and not otherwise defined herein. Pursuant to the request of the Company and in accordance with the provisions of Section 15 of the Original NPAs, the parties hereto consent to the amendment of the Original NPAs and agree as follows: SECTION 1. Amendment. From and after the date this April 2002 Modification becomes effective in accordance with its terms, each Original NPA shall be amended as follows: 1.01 Amendment to Exhibit G. Exhibit G--the Intercreditor Agreement to the Original NPA is deleted in its entirety and replaced with Exhibit G--the Intercreditor Agreement attached to this April 2002 Modification. 1.02 Amendment to Paragraph 5A. Paragraph 5A Financial Statements is amended to: (a) amend and restate clauses (i), (ii) and (iii) as follows: (i) as soon as available, but not later than 120 days after the end of each fiscal year, a copy of the audited consolidated balance sheet of the Company and its Subsidiaries as at the end of such year and the related consolidated statements of income or operations, shareholders' equity and cash flows for such year, setting forth in each case in comparative form the figures for the previous fiscal year, and accompanied by the opinion of PriceWaterhouseCoopers LLP or another nationally-recognized independent public accounting firm ("INDEPENDENT AUDITOR") which report (x) shall state that such consolidated financial statements present fairly the financial position for the periods indicated in conformity with GAAP applied on a basis consistent with prior years and (y) shall not be qualified or limited because of a restricted or limited examination by the Independent Auditor of any material portion of the Company's or any Subsidiary's records; (ii) as soon as available, but not later than 60 days after the end of each of the first three fiscal quarters of each fiscal year, a copy of the unaudited consolidated balance sheet of the Company and its Subsidiaries as of the end of such quarter and the related consolidated statements of income, shareholders' equity and cash flows for the period commencing on the first day and ending on the last day of such quarter, and certified by a Responsible Officer as fairly presenting, in accordance with GAAP (subject to the absence of footnotes and ordinary, good faith year-end audit adjustments), the financial position and the results of operations of the Company and the Subsidiaries; and (iii) as soon as available, but not later than 30 days after the end of each fiscal month (or 60 days after the end of December of each year), a copy of the financial report delivered to the Board of Directors of the Company (or, if no such report is delivered to the Board of Directors of the Company for any month, a copy of a substantially similar financial report for such month), including unaudited consolidated balance sheet of the Company and its Subsidiaries as of the end of such month and the related consolidated statements of income and cash flows for the period commencing on the first day and ending on the last day of such month, and certified by a Responsible Officer as fairly presenting, in accordance with GAAP (subject to the absence of footnotes and ordinary, good faith year-end audit adjustments), the financial position and the results of operations of the Company and the Subsidiaries. (b) delete the "and" at the end of clause (xi) and replace the "." at the end of clause (xii) with the word "and"; and (c) to insert at the end of clause (xii) ";" and the following provisions: (xiii) as soon as available, but not later than 15 days after delivery of the financial report under clause (iii) above, and at the Company's expense, a report from Zolfo Cooper or other financial consultants acceptable to the Required Holder(s) on the performance of the Company as set forth in such financial report as against the Business Plan; and (xiv) concurrently with the delivery of the financial statements referred to in Section 5A(i) for the year ended December 31, 2002 and each year thereafter, to the extent not prohibited by applicable accounting guidelines, a certificate of the Independent Auditor stating that in making the examination necessary therefor no knowledge was obtained of any Event of Default or Unmatured Event of Default, except as specified in such certificate. 1.03 Amendment to Paragraph 5K. Paragraph 5K Further Assurances is amended by deleting such paragraph and replacing it with the following: 5K. FURTHER ASSURANCES. The Company shall (a) cause all Subsidiaries to guarantee the obligations of the Company hereunder pursuant to the Guaranty (and in furtherance of the foregoing, immediately upon the creation or acquisition of any Subsidiary, cause such Subsidiary to execute and deliver a counterpart of the Guaranty, together with such other documents, including resolutions and opinions of counsel, as the Required Holder(s) may reasonably request), provided, however, that (i) none of TruServ Specialty Company LLC nor any Inactive Subsidiary or Foreign Subsidiary shall have an obligation to execute a counterpart of the Guaranty; and (ii) if Advocate Services, Inc., Servistar Paint Company, or the Canadian Subsidiary shall still be in existence on the 180th day following the Amendment Effective Date, then each such entity still in existence shall execute and deliver a counterpart of the Guaranty on such day; and (b) take, and cause each of Guarantors to take, such actions as are necessary or as the Required Holder(s) may reasonably request from time to time (including the execution and delivery of security agreements, pledge agreements, financing statements, mortgages, deeds of trust and other documents, the filing or recording of any of the foregoing, the delivery of stock certificates and other collateral with respect to which perfection is obtained solely by possession, the notation of the Collateral Agent's Liens on certificates of title for vehicles and the delivery of opinions of counsel) to ensure that the obligations of the Company and each Guarantor hereunder and under the Guaranty, as applicable, are secured by perfected security interests in substantially all of the personal property of each such entity, and provided further that neither the Company nor any Guarantor shall be required to pledge more than 65% of the stock of any Foreign Subsidiary. 1.04 Amendment to Paragraph 5G. Paragraph 5G Payment of Taxes and Claims is amended by deleting the proviso in such paragraph and replacing it with the following: provided that neither the Company nor any Subsidiary need pay any such tax or assessment or claims if (i) the amount, applicability or validity thereof is contested by the Company or such Subsidiary on a timely basis in good faith and in appropriate proceedings, and the Company or such Subsidiary has established adequate reserves therefor in accordance with GAAP on the books of the Company or such Subsidiary, or (ii) the non-payment of such tax or assessment or claims (a) could not be reasonably expected to have a material adverse effect on the business, condition (financial or otherwise) or operations of the Company and its Subsidiaries taken as whole and (b) does not result in the creation of any Lien other than Liens permitted by paragraph 6A(1). 1.05 Amendment to Paragraph 5H. Paragraph 5H Corporate Existence, etc. is amended to insert at the end of the last sentence "or any Canadian Subsidiary". 1.06 Addition of Paragraph 5M, 5N, 5O and 5P. Paragraph 5 is amended by adding the following paragraphs 5M, 5N, 5O and 5P after paragraph 5L: 5M. ANNIVERSARY FEE. The Company shall pay ratably to each Purchaser a fee calculated on the then unpaid balance of the aggregate principal amount of the Notes held by such Purchaser of (a) 0.50% on the earlier of (x) the first anniversary of the Amendment Effective Date and (y) the Termination Date and (b) if the Termination Date has not occurred prior to the first anniversary of the Amendment Effective Date, 0.25% on the earlier of (x) the second anniversary of the Amendment Effective Date and (y) the Termination Date. 5N. SUPPLEMENTAL FUNDING FEE. The Company shall pay ratably to each Purchaser a quarterly supplemental funding fee from February 28, 2002 until the Termination Date on the average unpaid balance of the aggregate principal amount of the Notes held by such Purchaser during each quarter at the rate equal to the Supplemental Funding Fee Rate. Such supplemental funding fee shall be computed on the basis of the actual days elapsed over a 360-day year for each respective preceding three month period ending on the last day of March, June, September and December, and shall be payable on the first Business Day of each April, July, October and January; provided that the first supplemental funding fee shall accrue from February 28, 2002 through March 31, 2002 and be payable on the Amendment Effective Date and the second supplemental funding fee shall accrue from April 1, 2002 through June 30, 2002 and be payable on July 1, 2002. 5O. CERTAIN PAYMENTS. 5O(1). EXCESS CASH FLOW. The Company shall pay ratably to each Purchaser, within 90 days after the end of each fiscal year of the Company in an amount equal to the Excess Cash Flow of the Company for such prior fiscal year, commencing with the fiscal year ended for 2002, together with interest on such principal amount so paid accrued to the payment date plus the Make-Whole Amount determined for the payment date with respect to such paid principal amount; provided, that for so long as the Intercreditor Agreement is in effect, the Notes shall be subject to mandatory pro rata payment within 90 days after the end of each fiscal year of the Company in an amount equal to that portion of Excess Cash Proceeds (as defined in the Intercreditor Agreement) for such prior fiscal year to which the Purchasers are entitled to under the Intercreditor Agreement; provided, further, that for so long as the Intercreditor Agreement is in effect, the Make-Whole Amount shall be based upon the principal amount paid as required under the Intercreditor Agreement (as opposed to the amount that would have been required to be paid had the Intercreditor Agreement not been in effect). 5O(2). PROCEEDS RECAPTURE. The Company shall pay ratably to each Purchaser payments from (i) all cash proceeds received in connection with the Lumber Note, (ii) all Net Disposition Proceeds and Net Debt Proceeds, and (iii) without duplication of mandatory payments made pursuant to paragraph 5O(1) or other payments made pursuant to paragraph 5O(2), Interim Proceeds and Final Proceeds, each as defined in the Intercreditor Agreement; in each case of clauses (i) through (iii), together with interest on such principal amount so paid accrued to the payment date plus the Make-Whole Amount determined for the payment date with respect to such paid principal amount; provided, that for so long as the Intercreditor Agreement is in effect, the Notes shall be subject to mandatory pro rata payment in an amount equal to that portion of the amounts in clauses (i) through (iii) above to which the Purchasers are entitled to under the Intercreditor Agreement; provided, further, that so long as the Intercreditor Agreement is in effect, the Make-Whole Amount shall be based upon the principal amount paid as required under the Intercreditor Agreement (as opposed to the amount that would have been required to be paid had the Intercreditor Agreement not been in effect). 5O(3). INTERCREDITOR DISTRIBUTIONS. For so long as the Intercreditor Agreement is in effect, amounts required to be paid under this paragraph 5O shall be paid (subject to the true-up provisions set forth therein), shared and distributed in accordance with the Intercreditor Agreement and, to the extent provided for in the Intercreditor Agreement, the Company's obligation to pay any Make-Whole Amount may be paid prior to the Final True-Up Date (as defined in the Intercreditor Agreement) by the issuance of Make-Whole Original Notes and Make-Whole Delta Notes (each as defined in the Intercreditor Agreement). Upon the termination of the Intercreditor Agreement, payments shall be made pro rata to the Purchasers hereunder and all Net Disposition Proceeds, Net Debt Proceeds and notes received in connection with any Asset Sales shall be delivered to the Purchasers. 5O(4). APPLICATION OF PROCEEDS. Under this paragraph 5O, such mandatory pro rata payments shall be applied, except to the extent that such payments are otherwise required to be applied under the Intercreditor Agreement, as follows: first, to the Make-Whole Amount determined for the payment date with respect to such principal amount; second, to interest on the principal amount so prepaid accrued to the payment date; and third, to the principal amount so prepaid. 5O(5). ALLOCATION OF PARTIAL PAYMENTS. In the case of each partial payment of the Notes, the principal amount of the Notes to be prepaid shall be allocated among all of the Notes at the time outstanding in proportion, as nearly as practicable, to the respective unpaid principal amounts thereof not theretofore called for payment. 5O(6). MATURITY; SURRENDER, ETC. In the case of each payment of Notes pursuant to this paragraph 5O, the principal amount of each Note to be prepaid shall mature and become due and payable on the date fixed for such payment, together with interest on such principal amount accrued to such date and the applicable Make-Whole Amount, if any. From and after such date unless the Company shall fail to pay such principal amount when so due and payable, together with the interest and Make-Whole Amount, if any, as aforesaid, interest on such principal amount shall cease to accrue. Any Note paid or prepaid in full shall be surrendered to the Company and canceled and shall not be reissued, and no Note shall be reissued in lieu of any prepaid principal amount of any Note. 5O(7). MAKE-WHOLE AMOUNT. For purposes of this paragraph 5O, the term "MAKE-WHOLE AMOUNT" means, with respect to any Note, an amount equal to the excess, if any, of the Discounted Value of the Remaining Scheduled Payments with respect to the Called Principal of such Note over the amount of such Called Principal, provided that the Make-Whole Amount may in no event be less than zero. For the purposes of determining the Make-Whole Amount under this paragraph 5O, the following terms have the following meanings: "CALLED PRINCIPAL" means, with respect to any Note, the principal of such Note that is to be prepaid pursuant to paragraph 5O or has become or is declared to be immediately due and payable pursuant to paragraph 7A, as the context requires. "DISCOUNTED VALUE" means, with respect to the Called Principal of any Note, the amount obtained by discounting all Remaining Scheduled Payments with respect to such Called Principal from their respective scheduled due dates to the Settlement Date with respect to such Called Principal, in accordance with accepted financial practice and at a discount factor (applied on the same periodic basis as that on which interest on the Notes is payable) equal to the Reinvestment Yield with respect to such Called Principal. "REINVESTMENT YIELD" means, with respect to the Called Principal of any Note, 0.50% over the yield to maturity implied by (i) the yields reported, as of 11:00 A.M. (New York City time) on the second Business Day preceding the Settlement Date with respect to such Called Principal, on page "USD" of the Bloomberg Financial Markets Services Screen (or, if not available, any other nationally recognized trading screen reporting on-line intraday trading in United States government securities) for actively traded U.S. Treasury securities having a maturity equal to the Remaining Average Life of such Called Principal as of such Settlement Date, or (ii) if such yields are not reported as of such time or the yields reported as of such time are not ascertainable, the Treasury Constant Maturity Series Yields reported, for the latest day for which such yields have been so reported as of the second Business Day preceding the Settlement Date with respect to such Called Principal, in Federal Reserve Statistical Release H.15 (519) (or any comparable successor publication) for actively traded U.S. Treasury securities having a constant maturity equal to the Remaining Average Life of such Called Principal as of such Settlement Date. Such implied yield will be determined, if necessary, by (a) converting U.S. Treasury bill quotations to bond-equivalent yields in accordance with accepted financial practice and (b) interpolating linearly between (1) the actively traded U.S. Treasury security with the duration closest to and greater than the Remaining Average Life and (2) the actively traded U.S. Treasury security with the duration closest to and less than the Remaining Average Life. "REMAINING AVERAGE LIFE" means, with respect to any Called Principal, the number of years (calculated to the nearest one-twelfth year) obtained by dividing (i) such Called Principal into (ii) the sum of the products obtained by multiplying (a) the principal component of each Remaining Scheduled Payment with respect to such Called Principal by (b) the number of years (calculated to the nearest one-twelfth year) that will elapse between the Settlement Date with respect to such Called Principal and the scheduled due date of such Remaining Scheduled Payment. "REMAINING SCHEDULED PAYMENTS" means, with respect to the Called Principal of any Note, all payments of such Called Principal and interest thereon that would be due after the Settlement Date with respect to such Called Principal if no payment of such Called Principal were made prior to its scheduled due date (it being understood and agreed that the interest rate on the Notes, for purposes of this calculation, shall be the interest rate that applies to the Notes on the third Business Day immediately preceding such Settlement Date), provided that if such Settlement Date is not a date on which interest payments are due to be made under the terms of the Notes, then the amount of the next succeeding scheduled interest payment will be reduced by the amount of interest accrued to such Settlement Date and required to be paid on such Settlement Date pursuant to paragraph 5O or paragraph 7A. "SETTLEMENT DATE" means, with respect to the Called Principal of any Note, the date on which such Called Principal is to be prepaid pursuant to paragraph 5O or has become or is declared to be immediately due and payable pursuant to paragraph 7A, as the context requires. 5P. INTEREST FEE. The Company shall pay ratably to each Purchaser a quarterly interest fee during each quarter at the rate per annum equal to the Applicable Interest Rate on (a) the unpaid balance of the aggregate principal amount of the Notes held by such Purchaser, and (b) to the extent permitted by law, on (i) any overdue payment (whether by acceleration or otherwise and including any overdue prepayment) of principal, (ii) any overdue payment of interest and (iii) any overdue payment of any Make-Whole Amount due under paragraph 4. Such interest fee shall be computed on the basis of the actual days elapsed over a 360-day year of twelve 30-day months, and shall be payable on the last Business Day of each calendar quarter, commencing with the last Business Day of June 2002. Such interest fee shall be applied as follows: first, to the accrued interest on the unpaid balance of the aggregate principal amount of the Notes held by the applicable Purchaser; second, to any overdue payment of principal; third, to any overdue payment of interest; fourth, to any overdue payment of any Make-Whole Amount due under paragraph 4. 1.07 Amendment to Paragraph 6A(1). Paragraph 6A(1) Liens is amended to amend and restate clause (ix) as provided below and insert after clause (x) (which shall not be amended hereby but shall continue to read as provided below) clauses (xi), (xii), (xiii), (xiv), (xv) and (xvi) as provided below: (ix) other Liens (including Liens arising under Capitalized Lease Obligations), in addition to the Liens permitted by clauses (i) through (viii) above and clauses (x) through (xvi) below, securing Indebtedness of the Company or any Subsidiary (other than Indebtedness that constitutes Subordinated Debt); provided, however, that (i) such Indebtedness is permitted by the provisions of Section 6A(2), (ii) the aggregate outstanding principal amount of all such Indebtedness (other than Indebtedness listed on Schedule 6A(1)(ix)) does not at any time exceed $25,000,000 and (iii) no Default or Event of Default shall exist or result therefrom; (x) Liens in favor of the Collateral Agent, provided that the Intercreditor Agreement shall be in full force and effect; (xi) any interest or title of a lessor in property subject to any lease other than (i) subject to clause (vii) above, a Capitalized Lease Obligation, (ii) a lease entered into as part of a sale and leaseback transaction or (iii) except as permitted by clause (xv) below, a Synthetic Lease; (xii) any interest of a lessee or a sublessee in property owned or leased by the Company or any Subsidiary; (xiii) any escrow, holdback or similar arrangement in connection with any sale, lease, transfer or other disposition of any asset not prohibited hereunder (including any sale of the Paint Business); (xiv) Liens in respect of mortgages on properties listed on Schedule 6A(1)(xiv) (the "Specified Facilities"); (xv) Liens in effect on the Amendment Effective Date listed on Schedule 6A(1)(xv); and (xvi) Liens in favor of the Collateral Agent on cash collateral not to exceed $4,000,000 in the aggregate for the Cash Management Bank (as such term is defined in the Intercreditor Agreement) and other cash management services provided with respect thereto (including, without limitation, the services provided by Fleet National Bank) and Liens in favor of the Collateral Agent on cash collateral not to exceed $30,000,000 in the aggregate for letters of credit issued and outstanding on behalf of the Company by the Collateral Agent. 1.08 Amendment to Paragraph 6A(2). Paragraph 6A(2) Debt is amended and restated in its entirety to read as follows: 6A(2). DEBT. The Company will not and will not permit any Subsidiary to create, incur, assume or suffer to exist any Debt, except: (i) Senior Funded Debt, (ii) Subordinated Debt, (iii) Debt under the Guaranty, and (iv) Short Term Debt of the Company. 1.09 Amendment to Paragraph 6A(3)(i). Paragraph 6A(3)(i) Sale of Assets is amended by (a) adding the phrase "or paid to the Collateral Agent to be distributed in accordance with the Intercreditor Agreement" at the end of clause (i); and (b) adding the following sentence to the end of paragraph 6A(3)(i): Notwithstanding the foregoing, an Asset Sale shall not include (i) the sale, lease, assignment, transfer or other disposition of value (each a "DISPOSITION") of inventory in the ordinary course of business, (ii) the Disposition of inventory or receivables to a Guarantor or to the Company, (iii) leases or subleases entered into in the ordinary course of business, (iv) the licensing of intellectual property by the Company or any Subsidiary in the ordinary course of business (so long as such licensing does not prevent the Company or such Subsidiary from using intellectual property material to the business of the Company or such Subsidiary) or (v) the Disposition of other assets having a value not exceeding $250,000 in the aggregate in any fiscal year. 1.10 Amendment to Paragraph 6B. Paragraph 6B Restricted Investments is amended to insert in clause (f) the word "Amendment" between the words "the" and "Effective" and to delete the word "and" after clause (g) and the "." after clause (h) and insert after clause (h) ";" as well as the following provisions: (i) enter into escrow, seller note, holdback or similar arrangements in connection with any sale, lease, transfer or other disposition of any asset not prohibited hereunder (including any sale of the Paint Business); and (ii) maintain investment accounts for the cash collateral held in connection with its cash management services and in support of its outstanding letters of credit. 1.11 Amendment to Paragraph 6C. Paragraph 6C Restricted Payments is amended and restated in its entirety to read as follows: (a) The Company will not, and will not permit any Subsidiary to, pay or declare cash dividends or cash patronage dividends or dividends on any class of its stock (other than dividends in kind) or redeem, purchase or otherwise acquire, or make any redemptions, purchase, or other acquisition of any of its stock or apply miscellaneous deductions in lieu of patronage dividends, or make or permit any Subsidiary to make any Restricted Investment (each a "RESTRICTED PAYMENT") except that the Company or any Subsidiary may pay cash patronage source dividends to members up to the minimum percentage of patronage source income required to be paid pursuant to the applicable regulations of the Internal Revenue Service for cooperatives; provided that if Adjusted EBITDA for the fiscal year most recently ended is at least equal to the amount set forth on Schedule 6C for such fiscal year, the Company may pay cash patronage source dividends in an amount not to exceed 30% of the patronage source income attributable to patronage source income other than income resulting from gains on Asset Sales plus 20% of patronage source income resulting from gains on Asset Sales; provided, however, none of the foregoing dividends based on Adjusted EBITDA shall be paid unless on a pro forma basis the Company can demonstrate it has sufficient liquidity to meet its obligations for the six months following such proposed payments. (b) The Company may not redeem or purchase any shares of stock except for Hardship Case Payments. 1.12 Amendment to Paragraph 6D. Paragraph 6D Compliance with ERISA is amended by inserting the phrase "(other than a Multiemployer Plan)" after the words "terminate or withdraw from any Plan" appearing therein. 1.13 Amendment to Paragraph 6E. Paragraph 6E No Change in Subordination Terms, No Optional Prepayments etc. is amended by (a) adding the words "except to the extent of Hardship Case Payments" to the end of clause (b) therein; (b) deleting the words "that do not trigger a reduction in any commitments of the lenders thereunder"; (c) and adding the words "Synthetic Lease Obligations, Shelf Notes and the" immediately prior to the words "Senior Note Obligations" in clause (ii) in the second sentence thereof; and (d) deleting the words "pursuant to the terms hereof" at the end of clause (ii); and (f) adding a final sentence thereto as follows: All such optional and voluntary prepayments shall be made in accordance with the terms of the Intercreditor Agreement, and in the absence thereof, in conformance with all the other terms hereof. 1.14 Amendment to Paragraph 6F. Paragraph 6F Nature of the Business. is amended and restated in its entirety to read as follows: 6F. NATURE OF BUSINESS. The Company will not and will not permit any Subsidiary to engage in the business of underwriting risks for insurance purposes, or in any other aspect of insurance related business other than in the ordinary course of business in accordance with its practices as of the Amendment Effective Date; or purchase and sell real estate (other than on an agency basis) for purposes other than those relating directly to its principal business except for (i) purchases and sales of store locations in the ordinary course of business which in the aggregate for the Company and its Subsidiaries taken as a whole do not exceed $10,000,000 during any rolling consecutive five year period and (ii) sales of the Specified Facilities. 1.15 Amendment to Paragraph 6G. Paragraph 6G Ratio of Asset Base to Debt is amended and restated in its entirety to read as follows: 6G. [INTENTIONALLY OMITTED.]. 1.16 Amendment to Paragraph 6H. Paragraph 6H Fixed Charge Coverage Ratio is amended and restated in its entirety to read as follows: 6H. FIXED CHARGE COVERAGE RATIO. The Company shall not permit the Fixed Charge Coverage Ratio as of the end of any fiscal quarter set forth below to be less than the applicable ratio set forth below for such period:
Fiscal Period(s) ending on or about Ratio ------------------------------------------ ---------- quarter ending March 2002 0.80:1.0 two quarters ending June 2002 0.90:1.0 three quarters ending September 2002 0.90:1.0 four quarters ending December 2002 0.70:1.0 four quarters ending March 2003 0.70:1.0 four quarters ending June 2003 0.70:1.0 four quarters ending September 2003 0.60:1.0 four quarters ending December 2003 0.75:1.0 four quarters ending March 2004 0.70:1.0 four quarters ending June 2004 0.65:1.0 each four quarter period thereafter 0.65:1.0
1.17 Amendment to Paragraph 6I. Paragraph 6I Minimum EBITDA is amended and restated in its entirety to read as follows: 6I. MINIMUM ADJUSTED EBITDA. The Company shall not permit Adjusted EBITDA as of the end of any fiscal period set forth below to be less than the respective amount set forth below:
Fiscal Period(s) ending on or about Amount ----------------------------------- ------ three months ended 3/31/02 $ 20,000,000 four months ended 4/30/02 $ 25,000,000 five months ended 5/31/02 $ 35,000,000 six months ended 6/30/02 $ 50,000,000 seven months ended 7/31/02 $ 60,000,000 eight months ended 8/31/02 $ 65,000,000 nine months ended 9/30/02 $ 80,000,000 ten months ended 10/31/02 $ 90,000,000 eleven months ended 11/30/02 $ 95,000,000 twelve months ended 12/31/02 $100,000,000 twelve months ended 1/31/03 $100,000,000 twelve months ended 2/28/03 $100,000,000 twelve months ended 3/31/03 $100,000,000 twelve months ended 4/30/03 $ 95,000,000 twelve months ended 5/31/03 $ 95,000,000 twelve months ended 6/30/03 $ 95,000,000 twelve months ended 7/31/03 $ 90,000,000 twelve months ended 8/31/03 $ 90,000,000 twelve months ended 9/30/03 $ 80,000,000 twelve months ended 10/31/03 $ 80,000,000 twelve months ended 11/30/03 $ 80,000,000 twelve months ended 12/31/03 $ 80,000,000 twelve months ended 1/31/04 $ 75,000,000 twelve months ended 2/29/04 $ 75,000,000 twelve months ended 3/31/04 $ 70,000,000 twelve months ended 4/30/04 $ 70,000,000 twelve months ended 5/31/04 $ 65,000,000 twelve months ended 6/30/04 $ 60,000,000 and the twelve month period $ 60,000,000 ended on the last day of each month thereafter
1.18 Amendment to Paragraph 6K. Paragraph 6K is amended and restated to read as follows: 6K. AMENDMENTS TO FINANCING AGREEMENTS. The Company covenants that, without the consent of the Required Holders, it will not, and will not permit any Subsidiary to, amend, modify, supplement, or restate, any Financing Agreement; provided, however, that notwithstanding the foregoing, the Company covenants that, without the consent of the holder or holders of 95% of the aggregate principal amount of the Notes from time to time outstanding (exclusive of Notes then owned by the Company or any of its Affiliates), it will not, and will not permit any Subsidiary to, amend, modify, supplement, or restate the BA Credit Agreements to extend the maturity date of the credit facilities thereunder beyond September 28, 2004. The Company will not deliver any certificate to the Collateral Agent pursuant to Section 3(f) of the Intercreditor Agreement unless it shall have furnished a copy thereof to each holder of Notes at least ten days prior to the date that it proposes to deliver such certificate to the Collateral Agent. The Company will not, and will not permit, any Subsidiary to, request to reduce its commitment under the BA Credit Agreements to less than $100,000,000. 1.19 Addition of Paragraphs 6L, 6M, 6N, 6O, 6P, 6Q, 6R and 6S. Paragraph 6 is amended by adding the following paragraphs 6L, 6M, 6N, 6O, 6P, 6Q, 6R and 6S immediately after paragraph 6K: 6L. MINIMUM GROSS SALES. The Company shall not permit the Gross Sales as of the end of any fiscal period set forth below to be less than the applicable amount set forth below:
Fiscal Period(s) ending on or about Amount ----------------------------------- ------ three months ended 3/31/02 $460,000,000 four months ended 4/30/02 $625,000,000 five months ended 5/31/02 $805,000,000 six months ended 6/30/02 $990,000,000 seven months ended 7/31/02 $1,200,000,000 eight months ended 8/31/02 $1,340,000,000 nine months ended 9/30/02 $1,520,000,000 ten months ended 10/31/02 $1,670,000,000 eleven months ended 11/30/02 $1,815,000,000 twelve months ended 12/31/02 $1,975,000,000 twelve months ended 1/31/03 $1,965,000,000 twelve months ended 2/28/03 $1,955,000,000 twelve months ended 3/31/03 $1,945,000,000 twelve months ended 4/30/03 $1,930,000,000 twelve months ended 5/31/03 $1,920,000,000 twelve months ended 6/30/03 $1,910,000,000 twelve months ended 7/31/03 $1,900,000,000 twelve months ended 8/31/03 $1,890,000,000 twelve months ended 9/30/03 $1,875,000,000 twelve months ended 10/31/03 $1,870,000,000 twelve months ended 11/30/03 $1,865,000,000 twelve months ended 12/31/03 $1,860,000,000 twelve months ended 1/31/04 $1,850,000,000 twelve months ended 2/29/04 $1,840,000,000 twelve months ended 3/31/04 $1,830,000,000 twelve months ended 4/30/04 $1,820,000,000 twelve months ended 5/31/04 $1,805,000,000 twelve months ended 6/30/04 $1,795,000,000 and the twelve month period $1,700,000,000 ended on the last day of each month thereafter
6M. MINIMUM INTEREST COVERAGE RATIO. The Company shall not permit the Interest Coverage Ratio as of the end of any fiscal period set forth below to be less than the applicable ratio set forth below:
Fiscal Period(s) Ratio ------------------------------------------ ---------- quarter ending March 2002 1.20:1.0 two quarters ending June 2002 1.50:1.0 three quarters ending September 2002 1.70:1.0 four quarters ending December 2002 1.70:1.0 four quarters ending March 2003 1.70:1.0 four quarters ending June 2003 1.75:1.0 four quarters ending September 2003 1.65:1.0 four quarters ending December 2003 1.70:1.0 four quarters ending March 2004 1.65:1.0 four quarters ending June 2004 1.50:1.0 and the four quarter period ended on the last day of each month thereafter 1.50:1.0
6N. MAXIMUM CAPITAL EXPENDITURES. The Company will not permit Capital Expenditures to be greater than the following amounts in the following fiscal periods of the Company:
First day of applicable fiscal year through fiscal Cumulative Amount --------------------------------------------------- ----------------- quarter ending on or about -------------------------- March 31, 2002 $6,400,000 June 30, 2002 $11,200,000 September 30, 2002 $13,600,000 December 31, 2002 $16,000,000 March 31, 2003 $6,400,000 June 30, 2003 $11,200,000 December 31, 2003 $16,000,000 March 31, 2004 $6,400,000 June 30, 2004 $11,200,000 Thereafter per fiscal year $16,000,000
6O. ADJUSTMENTS TO FINANCIAL COVENANTS. The financial covenants contained herein may be adjusted upon the mutual agreement of the Company and the Purchasers to reflect (1) an acceleration of the sale of the Paint Business if the closing of such sale occurs prior to June 30, 2003 as contemplated in the Business Plan; and (2) Asset Sales not currently contemplated in the Business Plan, including, but not limited to sale-lease back transactions; provided, however, that if the parties cannot reach agreement within sixty days of the commencement of their negotiations, such covenant shall remain unchanged. 6P. SUBORDINATED NOTES. The Company will discontinue the Variable Denomination Subordinated Floating Rate Demand Notes program on or before July 31, 2002, and no new TIP Notes will be issued after the date hereof without the approval of the Required Holders. 6Q. CHIEF EXECUTIVE OFFICER. Any appointment by the Company of a chief executive officer will be subject to the consent of the Required Holders. 6R. SALE OF HAGERSTOWN FACILITY. The Hagerstown Facility shall not be sold unless (a) the requisite Synthetic Lease Lenders (as defined in the Intercreditor Agreement) approve such sale in writing and (b) the Net Disposition Proceeds of such sale are applied to reduce the balance of the Synthetic Lease Obligations (as defined in the Intercreditor Agreement to the extent permitted by the Intercreditor Agreement). 6S. ASSETS SALES PROHIBITION. Notwithstanding paragraph 6A(3)(i), the Company shall not sell, lease or transfer or otherwise dispose of any assets of the Company or any Subsidiary other than in the ordinary course of business without the consent of the Required Holders; provided that the Company and its Subsidiaries may sell, lease, transfer or otherwise dispose of assets (a) to the extent that such sale, lease, transfer or disposition relates to a Designated Permitted Asset Sale as set forth on Schedule 6S, (b) in connection with the sale and leaseback of distribution centers owned by the Company or any Subsidiary, (c) in connection with the dissolution of any Inactive Subsidiary, and (d) outside the ordinary course of business so long as (1) the aggregate amount of all assets sold, leased, transferred or otherwise disposed of outside the ordinary course of business for the thirty-six months preceding such proposed sale added together, without duplication, with (x) any shares of stock or Debt of any Subsidiary sold or otherwise disposed of, or with respect to which the Company or any Subsidiary has parted control of, except to the Company or another Subsidiary, during such period and (y) any assets then proposed to be sold outside of the ordinary course of business, do not constitute more than 10% of the total assets of the Company and its Subsidiaries on a consolidated basis as of the end of the most recent fiscal quarter for which the Company has delivered financial statements pursuant to paragraph 5A and (2) any such sale of assets is not in excess of $2,500,000 per sale; and, provided, further, that, in the case of (a) through (d) above, all such assets have been sold, leased, transferred or otherwise disposed of for fair market value and the Net Disposition Proceeds paid, and all notes received in respect thereto delivered, to the Collateral Agent to be distributed in accordance with the Intercreditor Agreement and as set forth in paragraph 5O(4). 1.20 Amendment to Paragraph 7A. Paragraph 7A Acceleration is amended by: (a) adding the parenthetical phrase "(other than an Inactive Subsidiary or a Canadian Subsidiary)" after the word "Subsidiary" in clause (vii) therein; (b) adding the phrase "or a Canadian Subsidiary" after the phrase "other than an Inactive Subsidiary" in clauses (viii), (ix) and (x) therein; (c) replacing clause (xix) therein with the following clause: (xix) the Company shall, on any date, not have in effect the BA Credit Agreements providing for a revolving loan facility to the Company with a commitment in the amount of at least $200,000,000 as such amount may be reduced by the application of Interim Proceeds as provided in the Intercreditor Agreement and as such amount may be voluntarily reduced by the Company in accordance with the BA Credit Agreements so long as voluntary reductions of the revolving loan facility do not exceed $50,000,000 in the aggregate; or (d) adding the following new clauses: (xxi) on June 30, 2003 (1) the aggregate outstanding principal balance (exclusive of any Make-Whole Obligations) of the Shelf Notes, the Senior Notes, the Hagerstown Note and the BA Credit Agreement is more than $270,000,000 and (2) the aggregate outstanding principal balance (exclusive of any Make-Whole Obligations) of the Shelf Notes, the Senior Notes, and the Hagerstown Note plus the aggregate amount of all the commitments under the BA Credit Agreement (less $30,000,000 which amount represents the "Unusable Amount" under the BA Credit Agreement for such date) exceeds $320,000,000; or; (xxii) the Company or a Subsidiary shall make any principal payment of any Subordinated Debt other than, so long as no Default or Event of Default exists or would be created thereby and the Company has met or exceeded its Minimum Adjusted EBITDA covenant set forth in paragraph 6I as of the most recent fiscal period for which such covenant is applicable, (x) up to an aggregate of $2,800,000 in principal amounts of variable denomination floating rate subordinated notes after the Amendment Effective Date, (y) up to an aggregate of $24,000,000 in principal amounts due in fiscal 2002, and (z) up to an aggregate of $14,000,000 in principal amounts due in fiscal 2003; or (xxiii) the Company fails to cause the appointment to its Board of Directors of: (1) at least two independent outside directors by May 31, 2002, (2) at least two additional independent outside directors by September 1, 2002 (raising the aggregate number of independent outside directors to no less than four by that time) and (3) at least one additional independent outside director by November 1, 2002 (raising the aggregate number of independent outside directors to no less than five by that time and thereafter); or (xxiv) the Intercreditor Agreement shall cease to be in full force and effect; or (xxv) the Company defaults in the payment of any principal or Make-Whole Amount, if any, payable with respect to any Note, including without limitation the Make-Whole Notes, when the same shall become due, either by the terms thereof or otherwise as herein provided (including, without limitation, paragraph 4A or paragraph 5O); or (xxvi) the Company defaults in the payment of any interest on any Note payable with respect to any Note, including without limitation the Make-Whole Notes, or the Company or any Subsidiary defaults in the payment of any other amount payable hereunder or under any other Note Document, for more than 3 days after the date due; or (xxvii) after the occurrence and during the continuation of an Event of Default, the Company makes any payments (whether principal, interest, premium, make-whole, or other amounts) of any Subordinated Debt; and (e) adding the following sentence after the end of clause (c) to the final paragraph of 7A : Notwithstanding the foregoing, if such event is an Event of Default specified in clauses (xxv), (xxvi) and (xxvii) of this paragraph 7A, any holder of any Note may at its option during the continuance of such Event of Default, by notice in writing to the Company, declare all of the Notes held by such holder to be and become, and all of the Notes held by such holder shall thereupon be and become, immediately due and payable at par together with interest accrued thereon and together with, to the full extent permitted by applicable law, the Make-Whole Amount, if any, with respect to such Notes, without presentment, demand, protest or notice of any kind all of which are hereby waived by the Company. 1.21 Amendment to Paragraph 10A Defined Terms. Paragraph 10A Defined Terms is amended to (a) add the words "or losses" immediately before the first parenthetical in clause (a) of the proviso contained in the definition of "Consolidated Net Earnings" and (b) add ", notes payable to Members and other Subordinated Debt" to first parenthetical in the definition of "Funded Debt" immediately after the words "Capitalized Lease Obligations" and to delete the phrase "and excluding borrowings under any revolving credit facility (including, without limitation, any BA Credit Agreement" and to delete ", so long as no event has occurred the result of which would be to cause or permit such Indebtedness to become due prior to any stated maturity" at the end thereof. 1.22 Amendment to Paragraph 10A Defined Terms. Paragraph 10A Defined Terms is amended to (1) delete the defined term "Year 2000 Problem", (2) to add the phrase ", notes payable to Members and other Subordinated Debt" to the first parenthetical in the definition of "Funded Debt" immediately after the words "Capitalized Lease Obligations"; and (3) to amend and restate the following defined terms or, if such definitions are not in the Original NPA, to add such defined terms, in the appropriate alphabetical order: "ADJUSTED CASH FLOW" shall mean, with respect to any period, Consolidated Net Earnings for such period less (a) the sum of (i) to extent not already deducted in the calculation of Consolidated Net Earnings, gains from Asset Sales realized during such period, (ii) Capital Expenditures during such period, (iii) amortization of all Indebtedness (including amortization of Indebtedness from payments of Excess Cash Flow but excluding amortization of Indebtedness from the proceeds of Asset Sales) for such period, (iv) patronage dividends accrued in the current fiscal year to be paid in the following fiscal year, (v) any increase in restricted cash during such period and (vi) Restructuring Charges taken during such period; plus (b) the sum of (i) to the extent deducted in the calculation of Consolidated Net Earnings, losses from Asset Sales realized during such period, (ii) depreciation and amortization expense for such period, (iii) non-cash income tax expense for such period and (iv) any decrease in restricted cash during such period. "ADJUSTED EBITDA" shall mean, for any period, EBITDA plus Restructuring Charges to the extent taken in such period. "ADJUSTED WORKING CAPITAL" shall mean, at any date of determination, the result of (a) current assets of the Company and its Subsidiaries at such date, minus (b) without duplication, cash and restricted cash of the Company and its Subsidiaries at such date, minus (c) current liabilities of the Company and its Subsidiaries at such date plus (d) the sum of (i) the current portion of Subordinated Debt and other Debt at such date, (ii) accrued and unpaid patronage dividends at such date, (iii) the value of current assets purchased, transferred or assumed in connection with Asset Sales consummated during such period, minus (e) the value of current liabilities purchased, transferred or assumed in connection with Asset Sales consummated during such period. "ADJUSTED WORKING CAPITAL CHANGE" shall mean, for any fiscal year, the result of (a) Adjusted Working Capital for such fiscal year minus (b) Adjusted Working Capital for the fiscal year immediately preceding such fiscal year. "AMENDMENT EFFECTIVE DATE" shall mean April 11, 2002. "APRIL 2002 MODIFICATION" shall mean that certain Amendment to the Amended and Restated Note Purchase Agreement, dated as of April 11, 2002, between the Company and the Purchasers who are signatories thereto. "BUSINESS PLAN" shall mean the business plan of the Company dated March 1, 2002 which was delivered by the Company to the Purchasers. "CANADIAN SUBSIDIARY" shall mean Cotter Canada Hardware and Variety Company, Inc. "CAPITAL EXPENDITURES" shall mean, for any period, the sum without duplication of (a) the aggregate amount of all expenditures of the Company and its Subsidiaries for fixed or capital assets made during such period which, in accordance with GAAP, would be classified as capital expenditures; and (b) the aggregate amount of all Capitalized Lease Obligations incurred during such period excluding, in each case, (i) expenditures made in connection with replacement, repair or restoration of fixed assets from insurance proceeds not to exceed $1,000,000 in the aggregate per loss and (ii) refinancings or renewals of the Capitalized Lease Obligations in effect on the Amendment Effective Date. "DESIGNATED PERMITTED ASSET SALE" shall mean the sale or other disposition of the properties set forth on Schedule 6S. "DISPOSITION" shall have the meaning ascribed to such term in paragraph 6A(3)(i). "EBITDA" shall mean, for any period, Consolidated Net Earnings for such period plus, to the extent deducted in computing such Consolidated Net Earnings, interest expense (including rent expense with respect to Synthetic Leases), taxes, depreciation and amortization. "EXCESS CASH FLOW" shall mean, for any period, 80% of the sum of (a) Adjusted Cash Flow for such period, plus (b) any negative Adjusted Working Capital Change for such period, minus (c) any positive Adjusted Working Capital Change for such period. "FIXED CHARGE COVERAGE RATIO" shall mean, as of the last day of any fiscal quarter, the ratio of (a) result, for the period of four consecutive fiscal quarters ending on such day, of the (i) Consolidated Net Earnings, plus (ii) to the extent deducted in determining such Consolidated Net Earnings, interest expense (including rent expense with respect to Synthetic Leases), taxes, depreciation and amortization, plus (iii) Restructuring Charges taken during such period, minus (iv) gains from Asset Sales realized during such period, to the extent included in determining Consolidated Net Earnings, plus (v) losses from Asset Sales realized during such period, to the extent deducted in determining Consolidated Net Earnings to (b) the sum for such period of (i) scheduled payments of principal with respect to the Shelf Notes and the Notes, (ii) interest expense (including rent expense with respect to Synthetic Leases and excluding interest expense with respect to Make-Whole Obligations and new Make-Whole Obligations of principal arising in such period) and (iii) Capital Expenditures; each as determined for the Company and its Subsidiaries on a consolidated basis. The amount in each of clauses (a) and (b) shall be calculated for the period ending (x) March 31, 2002 based upon such period and then multiplied by four, (y) June 30, 2002 based upon the period of two consecutive fiscal quarters ending on such date and then multiplied by two and (z) September 30, 2002 based upon the period of three consecutive fiscal quarters ending on such date and then multiplied by one and one-third. "FOREIGN SUBSIDIARIES" shall mean each Subsidiary of the Company which is organized under the law of any jurisdiction, other than and which is conducting the majority of its business, outside of the United States or any state thereof. "GROSS SALES" shall mean the consolidated gross sales for the Company and its Subsidiaries. "HAGERSTOWN FACILITY" shall mean the distribution center located at 16500 Hunters Green Parkway, Hagerstown, Maryland. "HAGERSTOWN NOTE" shall mean the "Synthetic Maximum Shortfall" as defined in the Intercreditor Agreement. "HARDSHIP CASE PAYMENT" shall mean the payment to any stockholder that has notified the Company of his termination and requested an accelerated redemption payment of any portion of his stock and/or Subordinated Debt investment pursuant to a hardship case request authorized in the by-laws of the Company, in an aggregate amount for all stockholders not to exceed $2,000,000 in any fiscal year. Such redemption payments must be administered by a Responsible Officer and made according to the Company's hardship case guidelines. "INACTIVE SUBSIDIARY" shall mean any Subsidiary which does not actively conduct business and which has less than $100,000 in assets. "INDEBTEDNESS" shall mean, with respect to any Person, without duplication, (i) all items (excluding items of contingency reserves or of reserves for deferred income taxes) which in accordance with generally accepted accounting principles would be included in determining total liabilities as shown on the liability side of a balance sheet of such Person as of the date on which Indebtedness is to be determined, (ii) all indebtedness secured by any Lien on any property or asset owned or held by such Person subject thereto, whether or not the indebtedness secured thereby shall have been assumed, (iii) all indebtedness of others with respect to which such Person has become liable by way of any Guaranty and (iv) obligations of such Person with respect to Synthetic Leases. "INDEPENDENT AUDITOR" shall have the meaning ascribed to such term in paragraph 5A. "INSOLVENCY PROCEEDING" shall mean, with respect to any Person, (a) any case, action or proceeding with respect to such Person before any court or other Governmental Authority relating to bankruptcy, reorganization, insolvency, liquidation, receivership, dissolution, winding-up or relief of debtors, or (b) any general assignment for the benefit of creditors, composition, marshalling of assets for creditors, or other, similar arrangement in respect of its creditors generally or any substantial portion of its creditors undertaken under U.S. Federal, state or foreign law, including the Bankruptcy Code. "INTERCREDITOR AGREEMENT" shall mean the First Amended and Restated Intercreditor Agreement dated as of April 11, 2002 among Bank of America, N.A. as agent under the BA Credit Agreements, the Collateral Agent, the Purchasers, The Prudential Insurance Company of America and various other parties substantially in the form of Exhibit G, as amended from time to time in accordance with its terms. "INTEREST COVERAGE RATIO" shall mean, as of the last day of any fiscal quarter, the ratio of (a) the sum, for the period of four consecutive fiscal quarters ending on such day, of (i) Consolidated Net Earnings plus (ii) to the extent deducted in determining such Consolidated Net Earnings, interest expense, taxes, depreciation and amortization, plus (iii) Restructuring Charges less (iv) gains from Asset Sales, to the extent included in determining Consolidated Net Earnings plus (v) losses from Asset Sales, to the extent deducted in determining Consolidated Net Earnings to (b) interest expense for such period (including rent expense with respect to Synthetic Lease Obligations but excluding interest expense with respect to Make-Whole Obligations and new Make-Whole Obligations of principal arising in such period); each as determined for the Company and its Subsidiaries on a consolidated basis. Notwithstanding the foregoing, the amount in each of clauses (a) and (b) shall be calculated for the period ending (x) March 31, 2002 based upon such period and then multiplied by four, (y) June 30, 2002 based upon the period of two consecutive fiscal quarters ending on such date and then multiplied by two and (z) September 30, 2002 based upon the period of three consecutive fiscal quarters ending on such date and then multiplied by one and one-third. "LUMBER NOTE" shall mean the $19,500,000 promissory note of Builder Marts of America, Inc. dated as of December 29, 2000 payable to the Company. "MAKE-WHOLE NOTES" shall mean those notes issued to the Purchasers under Section 4 of the Intercreditor Agreement. "MAKE-WHOLE OBLIGATIONS" shall have the meaning ascribed to such term under the Intercreditor Agreement. "MEMBERS" shall mean any Person which is a member of the Company. "NET DEBT PROCEEDS" shall mean, as to any issuance of Indebtedness for borrowed money (other than any such Indebtedness incurred to refinance existing Indebtedness, provided that the principal amount of such existing Indebtedness is not increased) by any Person, cash proceeds received by such Person in connection therewith, net of reasonable out-of-pocket costs and expenses paid or incurred in connection therewith in favor of any Person not an Affiliate of such Person, such costs and expenses not to exceed 5% of the gross proceeds of such issuance. "NET DISPOSITION PROCEEDS" shall mean, as to any Asset Sale, proceeds in cash, checks or other cash equivalent financial instruments and proceeds from notes, each as and when received by such Person, net of: (a) the direct costs relating to such disposition, excluding amounts payable to such Person or any Affiliate of such Person, (b) an estimate of cash taxes paid or payable by such Person within nine months of the disposition as a direct result of such Asset Sale and (c) amounts required to be applied to repay principal, interest and prepayment premiums and penalties on purchase money liens on the asset which is the subject of such Asset Sale, and in the case of proceeds from the sale of the Hagerstown Facility, net of the amount required to satisfy the obligations with respect to its Synthetic Lease. Net Disposition Proceeds shall include any insurance proceeds received upon the loss of, damage to, or destruction of property, except to the extent such insurance proceeds are applied to replace, repair, restore or rebuild such property up to an aggregate in proceeds per loss of $1,000,000; provided, with the prior written consent of the Required Holders, the Company may reinvest proceeds in excess of $1,000,000 to replace, repair, restore or rebuild such property. "PAINT BUSINESS" shall mean the manufacturing portion of the business classified as the "Paint Segment" in the Company's Form 10-K for the fiscal year ended December 31, 2000. "RESPONSIBLE OFFICER" means the chief executive officer, chief operating officer, chief financial officer, treasurer or chief accounting officer of the Company, the general counsel of the Company or any other officer of the Company involved principally in its financial administration or its controllership function. "RESTRUCTURING CHARGES" shall mean any charges recorded under "Emerging Issues Task Force 94-3: Liability Recognition for Certain Employee Benefits and Other Costs to Exit an Activity (including certain costs incurred in a Restructuring)" issued by the American Institute of Certified Public Accounts; provided that any such charges in excess of $2,000,000 in the aggregate after the date hereof may not be taken by the Company or its Subsidiaries for purposes of covenant calculations and related definitions without the prior written consent of the Required Holders. Such charges include, but are not limited to, costs related to employee benefits, such as severance and termination benefits, costs associated with the elimination and reduction of product lines, costs to consolidate or relocate facilities, costs for new systems development or acquisition, costs to retrain employees to use newly-deployed systems, costs incurred to reduce excess inventory (defined to be inventory on hand in excess of 180 days' worth of supply), costs incurred to dispose of any remaining inventory on hand at the time of closure of a facility, and losses and asset impairments and disposals of assets. "SHELF NOTES" shall mean the Shelf Notes issued pursuant to the Prudential Agreement. "SHORT TERM DEBT" shall mean, as of any date of determination with respect to any Person, (i) all Indebtedness of such Person of a borrowed money other than Funded Debt of such Person and (ii) Guarantees by such Person of Short Term Debt of Persons other than Members. "SPECIFIED FACILITIES" shall have the meaning specified in paragraph 6A(1)(xiv). "SUPPLEMENTAL FUNDING FEE RATE" shall mean 0.765% per quarter. "SYNTHETIC LEASE" shall mean (a) a so-called synthetic, off-balance sheet or tax retention, lease or (b) an agreement for the use or possession of property creating obligations that do not appear on the balance sheet of such Person but which, upon the insolvency or bankruptcy of such Person, would be characterized as the indebtedness of such Person (without regard to accounting treatment). "TERMINATION DATE" shall mean the date on which all of the obligations due hereunder have been paid in full and this Agreement has been terminated. "TIP NOTES" shall mean the registered subordinated debt securities, as amended from time to time, issued under the Company's investment program and designated "Variable Denomination Redeemable Subordinated Fixed Rate Term Notes." "UNMATURED EVENT OF DEFAULT" shall mean any event or circumstance which, with the giving of notice, the lapse of time, or both, would (if not cured or otherwise remedied during such time) constitute an Event of Default. 1.23 Amendment to Paragraph 12A. Paragraph 12A Place of Payment is amended by adding the phrase "and subject to the provisions of the Intercreditor Agreement" after the reference to "paragraph 12B" in the first sentence. 1.24 Addition of Paragraph 13D and Paragraph 13E. Paragraph 13 is amended by adding the following paragraph 13D and paragraph 13E after paragraph 13C: 13D. NOTE PAYMENTS. Notwithstanding any agreement to the contrary herein or in the Notes, the Company hereby agrees that, to the extent any obligation (or part thereof) hereunder or under the Notes which was originally intended to be satisfied in whole or in part is rescinded or must otherwise be restored whether as a result of any proceedings in bankruptcy or reorganization or otherwise, such obligation (or part thereof), and all Liens, rights and remedies therefor and in respect thereof, shall be deemed revived and continued in full force and effect as if such original payment had not been made. The Company agrees that the books and records of each Purchaser showing the outstanding amount of the Notes and including amounts of principal, interest and other obligations of the Company to such Purchaser shall constitute rebuttably presumptive proof thereof, irrespective of whether any principal or other obligation is or should be evidenced by a promissory note or other instrument. This provision shall supersede any action taken by a Purchaser in reliance upon any payments received or proceeds applied and all such actions taken are deemed hereby to be conditioned upon such payments or applications of proceeds being final and irrevocable and not subject to this paragraph 13D. The Company hereby indemnifies each Purchaser for all reasonable costs and expenses incurred by such Purchaser in connection with any rescission or restoration, including any costs and expenses incurred in defending against any claim alleging that such payment constituted a preference, fraudulent transfer or similar payment under any bankruptcy, insolvency or similar law. 13E. SCHEDULES AND EXHIBITS. The Schedules and Exhibits attached hereto are an integral part of this Agreement. 1.25 Addition of Paragraph 20M. Paragraph 20 is amended by adding the following paragraph 20M after paragraph 20L: 20M. NON-CONSENTING HOLDER. (a) Notwithstanding anything to the contrary contained elsewhere herein, one Purchaser, Jeffrey D. Benjamin, has not consented to the April 2002 Modification, and therefore, (i) solely for the purposes of amounts to be paid to Jeffrey Benjamin or his successors, assigns and transferees, the amount of any prepayment or payment of principal of, or the rate of payment or method of computation of interest or of the Make-Whole Amount (as such term is used in paragraph 4) on, the Notes that he receives under the NPAs shall not in any event be less than that which he was entitled to receive under his Original NPA and (ii) solely for the purposes of timing of the amounts to be paid to Jeffrey Benjamin or his successors, assigns and transferees, the time of any prepayment or payment of principal of, or time of payment or method of computation of interest or of the Make-Whole Amount (as such term is used in paragraph 4) on, the Notes that he receives under the NPAs shall not in any event be different than that which he was entitled to receive under his Original NPA. (b) Notwithstanding the foregoing, the April 2002 Modification shall be fully enforceable as between the Purchasers signatories hereto, their successors, assigns and transferees. Each of the Purchasers executing the April 2002 Modification hereby releases each of the other Purchasers executing the April 2002 Modification from any and all claims arising from any purported invalidity of the April 2002 Modification due to the lack of Jeffrey Benjamin's consent and signature hereto. 1.26 Amendment to Schedules. Schedule 1--Purchasers and Schedule 6B--Investments are deleted in their entirety and replaced with Schedule 1--Purchasers and Schedule 6B--Investments, attached to this April 2002 Modification and any new schedules attached hereto shall be an integral part of the NPAs. SECTION 2. Pricing. Effective as of February 28, 2002, any principal, Make-Whole Amount, premium and interest which was accruing interest at the Overdue Rate under paragraph 1A of the Original NPAs shall cease to bear interest at the Overdue Rate and shall bear interest at the Applicable Interest Rate as if no Event of Default had occurred or was continuing, provided, however, that upon any subsequent Event of Default the interest rate on the Notes shall be determined by application of the appropriate clause in the definition of the Applicable Interest Rate and paragraph 1A of the NPAs and the terms of the Notes. SECTION 3. Representations and Warranties. The Company represents, covenants and warrants to each of the Purchasers that, after giving effect hereto as though all conditions of effectiveness have been met, (a) each representation and warranty set forth below is true and correct as of the date of execution and delivery of this Amendment by the Company with the same effect as if made on such date (except to the extent such representations and warranties expressly refer to an earlier date, in which case they were true and correct as of such earlier date) and (b) except for the Events of Default arising from non-compliance with financial covenants contained in paragraph 6 under the Original NPA being waived in Section 8 below and the defaults disclosed in that certain letter from the Company to the Purchasers dated April 11, 2002 (the "DEFAULT LETTER"), no Event of Default or Default exists: 3A. ORGANIZATION; QUALIFICATIONS; CORPORATE POWER. The Company is a corporation duly organized and existing in good standing under the laws of the State of Delaware, each Subsidiary is duly organized and existing in good standing under the laws of the jurisdiction in which it is formed and the Company and each of its Subsidiaries is duly qualified as a foreign corporation or entity and is in good standing in each jurisdiction in which such qualification is required by law, other than those jurisdictions in which the failure to be so qualified could not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect. The Company has and each Subsidiary has the power to own their respective properties and to carry on their respective businesses as now being conducted. No Subsidiary has outstanding any shares of stock of a class which has priority over any other class as to dividends or in liquidation (except as otherwise disclosed on Schedule 3A). Each of the Company and each Subsidiary has the power and authority to execute and deliver this Agreement, the Other Agreements, the Guaranty, the Collateral Documents, the Notes and all other Note Documents to which it is a party and to perform the provisions hereof and thereof. 3B. AUTHORIZATION, ETC. This Agreement, the Other Agreements, the Guaranty, the Collateral Documents, the Notes and all other Note Documents have been duly authorized by all necessary action on the part of the Company and each Subsidiary party thereto and this Agreement, the Other Agreements, the Guaranty, the Collateral Documents and all other Note Documents constitute, and upon execution and delivery thereof each Note will constitute, a legal, valid and binding obligation of the Company and each Subsidiary party thereto enforceable against the Company and each such Subsidiary in accordance with its terms, except as such enforceability may be limited by (i) applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting the enforcement of creditors' rights generally and (ii) general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law). 3C. ORGANIZATION AND OWNERSHIP OF SHARES OF SUBSIDIARIES; AFFILIATES. (a) Schedule 3C contains complete and correct lists (i) of the Company's Subsidiaries, showing, as to each Subsidiary, the correct name thereof, the jurisdiction of its organization, the percentage of shares of each class of its capital stock or similar equity interests outstanding owned by the Company and each other Subsidiary, (ii) of the Company's Affiliates, other than Subsidiaries, and (iii) of the Company's directors and senior officers. (b) All of the outstanding shares of capital stock or similar equity interests of each Subsidiary shown in Schedule 3C as being owned by the Company and its Subsidiaries have been validly issued, are fully paid and nonassessable and are owned by the Company or another Subsidiary free and clear of any Lien (except as otherwise disclosed in Schedule 3C). (c) No Subsidiary is a party to, or otherwise subject to any legal restriction or any agreement (other than this Agreement, the agreements listed on Schedule 3C and customary limitations imposed by corporate law statutes) restricting the ability of such Subsidiary to pay dividends out of profits or make any other similar distributions of profits to the Company or any of its Subsidiaries that owns outstanding shares of capital stock or similar equity interests of such Subsidiary. (d) Except as otherwise provided in paragraph 5K of the NPAs (after giving effect to the April 2002 Modification), the Subsidiaries that are parties to the Guaranty and the Security Agreement constitute all of the Subsidiaries of the Company. Except as otherwise provided in paragraph 5K of the NPAs (after giving effect to the April 2002 Modification), the Company has pledged, pursuant to the Pledge Agreement, all of the capital stock of each Subsidiary. 3D. FINANCIAL STATEMENTS. (a) The Company has furnished you and each Other Purchaser of any Note with the following financial statements, identified by a Senior Financial Officer of the Company: (i) a consolidated balance sheet of the Company and its Subsidiaries as at fiscal year end in each of the three fiscal years of the Company most recently completed prior to the date as of which this representation is made or repeated to such Purchaser (other than fiscal years completed within 90 days prior to such date for which audited financial statements have not been released) and consolidated statements of operations and cash flows and a consolidated statement of capital stock and retained earnings of the Company and its Subsidiaries for each such year, all reported on by Ernst & Young (or any independent public accounting firm of recognized national standing) and (ii) a consolidated balance sheet of the Company and its Subsidiaries as at the end of the quarterly period (if any) most recently completed prior to such date and after the end of such fiscal year (other than quarterly periods completed within 60 days prior to such date for which financial statements have not been released) and the comparable quarterly period in the preceding fiscal year and consolidated statements of operations and cash flows and a consolidated statement of capital stock and retained earnings for the periods from the beginning of the fiscal years in which such quarterly periods are included to the end of such quarterly periods, prepared by the Company. Such financial statements (including any related schedules and/or notes) are true and correct in all material respects (subject as to interim statements to changes resulting from audits and year-end adjustments), have been prepared in accordance with GAAP consistently followed throughout the periods involved and show all liabilities, direct and contingent, of the Company and its Subsidiaries required to be shown in accordance with such principles. The balance sheets fairly present the condition of the Company and its Subsidiaries as at the dates thereof, and the statements of operations, capital stock and retained earnings and cash flows fairly present the results of the operations of the Company and its Subsidiaries and their cash flows for the periods indicated. (b) There has been no material adverse change in the business, operations, condition (financial or otherwise), assets, properties or prospects of the Company and its Subsidiaries taken as a whole since the end of the most recent fiscal year for which such audited financial statements have been furnished other than as has been previously disclosed by the Company to the Purchasers for any changes through the Amendment Effective Date. The Business Plan relating to the Company and its Subsidiaries for the period January 1, 2002-June 30, 2004, a copy of which was delivered previously to the Purchasers, discloses all material assumptions used in formulating such projections. The Company is not aware of any facts that (individually or in the aggregate) would result in any material change in the Business Plan. It was prepared on the basis of the assumptions stated therein (all of which were made by the Company in good faith), and reflect the reasonable estimates of the Company of the financial condition, results of operations and other information projected therein. 3E. ACTIONS PENDING. Except as described in reasonable detail on Schedule 3E, there is no action, suit, investigation or proceeding pending or, to the knowledge of the Company, threatened against the Company or any of its Subsidiaries, or any properties or rights of the Company or any of its Subsidiaries, by or before any court, arbitrator or administrative or governmental body which could be reasonably expected to have a Material Adverse Effect. 3F. OUTSTANDING DEBT. Neither the Company nor any of its Subsidiaries has outstanding any Debt except as permitted by paragraph 6A(2) of the NPAs (after giving effect to the April 2002 Modification). There exists no default under the provisions of any instrument (as defined in the UCC) or agreement evidencing Debt of the Company or any of its Subsidiaries in an amount greater than $250,000 or of any agreement relating thereto (it being understood that the representation and warranty in this sentence is made after giving effect to the April 2002 Modification and the amendments prior thereto). 3G. TITLE TO PROPERTIES. The Company has and each of its Subsidiaries has good and marketable title to its respective real properties (other than properties which it leases) and good title to all of its other respective properties and assets, including the properties and assets reflected in the most recent audited balance sheet referred to in paragraph 3D (other than properties and assets disposed of in the ordinary course of business), subject to no Lien of any kind except Liens permitted by paragraph 6A(1) of the NPAs. All leases necessary in any material respect for the conduct of the respective businesses of the Company and its Subsidiaries are valid and subsisting and are in full force and effect. The security interests granted under the Security Agreement by the Company and its Subsidiaries (the "Security Interests") are granted as security only and shall not subject the Collateral Agent or any holder of the Notes to, or transfer or in any way affect or modify, any obligation or liability of the Company or any other Debtor (as defined in the Security Agreement) with respect to any of the Collateral (as defined in the Security Agreement) or any transaction in connection therewith. The Security Interests constitute valid security interests under the Uniform Commercial Code as in effect from time to time in the State of Illinois ("UCC") securing the Liabilities (as defined in the Security Agreement). The Security Interests constitute perfected security interests in the Collateral (as defined in the Security Agreement) (except inventory in transit) to the extent that a security interest therein may be perfected by filing pursuant to the UCC, prior to all other liens, claims and rights of others therein except for Permitted Liens (as defined in the Security Agreement). 3H. TAXES. The Company has and each of its Subsidiaries has filed all federal, state and other tax returns which are required to be filed, and each has paid all taxes as shown on such returns and on all assessments received by it to the extent that such taxes have become due, except such unfiled returns and unpaid taxes (i) as are being contested in good faith by appropriate proceedings for which adequate reserves have been established in accordance with GAAP or (ii) the non-filing or non-payment of which (a) could not be reasonably expected to have a Material Adverse Effect and (b) does not result in the creation of any Lien other than Liens permitted by paragraph 6A(l)(i) of the NPAs. 3I. CONFLICTING AGREEMENTS AND OTHER MATTERS. Neither the Company nor any of its Subsidiaries is a party to any contract or agreement or subject to any charter or other corporate restriction which could have a Material Adverse Effect. Neither the execution nor delivery of this Agreement, the Other Agreements, the Guaranty, the Collateral Documents, the Notes or any of the other Note Documents, nor the offering, issuance and sale of the Notes, nor fulfillment of nor compliance with the terms and provisions hereof and thereof and of the Notes will conflict with, or result in a breach of the terms, conditions or provisions of, or constitute a default under, or result in any violation of, or result in the creation of any Lien (other than the Liens created by the Collateral Documents) upon any of the properties or assets of the Company or any of its Subsidiaries pursuant to, the charter or by-laws of the Company or any of its Subsidiaries, any award of any arbitrator or any agreement (including any agreement with stockholders), instrument, order, judgment, decree, statute, law, rule or regulation to which the Company or any of its Subsidiaries is subject. Neither the Company nor any of its Subsidiaries is a party to, or otherwise subject to any provision contained in, any instrument evidencing Indebtedness of the Company or such Subsidiary, any agreement relating thereto or any other contract or agreement (including its charter) which limits the amount of, or otherwise imposes restrictions on the incurring of, Debt of the Company of the type to be evidenced by the Notes except as set forth in the agreements listed in Schedule 3I attached hereto (as such Schedule 3I may have been modified from time to time by written supplements thereto delivered by the Company and accepted in writing by the Required Holders). 3J. ERISA. No contribution required to have been made to any Plan by the Company or any Subsidiary under the provisions of the Plan or ERISA remains unpaid and no accumulated funding deficiency (as defined in section 302 of ERISA and section 412 of the Code), whether or not waived, exists with respect to any Plan (other than a Multiemployer Plan). No liability to the PBGC has been or is expected by the Company or any ERISA Affiliate to be incurred with respect to any Plan (other than a Multiemployer Plan) by the Company, any Subsidiary or any ERISA Affiliate which has caused or could cause a Material Adverse Effect. None of the Company, any Subsidiary or any ERISA Affiliate has incurred or presently expects to incur any withdrawal liability under Title IV of ERISA with respect to any Multiemployer Plan which has caused or could cause a Material Adverse Effect. 3K. GOVERNMENTAL CONSENT. Neither the nature of the Company or of any Subsidiary, nor any of their respective businesses or properties, nor any relationship between the Company or any Subsidiary and any other Person, nor any circumstance in connection with the offering, issuance, sale or delivery of the Notes is such as to require any authorization, consent, approval, exemption or any action by or notice to or filing with any court or administrative or governmental body (other than routine filings after the Effective Date for any Notes with the Securities and Exchange Commission and/or state Blue Sky authorities) in connection with the execution and delivery of this Agreement, the offering, issuance, sale or delivery of the Notes or fulfillment of or compliance with the terms and provisions hereof or of the Notes. 3L. ENVIRONMENTAL COMPLIANCE. The Company and its Subsidiaries and all of their respective properties and facilities have complied at all times and in all respects with all Environmental Laws, except, in any such case, where failure to so comply could not reasonably be expected to result in a Material Adverse Effect. 3M. SECTION 144A. The Notes are not of the same class as securities, if any, of the Company listed on a national securities exchange registered under Section 6 of the Exchange Act or quoted in a U.S. automated inter-dealer quotation system. 3N. STATUS UNDER CERTAIN STATUTES. Neither the Company nor any Subsidiary is subject to regulation under the investment Company Act of 1940, as amended, the Public Utility Holding Company Act of 1935, as amended, the Interstate Commerce Act, as amended, or the Federal Power Act, as amended. 3O. PRIORITY OF NOTES; BENEFITED OBLIGATIONS. The Notes constitute "Superior Indebtedness" as such term is defined in the Company's Promissory (subordinated) Notes, the form of which is attached hereto as Exhibit A and the Subordinated Debt is subordinated to the Indebtedness owing from time to time by the Company to the holders of the Notes in connection with this Agreement. Schedule 3O lists, as of the date hereof, the principal or face amount of each of the Benefited Obligations held by a Benefited Party and the amount thereof constituting First Tier Benefited Obligations. 3P. LICENSES, PERMITS, ETC. Except as disclosed in Schedule 3P, (i) the Company and its Subsidiaries own or possess all licenses, permits, franchises, authorizations, patents, copyrights, service marks, trademarks and trade names, or rights thereto, that individually or in the aggregate are Material, without known conflict with the rights of others; . (ii) to the best knowledge of the Company, no product of the Company infringes in any material respect any license, permit, franchise, authorization, patent, copyright, service mark, trademark, trade name or other right owned by any other Person; and (iii) to the best knowledge of the Company, there is no Material violation by any Person of any right of the Company or any of its Subsidiaries with respect to any patent, copyright, service mark, trademark, trade name or other right owned or used by the Company or any of its Subsidiaries. SECTION 4. Effectiveness. The amendments described in Section 1 above and the waiver in Section 7 below shall become effective as of the date upon which each Purchaser has received the following (the "AMENDMENT EFFECTIVE DATE"): (a) Amendment. A copy of this Amendment duly executed by each party hereto; (b) Resolutions; Incumbency; Certificate of Incorporation; Bylaws. (i) Copies of the resolutions of the board of directors of the Company and each Guarantor authorizing the transactions contemplated hereby, certified as of the date hereof by the Secretary or an Assistant Secretary of the Company; (ii) a certificate of the Secretary or Assistant Secretary of the Company certifying the names and true signatures of the officers of the Company authorized to execute and deliver this Agreement and the Intercreditor Agreement to be delivered by it hereunder; and (iii) copies of the certificate of incorporation and by-laws (or other organizational documents) of the Company, certified by the Secretary or an Assistant Secretary of the Company. (c) Good Standing. A copy of a good standing certificate as of a recent date for the Company from the Secretary of State (or similar, applicable Governmental Authority) of its state of incorporation. (d) Legal Opinion. An opinion of counsel to the Company in form and substance reasonably acceptable to the Purchasers. (e) Payment of Fees. Evidence of payment by the Company of all accrued and unpaid fees, costs and reasonable expenses to the extent then due and payable on Amendment Effective Date, together with Attorney Costs of the Purchasers to the extent invoiced prior to or on the Amendment Effective Date, plus such additional amounts of Attorney Costs as shall constitute the Purchasers' reasonable estimate of Attorney Costs incurred or to be incurred by it through the closing proceedings (provided that such estimate shall not thereafter preclude final settling of accounts between the Company and the Purchasers), including any such costs, fees and reasonable expenses arising under or referenced in paragraphs 1C and 1D in the NPAs and Section 5 hereto. (f) Certificate. A certificate signed by a Responsible Officer, dated as of the Amendment Effective Date, stating that: (i) the representations and warranties are true and correct as provided in Section 3 above; (ii) no Event of Default or Unmatured Event of Default exists or would result from the execution and delivery of this Amendment; and (iii) since December 31, 2000, no event or circumstance has occurred that has resulted or could reasonably be expected to result in a Material Adverse Effect, except as set forth on Schedule 4.1(f). (g) Consent. The Consent, signed by each Guarantor. (h) Intercreditor Agreement. The Intercreditor Agreement in the form attached hereto as Exhibit G, signed by the parties thereto and consented to by the Company and the Guarantors. (i) Amendment of Certain Agreements. Evidence, satisfactory to the Purchasers, that each of the "Operative Documents" as defined in the Synthetic Lease Guaranty (as defined in the Intercreditor Agreement), the BA Credit Agreements and each Prudential Agreement has been amended to conform in all material respects with the representations, warranties, covenants and defaults contained in this Agreement. (j) Service Agreement. A copy of that certain Three Party Blocked Account Service Agreement dated as of December 10, 2001, duly executed by TruServ, the Collateral Agent and Fleet National Bank. (k) Other Documents. Such other approvals, opinions, documents or materials as the Purchasers may reasonably request. 4.2 Other Conditions to Effectiveness. All proceeds by the Collateral Agent shall have been applied as set forth under the Intercreditor Agreement. SECTION 5. Amendment Fees. In consideration of the Purchasers entering into this Amendment, the Company agrees to pay, on or before the Amendment Effective Date, ratably to each Purchaser, an aggregate fee of $1,312,500. SECTION 6. Reference to and Effect on Original NPA. Upon the effectiveness of this Amendment as set forth in Section 4 above, each reference to the Original NPAs in any other document, instrument or agreement shall mean and be a reference to such agreement as modified by this Amendment. Except as specifically set forth in and in conformity with Section 1 above, each Original NPA shall remain in full force and effect and each is hereby ratified and confirmed in all respects. SECTION 7. Company Indemnification. Whether or not the transactions contemplated hereby are consummated, the Company shall indemnify and hold each of the Purchasers and each of their respective officers, directors, employees, counsel, agents and attorneys-in-fact (each an "Indemnified Person") harmless from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, charges, expenses and disbursements (including Attorney Costs) of any kind or nature whatsoever which may at any time (including at any time following repayment of the obligations hereunder) be imposed on, incurred by or asserted against any such Indemnified Person in any way relating to or arising out of this Amendment or any document contemplated by or referred to herein, or the transactions contemplated hereby or thereby, or any action taken or omitted by any such Indemnified Person, including any Purchaser failing to consent to this Amendment, under or in connection with any of the foregoing, including with respect to any investigation, litigation or proceeding (including any Insolvency Proceeding or appellate proceeding) related to or arising out of this Amendment or the Notes the Intercreditor Agreement, the BA Credit Agreements, the Shelf Notes, the Prudential Agreement, or the "Operative Documents" (as defined in the Intercreditor Agreement) or the use of the proceeds thereof, whether or not any Indemnified Person is a party hereto or thereto (all the foregoing, collectively, the "Indemnified Liabilities"); provided that the Company shall have no obligation hereunder to any Indemnified Person with respect to Indemnified Liabilities resulting solely and directly from the gross negligence or willful misconduct of such Indemnified Person. The agreements in this Section shall survive payment of all other obligations hereunder and the termination of this Amendment. SECTION 8. Waiver. Effective on the Amendment Effective Date, the Purchasers waive any Default or Event of Default arising from non-compliance with the financial covenants contained in paragraph 6 of the Original NPA and the defaults specifically disclosed in the Default Letter. Except as specifically set forth in the preceding sentence, nothing contained herein shall be construed as a waiver of or consent to any other violation of the Original NPA or any other Default or Event of Default under the Original NPA. SECTION 9. Governing Law. This Agreement shall be construed and enforced in accordance with, and the rights of the parties shall be governed by, the law of the State of New York, excluding choice-of-law principles of the law in such State that would require the application of the laws of a jurisdiction other than such State. SECTION 10. WAIVER OF JURY TRIAL. EACH OF THE COMPANY AND EACH HOLDER OF NOTES HEREBY IRREVOCABLY WAIVES ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR RELATING TO THIS AMENDMENT, THE ORIGINAL NPA, THE NOTES OR THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY SECTION 11. Counterparts; Section Titles. This Amendment may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed and delivered shall be deemed to be an original and all of which when taken together shall constitute but one and the same instrument. The section titles contained in this letter agreement are and shall be without substance, meaning or content of any kind whatsoever and are not a part of the agreement between the parties hereto. [SIGNATURES ON FOLLOWING PAGE] * * * * * If you are in agreement with the foregoing, please sign this Amendment and return it to the Company, whereupon the foregoing shall become a binding agreement between you and the Company. Very truly yours, TRUSERV CORPORATION By: /s/ BARBARA WAGNER Name: Barbara Wagner Title: Vice President and Treasurer The foregoing Amendment is hereby accepted as of the date first above written. ALLSTATE INSURANCE COMPANY By: /s/ ROBERT BODETT Name: Robert Bodett Title: Senior Portfolio Manager By: /s/ RONALD MENDEL Name: Ronald Mendel Title: Managing Director * * * * * If you are in agreement with the foregoing, please sign this Amendment and return it to the Company, whereupon the foregoing shall become a binding agreement between you and the Company. Very truly yours, TRUSERV CORPORATION By: /s/ BARBARA WAGNER Name: Barbara Wagner Title: Vice President and Treasurer The foregoing Amendment is hereby accepted as of the date first above written. ALLSTATE LIFE INSURANCE COMPANY By: /s/ ROBERT BODETT Name: Robert Bodett Title: Senior Portfolio Manager By: /s/ RONALD MENDEL Name: Ronald Mendel Title: Managing Director * * * * * If you are in agreement with the foregoing, please sign this Amendment and return it to the Company, whereupon the foregoing shall become a binding agreement between you and the Company. Very truly yours, TRUSERV CORPORATION By: /s/ BARBARA WAGNER Name: Barbara Wagner Title: Vice President and Treasurer The foregoing Amendment is hereby accepted as of the date first above written. KEYPORT LIFE INSURANCE COMPANY BY STEIN ROE & FARNHAM INCORPORATED AS AGENT By: /s/ RICHARD A. HEGWOOD Name: Richard A. Hegwood Title: Senior Vice President * * * * * If you are in agreement with the foregoing, please sign this Amendment and return it to the Company, whereupon the foregoing shall become a binding agreement between you and the Company. Very truly yours, TRUSERV CORPORATION By: /s/ BARBARA WAGNER Name: Barbara Wagner Title: Vice President and Treasurer The foregoing Amendment is hereby accepted as of the date first above written. AID ASSOCIATION FOR LUTHERANS By: /s/ R. JERRY SCHEEL Name: R. Jerry Scheel Title: Second Vice President-Securities By: /s/ GREG ANDERSON Name: Greg Anderson Title: Portfolio Manager * * * * * If you are in agreement with the foregoing, please sign this Amendment and return it to the Company, whereupon the foregoing shall become a binding agreement between you and the Company. Very truly yours, TRUSERV CORPORATION By: /s/ BARBARA WAGNER Name: Barbara Wagner Title: Vice President and Treasurer The foregoing Amendment is hereby accepted as of the date first above written. NATIONWIDE LIFE INSURANCE COMPANY By: /s/ MARK W. POEPPELMAN Name: Mark W. Poeppelman Title: Associate Vice President * * * * * If you are in agreement with the foregoing, please sign this Amendment and return it to the Company, whereupon the foregoing shall become a binding agreement between you and the Company. Very truly yours, TRUSERV CORPORATION By: /s/ BARBARA WAGNER Name: Barbara Wagner Title: Vice President and Treasurer The foregoing Amendment is hereby accepted as of the date first above written. FEDERATED LIFE INSURANCE COMPANY By: /s/ MARK A. HOOD Name: Mark A. Hood Title: Vice President * * * * * If you are in agreement with the foregoing, please sign this Amendment and return it to the Company, whereupon the foregoing shall become a binding agreement between you and the Company. Very truly yours, TRUSERV CORPORATION By: /s/ BARBARA WAGNER Name: Barbara Wagner Title: Vice President and Treasurer The foregoing Amendment is hereby accepted as of the date first above written. FEDERATED MUTUAL INSURANCE COMPANY By: /s/ MARK A. HOOD Name: Mark A. Hood Title: Vice President * * * * * If you are in agreement with the foregoing, please sign this Amendment and return it to the Company, whereupon the foregoing shall become a binding agreement between you and the Company. Very truly yours, TRUSERV CORPORATION By: /s/ BARBARA WAGNER Name: Barbara Wagner Title: Vice President and Treasurer The foregoing Amendment is hereby accepted as of the date first above written. MODERN WOODMEN OF AMERICA By: /s/ GREG E. STOEFEN Name: Greg E. Stoefen Title: Director, Treasurer and Investment Manager * * * * * If you are in agreement with the foregoing, please sign this Amendment and return it to the Company, whereupon the foregoing shall become a binding agreement between you and the Company. Very truly yours, TRUSERV CORPORATION By: /s/ BARBARA WAGNER Name: Barbara Wagner Title: Vice President and Treasurer The foregoing Amendment is hereby accepted as of the date first above written. AMERITAS LIFE INSURANCE CORP. BY AMERITAS INVESTMENT ADVISORS, INC. AS AGENT By: /s/ ANDREW S. WHITE Name: Andrew S. White Title: Vice President * * * * * If you are in agreement with the foregoing, please sign this Amendment and return it to the Company, whereupon the foregoing shall become a binding agreement between you and the Company. Very truly yours, TRUSERV CORPORATION By: /s/ BARBARA WAGNER Name: Barbara Wagner Title: Vice President and Treasurer The foregoing Amendment is hereby accepted as of the date first above written. NATIONAL GUARDIAN LIFE INSURANCE COMPANY By: R.A. MUCCI Name: R.A. Mucci Title: Vice President and Treasurer * * * * * If you are in agreement with the foregoing, please sign this Amendment and return it to the Company, whereupon the foregoing shall become a binding agreement between you and the Company. Very truly yours, TRUSERV CORPORATION By: /s/ BARBARA WAGNER Name: Barbara Wagner Title: Vice President and Treasurer The foregoing Amendment is hereby accepted as of the date first above written. FOOTHILL PARTNERS IV, L.P. By: R. MICHAEL BOHANNON Name: R. Michael Bohannon Title: Managing Member * * * * * If you are in agreement with the foregoing, please sign this Amendment and return it to the Company, whereupon the foregoing shall become a binding agreement between you and the Company. Very truly yours, TRUSERV CORPORATION By: /s/ BARBARA WAGNER Name: Barbara Wagner Title: Vice President and Treasurer The foregoing Amendment is hereby accepted as of the date first above written. EVEREST CAPITAL SENIOR DEBT FUND By: PETER JINKS Name: Peter Jinks Title: Chief Financial Officer By: ERIC GRAHAM Name: Eric Graham Title: Vice President * * * * * If you are in agreement with the foregoing, please sign this Amendment and return it to the Company, whereupon the foregoing shall become a binding agreement between you and the Company. Very truly yours, TRUSERV CORPORATION By: /s/ BARBARA WAGNER Name: Barbara Wagner Title: Vice President and Treasurer The foregoing Amendment is hereby accepted as of the date first above written. ABRAMS CAPITAL, LLC By: /s/ DAVID ABRAMS Name: David Abrams Title: Managing Member * * * * * If you are in agreement with the foregoing, please sign this Amendment and return it to the Company, whereupon the foregoing shall become a binding agreement between you and the Company. Very truly yours, TRUSERV CORPORATION By: /s/ BARBARA WAGNER Name: Barbara Wagner Title: Vice President and Treasurer The foregoing Amendment is hereby accepted as of the date first above written. U. S. BANCORP LIBRA, A TRADE NAME OF U. S. BANCORP INVESTMENTS, INC. By: /s/ ROBERT A. KRUEGER Name: Robert A. Krueger Title: Vice President * * * * * If you are in agreement with the foregoing, please sign this Amendment and return it to the Company, whereupon the foregoing shall become a binding agreement between you and the Company. Very truly yours, TRUSERV CORPORATION By: /s/ BARBARA WAGNER Name: Barbara Wagner Title: Vice President and Treasurer The foregoing Amendment is hereby accepted as of the date first above written. RAVICH REVOCABLE TRUST OF 1989 By: /s/ JESS RAVICH Name: Jess Ravich Title: Trustee EXHIBIT G INTERCREDITOR AGREEMENT Please see attached. EXHIBIT A TO NOTE AMENDMENT FORM OF PROMISSORY (SUBORDINATED) NOTES Please see attached. EX-4.R 9 c66649ex4-r.txt AMENDMENT TO AMENDED PRIVATE SHELF AGREEMENT April 11, 2002 TruServ Corporation 8600 West Bryn Mawr Avenue Chicago, Illinois 60631 Attention: Chief Financial Officer Re: Amendment of Note Agreement and Private Shelf Agreement Ladies and Gentlemen: Reference is made to that certain Amended and Restated Private Shelf Agreement dated as of November 13, 1997, as amended by letter agreements dated September 9, 1998, May 12, 1999, and April 14, 2000 (the "Shelf Note Agreement") between TruServ Corporation, a Delaware corporation ("TruServ"), and The Prudential Insurance Company of America ("Prudential") and each affiliate of Prudential which is bound thereby pursuant to the terms thereof (Prudential together with its affiliates, the "Purchasers"). Reference is also made to that certain Note Agreement dated as of April 13, 1992, as amended through the date hereof, between Cotter & Company, the predecessor to TruServ, and Prudential (the "Cotter Note Agreement" and, together with the Shelf Note Agreement, the "Note Agreements"). Capitalized terms used herein and not otherwise defined herein shall have the meanings assigned to such terms in the Shelf Note Agreement. Pursuant to the request of TruServ and in accordance with the provisions of (i) Paragraph 11C of the Shelf Note Agreement and (ii) Paragraph 11C of the Cotter Note Agreement, the parties hereto consent to the amendment of the Note Agreements and agree as follows: SECTION 1. Amendment. From and after the date this letter agreement becomes effective in accordance with its terms, the Note Agreements shall be respectively amended as follows: 1.1 Paragraph 1 Amendment and Restatement; Authorization of the Note Agreements is amended by deleting the last paragraph thereof in its entirety. 1.2 Paragraph 2 Purchase and Sale of Notes of the Note Agreements is amended to add the following new clauses: 2B(8)(v). SUPPLEMENTAL FUNDING FEE. The Company shall pay ratably to each Purchaser a supplemental funding fee from February 28, 2002 until the Termination Date on the average unpaid balance of the aggregate principal amount of the Notes held by such Purchaser during each quarter at the rate equal to the Supplemental Funding Fee Rate. Such supplemental funding fee shall be computed on the basis of the actual days elapsed over a 360 day year for each respective preceding three month period ending on the last day of March, June, September and December, and shall be payable on the first Business Day of each April, July, October and January; provided that the first supplemental funding fee shall accrue from February 28, 2002 through March 31, 2002 and be payable on the Amendment Effective Date and the second supplemental funding fee shall accrue from April 1, 2002 through June 30, 2002 and be payable on July 1, 2002. 2B(8)(vi). ANNIVERSARY FEE. The Company shall pay ratably to each Purchaser a fee calculated on the then unpaid balance of the aggregate principal amount of the Notes held by such Purchaser of (a) 0.50% on the earlier of (x) the first anniversary of the April 2002 Modification and (y) the Termination Date and (b) if the Termination Date has not occurred prior to the first anniversary of the Amendment Effective Date, 0.25% on the earlier of (x) the second anniversary of the April 2002 Modification and (y) the Termination Date. 1.3 Paragraph 4A Required Prepayments of the Note Agreements is amended by adding the following at the end thereof: 4(A)(1). EXCESS CASH FLOW. The Notes shall be subject to mandatory pro rata prepayment within 90 days after the end of each fiscal year of the Company in an amount equal to the Excess Cash Flow of the Company for such prior fiscal year, commencing with the fiscal year ended for 2002, together with interest on such principal amount so prepaid accrued to the prepayment date plus the Yield Maintenance Amount determined for the prepayment date with respect to such prepaid principal amount; provided, that for so long as the Intercreditor Agreement is in effect, the Notes shall be subject to mandatory pro rata prepayment within 90 days after the end of each fiscal year of the Company in an amount equal to that portion of Excess Cash Proceeds (as defined in the Intercreditor Agreement) for such prior fiscal year to which the Purchasers are entitled to under the Intercreditor Agreement; provided, further, that the Yield Maintenance Amount shall be based upon the principal amount prepaid as required under the Intercreditor Agreement (as opposed to the amount that would have been required to be prepaid had the Intercreditor Agreement not been in effect). 4(A)(2). PROCEEDS RECAPTURE. The Notes shall further be subject to mandatory pro rata prepayments from (i) all cash proceeds received in connection with the Lumber Note, (ii) all Net Disposition Proceeds and Net Debt Proceeds, and (iii) without duplication of mandatory prepayments made pursuant to paragraph 4(A)(1) or other payments made pursuant to paragraph 4(a)(2), Interim Proceeds and Final Proceeds, each as defined in the Intercreditor Agreement; in each case of clauses (i) through (iii), together with interest on such principal amount so prepaid accrued to the prepayment date plus the Yield Maintenance Amount determined for the prepayment date with respect to such prepaid principal amount; provided, that for so long as the Intercreditor Agreement is in effect, the Notes shall be subject to mandatory pro rata prepayment in an amount equal to that portion of the amounts in clauses (i) through (iii) above to which the Purchasers are entitled to under the Intercreditor Agreement; provided, further, that the Yield Maintenance Amount shall be based upon the principal amount prepaid as 2 required under the Intercreditor Agreement (as opposed to the amount that would have been required to be prepaid had the Intercreditor Agreement not been in effect). 4(A)(3). INTERCREDITOR DISTRIBUTIONS. For so long as the Intercreditor Agreement is in effect, amounts required to be prepaid under this paragraph 4(A) shall be paid (subject to the true-up provisions set forth therein), shared and distributed in accordance with the Intercreditor Agreement and, to the extent provided for in the Intercreditor Agreement, the Company's obligation to pay Yield Maintenance Amount may be paid prior to the Final True-Up Date (as defined in the Intercreditor Agreement) by the issuance of Make-Whole Original Notes and Make-Whole Delta Notes (each as defined in the Intercreditor Agreement). Upon the termination of the Intercreditor Agreement, prepayments shall be made pro rata to the Purchasers hereunder and all Net Disposition Proceeds, Net Debt Proceeds and notes received in connection with any Asset Sales shall be delivered to the Purchasers. 1.4 Paragraph 4D Application of Payments of the Note Agreements is amended by adding the following immediately after the word "respective" at the end of the last line on page eight and prior to the text beginning on page nine: unpaid principal amounts thereof. 4E. NO ACQUISITION OF NOTES. The Company shall not, and shall not 1.5 Paragraph 5A Financial Statements is amended by (a) replacing clauses (i) and (ii) with the new clauses (i) and (ii) below; (b) renumbering the existing clauses (iii) through (ix) as clauses (iv) through (x); (c) replacing the newly numbered clause (v) with the new clause (v) below; (d) adding a new clause (iii) as below; (e) replacing each occurrence of the words "BofA Credit" in clause (ix) with "BA Credit"; (f) adding the phrase ", information or documentation" after the word "data" in clause (x); (g) deleting the "and" at the end of clause (ix) and the "." at the end of clause (x); and (h) inserting at the end of clause (x) "; and" and adding a new clause (xi) as below: (i) as soon as available, but not later than 120 days after the end of each fiscal year, a copy of the audited consolidated balance sheet of the Company and its Subsidiaries as at the end of such year and the related consolidated statements of income or operations, shareholders' equity and cash flows for such year, setting forth in each case in comparative form the figures for the previous fiscal year, and accompanied by the opinion of PriceWaterhouseCoopers LLP or another nationally-recognized independent public accounting firm ("Independent Auditor") which report (x) shall state that such consolidated financial statements present fairly the financial position for the periods indicated in conformity with GAAP applied on a basis consistent with prior years and (y) shall not be qualified or limited because of a restricted or limited examination by the Independent Auditor of any material portion of the Company's or any Subsidiary's records; (ii) as soon as available, but not later than 60 days after the end of each of the first three fiscal quarters of each fiscal year, a copy of the unaudited consolidated balance sheet of the Company and its Subsidiaries as of the end of such quarter and the related consolidated statements of income, shareholders' equity and cash flows for the period 3 commencing on the first day and ending on the last day of such quarter, and certified by a Responsible Officer as fairly presenting, in accordance with GAAP (subject to the absence of footnotes and ordinary, good faith year-end audit adjustments), the financial position and the results of operations of the Company and the Subsidiaries; (iii) as soon as available, but not later than 30 days after the end of each fiscal month (or 60 days after the end of December of each year), a copy of the financial report delivered to the Board of Directors of the Company (or, if no such report is delivered to the Board of Directors of the Company for any month a copy of a substantially similar financial report for such month), including unaudited consolidated balance sheet of the Company and its Subsidiaries as of the end of such month and the related consolidated statements of income and cash flows for the period commencing on the first day and ending on the last day of such month, and certified by a Responsible Officer as fairly presenting, in accordance with GAAP (subject to the absence of footnotes and ordinary, good faith year-end audit adjustments), the financial position and the results of operations of the Company and the Subsidiaries; (v) as soon as available, but not later than 15 days after delivery of the financial report under clause (iii) above, and at the Company's expense, a report from Zolfo Cooper or other financial consultants acceptable to the Purchasers on the performance of the Company as set forth in such financial report as against the Business Plan; (xi) concurrently with the delivery of the financial statements referred to in paragraph 5A(i) for the year ended December 31, 2002 and each year thereafter, to the extent not prohibited by applicable accounting guidelines, a certificate of the Independent Auditor stating that in making the examination necessary therefor no knowledge was obtained of any Event of Default or Unmatured Event of Default, except as specified in such certificate. 1.6 Paragraph 5I Further Assurances of the Note Agreements is amended by deleting the parenthetical "(other than Cotter Canada Hardware and Variety Company, Inc.)" in both places that it appears therein and adding at the end of the proviso in clause (a) the following additional proviso: provided, however, that if Advocate Services, Inc., Servistar Paint Company, or the Canadian Subsidiary shall still be in existence on the 180th day following the Amendment Effective Date, then each such entity still in existence shall execute and deliver a counterpart of the Guaranty: 1.7 Paragraph 6B(1) Liens of the Note Agreement is amended by replacing clause (ix) therein as below and adding the following new clauses (xii) through (xvii): (ix) other Liens (including Liens arising under capital leases), in addition to the Liens permitted by clauses (i) through (viii) above and clauses (x) through (xvii) below, securing Indebtedness of the Company or any Subsidiary (other than Indebtedness that constitutes Subordinated Debt); provided, however, that (i) such Indebtedness is permitted by the provisions of paragraph 6B(2) and (ii) the aggregate outstanding principal amount of all such Indebtedness (other than Indebtedness listed on Schedule 6B(1)(ix)) does not at any time exceed $25,000,000; 4 (xii) any interest or title of a lessor in property subject to any lease other than (i) subject to clause (vii) above, a Capitalized Lease Obligation, (ii) a lease entered into as part of a sale and leaseback transaction or (iii) except as permitted by clause (xvi) below, a Synthetic Lease; (xiii) any interest of a lessee or a sublessee in property owned or leased by the Company or any Subsidiary; (xiv) any escrow, holdback or similar arrangement in connection with any sale, lease, transfer or other disposition of any asset not prohibited hereunder (including any sale of the Paint Business); (xv) Liens in respect of mortgages on properties listed on Schedule 6B(1)(xv) (the "Specified Facilities"); (xvi) Liens in effect on the Amendment Effective Date listed on Schedule 6B(1)(xvi); and (xvii) Liens in favor of BofA on cash collateral not to exceed $4,000,000 in the aggregate for the Cash Management Bank and other cash management services provided with respect thereto (including, without limitation, the services provided by Fleet National Bank) and Liens in favor of BofA on cash collateral not to exceed $30,000,000 in the aggregate for letters of credit issued and outstanding on behalf of the Company by BofA. 1.8 Paragraph 6B(2) Debt of the Note Agreements is amended by replacing the semi-colon at the end of clause (d) therein with a period and deleting the proviso. 1.9 Paragraph 6B(4)(i) Sale of Assets of the Note Agreements is amended by deleting the clause in its entirety and replacing it with the following: SALE OF ASSETS. Sell, lease or transfer or otherwise dispose of any assets of the Company or any Subsidiary other than in the ordinary course of business; provided that the Company and its Subsidiaries may sell, lease, transfer or otherwise dispose of assets (a) to the extent that such sale, lease, transfer or disposition relates to a Designated Permitted Asset Sale, (b) in connection with the sale and leaseback of distribution centers owned by the Company or any Subsidiary, (c) in connection with the dissolution of any Inactive Subsidiary, and (d) outside the ordinary course of business so long as (1) the aggregate amount of all assets sold, leased, transferred or otherwise disposed of outside the ordinary course of business for the thirty-six months preceding such proposed sale added together, without duplication, with (x) any shares of stock or Debt of any Subsidiary sold or otherwise disposed of, or with respect to which the Company or any Subsidiary has parted control of, except to the Company or another Subsidiary, during such period and (y) any assets then proposed to be sold outside of the ordinary course of business, do not constitute more than 10% of the total assets of the Company and its Subsidiaries on a consolidated basis as of the end of the most recent fiscal quarter for which the Company has delivered financial statements pursuant to paragraph 5A and (2) any such sale of assets is not in excess of $2,500,000 per sale; and, provided, further, that, in the case of (a) through (d) above, all such assets have been sold, leased, 5 transferred or otherwise disposed of for fair market value and the Net Disposition Proceeds paid, and all notes received in respect thereto delivered, to the Collateral Agent to be distributed in accordance with the Intercreditor Agreement or as set forth in paragraph 4(A)(3). 1.10 Paragraph 6C Ratio of Asset Base to Debt of the Note Agreements is deleted in its entirety and such paragraph shall read as follows: [Intentionally Omitted.]. 1.11 Paragraph 6D Compliance with ERISA of the Note Agreements is amended to change the reference to section 4062(f) of ERISA to section 4062(e) instead. 1.12 Paragraph 6F Nature of the Business of the Note Agreements is amended in its entirety to read as follows: 6F. NATURE OF BUSINESS. The Company will not and will not permit any Subsidiary to engage in the business of underwriting risks for insurance purposes, or in any other aspect of insurance related business other than in the ordinary course of business in accordance with its practices as of the Amendment Effective Date; or purchase and sell real estate (other than on an agency basis) for purposes other than those relating directly to its principal business except for (i) purchases and sales of store locations in the ordinary course of business which in the aggregate for the Company and its Subsidiaries taken as a whole do not exceed $10,000,000 during any rolling consecutive five year period and (ii) sales of the Specified Facilities. 1.13 Paragraph 6H Fixed Charge Coverage Ratio of the Note Agreements is amended in its entirety to read as follows: 6H. FIXED CHARGE COVERAGE RATIO. The Company shall not permit the Fixed Charge Coverage Ratio as of the end of any fiscal period set forth below to be less than the applicable ratio set forth below for such period:
Fiscal Period(s) ending on or about Ratio ----------------------------------- ----- quarter ending March 2002 0.80:1.0 two quarters ending June 2002 0.90:1.0 three quarters ending September 2002 0.90:1.0 four quarters ending December 2002 0.70:1.0 four quarters ending March 2003 0.70:1.0 four quarters ending June 2003 0.70:1.0 four quarters ending September 2003 0.60:1.0 four quarters ending December 2003 0.75:1.0 four quarters ending March 2004 0.70:1.0 four quarters ending June 2004 0.65:1.0 each four quarter period thereafter 0.65:1.0
1.14 Paragraph 6I Restricted Investments of the Note Agreements is amended by (a) inserting in clause (vi) the word "Amendment" between the words "the" and "Effective"; (b) 6 replacing "BofA" with "BA" and deleting the word "and" after clause (vii) and the period after clause (viii); and (c) adding the following provisions: (ix) enter into escrow, seller note, holdback or similar arrangements in connection with any sale, lease, transfer or other disposition of any asset not prohibited hereunder (including any sale of the Paint Business); and (x) maintain investment accounts for the cash collateral held in connection with its cash management services and in support of its outstanding letters of credit. 1.15 Paragraph 6J Restricted Payments of the Note Agreements is amended by (a) deleting the end of the first sentence therein starting with the words "except, if" and (b) adding: ; provided, that cash patronage source dividends may be paid to Members up to the minimum percentage of patronage source income required to be paid pursuant to the applicable regulations of the Internal Revenue Service for cooperatives; provided, further, if Adjusted EBITDA for the fiscal year most recently ended is at least equal to the amount set forth on Schedule 6J for such fiscal year, the Company may pay cash patronage source dividends in an amount not to exceed 30% of the patronage source income attributable to patronage source income other than income resulting from gains on Asset Sales plus 20% of patronage source income resulting from gains on Asset Sales; provided, however, none of the foregoing dividends based on Adjusted EBITDA shall be paid unless on a pro forma basis the Company can demonstrate it has sufficient liquidity to meet its obligations for the six months following such proposed payments. The Company may not redeem or purchase any shares of stock except for Hardship Case Payments. 1.16 Paragraph 6K Amendments to Financing Agreements or Subordinated Debt; No Optional Prepayments of the Note Agreements is amended by: (a) adding the words "except to the extent of Hardship Case Payments" to the end of clause (b) therein; (b) deleting the words "that do not trigger a reduction in any commitments of the lenders thereunder" in clause (b)(ii); (c) adding the words "Synthetic Lease Obligations, the Senior Note Obligations and the" immediately prior to the words "Shelf Obligations" in clause (ii) in the second sentence thereof; (d) deleting the words "pursuant to the terms hereof" at the end of clause (ii); and (e) adding a final sentence thereto as follows: All such optional and voluntary prepayments shall be made in accordance with the terms of the Intercreditor Agreement, and in the absence thereof, in conformance with all of the other terms hereof. 1.17 Paragraph 6L Minimum EBITDA of the Note Agreements is amended in its entirety to read as follows: 6L. MINIMUM ADJUSTED EBITDA. The Company shall not permit the sum of Adjusted EBITDA as of the end of any fiscal period set forth below to be less than the respective amount set forth below: 7
Fiscal Period(s) ending on or about Amount ----------------------------------- ------ three months ended 3/31/02 $ 20,000,000 four months ended 4/30/02 $ 25,000,000 five months ended 5/31/02 $ 35,000,000 six months ended 6/30/02 $ 50,000,000 seven months ended 7/31/02 $ 60,000,000 eight months ended 8/31/02 $ 65,000,000 nine months ended 9/30/02 $ 80,000,000 ten months ended 10/31/02 $ 90,000,000 eleven months ended 11/30/02 $ 95,000,000 twelve months ended 12/31/02 $100,000,000 twelve months ended 1/31/03 $100,000,000 twelve months ended 2/28/03 $100,000,000 twelve months ended 3/31/03 $100,000,000 twelve months ended 4/30/03 $ 95,000,000 twelve months ended 5/31/03 $ 95,000,000 twelve months ended 6/30/03 $ 95,000,000 twelve months ended 7/31/03 $ 90,000,000 twelve months ended 8/31/03 $ 90,000,000 twelve months ended 9/30/03 $ 80,000,000 twelve months ended 10/31/03 $ 80,000,000 twelve months ended 11/30/03 $ 80,000,000 twelve months ended 12/31/03 $ 80,000,000 twelve months ended 1/31/04 $ 75,000,000 twelve months ended 2/29/04 $ 75,000,000 twelve months ended 3/31/04 $ 70,000,000 twelve months ended 4/30/04 $ 70,000,000 twelve months ended 5/31/04 $ 65,000,000 twelve months ended 6/30/04 $ 60,000,000 and the twelve month period ended on the last day of each month thereafter $ 60,000,000
1.18 Paragraph 6 Negative Covenants of the Note Agreements is amended to add the following new clauses: 6N. MINIMUM GROSS SALES. The Company shall not permit the Gross Sales as of the end of any fiscal period set forth below to be less than the applicable amount set forth below:
Fiscal Period(s) ending on or about Amount ----------------------------------- ------ three months ended 3/31/02 $ 460,000,000 four months ended 4/30/02 $ 625,000,000 five months ended 5/31/02 $ 805,000,000 six months ended 6/30/02 $ 990,000,000 seven months ended 7/31/02 $1,200,000,000 eight months ended 8/31/02 $1,340,000,000 nine months ended 9/30/02 $1,520,000,000 ten months ended 10/31/02 $1,670,000,000 eleven months ended 11/30/02 $1,815,000,000 twelve months ended 12/31/02 $1,975,000,000 twelve months ended 1/31/03 $1,965,000,000
8 twelve months ended 2/28/03 $1,955,000,000 twelve months ended 3/31/03 $1,945,000,000 twelve months ended 4/30/03 $1,930,000,000 twelve months ended 5/31/03 $1,920,000,000 twelve months ended 6/30/03 $1,910,000,000 twelve months ended 7/31/03 $1,900,000,000 twelve months ended 8/31/03 $1,890,000,000 twelve months ended 9/30/03 $1,875,000,000 twelve months ended 10/31/03 $1,870,000,000 twelve months ended 11/30/03 $1,865,000,000 twelve months ended 12/31/03 $1,860,000,000 twelve months ended 1/31/04 $1,850,000,000 twelve months ended 2/29/04 $1,840,000,000 twelve months ended 3/31/04 $1,830,000,000 twelve months ended 4/30/04 $1,820,000,000 twelve months ended 5/31/04 $1,805,000,000 twelve months ended 6/30/04 $1,795,000,000 and the twelve month period ended on the last day of each month thereafter $1,700,000,000
6O. MINIMUM INTEREST COVERAGE RATIO. The Company shall not permit the Interest Coverage Ratio as of the end of any fiscal period set forth below to be less than the applicable ratio set forth below:
Fiscal Period(s) Ratio ---------------- ----- quarter ending March 2002 1.20:1.0 two quarters ending June 2002 1.50:1. three quarters ending September 2002 1.70:1.0 four quarters ending December 2002 1.70:1.0 four quarters ending March 2003 1.70:1.0 four quarters ending June 2003 1.75:1.0 four quarters ending September 2003 1.65:1.0 four quarters ending December 2003 1.70:1.0 four quarters ending March 2004 1.65:1.0 four quarters ending June 2004 1.50:1.0 and the four quarter period ended on the last day of each month thereafter 1.50:1.0
6P. MAXIMUM CAPITAL EXPENDITURES. The Company shall not permit its Capital Expenditures as of the end of any fiscal period set forth below to be more than the applicable amount set forth below:
Fiscal Period(s) ending on or about Amount ----------- ------ quarter ended 3/31/02 $6,400,000 1/1/02 - 6/30/02 $11,200,000 1/1/02 - 9/30/02 $13,600,000 1/1/02 - 12/31/02 $16,000,000 1/1/03 - 3/31/03 $6,400,000
9 1/1/03 - 6/30/03 $11,200,000 1/1/03 - 9/30/03 $13,600,000 1/1/03 - 12/31/03 $16,000,000 1/1/04 - 3/31/04 $6,400,000 1/1/04 - 6/30/04 $11,200,000 thereafter per fiscal year $16,000,000
6Q. ADJUSTMENTS TO FINANCIAL COVENANTS. The financial covenants contained herein may be adjusted upon the mutual agreement of the Company and the Purchasers to reflect (1) an acceleration of the sale of the Paint Business if the closing of such sale occurs prior to June 30, 2003 as contemplated in the Business Plan and (2) Asset Sales not contemplated in the Business Plan, including but not limited to sale-leaseback transactions; provided, however, that if the parties cannot reach agreement within sixty days of negotiations, such covenant shall remain unchanged. 6R. SUBORDINATED NOTES. The Company will discontinue the Variable Denomination Subordinated Floating Rate Demand Notes program on or before July 31, 2002, and no new TIP Notes will be issued after the date hereof without the approval of the Required Holders. 6S. CHIEF EXECUTIVE OFFICER. Any appointment by the Company of a chief executive officer shall be subject to the consent of the Required Holders. 6T. SALE OF HAGERSTOWN FACILITY. The Hagerstown Facility shall not be sold unless (a) the requisite Synthetic Lease Lenders (as defined in the Intercreditor Agreement) approve such sale in writing and (b) the Net Disposition Proceeds of such sale are applied to reduce the balance of the Synthetic Lease Obligations (as defined in the Intercreditor Agreement) to the extent permitted by the Intercreditor Agreement. 1.19 Paragraph 7A Acceleration of the Note Agreements is amended by: (a) adding the phrase ", including without limitation the Make-Whole Notes, immediately after the word "Note" in clause (ii) therein; (b) changing the number "30" in clause (vi) therein to the number "15"; (c) including the parenthetical "(other than an Inactive Subsidiary or a Canadian Subsidiary)" after the first occurrence of the word "Subsidiary" in each of clauses (vii), (viii), (ix) and (x) therein; (d) changing the dollar amount of "$7,000,000" in clause (xiii) therein to the dollar amount "$5,000,000"; (e) replacing clause (xviii) therein as follows and adding the following new clauses immediately after the end thereof: (xviii) the Company shall, on any date, not have in effect a BA Credit Agreement providing for a revolving loan facility to the Company with a commitment in the amount of at least $200,000,000 as such amount may be reduced by the application of Interim Proceeds as provided in the Intercreditor Agreement and as such amount may be voluntarily reduced by the Company in accordance with the BA Credit Agreement so long as voluntary reductions of the revolving loan facility do not exceed $50,000,000 in the aggregate; or (xix) on June 30, 2003 (1) the aggregate outstanding principal balance (exclusive of any Make-Whole Obligations) of the Shelf Notes, the Senior Notes, the Hagerstown Note and the BA Credit Agreement is more than $270,000,000 and (2) the aggregate 10 outstanding principal balance (exclusive of any Make-Whole Obligations) of the Shelf Notes, the Senior Notes, and the Hagerstown Note plus the aggregate amount of all the commitments under the BA Credit Agreement (less $30,000,000 which amount represents the "Unusable Amount" under the BA Credit Agreement for such date) exceeds $320,000,000; or (xx) the Company or a Subsidiary shall make any principal payment of any Subordinated Debt other than, so long as no Default or Event of Default exists or would be created thereby and the Company has met or exceeded its Minimum Adjusted EBITDA covenant set forth in paragraph 6L as of the most recent fiscal period for which such covenant is applicable, (x) up to an aggregate of $2,800,000 in principal amounts of variable denomination floating rate subordinated notes after the date of the April 2002 Modification, (y) up to an aggregate of $24,000,000 in principal amounts due in fiscal 2002, and (z) up to an aggregate of $14,000,000 in principal amounts due in fiscal 2003; or (xxi) the Company fails to cause the appointment to its Board of Directors of: (1) at least two independent outside directors by May 31, 2002, (2) at least two additional independent outside directors by September 1, 2002 (raising the aggregate number of independent outside directors to no less than four by that time) and (3) at least one additional independent outside director by November 1, 2002 (raising the aggregate number of independent outside directors to no less than five by that time and thereafter); or (xxii) the Intercreditor Agreement shall cease to be in full force and effect; 1.20 Paragraph 8A Organization of the Note Agreements is amended to add "organized or formed," after the word "incorporated" therein. 1.21 Paragraph 8B Financial Statements of the Shelf Note Agreement is amended to: (a) add the following words to the last sentence thereof after the word "furnished": other than as has been previously disclosed by the Company to the Purchasers for any changes through the Amendment Effective Date (b) delete the last paragraph therein; (c) add as a new final paragraph, the following: The Business Plan relating to the Company and its Subsidiaries for the period January 1, 2002-June 30, 2004, a copy of which was delivered previously to the Purchasers, discloses all material assumptions used in formulating such projections. The Company is not aware of any facts that (individually or in the aggregate) would result in any material change in the Business Plan. It was prepared on the basis of the assumptions stated therein (all of which were made by the Company in good faith), and reflect the reasonable estimates of the Company of the financial condition, results of operations and other information projected therein. 1.22 Paragraph 8B Financial Statements, Paragraph 8E Title to Properties, and Paragraph 8G Conflicting Agreements and Other Matters of the Cotter Note Agreement are 11 amended by deleting each one in its entirety and substituting therefor Paragraphs 8B, 8E and 8G of the Shelf Note Agreement as amended herein. 1.23 Paragraph 8C Actions Pending of the Note Agreements is amended to add the following words to the last sentence thereof after the word "Agreement": other than as described in reasonable detail on Schedule 8C 1.24 Paragraph 8D Outstanding Debt of the Note Agreements is amended to add the following words to the last sentence thereof after the word "instrument" and before the word "evidencing": (as defined in the Uniform Commercial Code) or agreement 1.25 Paragraph 8J ERISA of the Note Agreements is amended by deleting the last two sentences thereof. 1.26 Paragraph 8N Disclosure of the Shelf Note Agreement is amended to add "as amended" after the words "this Agreement" at the end of the second sentence therein and Paragraph 8M Disclosure of the Cotter Note Agreement is deleted in its entirety and replaced with the language contained in Paragraph 8N of the Shelf Note Agreement as amended hereby. 1.27 Paragraph 8P Priority of Notes of the Shelf Note Agreement is amended to add "1992" in the last line thereof immediately after the word "Existing" and before the second occurrence of the word "Agreement" therein. 1.28 Paragraph 8Q Year 2000 Problem of the Shelf Note Agreement is deleted in its entirety. 1.29 Paragraph 10A Yield-Maintenance Terms of the Note Agreements is amended to delete the following defined terms: "Called Principal", "Remaining Scheduled Payments", and "Settlement Date" and insert the following defined terms in the appropriate alphabetical order: "CALLED PRINCIPAL" shall mean, with respect to any Note, the principal of such Note that is to be prepaid pursuant to paragraph 4(A)(1), 4(A)(2) or 4B or has become or is declared to be immediately due and payable pursuant to paragraph 7A, as the context requires. "REMAINING SCHEDULED PAYMENTS" shall mean, with respect to the Called Principal of any Note, all payments of such Called Principal and interest thereon that would be due on or after the Settlement Date with respect to such Called Principal if no payment of such Called Principal were made prior to its scheduled due date (it being understood and agreed that the interest rate on the Notes, for purposes of this calculation, shall be the interest rate that applies to the Notes on the third Business Day immediately preceding such Settlement Date), provided that if such Settlement Date is not a date on which interest payments are due to be made under the terms of the Notes, then the amount of the next succeeding scheduled interest payment will be reduced by the amount of interest accrued to such Settlement Date and required to be paid on such Settlement Date pursuant to paragraph 4A, 4B or 7A. 12 "SETTLEMENT DATE" shall mean, with respect to the Called Principal of any Note, the date on which such Called Principal is to be prepaid pursuant to paragraph 4A or 4B or has become or is declared to be immediately due and payable pursuant to paragraph 7A, as the context requires. 1.30 Paragraph 10B Other Terms of the Note Agreements is amended to delete the following defined terms: "Asset Base", "Designated Permitted Asset Sale", "EBITDA", "Fixed Charge Coverage Ratio", "Indebtedness", "Intercreditor Agreement", "Private Placement Agreements", "Restricted Payment", "Supplemental Coupon Elimination Date", "Supplemental Interest Rate", and "Year 2000 Problem". 1.31 Paragraph 10B Other Terms of the Note Agreements is amended to (a) add the words "or losses" immediately before the first parenthetical in clause (a) of the proviso contained in the definition of "Consolidated Net Earnings" and (b) add ", notes payable to Members and other Subordinated Debt" to first parenthetical in the definition of "Funded Debt" immediately after the words "Capitalized Lease Obligations" and to delete ", so long as no event has occurred the result of which would be to cause or permit such Indebtedness to become due prior to any stated maturity" at the end thereof. 1.32 Paragraph 10B Other Terms of the Note Agreements is amended to add the following defined terms in the appropriate alphabetical order: "ADJUSTED EBITDA" shall mean, for any period, EBITDA plus Restructuring Charges to the extent taken in such period. "ADJUSTED CASH FLOW" means, with respect to any period, Consolidated Net Earnings for such period less (a) the sum of (i) to extent not already deducted in the calculation of Consolidated Net Earnings, gains from Asset Sales realized during such period, (ii) Capital Expenditures during such period, (iii) amortization of all Indebtedness (including amortization of Indebtedness from payments of Excess Cash Flow but excluding amortization of Indebtedness from the proceeds of Asset Sales) for such period, (iv) patronage dividends accrued in the current fiscal year to be paid in the following fiscal year, (v) any increase in restricted cash during such period and (vi) Restructuring Charges taken during such period; plus (b) the sum of (i) to the extent deducted in the calculation of Consolidated Net Earnings, losses from Asset Sales realized during such period, (ii) depreciation and amortization expense for such period, (iii) non-cash income tax expense for such period and (iv) any decrease in restricted cash during such period. "ADJUSTED WORKING CAPITAL" shall mean, at any date of determination, the result of (a) consolidated current assets of the Company and its Subsidiaries at such date, minus (b) without duplication, cash and restricted cash of the Company and its Subsidiaries at such date, minus (c) current liabilities of the Company and its Subsidiaries at such date plus (d) the sum of (i) the current portion of Subordinated Debt and other Debt at such date, (ii) accrued and unpaid patronage source dividends at such date, (iii) the value of current assets purchased, transferred or assumed in connection with Asset Sales consummated during such period, minus (e) the value of current liabilities purchased, transferred or assumed in connection with Asset Sales consummated during such period. 13 "ADJUSTED WORKING CAPITAL CHANGE" shall mean, for any fiscal year, the result of (a) Adjusted Working Capital for such fiscal year minus (b) Adjusted Working Capital for the fiscal year immediately preceding such fiscal year. "AMENDMENT EFFECTIVE DATE" shall have the meaning given in the April 2002 Modification. "APRIL 2002 MODIFICATION" shall mean that certain letter agreement, dated April 11, 2002, between the Company and the Purchasers amending this Agreement. "ASSET SALES" shall mean the sale, lease, assignment, transfer or other disposition of value (each a "Disposition") by the Company or any Subsidiary to any Person (other than the Company or a Subsidiary) of any assets of the Company or such Subsidiary, other than (i) the Disposition of inventory in the ordinary course of business, (ii) the Disposition of inventory or receivables to a Guarantor or to the Company, (iii) leases or subleases entered into in the ordinary course of business, (iv) the licensing of intellectual property by the Company or any Subsidiary in the ordinary course of business (so long as such licensing does not prevent the Company or such Subsidiary from using intellectual property material to the business of the Company or such Subsidiary ) or (v) the Disposition of other assets having a value not exceeding $250,000 in the aggregate in any fiscal year. "BUSINESS PLAN" shall mean the business plan of the Company dated March 20, 2002, which was delivered by the Company to the Purchasers. "CANADIAN SUBSIDIARY" shall mean Cotter Canada Hardware and Variety Company, Inc. "CAPITAL EXPENDITURES" shall mean, for any period, the sum without duplication of (a) the aggregate amount of all expenditures of the Company and its Subsidiaries for fixed or capital assets made during such period which, in accordance with GAAP, would be classified as capital expenditures; and (b) the aggregate amount of all Capitalized Lease Obligations incurred during such period excluding, in each case, (i) expenditures made in connection with replacement, repair or restoration of fixed assets from insurance proceeds not to exceed $1,000,00 in the aggregate per loss and (ii) refinancings or renewals of Capitalized Lease Obligations in effect on the Amendment Effective Date. "DESIGNATED PERMITTED ASSET SALE" shall mean the sale or other disposition of the properties set forth on Schedule 6B(4). "DISPOSITION" shall have the meaning set forth in the definition of "Asset Sales". "EBITDA" shall mean, for any period, Consolidated Net Earnings for such period plus, to the extent deducted in computing such Consolidated Net Earnings, interest expense (including rent expense with respect to Synthetic Leases), taxes, depreciation and amortization. 14 "EXCESS CASH FLOW" shall mean, for any period, 80% of the sum of (a) Adjusted Cash Flow for such period plus (b) any negative Adjusted Working Capital Change for such period minus (c) any positive Adjusted Working Capital Change for such period. "FIXED CHARGE COVERAGE RATIO" shall mean, as of the last day of any fiscal quarter, the ratio of: (a) the result, for the period of four consecutive fiscal quarters ending on such day, of (i) Consolidated Net Earnings, plus (ii) to the extent deducted in determining such Consolidated Net Earnings, interest expense (including rent expense with respect to Synthetic Leases), taxes, depreciation and amortization, plus (iii) Restructuring Charges taken during such period, minus (iv) gains from Asset Sales realized during such period, to the extent included in determining Consolidated Net Earnings, plus (v) losses from Asset Sales realized during such period, to the extent deducted in determining Consolidated Net Earnings to (b) the sum for such period of (i) scheduled payments of principal with respect to the Shelf Notes and the Senior Notes, (ii) interest expense (including rent expense with respect to Synthetic Leases and excluding interest expense with respect to Make-Whole Obligations and new Make-Whole Obligations of principal arising in such period), and (iii) Capital Expenditures; each as determined for the Company and its Subsidiaries on a consolidated basis. The amount in each of clauses (a) and (b) shall be calculated for the period ending (x) March 31, 2002 based upon such period and then multiplied by four, (y) June 30, 2002 based upon the period of two consecutive fiscal quarters ending on such date and then multiplied by two and (z) September 30, 2002 based upon the period of three consecutive fiscal quarters ending on such date and then multiplied by one and one-third. "GROSS SALES" shall mean the consolidated gross sales for the Company and its Subsidiaries. "HAGERSTOWN FACILITY" shall mean the distribution center located at 16500 Hunters Green Parkway in Hagerstown, Maryland. "HAGERSTOWN NOTE" shall mean the "Synthetic Maximum Shortfall" as defined in the Intercreditor Agreement. "HARDSHIP CASE PAYMENTS" shall mean all payments to any stockholder that has notified the Company of his termination and requested an accelerated redemption payment of any portion of his stock and/or Subordinated Debt investment pursuant to a hardship case request authorized in the by-laws of the Company, in an aggregate amount for all stockholders not to exceed $2,000,000 in any fiscal year. Such redemption payments must be administered by a Responsible Officer and made according to the Company's hardship case guidelines. 15 "INDEBTEDNESS" shall mean, with respect to any Person, without duplication, (i) all items (excluding items of contingency reserves or of reserves for deferred income taxes) which in accordance with generally accepted accounting principles would be included in determining total liabilities as shown on the liability side of a balance sheet of such Person as of the date on which Indebtedness is to be determined, (ii) all indebtedness secured by any Lien on any property or asset owned or held by such Person subject thereto, whether or not the indebtedness secured thereby shall have been assumed, (iii) all indebtedness of others with respect to which such Person has become liable by way of any Guarantee and (iv) obligations of such Person with respect to Synthetic Leases. "INTERCREDITOR AGREEMENT" shall mean the First Amended and Restated Intercreditor Agreement dated as of April 11, 2002 among BofA as agent under the BA Credit Agreements, the Collateral Agent, the Purchasers, the holders of the Senior Notes, the Company and its Subsidiaries, and various other parties. "INTEREST COVERAGE RATIO" shall mean, as of the last day of any fiscal quarter, the ratio of (a) the sum, for the period of four consecutive fiscal quarters ending on such day, of (i) Consolidated Net Earnings plus (ii) to the extent deducted in determining such Consolidated Net Earnings, interest expense, taxes, depreciation and amortization, plus (iii) Restructuring Charges less (iv) gains from Asset Sales, to the extent included in determining Consolidated Net Earnings plus (v) losses from Asset Sales, to the extent deducted in determining Consolidated Net Earnings to (b) interest expense for such period (including rent expense with respect to Synthetic Leases but excluding interest expense with respect to Make-Whole Obligations and new Make-Whole Obligations of principal arising in such period); each as determined for the Company and its Subsidiaries on a consolidated basis. Notwithstanding the foregoing, the amount in each of clauses (a) and (b) shall be calculated for the period ending (x) March 31, 2002 based upon such period and then multiplied by four, (y) June 30, 2002 based upon the period of two consecutive fiscal quarters ending on such date and then multiplied by two and (z) September 30, 2002 based upon the period of three consecutive fiscal quarters ending on such date and then multiplied by one and one-third. "LUMBER NOTE" shall mean the $19,500,000 promissory note made by Builder Marts of America, Inc. on December 29, 2000, payable to the Company. "MAKE-WHOLE NOTES" shall mean those notes issued to the Purchasers under Section 4 of the Intercreditor Agreement. "MAKE-WHOLE OBLIGATIONS" shall have the meaning set forth for such term in the Intercreditor Agreement. "NET DEBT PROCEEDS" shall mean, as to any issuance of Indebtedness for borrowed money (other than any such Indebtedness incurred to refinance existing Indebtedness, provided that the principal amount of such existing Indebtedness is not increased) by any Person, cash proceeds received by such Person in connection therewith, net of reasonable out-of-pocket costs and expenses paid or incurred in 16 connection therewith in favor of any Person not an Affiliate of such Person, such costs and expenses not to exceed 5% of the gross proceeds of such issuance. "NET DISPOSITION PROCEEDS" shall mean, as to any Asset Sale, proceeds in cash, checks or other cash equivalent financial instruments and proceeds from notes, each as and when received by such Person, net of: (a) the direct costs relating to such disposition, excluding amounts payable to such Person or any Affiliate of such Person, (b) an estimate of cash taxes paid or payable by such Person within nine months of the disposition as a direct result of such Asset Sale and (c) amounts required to be applied to repay principal, interest and prepayment premiums and penalties on purchase money liens on the asset which is the subject of such Asset Sale, and in the case of proceeds from the sale of the Hagerstown Facility, net of the amount required to satisfy the obligations with respect to its Synthetic Lease. Net Disposition Proceeds shall include any insurance proceeds received upon the loss of, damage to, or destruction of property, except to the extent such insurance proceeds are applied to replace, repair, restore or rebuild such property up to an aggregate in proceeds per loss of $1,000,000; provided, with the prior written consent of the Required Holders, the Company may reinvest proceeds in excess of $1,000,000 to replace, repair, restore or rebuild such property. "PAINT BUSINESS" shall mean the manufacturing portion of the business classified as the "Paint Segment" in the Company's Form 10-K for the fiscal year ended December 31, 2000. "PRIVATE PLACEMENT AGREEMENTS" shall mean the several Note Purchase Agreements dated as of September 10, 1998 among the Company and the purchasers listed in Schedule 1 thereto, pursuant to which the Company issued its 6.85% Senior Notes due July 1, 2008 in the original aggregate principal amount of $105,000,000, as such agreements were amended as of April 1, 1999, as amended and restated as of April 14, 2000, and as further amended as of April 11, 2002. "PROJECTIONS" shall mean a 12-month forecast (to include forecasted consolidated balance sheets, income statements and cash flow statements) for the Company and its Subsidiaries in fiscal quarter periods to be delivered no later than forty-five days after the end of each fiscal quarter of the Company. "RESPONSIBLE OFFICER" shall mean the chief executive officer, chief operating officer, chief financial officer, treasurer or chief accounting officer of the Company, the general counsel of the Company or any other officer of the Company involved principally in its financial administration or its controllership function. "RESTRICTED PAYMENT" shall have the meaning set forth in paragraph 6J. "RESTRUCTURING CHARGES" shall mean any charges recorded under "Emerging Issues Task Force 94-3: Liability Recognition for Certain Employee Benefits and Other Costs to Exit an Activity (including certain costs incurred in a Restructuring)" issued by the American Institute of Certified Public Accounts; provided that any such charges in excess of $2,000,000 in the aggregate after the date hereof may not be taken by the Company or its Subsidiaries for purposes of covenant calculations and related 17 definitions without the prior written consent of the Required Holders. Such charges include, but are not limited to, costs related to employee benefits, such as severance and termination benefits, costs associated with the elimination and reduction of product lines, costs to consolidate or relocate facilities, costs for new systems development or acquisition, costs to retrain employees to use newly-deployed systems, costs incurred to reduce excess inventory (defined to be inventory on hand in excess of 180 days' worth of supply), costs incurred to dispose of any remaining inventory on hand at the time of closure of a facility, and losses and asset impairments and disposals of assets. "SENIOR NOTES" shall mean the 6.85% Senior Notes issued pursuant to the Private Placement Agreements. "SPECIFIED FACILITIES" shall have the meaning set forth in paragraph 6B(1)(xv). "SUPPLEMENTAL FUNDING FEE RATE" shall mean 0.765% per quarter. "SYNTHETIC LEASE" shall mean (a) a so-called synthetic, off-balance sheet or tax retention, lease or (b) an agreement for the use or possession of property creating obligations that do not appear on the balance sheet of such Person but which, upon the insolvency or bankruptcy of such Person, would be characterized as the indebtedness of such Person (without regard to accounting treatment). "TERMINATION DATE" shall mean the date on which all of the obligations due hereunder have been paid in full and this Agreement has been terminated. "TIP NOTES" shall mean the registered subordinated debt securities, as amended from time to time, issued under the Company's investment program and designated "Variable Denomination Redeemable Subordinated Fixed Rate Term Notes". "UNMATURED EVENT OF DEFAULT" shall mean any event or circumstance which, with the giving of notice, the lapse of time, or both, would (if not cured or otherwise remedied during such time) constitute an Event of Default. 1.33 Paragraph 11A Note Payments of the Note Agreements is amended to add the following at the end thereof: Notwithstanding any agreement to the contrary herein or in the Notes, the Company hereby agrees that, to the extent any obligation (or part thereof) hereunder or under the Notes which was originally intended to be satisfied in whole or in part is rescinded or must otherwise be restored whether as a result of any proceedings in bankruptcy or reorganization or otherwise, such obligation (or part thereof), and all Liens, rights and remedies therefor and in respect thereof, shall be deemed revived and continued in full force and effect as if such original payment had not been made. The Company agrees that the books and records of each Purchaser showing the outstanding amount of the Notes and including amounts of principal, interest and other obligations of the Company to such Purchaser shall constitute rebuttably presumptive proof thereof, irrespective of whether any principal or other obligation is or should be evidenced by a promissory note or other instrument. 18 This provision shall supersede any action taken by a Purchaser in reliance upon any payments received or proceeds applied and all such actions taken are deemed hereby to be conditioned upon such payments or applications of proceeds being final and irrevocable and not subject to this paragraph 11A. The Company hereby indemnifies each Purchaser for all reasonable costs and expenses incurred by such Purchaser in connection with any rescission or restoration, including any costs and expenses incurred in defending against any claim alleging that such payment constituted a preference, fraudulent transfer or similar payment under any bankruptcy, insolvency or similar law. 1.34 Paragraph 11 Miscellaneous of the Note Agreements is amended to replace paragraph 11T and add a new paragraph 11U at the end thereof as follows: 11T. COMPANY INDEMNIFICATION. Whether or not the transactions contemplated hereby are consummated, the Company shall indemnify and hold each of the Purchasers and each of their respective officers, directors, employees, counsel, agents and attorneys-in-fact (each an "Indemnified Person") harmless from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, charges, expenses and disbursements (including all fees and expenses of legal counsel) of any kind or nature whatsoever which may at any time (including at any time following repayment or transfer by any Purchaser of the obligations hereunder) be imposed on, incurred by or asserted against any such Person in any way relating to or arising out of this Agreement, or the Notes, the Intercreditor Agreement, the BA Credit Agreement, the Senior Notes, the Private Placement Agreements, or the "Operative Documents" (as defined in the Intercreditor Agreement) or any document contemplated by or referred to herein or therein, or the transactions contemplated hereby or thereby, or any action taken or omitted by any such Person under or in connection with any of the foregoing, including with respect to any investigation, litigation or proceeding (including any bankruptcy or insolvency proceeding, reorganization or other similar proceeding, or appellate proceeding) related to or arising out of this Agreement or the Notes or the use of the proceeds thereof, whether or not any Indemnified Person is a party thereto (all the foregoing, collectively, the "Indemnified Liabilities"); provided that the Company shall have no obligation under this paragraph 11T to any Indemnified Person with respect to Indemnified Liabilities resulting solely and directly from the gross negligence or willful misconduct of such Indemnified Person. The agreements in this paragraph 11T shall survive repayment of all obligations hereunder and the termination of this Agreement. 1.35 The Schedules and Exhibits attached hereto shall be deemed to amend and restate the previous schedules or exhibits and any new schedules or exhibits attached hereto shall be an integral part of the Note Agreements. 1.36 Each Note is amended by changing the Interest Payment Dates thereon to be the last Business Day of each calendar quarter, commencing with the last Business Day of June 2002; provided, however, that interest which is due and payable on May 13, 2002 in respect to Series B Notes and Series C Notes shall be paid on such date and the next interest payments shall for those Notes accrue from May 13, 2002 through the last Business Day of June 2002; and, provided, further, that interest which is due on the Series D Note on June 23, 2002 shall continue to accrue until the last Business Day of June and be due and payable on such date. 19 1.37 Effective as of February 28, 2002, any principal, Yield Maintenance Amount, premium and interest which was accruing interest at the default rate under paragraph 1B of the Note Agreements shall cease to bear the incremental default interest rate and shall bear interest at the non-default interest rate; provided, however, that upon any subsequent Event of Default the interest rate on the Notes shall be determined in accordance with paragraph 1(B) of the Note Agreements and the Notes. SECTION 2. Representations and Warranties. TruServ represents and warrants to each of the Purchasers that, after giving effect hereto as though all conditions of effectiveness have been met, (a) each and every representation and warranty set forth in paragraph 8 of each of the Note Agreements (other than paragraphs 8H, 8I, and 8O) is true and correct as of the date of execution and delivery of this letter agreement by TruServ with the same effect as if made on such date (except to the extent such representations and warranties expressly refer to an earlier date, in which case they were true and correct as of such earlier date and the defaults specifically disclosed in that certain letter from the Company to the Purchasers dated April 11, 2002 (the "Default Letter")) and (b) except for the Defaults arising from non-compliance with the financial covenants contained in paragraph 6 under the Note Agreements and the defaults set forth in the Default Letter being waived in Section 6 hereinbelow, no Event of Default or Default exists. SECTION 3. Effectiveness. The amendments described in Section 1 above shall become effective as of the date upon which each Purchaser has received the following (the "Amendment Effective Date"): (a) Evidence of payment of the fees referred to in Section 4 below and all costs and expenses of such Purchaser (including reasonable fees and disbursements of (i) the current legal counsel (Weil, Gotshal & Manges LLP) to the Purchasers and their prior legal counsel (Wachtell, Lipton, Rosen & Katz)) in connection with this letter agreement and all prior negotiations and documentation; (b) A copy of this letter agreement duly executed by each party hereto; (c) A copy of each of the amendments to the BA Credit Agreements, the Private Placement Agreements, and the "Operative Documents" as defined in the Intercreditor Agreement, each certified as being in full force and effect and each being in form and substance reasonably satisfactory to the Purchasers and all ancillary documents in connection therewith; (d) A copy of the Intercreditor Agreement duly executed by all the parties thereto and in form and substance satisfactory to the Purchasers, and all ancillary documents in connection therewith, including without limitation all amendments, consents and reaffirmations to the Collateral Documents (as defined in the Intercreditor Agreement); (e) A copy of that certain Three Party Blocked Account Service Agreement dated as of December 10, 2001, duly executed by TruServ, the Collateral Agent and Fleet National Bank. (f) Such other documents or certificates as any Purchaser may reasonably request, including a legal opinion of counsel to TruServ in form and substance reasonably satisfactory to the Purchasers; and 20 (g) Evidence reasonably satisfactory to the Purchasers that all corporate and other proceedings shall have occurred. SECTION 4. Fees. In consideration of the Purchasers entering into this letter agreement, TruServ agrees to pay, on or before the Amendment Effective Date, ratably to Prudential and each other Purchaser, an aggregate fee of $2,180,363. SECTION 5. Reference to and Effect on Note Agreements. Upon the effectiveness of this letter agreement as set forth in Section 3 above, each reference to the Shelf Note Agreement and the Cotter Note Agreement in any other document, instrument or agreement shall mean and be a reference to such agreement as modified by this letter agreement. Except as specifically set forth in and in conformity with Section 1 above, each Note Agreement shall remain in full force and effect and each is hereby ratified and confirmed in all respects. SECTION 6. Waiver. Effective on the Amendment Effective Date, the Purchasers waive any Default or Event of Default arising from non-compliance with financial covenants contained in paragraph 6 of the Note Agreements and the defaults specifically disclosed in the Default Letter. Except as specifically set forth in the preceding sentence, nothing contained herein shall be construed as a waiver of or consent to any other violation of the Note Agreements or any other Default or Event of Default under the Note Agreements. SECTION 7. Governing Law. THIS LETTER AGREEMENT SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE LAWS OF THE STATE OF ILLINOIS, WITHOUT REGARD TO PRINCIPLES OF CONFLICT OF LAWS OF SUCH STATE WHICH WOULD OTHERWISE CAUSE THIS LETTER TO BE CONSTRUED OR ENFORCED OTHER THAN IN ACCORDANCE WITH THE LAWS OF THE STATE OF ILLINOIS. SECTION 8. Counterparts; Section Titles. This letter agreement may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed and delivered shall be deemed to be an original and all of which when taken together shall constitute but one and the same instrument. The section titles contained in this letter agreement are and shall be without substance, meaning or content of any kind whatsoever and are not a part of the agreement between the parties hereto. [SIGNATURES ON FOLLOWING PAGE] 21 Very truly yours, THE PRUDENTIAL INSURANCE COMPANY OF AMERICA By: /s/ THOMAS E. LUTHER ------------------------------------ Name: Thomas E. Luther Title: Vice President PRUCO LIFE INSURANCE COMPANY By: /s/ THOMAS E. LUTHER ------------------------------------ Name: Thomas E. Luther Title: Vice President U.S. PRIVATE PLACEMENT FUND By: PRUDENTIAL PRIVATE PLACEMENT INVESTORS, L.P., Investment Advisor By: PRUDENTIAL PRIVATE PLACEMENT INVESTORS, L.P., its General Partner By: /s/ THOMAS E. LUTHER ------------------------------------ Name: Thomas E. Luther Title: Vice President Accepted and Agreed: TRUSERV CORPORATION By: /s/ BARBARA L. WAGNER ----------------------------- Name: Barbara L. Wagner Title: Vice President 22 EX-4.S 10 c66649ex4-s.txt 1ST AMENDED & RESTATED INTERCREDITOR AGREEMENT FIRST AMENDED AND RESTATED INTERCREDITOR AGREEMENT among Bank of America, N.A., as Agent under a Credit Agreement with TruServ Corporation, Allstate Insurance Company and certain financial institutions, The Prudential Insurance Company of America and certain of its affiliates, Shelf Noteholders, TRUSERV 1998 Trust Wilmington Trust Company in its individual capacity and as owner trustee, BMO Global Capital Solutions, Inc., Bank of Montreal, as Administrative Agent Bank of America, N.A., as Collateral Agent and TruServ Corporation, et al. Dated as of April 11, 2002 TABLE OF CONTENTS
PAGE SECTION 1. DEFINED TERMS AND INTERPRETATION......................... 3 SECTION 2. APPOINTMENT OF COLLATERAL AGENT.......................... 13 SECTION 3. ADMINISTRATION; EXERCISE OF REMEDIES..................... 13 SECTION 4. APPLICATION OF INTERIM PROCEEDS; INTERIM TRUE UP......... 15 SECTION 5. FINAL TRUE UP............................................ 17 SECTION 6. APPLICATION OF PROCEEDS AFTER FINAL TRUE UP EVENT........ 18 SECTION 7. SPECIAL TRUST ACCOUNT; RECEIPT OF PROCEEDS; SHARING...... 20 SECTION 8. INFORMATION FROM BENEFITED PARTIES....................... 21 SECTION 9. DISCLAIMERS, INDEMNITY, ETC.............................. 22 SECTION 10. INVALIDATED PAYMENTS.................................... 26 SECTION 11. MISCELLANEOUS........................................... 27
SCHEDULE I SENIOR NOTE AGREEMENTS SCHEDULE II COLLATERAL DOCUMENTS SCHEDULE III LIST OF SCHEDULED SALES SCHEDULE IV ORIGINAL SHELF NOTE RATES EXHIBIT A FORMS OF MAKE-WHOLE ORIGINAL NOTE EXHIBIT B FORMS OF MAKE-WHOLE DELTA NOTE
FIRST AMENDED AND RESTATED INTERCREDITOR AGREEMENT This FIRST AMENDED AND RESTATED INTERCREDITOR AGREEMENT (this "Agreement") dated as of April 11, 2002, amends and restates in its entirety the Intercreditor Agreement (the "Original Intercreditor Agreement") dated as of April 14, 2000 entered into among BANK OF AMERICA, N.A. ("Bank of America") in its capacity as Agent for various financial institutions under the Credit Agreement defined below (in such capacity, together with its successors and assigns in such capacity, the "Agent"), such various financial institutions, The Prudential Insurance Company of America ("Prudential") and certain of its affiliates (together with their respective successors and assigns, individually each a "Shelf Noteholder" and collectively the "Shelf Noteholders") as holders of certain notes issued by TruServ Corporation (the "Company") under the Shelf Agreement defined below, the holders (together with their respective successors and assigns, individually each a "Senior Noteholder" and, collectively, the "Senior Noteholders") of certain notes issued by the Company under the Senior Note Agreements defined below, Wilmington Trust Company, in its individual capacity and as owner trustee, BMO Global Capital Solutions, Inc., Bank of Montreal, in its capacity as administrative agent and Bank of America, as Collateral Agent (as defined below). R E C I T A L S A. Pursuant to an Amended and Restated Credit Agreement dated as of April 14, 2000 (the "Original Credit Agreement") among the Company, certain financial institutions party thereto (together with their respective successors and assigns, individually each a "Lender" and collectively the "Lenders") and the Agent, the Lenders have made available to the Company certain loans and other financial accommodations. B. Pursuant to (i) a Note Agreement dated as of April 13, 1992 (the "Cotter Note Agreement") and (ii) an Amended and Restated Private Shelf Agreement dated as of November 13, 1997 (collectively with the Cotter Note Agreement and each as amended and through the date hereof, the "Shelf Agreement") between the Company (previously known as Cotter & Company) and Prudential, the Company issued and sold certain notes (the "Shelf Notes") to the Shelf Noteholders. C. Pursuant to the Amended and Restated Note Agreements dated April 14, 2000 listed on Schedule I to the Original Intercreditor Agreement (collectively, as amended through the date hereof, the "Senior Note Agreements"), the Company issued and sold certain notes (the "Senior Notes") to the Senior Noteholders. D. Bank of America (together with its successors and assigns in each one's capacity as a provider of cash management services, the "Cash Management Bank") has provided and may from time to time hereafter provide overdraft protection, Automated Clearing House services and other cash management services to the Company (any arrangement to provide such protection and/or services, a "Cash Management Arrangement"). E. Pursuant to a Guaranty dated as of April 30, 1998 (the "Synthetic Lease Guaranty") issued in favor of TruServ 1998 Trust, Wilmington Trust Company, in its individual capacity and as Owner Trustee, BMO Global Capital Solutions, Inc. (then known as BMO Leasing (U.S.), Inc.), as Agent Certificate Holder, BMO Global Capital Solutions, Inc. (then known as BMO Leasing (U.S.), Inc.) and various other financial institutions, as Certificate Holders, Bank of Montreal, as Administrative Agent, and Bank of Montreal and various other financial institutions, as Lenders (all of the foregoing, together with their respective successors and assigns, individually each a "Synthetic Lease Lender" and, collectively, the "Synthetic Lease Lenders"), the Company has guaranteed all obligations of Mary Green, LLC under or in connection with the "Operative Documents" referred to in the Synthetic Lease Guaranty (the "Operative Documents"); F. Pursuant to the Guaranty dated as of April 14, 2000 (the "Subsidiary Guaranty"), certain subsidiaries of the Company have guaranteed the payment of all obligations of the Company under or in connection with the Credit Agreement, the Shelf Agreement and the Shelf Notes, the Senior Note Agreements and the Senior Notes, the Cash Management Arrangements, the Synthetic Lease Guaranty and the Collateral Documents (as defined in Section 1). G. Pursuant to the Original Intercreditor Agreement, the Company and the other Debtors (as defined in Section 1) agreed to grant collateral security for their respective obligations under the Credit Agreement, the Shelf Agreement and the Shelf Notes, the Senior Note Agreements and the Senior Notes, the Cash Management Arrangements, the Synthetic Lease Guaranty and the Subsidiary Guaranty, as applicable, pursuant to one or more of the Collateral Documents. H. Pursuant to the Original Intercreditor Agreement, the Agent, the Lenders, the Shelf Noteholders, the Senior Noteholders, the Cash Management Bank, the Synthetic Lease Lenders, the Company and the other Debtors agreed that the Credit Agreement Obligations, the Shelf Obligations, the Senior Note Obligations, the Cash Management Obligations, the Synthetic Lease Obligations and the Subsidiary Guaranty Obligations (each as defined in Section 1) became secured pursuant to the Collateral Documents subject to the respective priorities provided in the Original Intercreditor Agreement; and the Benefited Parties (as defined in Section 1) appointed Bank of America to act as collateral agent (in such capacity, together with its successors and assigns in such capacity, the "Collateral Agent") on behalf of all Benefited Parties regarding the Subsidiary Guaranty and the Collateral (as defined in Section 1), all as more fully provided therein. I. The Original Intercreditor Agreement also provided for collateral for LC Obligations, IRB Obligations and Canadian Guaranty Obligations (each as defined in the Original Intercreditor Agreement) and for Cash Management Obligations, as defined in the Original Intercreditor Agreement, for the benefit of each cash management bank other than Bank of America. All such obligations have been repaid in full. J. The Agent and the Lenders have agreed to amend and restate in its entirety the Original Credit Agreement as the Second Amended and Restated Credit Agreement dated as of April 11, 2002 (the "Credit Agreement"). Page 2 Intercreditor Agreement K. The Senior Noteholders have agreed to enter into that certain Amendment to the Amended and Restated Note Purchase Agreement dated as of April 11, 2002. L. Pursuant to the request of the Company, the Shelf Noteholders and the Company have agreed to amend the Shelf Agreement as set forth in that certain letter amendment dated as of April 11, 2002. M. The Synthetic Lease Lenders have agreed to enter into that certain Fourth Amendment to Participation Agreement, Second Amendment to Master Lease and Loan Agreement dated as of April 11, 2002. N. Subject to Section 11(l) herein, the parties to the Original Intercreditor Agreement have agreed to amend and restate the Original Intercreditor Agreement herein in its entirety. NOW, THEREFORE, in consideration of the premises and other good and valuable consideration, the sufficiency and receipt of which are hereby acknowledged, the parties hereto agree that the Original Intercreditor Agreement is hereby amended and restated in its entirety as follows: SECTION 1. DEFINED TERMS AND INTERPRETATION. (a) As used in this Agreement, the following terms have the respective meanings set forth below, all such definitions to be appropriately applicable to the singular and plural forms of the terms defined: Affected Benefited Party - see Section 10. Affiliate means, as to any Person, any other Person which, directly or indirectly, is in control of, is controlled by, or is under common control with such Person. A Person shall be deemed to control another Person if the controlling Person possesses, directly or indirectly, the power to direct or cause the direction of the management and policies of such other Person, whether through the ownership of voting securities, partnership interests or membership interests, by contract, or otherwise. A Person that is or was a Member, Substantial Stockholder or material customer shall not be deemed an "Affiliate" solely on account of such status absent satisfying the control test hereinabove. Agent - see the Preamble. Agreement - see the Preamble. Bank of America - see the Preamble. Bankruptcy Proceeding means, with respect to any Person, a general assignment by such Person for the benefit of its creditors, or the institution by or against such Person of any proceeding seeking relief as debtor, or seeking to adjudicate such Person as bankrupt or insolvent, or seeking reorganization, arrangement, adjustment or composition of such Person or its debts under any law relating to bankruptcy, insolvency, reorganization or relief of debtors, or Page 3 Intercreditor Agreement seeking appointment of a receiver, trustee, custodian or other similar official for such Person or for any substantial part of its property. Benefited Obligations means, (a) with respect to the Company, all Credit Agreement Obligations, all Shelf Obligations, all Senior Note Obligations, all Cash Management Obligations, all Synthetic Lease Obligations, including (without limitation) any and all Make-Whole Obligations, and all obligations in respect of interest, accreted interest, breakage costs, premium, yield maintenance, make-whole, commissions, fees, indemnities, expense reimbursements and unfunded liabilities in respect thereof and (b) with respect to any other Debtor, all Subsidiary Guaranty Obligations of such Debtor. Benefited Parties means, with respect to any Debtor, the holders from time to time of the Benefited Obligations of such Debtor. Business Day means any day other than (i) a Saturday or a Sunday and (ii) a day on which commercial banks in New York City are required or authorized to be closed. Cash Management Arrangements - see the Recitals. Cash Management Bank - see the Recitals. Cash Management Obligations means all obligations of the Company under or in connection with any Cash Management Arrangements, including reimbursement obligations relating thereto, overdraft liabilities, fees, expenses and indemnities and shall include, without limitation, all obligations of the Collateral Agent to reimburse Fleet National Bank in respect of paragraph 7 of the Fleet Blocked Account Agreement. Code means the Uniform Commercial Code as the same may from time to time be in effect in the State of Illinois. Collateral means, with respect to any Debtor, all property and interests in property of such Debtor in which a Lien has been created in favor of: (i) the Collateral Agent for the benefit of the Benefited Parties and/or (ii) any Benefited Party to secure the Benefited Obligations of such Debtor; provided that, to the extent the Synthetic Lease Lenders have a first Lien thereon, Collateral shall not include the Synthetic Collateral. Collateral Agent - see the Recitals. Collateral Document means each of the documents referred to on Schedule II and any other document or instrument pursuant to which any Debtor grants to the Collateral Agent or any Benefited Party a Lien on any property to secure any of the Benefited Obligations. Company - see the Preamble. Contingent Obligation means with respect to (i) the Synthetic Lease Guaranty, any portion of the obligations guaranteed pursuant to such guaranty which is not then due and Page 4 Intercreditor Agreement payable and (ii) any letter of credit issued under a Financing Agreement, the undrawn amount of such letter of credit for which the issuer thereof does not hold cash collateral in respect thereof. Cotter Note Agreement - see Recitals. Credit Agreement - see the Recitals. Credit Agreement Commitment means, initially, the $200,000,000 Commitment under the Credit Agreement, and as reduced thereafter by the application of Interim Proceeds distributed to the Lenders, and as voluntarily reduced by the Company from time to time. Credit Agreement Obligations means all obligations of the Company under or in connection with the Credit Agreement, including for principal, interest, fees, reimbursement obligations under bankers' acceptances, breakage costs, expenses and indemnities. Creditor means a holder of Benefited Obligations. Debtor means the Company and each subsidiary of the Company which is a party to the Subsidiary Guaranty or any Collateral Document. Defaulting Creditor - see Section 5. Enforcement means the commencement of any enforcement, collection (including judicial or non-judicial foreclosure) or similar proceeding with respect to any Collateral or the Subsidiary Guaranty. Event of Default means an "Event of Default" as defined in the Credit Agreement, the Shelf Agreement, any Senior Note Agreement, or the Operative Documents or any similar event under any other Financing Agreement which causes any Benefited Obligations, or permits any Benefited Party (or group of Benefited Parties) to cause any Benefited Obligations, to become due and payable (or to be required to be repaid, repurchased, redeemed or defeased) prior to their stated maturity. Excess Cash Proceeds means for any fiscal year, commencing with the fiscal year ended on or about December 31, 2002 (or for any other period for which "Excess Cash Flow" (as defined in the Financing Agreements) gives rise to a prepayment obligation under the Financing Agreements), an amount equal to "Excess Cash Flow" with respect to such fiscal year (or such applicable period) as determined pursuant to the Financing Agreements (as in effect on the date hereof). Final Principal Obligations - see Section 5. Final Proceeds means any and all proceeds of Collateral, Net Disposition Proceeds and Net Debt Proceeds received upon or after the occurrence of a Final True Up Event and includes amounts payable to the Collateral Agent pursuant to Sections 5 and 7. Page 5 Intercreditor Agreement Final Settlement Percentage means, for each Primary Benefited Party and the Cash Management Bank, the percentage (rounded to the closest thousandth) such party's total aggregate outstanding Benefited Obligations represents of the total aggregate outstanding of all the Primary Benefited Parties' Benefited Obligations (it being agreed that for purposes of this definition, Benefited Obligations in the case of (i) the Noteholders shall not include the amount of any Make-Whole Delta Obligations and (ii) the Synthetic Lease Lenders shall not exceed the Synthetic Maximum Shortfall) plus the Benefited Obligations of the Cash Management Bank (subject to the aggregate cap for the Cash Management Bank set forth in the proviso hereinafter), such percentage to be calculated as of the Final True-Up Date and after taking into account all payments made to such party pursuant to Section 5 and clauses SECOND and THIRD of Section 6; provided, that the total aggregate maximum outstanding Benefited Obligations of the Cash Management Bank to be used for calculation of the Final Settlement Percentage herein shall in no event exceed $66,000,000. Final True-Up Date - see Section 5. Final True Up Event means (a) the commencement of a Bankruptcy Proceeding with respect to the Company; (b) the repayment in full of all Principal Benefited Obligations of (i) the Lenders, (ii) the Shelf Noteholders, or (iii) the Senior Noteholders; (c) the refinancing of the Credit Agreement Obligations or the Senior Note Obligations or the Shelf Obligations; (d) the Credit Agreement Commitment is no longer available to the Company or has been terminated; or (e) the acceleration of the Credit Agreement Obligations, the Senior Note Obligations or the Shelf Obligations has occurred. Final True-Up Percentages - see Section 5. Financing Agreements means the Credit Agreement, the Shelf Agreement, the Shelf Notes, the Senior Note Agreements, the Senior Notes, the Synthetic Lease Guaranty, this Agreement, the Subsidiary Guaranty and the Collateral Documents. Fleet Blocked Account Agreement means that certain Three-Party Blocked Account Service Agreement dated as of December 10, 2001 among the Company, the Collateral Agent, and Fleet National Bank. Hagerstown Excess means the positive amount, if any, by which the amount of Hagerstown Proceeds exceeds the lesser of (1) $39,990,654.52 or (2) the aggregate amount of the outstanding Synthetic Lease Obligations at such time. Hagerstown Facility means the distribution center located at 16500 Hunters Green Parkway, Hagerstown, Maryland. Hagerstown First Lien means the Lien on the Hagerstown Facility held by the Synthetic Lease Lenders. Hagerstown Overage means the positive amount, if any, by which the amount of the Hagerstown Proceeds exceeds $19,995,327.26, but shall not include any Hagerstown Excess. Page 6 Intercreditor Agreement Hagerstown Proceeds means all proceeds from the sale of the Hagerstown Facility. Hagerstown Second Lien means the Lien on the Hagerstown Facility held by the Collateral Agent for the benefit of the Benefited Parties. Interim Proceeds means any and all (i) cash proceeds of notes received from the sale of assets, including proceeds of the Lumber Note; (ii) Net Disposition Proceeds to the extent consisting of cash required to be prepaid under any of the Financing Agreements, (iii) Net Debt Proceeds required to be prepaid under any of the Financing Agreements, and (iv) Excess Cash Proceeds, in each case received prior to the occurrence of a Final True Up Event; provided, however, that Hagerstown Proceeds shall not constitute Interim Proceeds; provided further, however, that after the Interim True Up Event has occurred, the Hagerstown Excess, if any, shall be Interim Proceeds. Interim True Up Event means the sale of the Hagerstown Facility. Interim True Up Percentages means, for each Primary Benefited Party, the percentage (rounded to the closest thousandth) that such party's base outstanding on April 1, 2001 as set forth below represents of the total aggregate base outstanding (see (2) below, which shall be the sum of the amounts listed under the caption "Base Out-Standing"); provided that the base outstanding for the Synthetic Lease Lenders to be used as (1) below shall be $19,995,327.26 minus the amount of the Hagerstown Overage:
Base Outstanding 4/1/01 Percentage ----------------------- ---------- Lenders $ 172,500,000 172,500,000/(2) Shelf Noteholders $ 180,000,000 180,000,000/(2) Senior Noteholders $ 105,000,000 105,000,000/(2) Synthetic Lease Lenders (1) (1)/(2) TOTAL BASE (2) 100%
Lender - see the Recitals. Lien means any security interest, mortgage, deed of trust, pledge, hypothecation, assignment for security, charge or deposit arrangement, encumbrance, preferential arrangement in the nature of security or lien (statutory or other) in respect of any property (including those created by, arising under or evidenced by any conditional sale or other title retention agreement, the interest of a lessor under a capital lease, or any financing lease having substantially the same economic effect as any of the foregoing, but not including the interest of a lessor under an operating lease). Lumber Note means the $19,500,000 promissory note made by Builder Marts of America, Inc. on December 29, 2000, payable to the Company. Make-Whole Amount means (a) with respect to the Shelf Agreement and Shelf Obligations, the amount resulting from the calculation of "Yield Maintenance Amount" as Page 7 Intercreditor Agreement defined in the Shelf Agreement and (b) with respect to the Senior Note Agreements and the Senior Note Obligations, the amount resulting from the calculation of the "Make-Whole Amount" as defined in the Senior Note Agreements. Make-Whole Delta Amount means the positive amount, if any, (a) with respect to the Shelf Agreement and Shelf Obligations, by which the respective Make-Whole Amount exceeds the amount resulting from the calculation of the corresponding Original Yield Maintenance Amount and (b) with respect to the Senior Note Agreements and the Senior Note Obligations, by which the respective Make-Whole Amount exceeds the amount resulting from the calculation of the corresponding Original Yield Maintenance Amount. Make-Whole Delta Interest Obligation means all obligations of the Company to pay interest on Make-Whole Delta Notes at the rates set forth in such notes. Make-Whole Delta Notes means any and all notes issued by the Company from time to time to evidence the obligations of the Company to pay the Make-Whole Delta Amounts owed to the Noteholders in the form of Exhibit B attached hereto and made a part hereof. Make-Whole Delta Obligations means all obligations of the Company to pay any Make-Whole Delta Amount and any Make-Whole Delta Interest Obligations. Make-Whole Obligations means, collectively, all obligations of the Company to pay Make-Whole Original Obligations and Make-Whole Delta Obligations. Make-Whole Original Amount means (a) with respect to the Shelf Agreement and Shelf Obligations, the Original Yield Maintenance Amount, (b) with respect to the Senior Note Agreements and the Senior Note Obligations, the Original Yield Maintenance Amount, and (c) with respect to the Noteholders, collectively, the aggregate sum of the Original Yield Maintenance Amounts under (a) and (b). Make-Whole Original Interest Obligation means all obligations of the Company to pay interest on Make-Whole Original Notes at the rates set forth in such notes. Make-Whole Original Note means any and all notes issued by the Company from time to time to evidence the obligations of the Company to pay the Make-Whole Original Amounts owed to the Noteholders in the form of Exhibit A attached hereto and made a part hereof. Make-Whole Original Obligations means all obligations of the Company to pay any Make-Whole Original Amount and any Make-Whole Original Interest Obligations. Member means any Person which is a stockholder of the Company or has applied for stock ownership of the Company. Net Debt Proceeds means, as to any issuance of debt by any Person, cash proceeds received by such Person in connection therewith, net of reasonable out-of-pocket costs and expenses paid or incurred in connection therewith in favor of any Person not an Affiliate of such Person, such costs and expenses not to exceed 5% of the gross proceeds of such issuance; Page 8 Intercreditor Agreement provided, that mere renewal and reissuance (without receipt of proceeds by the Company) of existing subordinated debt to current and former Members or their related parties by the Company shall be excluded. Net Disposition Proceeds means, as to any disposition of assets (other than of inventory in the ordinary course of business and the sale of the Hagerstown Facility), proceeds in cash, checks or other cash equivalent financial instruments, notes and other means of payment, as and when received by such Person, net of: (a) the direct costs relating to such disposition, excluding amounts payable to such Person or any Affiliate of such Person, (b) an estimate of cash taxes paid or payable by such Person within nine months of the disposition as a direct result thereof and (c) amounts required to be applied to repay principal, interest and prepayment premiums and penalties on purchase money liens on the asset which is the subject of such disposition. Net Disposition Proceeds shall include any insurance proceeds received upon the loss of, damage to, or destruction of property, except that (i) up to $1,000,000 per occurrence of such insurance proceeds may be applied to replace, repair, restore or rebuild such property without the consent of any party hereto and (ii) any such proceeds in excess of $1,000,000 for each occurrence may be applied to replace, restore or rebuild such property with the consent of the Required Benefited Parties. Noteholders means, collectively, the Senior Noteholders and the Shelf Noteholders. Notice of Final True Up Event - see subsection 7(b). Operative Documents - see the Recitals. Original Credit Agreement - see the Recitals. Original Intercreditor Agreement - see the Preamble. Original Shelf Note Rate means, for each Shelf Note, its respective interest rate set forth on Schedule IV attached hereto, representing the interest rate applicable to such Shelf Note upon its issuance. Original True-Up Percentages - see Section 4. Original Yield Maintenance Amount means (a) with respect to the Shelf Agreement and Shelf Obligations, the "Yield Maintenance Amount" as defined in the Shelf Agreement and calculated in respect of the Original Shelf Note Rate and (b) with respect to the Senior Note Agreements and the Senior Note Obligations, the "Make-Whole Amount" as defined in the Senior Note Agreement and calculated in respect of the original interest rate of 6.85% as set forth therein. Outstanding means at any time all Benefited Obligations (including Contingent Obligations) then outstanding and unpaid, whether or not due. Page 9 Intercreditor Agreement Paint Business means the manufacturing portion of the business classified as the "Paint Segment" in the Company's form 10-K for the fiscal year ended December 31, 2000. For clarification, a sale of the Paint Business is neither a Scheduled Sale nor a Permitted Sale. Payment means any payment or receipt of Proceeds from the Company or any other Debtor or any other source with respect to any Benefited Obligations (including from the exercise of any set-off). Permitted Sale means any sale of an asset by the Company which, without causing a default or an Event of Default, is permitted under the terms of the Financing Agreements and for which no consent of any Benefited Party is required. Person means any individual, corporation, partnership, limited liability company, trust or other entity. Principal Benefited Obligations means, at any time, the obligations of the Company for: (i) the principal amount outstanding at such time under the Credit Agreement, the Senior Note Agreements and Senior Notes, the Shelf Agreement and Shelf Notes, and (ii) the attributed principal amount of obligations owing under the Synthetic Lease Guaranty but not to exceed the Synthetic Maximum Shortfall at such time. Primary Benefited Parties - see Section 4. Proceeds (a) with respect to any Collateral, has the meaning assigned to it under the Code and, in any event, includes (i) any and all proceeds of any collection, sale or other disposition of such Collateral and (ii) any and all amounts from time to time paid or payable under or in connection with any of such Collateral; and (b) with respect to the Subsidiary Guaranty, means all amounts paid to or received by the Collateral Agent or any other Benefited Party under the Subsidiary Guaranty. Prudential - see the Preamble. Repayment Event - see Section 10. Required Benefited Parties means (a) prior to the payment in full of all Final Principal Obligations and the termination of the "Commitments" under and as defined in the Credit Agreement (as in effect on the date hereof), each of: the "Required Lenders" as defined in the Credit Agreement (as in effect on the date hereof), the "Required Holders" as defined in the Shelf Agreement (as in effect on the date hereof), the "Majority Holders" as defined in the Senior Note Agreements (as in effect on the date hereof) and Benefited Parties holding more than 50% of the outstanding principal or face amount of the Principal Benefited Obligations; and (b) thereafter, Benefited Parties holding more than 50% of the Benefited Obligations. For purposes of the foregoing and Section 11(b), the principal amount of the outstanding Synthetic Lease Obligations shall be the principal amount of the Synthetic Lease Obligations guaranteed pursuant to the Synthetic Lease Guaranty less the value of the Specific Collateral held for such Synthetic Lease Obligations and the amount of cash held by the Collateral Agent for the Page 10 Intercreditor Agreement Synthetic Lease Obligations pursuant to clause SECOND of Section 4 and clauses SECOND and FOURTH of Section 6. Scheduled Sales means the proceeds from the sales of the Canadian subsidiary, the Indianapolis facility, the lumber business, the Hagerstown Excess, and the sales listed on Schedule III. Second Tier Benefited Obligations means (i) all Make-Whole Delta Obligations, (ii) all Synthetic Lease Obligations in excess of the Synthetic Maximum Shortfall and (iii) all Cash Management Obligations which have not been satisfied (w) from the $4,000,000 in cash collateral held as Specific Collateral, (x) by set-off, chargeback, account adjustment, or charge/deduction against an account of any Debtor, (y) by reimbursement from or payment by any Debtor or (z) pursuant to any payment under clause FOURTH of Section 6 hereof. Senior Note Agreements - see the Recitals. Senior Note Obligations means all obligations of the Company under or in connection with the Senior Note Agreements and the Senior Notes, including all principal of, premium and make-whole amounts, if any, and interest on any Senior Note issued thereunder, and all fees, expenses and indemnities. Senior Noteholder - see the Preamble. Senior Notes - see the Recitals. Shelf Agreement - see the Recitals. Shelf Noteholder - see the Preamble. Shelf Notes - see the Recitals. Shelf Obligations means all obligations of the Company under or in connection with the Shelf Agreement and the Shelf Notes, including, without limitation, all principal of, yield maintenance amount, premium and make-whole amounts if any, and interest on any Shelf Note, and all fees, expenses and indemnities. Special Trust Account means an interest bearing trust account maintained by the Collateral Agent, in accordance with its standard procedures for handling trust funds, for the purpose of receiving and holding Payments, for the benefit of the Benefited Parties. Specific Collateral means in the case of (i) the Synthetic Lease Lenders, all property in which the Synthetic Lease Lenders have a Lien or an ownership interest pursuant to the Operative Documents (the "Synthetic Collateral") and (ii) the Cash Management Bank and Cash Management Obligations, $4,000,000 in cash representing (x) the first $2,000,000 in the "Peg Account" as defined in the Fleet Blocked Account Agreement and (y) the $2,000,000 ACH coverage deposit being retained by the Cash Management Bank. Page 11 Intercreditor Agreement Specific Obligations means all Synthetic Lease Obligations and all Cash Management Obligations. Subsidiary Guaranty - see the Recitals. Subsidiary Guaranty Obligations means, with respect to any Debtor other than the Company, all obligations of such Debtor under or in connection with the Subsidiary Guaranty. Substantial Portion means, with respect to Collateral, a portion of Collateral such that the aggregate book value of such portion as a percentage of the aggregate book value of all the Collateral is in excess of 10%. Substantial Stockholder means (i) any Person owning, beneficially or of record, directly or indirectly, either individually or together with all other Persons to whom such Person is related by blood, adoption or marriage, stock of the Company (of any class having ordinary voting power for the election of directors) aggregating five percent (5%) or more of such voting power or (ii) any Person related by blood, adoption or marriage to any Person described or coming within the provisions of clause (i) of this definition. Synthetic Collateral - see the definition of "Specific Collateral". Synthetic Lease Guaranty - see the Recitals. Synthetic Lease Lender - see the Recitals. Synthetic Lease Obligations means all obligations of the Company under or in connection with the Synthetic Lease Guaranty. Synthetic Maximum Shortfall means initially $19,995,327.26 and thereafter such amount as reduced by (i) any Interim Proceeds paid to the Synthetic Lease Lenders under Section 4 and (ii) the amount of the Hagerstown Overage, if any. True-Up Amount - see Section 6. True-Up Payment - see Section 5. (b) Section captions are included in this Agreement for convenience only and shall not be given effect in interpreting this Agreement. The term "including" shall in all cases mean "including, without limitation." Reference to any agreement (including this Agreement), document, note or instrument means such agreement, document, note or instrument as amended, restated or otherwise modified from time to time; and the terms "Credit Agreement," "Senior Note Agreement", "Shelf Agreement" and "Operative Documents" shall include any agreement refinancing or replacing any of the foregoing (and corresponding terms, such as "Credit Agreement Obligations," "Senior Note Obligations", "Shelf Obligations", "Synthetic Lease Obligations","Senior Noteholder", "Shelf Noteholder", "Synthetic Lease Lender" and "Lender" shall be deemed amended accordingly); provided that no agreement refinancing or replacing any of the foregoing shall (i) in the case of a revolving credit facility, increase the amount available Page 12 Intercreditor Agreement or shorten the scheduled availability period thereunder; or (ii) in the case of a term loan facility or note issuance, increase the amount outstanding thereunder or shorten the scheduled maturity of any installment thereof, without, in each case, the consent of the Required Benefited Parties. SECTION 2. APPOINTMENT OF COLLATERAL AGENT; COLLATERAL. Each of the Lenders and each other Benefited Party hereby designates and appoints Bank of America to serve as the Collateral Agent under this Agreement, the Subsidiary Guaranty and the Collateral Documents. Each of the Lenders and each other Benefited Party hereby authorizes the Collateral Agent to act as agent for the Benefited Parties for the purposes of executing and delivering on behalf of the Benefited Parties the Collateral Documents and, subject to the provisions of this Agreement, enforcing the Benefited Parties' rights under the Subsidiary Guaranty and the Collateral Documents and the obligations of the Debtors thereunder, together with such other powers as are reasonably incidental thereto. Each of the Debtors represents and warrants that other than the assets subject to the Hagerstown First Lien, all of its Collateral is subject to a valid and perfected first priority Lien in favor of the Collateral Agent to the extent required by the Collateral Documents and subject only to Permitted Liens (as defined in the Collateral Documents). Each Debtor hereby covenants that it will promptly deliver to the Collateral Agent all Collateral (or such documentation necessary to perfect its Lien therein) it receives hereinafter. SECTION 3. ADMINISTRATION; EXERCISE OF REMEDIES. (a) Except as set forth in subsection 3(g), the Collateral Agent agrees that it will not (i) release any Liens or Collateral without the written consent of the Required Benefited Parties or (ii) commence Enforcement without the written direction of the Required Benefited Parties. The Collateral Agent agrees to administer the Collateral and to make such demands and give such notices under the Subsidiary Guaranty and the Collateral Documents as the Required Benefited Parties may request, and to take such action to enforce the Subsidiary Guaranty and the Collateral Documents and to realize upon, collect and dispose of the Collateral or any portion thereof as may be directed by the Required Benefited Parties. The Collateral Agent shall not be required to take any action that is in the reasonable opinion of counsel to the Collateral Agent contrary to applicable law or to the terms of this Agreement, the Subsidiary Guaranty or any Collateral Document, or that would in the reasonable opinion of such counsel subject the Collateral Agent or any of its officers, employees, agents or directors to additional liability, and the Collateral Agent shall not be required to take any action under this Agreement, the Subsidiary Guaranty or any Collateral Document unless and until the Collateral Agent shall be indemnified to its reasonable satisfaction by the Benefited Parties against any and all loss, cost, expense or liability in connection therewith. (b) Each Benefited Party agrees that the Collateral Agent shall act as the Required Benefited Parties may request (regardless of whether any individual Benefited Party agrees, disagrees or abstains with respect to such request) and that the Collateral Agent shall have no liability for acting reasonably in accordance with such request (provided such action does not conflict with applicable law, the express terms of this Agreement, the Subsidiary Guaranty or Page 13 Intercreditor Agreement any Collateral Document). The Collateral Agent shall give prompt written notice to each Benefited Party of (i) any request and (ii) any action taken pursuant to the instructions of the Required Benefited Parties to enforce any Collateral Document; provided, absent gross negligence or willful misconduct, that the failure to give any such notice shall not impair the right of the Collateral Agent to take any such action or the validity of any action so taken or impose any liability on the Collateral Agent. (c) The Collateral Agent may at any time request directions from the Required Benefited Parties as to any course of action or other matter relating hereto or relating to the Subsidiary Guaranty or any Collateral Document. Except as otherwise provided in this Agreement, directions given by the Required Benefited Parties to the Collateral Agent hereunder shall be binding on all Benefited Parties, for all purposes. (d) Nothing contained in this Agreement, except as specifically provided, shall affect the right (if any) of any Benefited Party to give the Company or any other applicable Person notice of any default or to accelerate or make demand for payment of its Benefited Obligations, under its respective Financing Agreement or to realize upon any Collateral on which such Benefited Party has a Lien. Except for and only to the extent of the first priority interest held by the Synthetic Lease Lenders in their Synthetic Collateral, each Benefited Party agrees not to take any action to enforce any term or provision of the Subsidiary Guaranty or any Collateral Document or to enforce any of its rights in respect of the Subsidiary Guaranty or any Collateral (including any right of set-off but excluding any Specific Collateral on which such Benefited Party has a Lien) except through the Collateral Agent or in accordance with this Agreement. Except for and only to the extent of the first priority interest held by the Synthetic Lease Lenders in their Synthetic Collateral and by the Cash Management Bank in its Specific Collateral, each Benefited Party agrees that it shall not (i) take or receive a security interest in or Lien on any property or assets of any Debtor as security for payment of any Benefited Obligations other than security interests and Liens assigned or granted to the Collateral Agent under the Collateral Documents to secure all Benefited Obligations or (ii) take or receive any guaranty or any other credit support for any of the Benefited Obligations other than the Subsidiary Guaranty or any other guaranty in favor of the Collateral Agent for the benefit of all Benefited Obligations. Bank of America, as Collateral Agent under the Fleet Blocked Account Agreement, agrees and confirms that it holds a security interest in the "Blocked Account" (as defined in the Fleet Blocked Account Agreement) and all proceeds thereof for the benefit of all the Benefited Parties. (e) [Intentionally omitted.] (f) The Collateral Agent shall not be deemed to have actual or constructive knowledge or notice of the occurrence of any Event of Default until it has received written notice thereof stating that it is a "Notice of Default". Any Benefited Party which has actual knowledge of an Event of Default or a Final True Up Event shall promptly deliver (in accordance with the notice requirements of Section 11(a)) to the Collateral Agent a written statement describing such Event of Default or a Final True Up Event (provided that failure to do so shall not constitute a waiver of such Event of Default or a Final True Up Event by any Benefited Party). Upon receipt of a notice from a Benefited Party of the occurrence of an Event of Default or a Final True Up Event, the Collateral Agent shall promptly (and in any event no later than one Business Day after Page 14 Intercreditor Agreement receipt of such notice in the manner provided in Section 11(a)) give notice of such Event of Default or a Final True Up Event to all other Benefited Parties. (g) Unless the Collateral Agent has received notice (as provided in subsection (f) above) that an Event of Default exists or a Final True Up Event has occurred, the Collateral Agent may with 3 Business Days advance written notice thereof to each of the Benefited Parties (x) release any Collateral (including any Specific Collateral) under any Collateral Document which is permitted to be sold or disposed of or otherwise released pursuant to the Financing Agreements and execute and deliver such releases as may be necessary to terminate of record the Collateral Agent's lien on or security interest in such Collateral (it being understood that sales of inventory in the ordinary course of business shall not require a specific release from the Collateral Agent); provided that the Collateral Agent shall not release all or any Substantial Portion of the Collateral or, other than the Hagerstown Second Lien, any Specific Collateral without the consent of the Required Benefited Parties; and (y) subordinate any Lien on any property which constitutes Collateral to the holder of any Lien on such property which is expressly permitted by the Financing Agreements (including the holder of any Lien on any Specific Collateral). In determining whether any such release or subordination is permitted, the Collateral Agent may, in the absence of actual notice or knowledge to the contrary, conclusively rely on a certificate from the Company that such release or subordination is permitted by all of the Financing Agreements. SECTION 4. APPLICATION OF INTERIM PROCEEDS; INTERIM TRUE UP. All Interim Proceeds shall be promptly paid by the Debtors to the Collateral Agent for deposit into the Special Trust Account. Prior to the occurrence of the Interim True Up Event, all such Interim Proceeds shall then be promptly applied and distributed by the Collateral Agent as follows: FIRST, To the payment of any reasonable costs and expenses of the Collateral Agent directly arising from the Collateral Agent's actions hereunder in such capacity for which it has not been previously paid or reimbursed; and SECOND, To each of the following Benefited Parties a portion of such Interim Proceeds (net of payment under FIRST above) according to its respective percentage share as follows: Lenders 36.1% Shelf Noteholders 37.7% Senior Noteholders 22.0% Synthetic Lease Lenders 4.2%
(such Benefited Parties, the "Primary Benefited Parties" and such percentages, the "Original True-Up Percentages") to be applied upon receipt by each of such Primary Benefited Parties to its respective Principal Benefited Obligations only. Page 15 Intercreditor Agreement Upon the occurrence of the Interim True Up Event, the Interim True Up Percentages shall be calculated and, thereafter, all Interim Proceeds shall be distributed by the Collateral Agent FIRST, As set forth in clause FIRST above; and SECOND, To each of the Primary Benefited Parties according to its respective Interim True Up Percentage share. To the extent that the Synthetic Lease Lenders have received Interim Proceeds prior to the Interim True Up Event, the amount so received in excess of what would have been received if its respective Interim True Up Percentage had been applied in calculating such Interim Proceeds instead of its respective Original True-Up Percentage shall be promptly paid to the Collateral Agent for reallocation among the other Principal Benefited Parties in accordance with their respective interests therein as though the Interim True Up Percentages had been applied to all Interim Proceeds received to date. Until such Interim Proceeds are so distributed, the Collateral Agent shall hold such Interim Proceeds in the Special Trust Account. The Credit Agreement Commitment shall be reduced simultaneously by the amount of Interim Proceeds distributed and applied hereunder to the Credit Agreement Obligations and any such reduction shall not constitute an event of default under any other Financing Agreement. The Collateral Agent shall give notice to the Company and each Benefited Party specifying the amount of all payments made to each of the Benefited Parties under this Section 4. So long as this Section 4 shall be in effect and no Final True-Up Event has occurred, the parties hereto agree for the purposes of this Agreement only and distributions made hereunder, that all Make-Whole Obligations arising from a Scheduled Sale, including the proceeds of the Lumber Note and such other amounts in the Special Trust Account on the date hereof that arose from Scheduled Sales shall be treated as follows: (x) the Make-Whole Original Obligations arising from such sale shall be evidenced by a Make-Whole Original Note issued in the appropriate form for the applicable Noteholder and the Make-Whole Original Obligations, including accrued and unpaid Make-Whole Original Interest Obligations in respect thereof, shall be includable as outstanding Benefited Obligations in the calculation of the Final Settlement Percentage of the respective Noteholder who shall receive distributions in respect thereof in accordance with clause FOURTH of Section 6, and, (y) the Make-Whole Delta Obligations arising from such sale shall be evidenced by a Make-Whole Delta Note issued in the appropriate form for the applicable Noteholder and the Make-Whole Delta Obligations, including Make-Whole Delta Interest Obligations in respect thereof, shall be deemed Second Tier Benefited Obligations payable under clause FIFTH of Section 6 and, solely for the purpose of calculating the Final Settlement Percentage, shall not be includable as outstanding Benefited Obligations. Page 16 Intercreditor Agreement Each of the parties hereto acknowledge and agree that the foregoing shall not apply to the Make-Whole Amount arising in the event of a sale of the Paint Business or any sale other than a Scheduled Sale. In the event that the Company proposes to sell the Paint Business, the parties hereto further agree to enter into discussions regarding the terms of payment of the Make-Whole Obligations in respect thereto. Each of the Primary Benefited Parties agree that payments made hereunder and in accordance herewith by the Company of Interim Proceeds to the Collateral Agent for distribution as set forth in this Agreement and payment of Make-Whole Obligations by the issuance of Make-Whole Notes as provided herein shall not constitute a default under their respective Financing Agreements. SECTION 5. FINAL TRUE UP. Upon the occurrence of a Final True Up Event (the date of such occurrence, the "Final True-Up Date"), each of the Primary Benefited Parties shall promptly, but in any event within ten Business Days of receipt of a Final True-Up Notice, notify the Collateral Agent of the amount of principal outstanding of its respective Principal Benefited Obligation and its outstanding Make-Whole Original Obligations, if any, on such Final True-Up Date. Based upon such notices, the Collateral Agent shall determine (i) the total aggregate amount of the Principal Benefited Obligations (the "Final Principal Obligations") and (ii) the percentage (rounded to the closest thousandth) that each Primary Benefited Party's Principal Benefited Obligation represents of the Final Principal Obligations (the "Final True-Up Percentages"). The Collateral Agent shall notify each of the Primary Benefited Parties of the amounts of the Final Principal Obligations and the Final True-Up Percentages, and such Final True-Up Percentages shall be deemed binding and conclusive absent any objection or correction from the Primary Benefited Parties within ten Business Days after receipt of such notice from the Collateral Agent. To the extent that a Primary Benefited Party's Final True-Up Percentage is less than (a) if no Interim True Up Event has occurred, its Original True-Up Percentage or (b) if the Interim True Up Event occurred, its Interim True Up Percentage, such Primary Benefited Party shall pay to the Collateral Agent, for deposit into the Special Trust Account to be deemed as "Final Proceeds" and distributed in accordance with clause SECOND of Section 6, an amount (the "True-Up Payment") equal to the sum of (i) (x) its Original True-Up Percentage or its Interim True Up Percentage, as the case may be, minus (y) its Final True-Up Percentage times (ii) the Final Principal Obligations. If any Creditor required under this Section 5 to make a payment to the Collateral Agent fails to do so within five Business Days' after its receipt of notice from the Collateral Agent of its obligation (a "Defaulting Creditor"), such Defaulting Creditor's obligation shall bear interest thereafter until paid at a rate equal to the rate such amount would have been subject to as an obligation of the Company to pay the Creditor(s) who will receive such amount under clause SECOND of Section 6. Such interest shall be paid by the Defaulting Creditor to the Collateral Agent for distribution thereof to the appropriate Creditors under clause SECOND of Section 6. Any amounts not paid shall be withheld by the Collateral Agent from any proceeds due such Defaulting Creditor hereunder. Page 17 Intercreditor Agreement Notwithstanding any agreement to the contrary in any of the other Financing Agreements, each Debtor hereby agrees that each Primary Benefited Party who has made a True-Up Payment to the Collateral Agent pursuant to this Section 5 shall, to the extent of the amount of such True-Up Payment, be deemed to have the obligation (or part thereof) which was originally intended to be satisfied of its respective Principal Benefited Obligation, and all Liens, rights and remedies therefor and in respect thereof, revived and continued in full force and effect as if such original payment of its respective Principal Benefited Obligation had not been made. Each Debtor agrees that the books and records of the Primary Benefited Parties showing the outstanding amount of the Primary Benefited Obligations shall constitute rebuttably presumptive proof thereof, irrespective of whether any Principal Benefited Obligation is or should be evidenced by a promissory note or other instrument. This provision shall supersede any action taken by a Primary Benefited Party in reliance upon any payments received or proceeds applied and all such actions taken are deemed hereby to be conditioned upon such payments or applications of proceeds being final and irrevocable and not subject to this Section 5. SECTION 6. APPLICATION OF PROCEEDS AFTER FINAL TRUE UP EVENT. (a) All Final Proceeds shall be promptly paid or delivered by the Debtors to the Collateral Agent for deposit into the Special Trust Account. All Proceeds of Specific Collateral in excess of the amount of the underlying obligation shall be promptly paid or delivered to the Collateral Agent for deposit into the Special Trust Account. All such Final Proceeds shall then be promptly applied and distributed by the Collateral Agent as follows: FIRST, To the payment of any reasonable costs and expenses of the Collateral Agent directly arising from the Collateral Agent's actions hereunder in such capacity for which it has not been previously paid or reimbursed; SECOND, To the extent that under Section 5 a Primary Benefited Party's Final True-Up Percentage is higher than (a) if no Interim True Up Event has occurred, its Original True-Up Percentage or (b) if the Interim True Up Event occurred, its Interim True Up Percentage, to each of such Primary Benefited Parties a portion of such Final Proceeds (such payment, the "True-Up Amount") representing an amount equal to the sum of (i) (x) its Final True-Up Percentage minus (y) its Original True-Up Percentage or its Interim True Up Percentage, as the case may be, times (ii) the Final Principal Obligations; such True-Up Amount to be applied upon receipt by each of such Primary Benefited Parties to its respective Principal Benefited Obligations; provided that, with respect to any Contingent Obligations of the Primary Benefited Parties, payment in respect thereof shall be held by the Collateral Agent, to be retained as Collateral for such Contingent Obligations (it being understood that (i) if any portion of such Contingent Obligations becomes due and payable, the Collateral Agent shall pay to the holder of such Contingent Obligations the ratable share of the amount of cash held as Collateral therefor pursuant to this clause which is allocable to such portion of such Contingent Obligations (less the amount of any cash held as Specific Collateral by such holder which is available to be applied to pay such portion of such Contingent Obligations) and (ii) if and to the extent that any such Page 18 Intercreditor Agreement Contingent Obligation ceases to exist (as the result of payment of any obligations guaranteed pursuant to the Synthetic Lease Guaranty or realization on Specific Collateral or otherwise) the amount of cash held as Collateral therefor pursuant to this clause shall be then applied and distributed pursuant to clause THIRD below; THIRD, To the payment of such unsatisfied Cash Management Obligations as of the Final True-Up Date (taking into account chargebacks and deposit adjustments made within two weeks after the Final True-Up Date) in an amount not to exceed the $4,000,000 in cash collateral held as Specific Collateral for the benefit of the Cash Management Bank. To the extent that the Cash Management Obligations do not exceed $4,000,000, the excess cash and any other deposits held in connection with the Cash Management Obligations shall be available for distribution as set forth hereinbelow; FOURTH, To each of the Primary Benefited Parties and the Cash Management Bank a portion of such Final Proceeds (net of payment(s) under FIRST, SECOND and THIRD above) according to its respective Final Settlement Percentage to be applied upon receipt by each of such Benefited Parties to its respective Benefited Obligations as set forth in its Financing Agreement or Cash Management Arrangement, as the case may be; provided, that payments under this clause FOURTH shall only be made until such Benefited Obligations of such Primary Benefited Party are paid in full and if and to the extent any payment hereunder to a Primary Benefited Party or the Cash Management Bank is in excess of the Benefited Obligations owed to such party, all amounts in excess thereof shall be shared pro rata among the other Primary Benefited Parties, and; provided further that, with respect to any Contingent Obligations of the Primary Benefited Parties, payment in respect thereof shall be held by the Collateral Agent, to be retained as Collateral for such Contingent Obligations (it being understood that (i) if any portion of such Contingent Obligations becomes due and payable, the Collateral Agent shall pay to the holder of such Contingent Obligations the ratable share of the amount of cash held as Collateral therefor pursuant to this clause which is allocable to such portion of such Contingent Obligations (less the amount of any cash held as Specific Collateral by such holder which is available to be applied to pay such portion of such Contingent Obligations) and (ii) if and to the extent that any such Contingent Obligation ceases to exist (as the result of payment of any obligations guaranteed pursuant to the Synthetic Lease Guaranty or realization on Specific Collateral or otherwise) the amount of cash held as Collateral therefor pursuant to this clause shall be then applied to the Final Principal Obligations which are not Contingent Obligations. FIFTH: To the ratable payment of the Second Tier Benefited Obligations then owing by the applicable Debtor; provided that with respect to Second Tier Benefited Obligations which are Contingent Obligations, payment shall be made Page 19 Intercreditor Agreement to the Collateral Agent, to be retained as Collateral, for the ratable portion of Second Tier Benefited Obligations consisting of such Contingent Obligations (it being understood that (i) if any portion of such Contingent Obligations becomes due and payable, the Collateral Agent shall pay to the holder of such Contingent Obligations the ratable share of such portion of such Contingent Obligations (less the amount of any cash held as Specific Collateral by such holder which is available to be applied to pay such portion of such Contingent Obligations) and (ii) if and to the extent that any Contingent Obligation ceases to exist, the amount of cash held as Collateral therefor pursuant to this clause shall be applied as set forth in this clause to non-Contingent Obligations; SIXTH: After payment in full of all Benefited Obligations, to the payment to or upon the order of the applicable Debtor, or to whomsoever may be lawfully entitled to receive the same or as a court of competent jurisdiction may direct, of any surplus then remaining from such Proceeds. (b) Until such Final Proceeds are so applied, the Collateral Agent shall hold such Final Proceeds in the Special Trust Account. SECTION 7. SPECIAL TRUST ACCOUNT; RECEIPT OF PROCEEDS; SHARING. (a) As of April 2, 2002, the Special Trust Account had a balance of $10,953,599.38. The Collateral Agent has heretofore provided each of the Primary Benefited Parties with an accounting of the funds in the Special Trust Account. Of said balance, $10,900,000.00 shall be deemed Interim Proceeds and shall be applied as set forth in Section 4 and distributed by the Collateral Agent by no later than April 30, 2002. Until the Final True-Up Date, the balance remaining in the Special Trust Account shall be subject to distributions under Section 4 at each time the Special Trust Account accumulates a balance in excess of $500,000. Upon the occurrence of the Final True-Up Date, all amounts in the Special Trust Account shall be distributed as set forth in Section 6. (b) Each Debtor agrees to give prompt notice to the Collateral Agent of the receipt of Net Disposition Proceeds and Net Debt Proceeds and promptly to pay or deliver, as the case may be, all of such Net Disposition Proceeds and Net Debt Proceeds to the Collateral Agent to the extent required under the Collateral Documents, the Financing Agreements, and hereunder. Any Proceeds received by any Benefited Party other than Proceeds of Specific Collateral, shall be promptly paid over to the Collateral Agent for deposit in the Special Trust Account for application as set forth herein. All Proceeds of the Specific Collateral in excess of the amount of any underlying obligation shall be held by the Collateral Agent for the benefit of the Primary Benefited Parties. (c) Payments by the Collateral Agent in respect of (i) the Credit Agreement Obligations and, to the extent relating to the Credit Agreement Obligations, the Subsidiary Guaranty Obligations shall be made to the Agent for distribution to the Lenders in accordance with the Credit Agreement; (ii) the Shelf Obligations and, to the extent relating to the Shelf Obligations, the Subsidiary Guaranty Obligations shall be made to Prudential (or such other Person as Page 20 Intercreditor Agreement Prudential may designate in writing to the Collateral Agent) for distribution to the Shelf Noteholders; (iii) the Senior Note Obligations and, to the extent relating to the Senior Note Obligations, the Subsidiary Guaranty Obligations shall be made to the related applicable Senior Noteholder; (iv) the Cash Management Obligations shall be paid to the Cash Management Bank; and (v) the Synthetic Lease Obligations and, to the extent relating to the Synthetic Lease Obligations, the Subsidiary Guaranty Obligations shall be made to Bank of Montreal (or such other Person as Bank of Montreal may designate in writing to the Collateral Agent) for distribution to the Synthetic Lease Lenders. (d) The Collateral Agent shall give each Benefited Party a written notice in accordance with Section 11(a) (a "Notice of Final True Up Event") promptly, but no later than one Business Day, after being notified in writing by a Benefited Party that a Final True Up Event has occurred or one Business Day after the Collateral Agent has knowledge that a Final True Up Event has occurred. After the receipt of such Notice of Final True Up Event, all payments by the Company or any other Debtor and all proceeds of Collateral shall be deposited into the Special Trust Account and applied as set forth in Section 6. (e) Each Benefited Party agrees that upon the occurrence of a Final True Up Event it shall (i) promptly notify the Collateral Agent in writing of the amount of all Payments (if any) previously received by such Benefited Party after the Final True-Up Date and of the receipt thereafter of any Payment other than any Payments received pursuant to Section 4, 5, or 6 hereof, (ii) hold such amounts in trust for the Benefited Parties and act as agent of the Benefited Parties during the time any such amounts are held by it and (iii) promptly deliver to the Collateral Agent such amounts for deposit into the Special Trust Account to be deemed as "Final Proceeds". (f) If at any time any Benefited Party shall have received any payment or distribution (whether voluntary, involuntary, through the exercise of any right of set-off or otherwise, but excluding (i) any payment or distribution from, or constituting proceeds of, Specific Collateral which is applied to related Specific Obligations and (ii) scheduled amortization and other payments required under its respective Financing Agreement) on any of its Benefited Obligations in excess of the payments or distributions such Benefited Party would have received through the operation of Section 4 or 6, as applicable, such Benefited Party shall hold such excess payments or distributions in trust for the benefit of the other Benefited Parties and shall promptly pay over such excess payments or distributions in the form received to the Collateral Agent for distribution to the Benefited Parties pursuant to Section 4 or 6, as applicable. Notwithstanding any contrary provision herein or any termination of this Agreement, this subsection 7(f) shall survive until the Benefited Obligations are paid in full or such earlier time as all Benefited Parties have agreed in writing to terminate this subsection 7(f). SECTION 8. INFORMATION FROM BENEFITED PARTIES. Each Benefited Party shall promptly from time to time, upon written request of the Collateral Agent, (i) notify the Collateral Agent of the outstanding Benefited Obligations owed to such Benefited Party as at such date as the Collateral Agent may specify and (ii) notify the Collateral Agent of any payment received thereafter by such Benefited Party to be applied to the Benefited Obligations owing to such Benefited Party. Each Benefited Party shall certify as to Page 21 Intercreditor Agreement such amounts and the Collateral Agent shall be entitled to rely conclusively upon such certification. The Collateral Agent shall notify each Benefited Party of the outstanding amounts of the Benefited Obligations of the other Benefited Parties upon the application of any Interim Proceeds but in any event no less frequently than bi-annually. SECTION 9. DISCLAIMERS, INDEMNITY, ETC. (a) The Collateral Agent shall have no duties or responsibilities except those expressly set forth in this Agreement and the Collateral Documents. The Collateral Agent shall not by reason of this Agreement, the Subsidiary Guaranty or any Collateral Document be a trustee for any Benefited Party or have any other fiduciary obligation to any Benefited Party (including any obligation under the Trust Indenture Act of 1939, as amended). The Collateral Agent shall not be responsible to any Benefited Party for any recitals, statements, representations or warranties contained in any other Financing Agreement or in any certificate or other document referred to or provided for in, or received by any of them under, any other Financing Agreement, or for any representations or warranties not made by it under this Agreement or any Collateral Document, or for the value, validity, effectiveness, genuineness, enforceability or sufficiency of any Financing Agreement or any other document referred to or provided for therein or any Lien under any Collateral Document or the perfection or priority of any such Lien or for any failure by the Company, any other Debtor, any Benefited Party or any other Person to perform any of its respective obligations under any Financing Agreement. Without limiting the foregoing, the Collateral Agent shall not be required to take any action under the Subsidiary Guaranty or any Collateral Document, including any action to perfect any security interest granted in the Collateral pursuant to any Collateral Document, or to administer any Collateral unless instructed to do so by the Required Benefited Parties. The Collateral Agent may employ agents and attorneys-in-fact and shall not be responsible, except as to money or securities received by it or its authorized agents, for the negligence or misconduct of any such agents or attorneys-in-fact selected by it with reasonable care. Neither the Collateral Agent nor any of its directors, officers, employees or agents shall be liable or responsible for any action taken or omitted to be taken by it or them hereunder or in connection herewith, except for the gross negligence or willful misconduct of such Person. (b) The Collateral Agent shall be entitled to rely upon any certification, notice or other communication received in the manner set forth in Section 11(a) reasonably believed by it to be genuine and correct and to have been signed or sent by or on behalf of the proper Person or Persons, and upon advice and statements of independent legal counsel, independent accountants and other experts selected by the Collateral Agent. As to any matters not expressly provided for by this Agreement, the Collateral Agent shall in all cases be fully protected in acting, or in refraining from acting, hereunder in accordance with instructions signed by the Required Benefited Parties, and such instructions of the Required Benefited Parties, and any action taken or failure to act pursuant thereto, shall be binding on all Benefited Parties. (c) The Benefited Parties agree that they will indemnify the Collateral Agent, in its capacity as the Collateral Agent, ratably in accordance with the principal or face amount of the Benefited Obligations held by each of the Benefited Parties at the time any item described below arises, to the extent the Collateral Agent is not reimbursed by the Company or the other Debtors Page 22 Intercreditor Agreement under the Financing Agreements or reimbursed out of any Proceeds pursuant to clause FIRST of Section 4 or clause FIRST of Section 6, for any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind or nature whatsoever that may be imposed on, incurred by or asserted against the Collateral Agent in any way directly relating to or arising out of this Agreement, the Subsidiary Guaranty or any Collateral Document or the enforcement of any of the terms thereof, including reasonable fees and charges of counsel (including the allocated cost of internal counsel); provided that no Benefited Party shall be liable for any such payment to the extent the obligation to make such payment is found in a final judgment by a court of competent jurisdiction to have arisen from the Collateral Agent's gross negligence or willful misconduct. The obligations of the Benefited Parties under this subsection 9(c) shall survive the payment in full of the Benefited Obligations and the termination of this Agreement. The Collateral Agent shall provide a detailed written statement of expenses and other amounts for which it seeks reimbursement to the Company with a copy to each Benefited Party. (d) Except for action expressly required of the Collateral Agent hereunder, the Collateral Agent shall, notwithstanding subsection 9(c), in all cases be fully justified in failing or refusing to act hereunder unless it shall be further indemnified to its reasonable satisfaction by the Benefited Parties against any and all additional liability and expense that may be incurred by it by reason of taking or continuing to take any such action. (e) The Collateral Agent may deem and treat the payee of any promissory note or other evidence of indebtedness or of any other liability relating to any Benefited Obligation as the owner thereof for all purposes hereof unless and until a written notice of the assignment or transfer thereof, signed by such payee and in form reasonably satisfactory to the Collateral Agent, shall have been filed with the Collateral Agent. Any request, authority or consent of any Person who at the time of making such request or giving such authority or consent is the holder of any such note or other evidence of indebtedness or obligation shall be conclusive and binding on any subsequent holder, transferee or assignee of such note or other evidence of indebtedness or obligation and of any note or notes or other evidences of indebtedness or obligation issued in exchange therefor. (f) Except as expressly provided herein, the Collateral Agent shall have no duty to take any affirmative steps with respect to the administration or collection of amounts payable in respect of the Subsidiary Guaranty, the Collateral Documents or the Collateral. The Collateral Agent shall incur no liability (except to the extent the actions or omissions of the Collateral Agent in connection therewith constitute gross negligence or willful misconduct) as a result of any sale of any Collateral, whether at any public or private sale. (g) (i) The Collateral Agent may resign at any time by giving at least 60 days' notice thereof to the Lenders and the other Benefited Parties, and the Collateral Agent may be removed as the Collateral Agent at any time by the Required Benefited Parties. In the event of any such resignation or removal of the Collateral Agent, the Required Benefited Parties shall thereupon have the right to appoint a successor Collateral Agent. If no successor Collateral Agent shall have been so appointed by the Required Benefited Parties and shall have accepted such appointment within 60 days after the notice of the intent of the Collateral Agent to resign or the Page 23 Intercreditor Agreement removal of the Collateral Agent, then the resignation or removal shall nonetheless become effective, the retiring or removed Collateral Agent shall be discharged from its duties and obligations hereunder and the Benefited Parties acting collectively shall thereafter have the rights and obligations of the Collateral Agent hereunder and under the Collateral Documents until a successor Collateral Agent has been appointed and accepted such appointment. Any successor Collateral Agent appointed pursuant to this subsection shall be a commercial bank or other financial institution organized under the laws of the United States of America or any state thereof having combined capital and surplus of at least $1,000,000,000. After any retiring or removed Collateral Agent's resignation or removal hereunder, the provisions of Section 3 and this Section 9 shall continue to inure to its benefit as to any actions taken or omitted to be taken by it while it was the Collateral Agent. (ii) Upon the acceptance by a successor Collateral Agent of appointment as the Collateral Agent hereunder, such successor Collateral Agent shall thereupon succeed to and become vested with all the rights, powers, privileges and duties of the retiring or removed Collateral Agent, and the retiring or removed Collateral Agent shall thereupon be discharged from its duties and obligations hereunder (if not previously discharged therefrom pursuant to subsection 9(g)(i)). (iii) Upon any resignation or removal of a Collateral Agent, the retiring or removed Collateral Agent shall execute and deliver such documents and instruments as the applicable successor Collateral Agent or the Required Benefited Parties may reasonably request to vest in such successor Collateral Agent or the Benefited Parties the rights, powers and privileges of the retiring or removed Collateral Agent. (h) In no event shall the Collateral Agent or any Benefited Party be liable or responsible for any funds or investments of funds held by the Company, any other Debtor or any of their Affiliates. (i) With respect to their respective shares of the Benefited Obligations, Bank of America and its Affiliates shall have and may exercise the same rights and powers hereunder as, and shall be subject to the same obligations and liabilities as and to the extent set forth herein for, any other Benefited Party, all as if Bank of America were not the Collateral Agent. The terms "Benefited Party", "Required Benefited Parties", "Lender", "Cash Management Bank" or any similar term shall, unless the context clearly otherwise indicates, include Bank of America or any Affiliate of Bank of America in its individual capacity as a Benefited Party, one of the Required Benefited Parties, a Lender or a Cash Management Bank. Bank of America and its Affiliates may lend money to, and generally engage in any kind of business with, the Company or any of its Affiliates as if Bank of America were not acting as the Collateral Agent and without any duty to account therefor to any other Benefited Party. Without limiting the foregoing, each Benefited Party acknowledges that (i) Bank of America is both a Lender and the Agent under the Credit Agreement and the Collateral Agent hereunder and under the Collateral Documents and (ii) Bank of America and its Affiliates may continue to engage in any credit decision with respect to the Credit Agreement or any other Financing Agreement without any duty to account therefor to the Benefited Parties by reason of its appointment as the Collateral Agent. Page 24 Intercreditor Agreement (j) Each party hereto acknowledges that it has, independently and without reliance upon the Collateral Agent or any other party hereto and based upon such documents and information as it has deemed appropriate, made its own credit analysis and decision to enter into this Agreement and the other Financing Agreements to which it is a party. Each party hereto also acknowledges that it will, independently and without reliance upon the Collateral Agent and based upon such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under the Financing Agreements to which it is a party. (k) If, with respect to any proposed action to be taken by it, the Collateral Agent shall determine in good faith that the provisions of this Agreement relating to the functions or discretionary powers of the Collateral Agent are or may be ambiguous or inconsistent, the Collateral Agent shall notify the other Benefited Parties identifying the proposed action and the provisions it considers to be ambiguous or inconsistent, and may decline either to perform such function or responsibility or to exercise such discretionary power unless it has received the written confirmation of the Required Benefited Parties that the Required Benefited Parties concur that the action proposed to be taken by the Collateral Agent is consistent with the terms of this Agreement or is otherwise appropriate. The Collateral Agent shall be fully protected in acting or refraining from acting upon the confirmation of the Required Benefited Parties in this respect, and such confirmation shall be binding upon all Benefited Parties. (l) Each of the Company and each other Debtor, by its consent hereto, agrees to pay to the Collateral Agent, from time to time upon demand, all reasonable fees, costs and expenses of the Collateral Agent (including the reasonable fees and charges of counsel to the Collateral Agent, the allocated cost of internal legal services, all disbursements of internal counsel and all fees and charges of any financial advisor retained by the Collateral Agent or by counsel to the Collateral Agent) (i) arising in connection with the administration or enforcement of any of the provisions of this Agreement or the other Financing Agreements, (ii) incurred or required to be advanced in connection with the administration of the Collateral, the sale or other disposition of the Collateral pursuant to any Collateral Document and the preservation, protection or defense of the Collateral Agent's rights under this Agreement and the other Financing Agreements and in and to the Collateral, or (iii) incurred by the Collateral Agent in connection with the resignation of the Collateral Agent pursuant to subsection 9(g). Each of the Company and each other Debtor, by its consent hereto, further agrees to indemnify the Collateral Agent, in its capacity as the Collateral Agent, for any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind or nature whatsoever that may be imposed on, incurred by or asserted against the Collateral Agent in any way relating to or arising out of this Agreement, the Subsidiary Guaranty or any Collateral Document or the enforcement of any of the terms thereof, including reasonable fees and charges of counsel (including the allocated cost of internal counsel); provided that no Debtor shall be liable for any such payment to the extent the obligation to make such payment is found in a final judgment by a court of competent jurisdiction to have arisen from the Collateral Agent's gross negligence or willful misconduct. The obligations of each Debtor other than the Company under this subsection 9(l) shall be limited to the maximum amount that such Debtor may pay without violating any fraudulent conveyance or fraudulent transfer law. The obligations of the Company and each Page 25 Intercreditor Agreement other Debtor under this subsection 9(l) shall survive the termination of the other provisions of this Agreement. SECTION 10. INVALIDATED PAYMENTS. If the Collateral Agent or any other Benefited Party receives any amount pursuant to this Agreement that is subsequently required to be returned or repaid by the Collateral Agent or such other Benefited Party to the Company or any other Debtor or any Affiliate thereof or their respective representatives or successors in interest, whether by court order, settlement or otherwise (a "Repayment Event"), then (x) if the Repayment Event results in the Collateral Agent being required to return or repay any amount distributed by it to the other Benefited Parties under this Agreement, each Benefited Party to which such amount was distributed shall, forthwith upon its receipt of a notice thereof from the Collateral Agent, pay the Collateral Agent an amount equal to its ratable share (based on the amount distributed to such Benefited Party) of the amount required to be returned or repaid relating to such Repayment Event, (y) if the Repayment Event results in any Benefited Party being required to return or repay any amount received by it for its own account under this Agreement directly or indirectly to the Company, any other Debtor or any Affiliate thereof or their respective representatives or successors in interest (any such Benefited Party being an "Affected Benefited Party"), each other Benefited Party shall, forthwith upon its receipt of a notice thereof from the Affected Benefited Party, pay the Collateral Agent an amount for distribution to such Affected Benefited Party such that, after giving effect to such payment and distribution, all Benefited Parties shall have received such proportion of the Proceeds or other payments received on account of the Benefited Obligations as they would have received had the original payment which gave rise to such Repayment Event not occurred, and (z) in either case, the Collateral Agent shall thereafter apply Proceeds received in a manner consistent with the terms of this Agreement such that all Benefited Parties receive such proportion of the Proceeds as they would have received had the original payment which gave rise to such Repayment Event not occurred, to cause each Benefited Party to hold the amount of the Benefited Obligations it would have held if the original payment which gave rise to such Repayment Event had not occurred; it being understood that if any Benefited Party shall fail to promptly pay any such amount to the Collateral Agent (and without limiting any right or remedy that the Collateral Agent or any other Benefited Party may have against such Benefited Party), the Collateral Agent may deduct such amount from any amount payable thereafter to such Benefited Party under this Agreement. Page 26 Intercreditor Agreement SECTION 11. MISCELLANEOUS. (a) All notices and other communications provided for herein shall be in writing and may be sent by messenger or overnight air courier, facsimile transmission, e-mail or United States mail and shall be deemed to have been given when delivered by messenger or overnight air courier, upon completion of facsimile transmission or e-mail (with, in each case, electronic confirmation of receipt) or four Business Days after deposit in the United States mail, registered or certified, with postage prepaid and properly addressed. For the purposes hereof, the addresses of the parties hereto (until notice of a change thereof is delivered as provided in this subsection 11(a)) shall be set forth under each party's name on the signature pages (including acknowledgments) hereof. The Lenders acknowledge and agree that any notice sent to Bank of America shall be conclusively deemed to have been received concurrently by all Lenders. The Shelf Noteholders acknowledge and agree that any notice sent to Prudential (or such other single Person as Prudential shall designate as the representative of the Shelf Noteholders for purposes of this subsection 11(a)) shall be conclusively deemed to have been received concurrently by all Shelf Noteholders. The Senior Noteholders acknowledge and agree that any notice sent to Allstate (or such other single Person as Allstate shall designate as the representative of the Senior Noteholders for purposes of this subsection 11(a)) shall be conclusively deemed to have been received concurrently by all the Senior Noteholders. The Synthetic Lease Lenders acknowledge and agree that any notice sent to Bank of Montreal (or such other single Person as Bank of Montreal shall designate as the representative of the Synthetic Lease Lenders for purposes of this subsection 11(a)) shall be conclusively deemed to have been received concurrently by all Synthetic Lease Lenders. The Collateral Agent shall have no liability for the failure of any Benefited Party to receive a notice sent by the Collateral Agent to all Benefited Parties so long as the Collateral Agent used best efforts to send such notice to such Benefited Party. (b) This Agreement may be amended, modified, waived, or terminated only by an instrument or instruments in writing signed by the Collateral Agent, the Agent (acting with the consent of the "Required Lenders" as defined in the Credit Agreement), the "Required Holders" as defined in the Shelf Agreement, the "Majority Holders" as defined in the Senior Note Agreements, and Benefited Parties holding more than 50% of the outstanding principal or face amount of the Principal Benefited Obligations (or, if all Principal Benefited Obligations (other than Contingent Obligations) have been paid in full and all Commitments under and as defined in the Credit Agreement have terminated, by the Collateral Agent and Benefited Parties holding more than 50% of the outstanding principal or face amount of the Benefited Obligations) and the Company and the other Debtors; provided that no amendment, modification or waiver shall (i) reduce the percentage of any payment, distribution or Proceeds to which any Benefited Party is entitled hereunder without the written consent of such Benefited Party; (ii) change the definitions of "Principal Benefited Obligations", "Final Principal Obligations", "Second Tier Benefited Obligations," "Primary Benefited Parties", "Required Benefited Parties" or "Final True Up Event" without the consent of all Benefited Parties; (iii) change the definitions of "Original True-Up Percentages", "Final Settlement Percentage", "Final True-Up Percentages", "True-Up Amount", or "True-Up Payment", without the consent of all holders of Principal Benefited Obligations; or (iv) amend Section 4, 5, 6 or 11 without the consent of all Benefited Parties. Page 27 Intercreditor Agreement (c) This Agreement shall be binding upon and inure to the benefit of the Collateral Agent and each Benefited Party and their respective successors and assigns. If the holder of any Benefited Obligations shall transfer such Benefited Obligations, it shall promptly so advise the Collateral Agent. Each transferee of any Benefited Obligations shall take such Benefited Obligations subject to the provisions of this Agreement and to any request made, waiver or consent given or other action taken or authorized hereunder, by each previous holder of such Benefited Obligations, prior to the receipt by the Collateral Agent of written notice of such transfer and each transferor shall cause its transferee to so agree; and, except as expressly otherwise provided in such notice, the Collateral Agent shall be entitled to assume conclusively that the transferee named in such notice shall thereafter be vested with all rights and powers as a Benefited Party under this Agreement. Upon the written request of any Benefited Party, the Collateral Agent will provide such Benefited Party with copies of any written notices of transfer received pursuant hereto. (d) This Agreement shall continue to be effective among the Benefited Parties even though a case or proceeding under any bankruptcy or insolvency law or any proceeding in the nature of a receivership, whether or not under any insolvency law, shall be instituted with respect to the Company or any other Debtor, or any portion of the property or assets of the Company or any other Debtor, and all actions taken by the Benefited Parties with regard to such proceeding shall be by the consent of the Required Benefited Parties; provided that nothing herein shall be interpreted to preclude any Benefited Party from filing a proof of claim with respect to its Benefited Obligations or from casting its vote, or abstaining from voting, for or against confirmation of a plan of reorganization in its sole discretion. (e) Each Benefited Party agrees to do such further acts and things and to execute and deliver such additional agreements, powers and instruments as the Collateral Agent or any other Benefited Party may reasonably request to carry into effect the terms, provisions and purposes of this Agreement or to better assure and confirm unto the Collateral Agent or such other Benefited Party the rights, powers and remedies hereunder. (f) This Agreement may be executed in any number of counterparts, all of which taken together shall constitute one and the same instrument, and any of the parties hereto may execute this Agreement by signing any such counterpart. A facsimile of the signature of any party on any counterpart shall be as effective as the original signature of such party for purposes of the effectiveness of this Agreement. (g) THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF ILLINOIS. (h) ANY LEGAL ACTION OR PROCEEDING WITH RESPECT TO THIS AGREEMENT MAY BE BROUGHT IN THE COURTS OF THE STATE OF ILLINOIS OR OF THE UNITED STATES FOR THE NORTHERN DISTRICT OF ILLINOIS, AND BY ITS EXECUTION AND DELIVERY OF THIS AGREEMENT, EACH BENEFITED PARTY (I) CONSENTS TO THE JURISDICTION OF SUCH COURTS, (II) IRREVOCABLY WAIVES ANY OBJECTION, INCLUDING ANY OBJECTION TO THE LAYING OF VENUE OR BASED ON THE GROUNDS OF FORUM NON CONVENIENS, WHICH IT MAY NOW OR Page 28 Intercreditor Agreement HEREAFTER HAVE TO THE BRINGING OF ANY ACTION OR PROCEEDING IN SUCH COURTS IN RESPECT OF THIS AGREEMENT; AND (III) WAIVES PERSONAL SERVICE OF ANY SUMMONS, COMPLAINT OR OTHER PROCESS; AND (IV) WAIVES RIGHT TO A TRIAL BY JURY OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF OR RELATED TO THIS AGREEMENT WITH RESPECT TO CONTRACT CLAIMS, TORT CLAIMS, OR OTHERWISE. (i) Nothing in this Agreement in the Subsidiary Guaranty or in any Collateral Document, express or implied, is intended or shall be construed to confer upon or give to any Person other than the Benefited Parties, the Company and the other Debtors any right, remedy or claim under or by reason of any such agreement or any covenant, condition or stipulation herein or therein contained. (j) In case any provision in or obligation under this Agreement shall be invalid, illegal or unenforceable in any jurisdiction, the validity, legality and enforceability of the remaining provisions or obligations in or under this Agreement, or of such provision or obligation in any other jurisdiction, shall not in any way be affected or impaired thereby. (k) The parties hereto agree that in the event of any conflict between any provisions in this Agreement and any provision in any Financing Agreement, this Agreement shall govern for so long as this Agreement is in full force and effect. Notwithstanding any provision contained in any Financing Agreement to the contrary, Hagerstown Proceeds other than the Hagerstown Excess shall be used to satisfy the Synthetic Lease Obligations. (l) NOTWITHSTANDING ANYTHING TO THE CONTRARY CONTAINED ELSEWHERE HEREIN, ONE SENIOR NOTEHOLDER, JEFFREY BENJAMIN, HAS NOT CONSENTED TO THIS AMENDMENT AND RESTATEMENT OF THE ORIGINAL INTERCREDITOR AGREEMENT, AND THEREFORE, SOLELY FOR THE PURPOSES OF DISTRIBUTIONS OF PROCEEDS AND AMOUNTS TO BE PAID TO JEFFREY BENJAMIN OR HIS SUCCESSORS, ASSIGNS AND TRANSFEREES, THE PERCENTAGE OF THE PAYMENTS, DISTRIBUTIONS AND PROCEEDS THAT HE RECEIVES UNDER THIS AGREEMENT SHALL NOT IN ANY EVENT BE LESS THAN THAT WHICH HE WAS ENTITLED TO RECEIVE UNDER THE ORIGINAL INTERCREDITOR AGREEMENT AND THE INCLUSION OF HIS SENIOR NOTE OBLIGATIONS IN THE DEFINITION OF "FIRST TIER BENEFITED OBLIGATIONS" AS DEFINED IN THE ORIGINAL INTERCREDITOR AGREEMENT SHALL CONTINUE UNCHANGED. NOTWITHSTANDING THE FOREGOING, THIS AGREEMENT SHALL BE FULLY ENFORCEABLE AS BETWEEN THE BENEFITED PARTIES SIGNATORIES HERETO, THEIR SUCCESSORS, ASSIGNS AND TRANSFEREES. EACH OF THE BENEFITED PARTIES EXECUTING THIS AGREEMENT HEREBY RELEASES EACH OF THE OTHER BENEFITED PARTIES EXECUTING THIS AGREEMENT FROM ANY AND ALL CLAIMS ARISING FROM ANY PURPORTED INVALIDITY OF THIS AMENDMENT AND RESTATEMENT OF THE ORIGINAL INTERCREDITOR AGREEMENT DUE TO THE LACK OF JEFFREY BENJAMIN'S CONSENT AND SIGNATURE HERETO. IF JEFFREY BENJAMIN, HIS SUCCESSORS, ASSIGNS OR TRANSFEREES SHOULD SUE AND RECOVER FUNDS ON BEHALF OF ANY BENEFITED PARTY EXECUTING THIS AGREEMENT, SUCH BENEFITED PARTY SHALL IMMEDIATELY DELIVER THE EXCESS OF ANY SUCH FUNDS RECOVERED OVER THE AMOUNT PAYABLE TO SUCH BENEFITED PARTY UNDER THIS AGREEMENT TO THE COLLATERAL AGENT FOR THE BENEFIT OF THE OTHER BENEFITED PARTIES WHO PAID SUCH FUNDS TO JEFFREY BENJAMIN, HIS SUCCESSORS, ASSIGNS OR TRANSFEREES. [Signatures begin on next page] Page 29 Intercreditor Agreement IN WITNESS WHEREOF, the undersigned have caused this Agreement to be duly executed and delivered by their respective officers thereunto duly authorized as of the date first above written. BANK OF AMERICA, N.A., as Collateral Agent By: /s/ DAVID JOHANSON --------------------------------------- Title: Vice President 231 South LaSalle Street, 8th floor Chicago, Illinois 60697 Attention: David Johanson Telephone: 312-828-7933 Facsimile: 312-974-9102 BANK OF AMERICA, N.A., as Agent By: /s/ RONALD PRINCE --------------------------------------- Title: Senior Vice President 231 South LaSalle Street, 8th floor Chicago, Illinois 60697 Attention: Ronald Prince Telephone: 312-828-1500 Facsimile: 312-987-0234 BANK OF AMERICA, N.A., as a Lender By: /s/ RONALD PRINCE --------------------------------------- Title: Senior Vice President 231 South LaSalle Street, 8th floor Chicago, Illinois 60697 Attention: Ronald Prince Telephone: 312-828-1500 Facsimile: 312-987-0234 BANK OF MONTREAL, as Co-Agent and as a Lender By: /s/ HEATHER L. TURF --------------------------------------- Title: Director BANK ONE, NA (Main Office Chicago), as Co-Agent and as a Lender By: /s/ RICHARD BABCOCK --------------------------------------- Title: First Vice President PNC BANK, NATIONAL ASSOCIATION, as Co-Agent and as a Lender By: /s/ J. WILLIAM BREHM --------------------------------------- Title: Vice President WACHOVIA BANK, N.A., as Co-Agent and as a Lender By: /s/ JAMES BARWIS --------------------------------------- Title: Director THE NORTHERN TRUST COMPANY, as a Lender By: /s/ OLGA GEORGIEV --------------------------------------- Title: Vice President Signature Page to Intercreditor Agreement 31 ABN AMRO BANK N.V., as a Lender By: /s/ WILLIAM J. TERESKY, JR. --------------------------------------- Title: Group Vice President By: /s/ NEIL J. BIVONA --------------------------------------- Title: Group Vice President NATIONAL CONSUMER COOPERATIVE BANK, as a Lender By: /s/ MARK W. HILITZ --------------------------------------- Title: Managing Director UMB BANK, N.A., as a Lender By: /s/ TERRY DIERKS --------------------------------------- Title: Senior Vice President BANK OF AMERICA, N.A., as Cash Management Bank By: /s/ RONALD PRINCE --------------------------------------- Title: Senior Vice President 231 South LaSalle Street, 8th floor Chicago, Illinois 60697 Attention: Ronald Prince Telephone: 312-828-1500 Facsimile: 312-987-0234 Signature Page to Intercreditor Agreement 32 BANK OF MONTREAL, as a Synthetic Lease Lender By: /s/ HEATHER L. TURF --------------------------------------- Title: Director 115 South LaSalle Street Chicago, Illinois 60603 Attention: Jack Kane Telephone: (312) 750-5900 Facsimile: (312) 750-6057 TRUSERV 1998 TRUST, as a Synthetic Lease Lender By: Wilmington Trust Company, not in its individual capacity but solely as Owner Trustee By: /s/ C. PAGLIA --------------------------------------- Title: Senior Financial Services Officer c/o Wilmington Trust Company 1100 North Market Street Wilmington, Delaware 19890-0001 Attention: Corporate Trust Administration Telephone: (302) 651-1000 Facsimile: (302) 651-8882 WILMINGTON TRUST COMPANY, as a Synthetic Lease Lender By: /s/ C. PAGLIA --------------------------------------- Title: Senior Financial Services Officer 1100 North Market Street Wilmington, Delaware 19890-0001 Attention: Corporate Trust Administration Telephone: (302) 651-1000 Facsimile: (302) 651-8882 Signature Page to Intercreditor Agreement 33 BMO GLOBAL CAPITAL SOLUTIONS, as a Synthetic Lease Lender By: /s/ MICHAEL JOYCE --------------------------------------- Title: President 115 South LaSalle Street Chicago, Illinois 60603 Attention: Jack Kane Telephone: (312) 750-5900 Facsimile: (312) 750-6057 THE PRUDENTIAL INSURANCE COMPANY OF AMERICA, as a Shelf Noteholder By: /s/ THOMAS E. LUTHER --------------------------------------- Title: Vice President c/ Prudential Capital Group Corporate and Project Workouts 7th Floor, Gateway Center 4 100 Mulberry Street Newark, New Jersey 07102 Attention: Managing Director Facsimile: (973) 802-2333 PRUCO LIFE INSURANCE COMPANY, as a Shelf Noteholder By: /s/ THOMAS E. LUTHER --------------------------------------- Title: Vice President c/o Prudential Capital Group Corporate and Project Workouts 7th Floor, Gateway Center 4 100 Mulberry Street Newark, New Jersey 07102 Attention: Managing Director Facsimile: (973) 802-2333 Signature Page to Intercreditor Agreement 34 U.S. PRIVATE PLACEMENT FUND, as a Shelf Noteholder By: Prudential Private Placement Investors, L.P., Investment Advisor By: Prudential Private Placement Investors, Inc., its General Partner By: /s/ THOMAS E. LUTHER ----------------------------- Title: Vice President c/o Prudential Capital Group Corporate and Project Workouts 7th Floor, Gateway Center 4 100 Mulberry Street Newark, New Jersey 07102 Attention: Managing Director Facsimile: (973) 802-2333 ALLSTATE LIFE INSURANCE COMPANY, as a Senior Noteholder By: /s/ ROBERT BODETT --------------------------------------- Title: Senior Portfolio Manager By: /s/ RONALD MENDEL --------------------------------------- Title: Managing Director 3075 Sanders Road, Suite G5D Northbrook, IL 60062-7127 Attention: Investment Operations - Private Placements Telephone: 847-402-4342 Facsimile: 847-402-3092 Signature Page to Intercreditor Agreement 35 ALLSTATE INSURANCE COMPANY, as a Senior Noteholder By: /s/ ROBERT BODETT --------------------------------------- Title: Senior Portfolio Manager By: /s/ RONALD MENDEL --------------------------------------- Title: Managing Director 3075 Sanders Road, Suite G5D Northbrook, IL 60062-7127 Attention: Investment Operations - Private Placements Telephone: 847-402-4342 Facsimile: 847-402-3092 AID ASSOCIATION FOR LUTHERANS, as a Senior Noteholder By: /s/ R. JERRY SCHEEL --------------------------------------- Title: Second Vice President-Securities By: /s/ GREG ANDERSON --------------------------------------- Title: Portfolio Manager 222 West College Avenue Appleton, WI 54919-0001 Attention: Investment Department Telephone: 920-730-3764 Facsimile: 920-730-3752 Signature Page to Intercreditor Agreement 36 KEYPORT LIFE INSURANCE COMPANY, as a Senior Noteholder By: Stein Roe & Farnham Incorporated, as Agent By: /s/ RICHARD A. HEGWOOD ---------------------------------- Title: Senior Vice President c/o Stein Roe & Farnham Incorporated 1 South Wacker Drive Chicago, IL 60606 Attention: Robert Summers Telephone: 312-368-7700 x8033 Facsimile: 312-368-8100 NATIONWIDE LIFE INSURANCE COMPANY, as a Senior Noteholder By: /s/ MARK W. POEPPELMAN ------------------------------------- Title: Associate Vice President One Nationwide Plaza Columbus, OH 43215 Attention: Investment Accounting Telephone: 614-249-9212 Facsimile: 614-249-4157 FEDERATED MUTUAL INSURANCE COMPANY, as a Senior Noteholder By: /s/ MARK A. HOOD --------------------------------------- Title: Vice President 121 East Park Square Owatonna, Minnesota 55060 Attention: Mark Hood Telephone: 507-455-8460 Facsimile: 507-444-6691 Signature Page to Intercreditor Agreement 37 FEDERATED LIFE INSURANCE COMPANY, as a Senior Noteholder By: /s/ MARK A. HOOD ------------------------------------------------- Title: Vice President 121 East Park Square Owatonna, Minnesota 55060 Attention: Mark Hood Telephone: 507-455-8460 Facsimile: 507-444-6691 MODERN WOODMEN OF AMERICA, as a Senior Noteholder By: /s/ GREG E. STOEFEN ------------------------------------------------- Title: Director, Treasurer and Investment Manager 1701 First Avenue Rock Island, IL 61201 Attention: Investment Department Telephone: 309-793-5567 Facsimile: 309-793-5574 AMERITAS LIFE INSURANCE CORP., as a Senior Noteholder By: Ameritas Investment Advisors, Inc., as Agent By: /s/ ANDREW S. WHITE ---------------------------------- Title: Vice President 5900 "O" Street Lincoln, NE 68510-2234 Attention: Pat Henry Telephone: 402-467-6973 Facsimile: 402-467-6970 Signature Page to Intercreditor Agreement 38 NATIONAL GUARDIAN LIFE INSURANCE COMPANY, as a Senior Noteholder By: /s/ R.A. MUCCI ------------------------------------------------- Title: Vice President and Treasurer 2 East Gilman Street Madison, WI 53703 Attention: Investment Department Telephone: 608-257-5612 x5258 Facsimile: 608-257-4282 FOOTHILL PARTNERS IV, L.P., as a Senior Noteholder By: /s/ R. MICHAEL BOHANNON ------------------------------------------------- Title: Managing Member Address: -------------------------------------------- Attention: -------------------------------------------- Telephone: -------------------------------------------- Facsimile: -------------------------------------------- EVEREST CAPITAL SENIOR DEBT FUND, as a Senior Noteholder By: /s/ PETER JINKS -------------------------------------- Title: Chief Financial Officer By: /s/ ERIC GRAHAM ------------------------- Title: Vice President Address: -------------------------------------------- Attention: -------------------------------------------- Telephone: -------------------------------------------- Facsimile: -------------------------------------------- Signature Page to Intercreditor Agreement 39 ABRAMS CAPITAL, LLC, as a Senior Noteholder By: /s/ DAVID ABRAMS ------------------------------ Title: Managing Member Address: -------------------------------------------- Attention: -------------------------------------------- Telephone: -------------------------------------------- Facsimile: -------------------------------------------- U.S. BANCORP LIBRA, a division of U.S. BANCORP INVESTMENTS, INC., as a Senior Noteholder By: /s/ ROBERT A. KRUEGER ------------------------------------ Title: Vice President Address: -------------------------------------------- Attention: -------------------------------------------- Telephone: -------------------------------------------- Facsimile: -------------------------------------------- RAVICH REVOCABLE TRUST OF 1989, as a Senior Noteholder By: /s/ JESS RAVICH ------------------------------ Title: Trustee Address: -------------------------------------------- Attention: -------------------------------------------- Telephone: -------------------------------------------- Facsimile: -------------------------------------------- Signature Page to Intercreditor Agreement 40 JEFFREY D. BENJAMIN, as a Senior Noteholder By: -------------------------------------------- Title: -------------------------------------------- Address: -------------------------------------------- Attention: -------------------------------------------- Telephone: -------------------------------------------- Facsimile: -------------------------------------------- Signature Page to Intercreditor Agreement 41 TRUSERV CORPORATION By: /s/ BARBARA L. WAGNER ----------------------------------------------- Name: Barbara L.Wagner Title: Vice President GENERAL PAINT & MANUFACTURING COMPANY By: /s/ BARBARA L. WAGNER ----------------------------------------------- Name: Barbara L.Wagner Title: Vice President TRUSERV ACCEPTANCE COMPANY By: /s/ BARBARA L. WAGNER ----------------------------------------------- Name: Barbara L.Wagner Title: Vice President TRUSERV LOGISTICS COMPANY By: /s/ BARBARA L. WAGNER ----------------------------------------------- Name: Barbara L.Wagner Title: Vice President MARYGREEN, LLC By: /s/ BARBARA L. WAGNER ----------------------------------------------- Name: Barbara L.Wagner Title: Vice President TRUE VALUE.COM CORPORATION By: /s/ BARBARA L. WAGNER ----------------------------------------------- Name: Barbara L.Wagner Title: Vice President EXHIBIT A-1 [FORM OF PRUDENTIAL MAKE-WHOLE ORIGINAL NOTE] THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933. THE SALE OR TRANSFER OF THIS NOTE IS SUBJECT TO CERTAIN RESTRICTIONS CONTAINED IN PARAGRAPH 9G OF THE [AMENDED AND RESTATED PRIVATE SHELF AGREEMENT DATED AS OF NOVEMBER 13, 1997] [NOTE AGREEMENT DATED AS OF APRIL 13, 1992] BETWEEN TRUSERV CORPORATION AND THE PRUDENTIAL INSURANCE COMPANY OF AMERICA. TRUSERV CORPORATION MAKE-WHOLE ORIGINAL NOTE NOTE NO. ________ MAKE-WHOLE ORIGINAL PRINCIPAL AMOUNT: $_________ ISSUE DATE: _____________ INTEREST RATE: The Interest Rate for any day, shall be a per annum rate equal to (x) the rate of interest in effect for such day as publicly announced from time to time by Bank of America, N.A. as its "prime rate" plus (y) 5%. INTEREST PAYMENT DATES: last Business Day of each calendar quarter FINAL MATURITY DATE: [07/01/12] [11/13/07] [11/13/02] [04/01/07] FOR VALUE RECEIVED, the undersigned, TruServ Corporation (herein called the "Company" and formerly known as Cotter & Company), a corporation organized and existing under the laws of the State of Delaware, hereby promises to pay to ____________________________________, or registered assigns, the principal sum of _______________________ DOLLARS in cash on the Final Maturity Date specified above with interest (computed on the basis of a 360-day year--30-day month) (a) on the unpaid balance thereof at the Interest Rate per annum specified above, payable in cash on each Interest Payment Date specified above and on the Final Maturity Date specified above, commencing with the Interest Payment Date next succeeding the date hereof, until the principal hereof shall have become due and payable, and (b) on any overdue payment (including any overdue prepayment) of principal, and any overdue payment of interest, payable on each Interest Payment Date as aforesaid (or, at the option of the registered holder hereof, on demand), at a rate per annum from time to time equal to 2% over the Interest Rate specified above. Payments of principal and interest are to be made at the main office of Bank of New York in New York City or at such other place as the holder hereof shall designate to the Company in writing, in lawful money of the United States of America. This Note is issued in connection with a series of Senior Notes (herein called the "Senior Notes") issued pursuant to [an Amended and Restated Private Shelf Agreement, dated as of November 13, 1997] [Note Agreement dated as of April 13, 1992] (as amended, the "Shelf A-1-2 Agreement"), between the Company, on the one hand, and The Prudential Insurance Company of America and each Prudential Affiliate (as defined in the Shelf Agreement) which becomes party thereto, on the other hand, and is entitled to the benefits thereof. The principal of this Note represents that portion of the Yield Maintenance Amount due in respect of the [TruServ Series] [Cotter & Company] Note due [07/01/12] [11/13/07] [11/13/02] [04/01/07] which has been calculated as the Make-Whole Original Amount under the Intercreditor Agreement. This Note is entitled to all the benefits of a Benefited Party (as defined in the Intercreditor Agreement) under the Guaranty and the Collateral Documents. This Note is a registered Note and, as provided in the Shelf Agreement, upon surrender of this Note for registration of transfer, duly endorsed, or accompanied by a written instrument of transfer duly executed, by the registered holder hereof or such holder's attorney duly authorized in writing, a new Note for the then outstanding principal amount will be issued to, and registered in the name of, the transferee. Prior to due presentment for registration of transfer, the Company may treat the person in whose name this Note is registered as the owner hereof for the purpose of receiving payment and for all other purposes, and the Company shall not be affected by any notice to the contrary. In case an Event of Default shall occur and be continuing, the principal of this Note and all accrued interest thereon may be declared or otherwise become due and payable in the manner and with the effect provided in the Agreement. Notwithstanding anything contained elsewhere herein or in the Shelf Agreement, this Note is due and payable in full in cash upon the occurrence of a "Final True Up Event" as defined in the Intercreditor Agreement. Capitalized terms used and not otherwise defined herein shall have the meanings (if any) provided in the Shelf Agreement. This Note is intended to be performed in the State of Illinois and shall be construed and enforced in accordance with the internal laws and decisions (as opposed to the conflicts of law provisions) of such State. TRUSERV CORPORATION By: --------------------------------- Title: ------------------------------ A-1-3 EXHIBIT A-2 [FORM OF SENIOR MAKE-WHOLE ORIGINAL NOTE] THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933. THE SALE OR TRANSFER OF THIS NOTE IS SUBJECT TO CERTAIN RESTRICTIONS CONTAINED IN PARAGRAPH 9A OF THE AMENDED AND RESTATED NOTE PURCHASE AGREEMENT DATED AS OF APRIL 14, 2000 BETWEEN TRUSERV CORPORATION AND THE PURCHASERS SET FORTH ON SCHEDULE 1 THERETO, AS AMENDED FROM TIME TO TIME. TRUSERV CORPORATION MAKE-WHOLE ORIGINAL NOTE PPN: ______________ NOTE NO. ________ MAKE-WHOLE ORIGINAL PRINCIPAL AMOUNT: $_________ ISSUE DATE: _____________ INTEREST RATE: The Interest Rate for any day, shall be a per annum rate equal to (x) the rate of interest in effect for such day as publicly announced from time to time by Bank of America, N.A. as its "prime rate" plus (y) 5%. INTEREST PAYMENT DATES: January 1, April 1, July 1 and December 1 FINAL MATURITY DATE: July 1, 2008 FOR VALUE RECEIVED, the undersigned, TruServ Corporation (herein called the "Company" and formerly known as Cotter & Company), a corporation organized and existing under the laws of the State of Delaware, hereby promises to pay to ____________________________________, or registered assigns, the principal sum of _______________________ DOLLARS in cash on the Final Maturity Date specified above with interest (computed on the basis of a 360-day year--30-day month) (a) on the unpaid balance thereof at the Interest Rate per annum specified above, payable in cash on each Interest Payment Date specified above and on the Final Maturity Date specified above, commencing with the Interest Payment Date next succeeding the date hereof, until the principal hereof shall have become due and payable, and (b) on any overdue payment (including any overdue prepayment) of principal, and any overdue payment of interest, payable on each Interest Payment Date as aforesaid (or, at the option of the registered holder hereof, on demand), at a rate per annum from time to time equal to 2% over the Interest Rate specified above. Payments of principal and interest are to be made at the main office of UMB, N.A. in Kansas City, Missouri or at such other place as the holder hereof shall designate to the Company in writing, in lawful money of the United States of America. A-2-1 This Note is issued in connection with a series of Senior Secured Notes (herein called the "Senior Notes") issued pursuant to the Amended and Restated Note Purchase Agreements, dated as of April 14, 2000 (as amended and collectively, the "Note Agreement"), between the Company, on the one hand, and the Purchasers set forth on Schedule 1 thereto, as amended from time to time, on the other hand, and is entitled to the benefits thereof and shall be treated as a "Note" thereunder. The principal of this Note represents that portion of the Make-Whole Amount due in respect of the Senior Secured Note due 2008 which has been calculated as the Make-Whole Original Amount under the Intercreditor Agreement. This Note is a registered Note and, as provided in the Note Agreement, upon surrender of this Note for registration of transfer, duly endorsed, or accompanied by a written instrument of transfer duly executed, by the registered holder hereof or such holder's attorney duly authorized in writing, a new Note for the then outstanding principal amount will be issued to, and registered in the name of, the transferee. Prior to due presentment for registration of transfer, the Company may treat the person in whose name this Note is registered as the owner hereof for the purpose of receiving payment and for all other purposes, and the Company shall not be affected by any notice to the contrary. This Note is entitled to all the benefits of a Benefited Party (as defined in the Intercreditor Agreement) under the Guaranty and the Collateral Documents. In case an Event of Default shall occur and be continuing, the principal of this Note and all accrued interest thereon may be declared or otherwise become due and payable in the manner and with the effect provided in the Note Agreement. Notwithstanding anything contained elsewhere herein or in the Note Agreement, this Note is due and payable in full upon the occurrence of a "Final True Up Event" as defined in the Intercreditor Agreement. Capitalized terms used and not otherwise defined herein shall have the meanings (if any) provided in the Note Agreement. This Note shall be construed and enforced in accordance with, and the rights of the parties shall be governed by, the law of the State of New York, excluding choice-of-law principles of the law in such State that would require the application of the laws of a jurisdiction other than such State. TRUSERV CORPORATION By: --------------------------------- Title: ------------------------------ A-2-2 EXHIBIT B-1 [FORM OF PRUDENTIAL MAKE-WHOLE DELTA NOTE] THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933. THE SALE OR TRANSFER OF THIS NOTE IS SUBJECT TO CERTAIN RESTRICTIONS CONTAINED IN PARAGRAPH 9G OF THE [AMENDED AND RESTATED PRIVATE SHELF AGREEMENT DATED AS OF NOVEMBER 13, 1997] [NOTE AGREEMENT DATED AS OF APRIL 13, 1992] BETWEEN TRUSERV CORPORATION AND THE PRUDENTIAL INSURANCE COMPANY OF AMERICA. TRUSERV CORPORATION MAKE-WHOLE DELTA NOTE NOTE NO:. __ MAKE WHOLE DELTA PRINCIPAL AMOUNT: $________________ ISSUE DATE: ________________ INTEREST RATE: This Make-Whole Delta Note will bear interest at the same rate (inclusive of supplemental rates and fees) as payable under the respective Underlying Note (as defined hereinbelow) INTEREST PAYMENT DATES: last Business Day of each calendar quarter FINAL MATURITY DATE: [07/01/12] [11/03/07] [11/13/02] [04/01/07] FOR VALUE RECEIVED, the undersigned, TruServ Corporation (herein called the "Company" and formerly known as Cotter & Company), a corporation organized and existing under the laws of the State of Delaware, hereby promises to pay to ___________________________________, or registered assigns, the principal sum of _____________________ DOLLARS in cash on the Final Maturity Date specified above with interest (computed on the basis of a 360-day year--30-day month) (a) on the unpaid balance thereof at the Interest Rate per annum specified above, payable: (i) until the occurrence of the earliest of an Event of Default, the Final Maturity Date or a "Final True-Up Event" (as defined in the Intercreditor Agreement), through the issuance of additional notes ("Additional Securities"); such Additional Securities shall be issued on each Interest Payment Date specified above in an aggregate principal amount equal to the amount of interest payable with respect to this Note and such Additional Securities shall be substantially identical to this Note and (ii) in cash on the earliest of an Event of Default, the Final Maturity Date or a "Final True-Up Event" (as defined in the Intercreditor Agreement), commencing with the Interest Payment Date next succeeding the date hereof, until the principal hereof shall have become due and payable, and (b) on any overdue payment (including any overdue prepayment) of principal and any overdue payment of interest, payable on each Interest Payment Date as aforesaid (or, at the option of the registered holder hereof, on demand), at a rate per annum from time to time equal to the greater of (i) 2% over the Interest Rate specified above or (ii) 2% over the rate of interest publicly announced by Bank of New York from time to B-1-1 time in New York City as its Prime Rate. In case an Event of Default shall occur and be continuing, the principal of this Note and all accrued interest thereon may be declared or otherwise become due and payable in the manner and with the effect provided in the Shelf Agreement. Payments of principal and interest are to be made at the main office of Bank of New York in New York City or at such other place as the holder hereof shall designate to the Company in writing, in lawful money of the United States of America. This Note is issued in connection with a series of Senior Notes (herein called the "Senior Notes") issued pursuant to [an Amended and Restated Private Shelf Agreement, dated as of November 13, 1997] [Note Agreement dated as of April 13, 1992] (herein called the "Shelf Agreement"), between the Company, on the one hand, and The Prudential Insurance Company of America and each Prudential Affiliate (as defined in the Shelf Agreement) which becomes party thereto, on the other hand, and is entitled to the benefits thereof. The principal of this Note represents that portion of the Yield Maintenance Amount due in respect of the [TruServ Series] [Cotter & Company] Note due [7/1/12] [11/13/07] [11/13/02] [4/1/07] (such Senior Note, the "Underlying Note") which has been calculated as the Make-Whole Delta Amount under the Intercreditor Agreement and shall include all interest paid in kind as set forth above. This Note is entitled to all the benefits of a Benefited Party (as defined in the Intercreditor Agreement) under the Guaranty and the Collateral Documents. This Note is a registered Note and, as provided in the Shelf Agreement, upon surrender of this Note for registration of transfer, duly endorsed, or accompanied by a written instrument of transfer duly executed, by the registered holder hereof or such holder's attorney duly authorized in writing, a new Note for the then outstanding principal amount will be issued to, and registered in the name of, the transferee. Prior to due presentment for registration of transfer, the Company may treat the person in whose name this Note is registered as the owner hereof for the purpose of receiving payment and for all other purposes, and the Company shall not be affected by any notice to the contrary. Capitalized terms used and not otherwise defined herein shall have the meanings (if any) provided in the Shelf Agreement. Notwithstanding anything contained elsewhere herein or in the Shelf Agreement, this Note is due and payable in full in cash upon the occurrence of a "Final True Up Event" as defined in the Intercreditor Agreement This Note is intended to be performed in the State of Illinois and shall be construed and enforced in accordance with the internal laws and decisions (as opposed to the conflicts of law provisions) of such State. TRUSERV CORPORATION By: ----------------------------------- Title: -------------------------------- B-1-2 EXHIBIT B-2 [FORM OF SENIOR MAKE-WHOLE DELTA NOTE] THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933. THE SALE OR TRANSFER OF THIS NOTE IS SUBJECT TO CERTAIN RESTRICTIONS CONTAINED IN PARAGRAPH 9A OF THE AMENDED AND RESTATED NOTE PURCHASE AGREEMENT DATED AS OF APRIL 14, 2000 BETWEEN TRUSERV CORPORATION AND THE PURCHASERS SET FORTH ON SCHEDULE 1 THERETO, AS AMENDED FROM TIME TO TIME. TRUSERV CORPORATION MAKE-WHOLE DELTA NOTE PPN: __________ NOTE NO:. __ MAKE WHOLE DELTA PRINCIPAL AMOUNT: $________________ ISSUE DATE: ________________ INTEREST RATE: This Make-Whole Delta Note will bear interest at the same rate (inclusive of supplemental rates and fees) as payable under the respective Underlying Note (as defined hereinbelow) INTEREST PAYMENT DATES: January 1, April 1, July 1 and December 1 FINAL MATURITY DATE: July 1, 2008 FOR VALUE RECEIVED, the undersigned, TruServ Corporation (herein called the "Company" and formerly known as Cotter & Company), a corporation organized and existing under the laws of the State of Delaware, hereby promises to pay to ___________________________________, or registered assigns, the principal sum of _____________________ DOLLARS in cash on the Final Maturity Date specified above with interest (computed on the basis of a 360-day year--30-day month) (a) on the unpaid balance thereof at the Interest Rate per annum specified above, payable (i) in kind on each Interest Payment Date specified above and (ii) in cash on the Final Maturity Date specified above, commencing with the Interest Payment Date next succeeding the date hereof, until the principal hereof shall have become due and payable, and (b) on any overdue payment (including any overdue prepayment) of principal and any overdue payment of interest, payable on each Interest Payment Date as aforesaid (or, at the option of the registered holder hereof, on demand), at a rate per annum from time to time equal to the greater of (i) 2% over the Interest Rate specified above or (ii) 2% over the rate of interest publicly announced by Bank of New York from time to time in New York City as its Prime Rate. Payments of principal and interest are to be made at the main office of UMB, N.A. in Kansas City, Missouri or at such other place as the holder hereof shall designate to the Company in writing, in lawful money of the United States of America. Until the occurrence of the earlier of an Event of Default under the Note Agreement, the Final Maturity Date or the "Final True-Up Event" (as defined in the Intercreditor Agreement), the Company shall pay any interest on this Note through the issuance of additional notes ("Additional Securities"). Such Additional Securities shall be issued in an aggregate principal amount equal to the amount of interest payable with respect to this Note and such Additional Securities shall be substantially identical to this Note. This Note is issued in connection with a series of Senior Secured Notes (herein called the "Senior Notes") issued pursuant to the Amended and Restated Note Purchase Agreements, dated as of April 14, 2000 (as amended and collectively, the "Note Agreement"), between the Company, on the one hand, and the Purchasers set forth on Schedule 1 thereto, as amended from time to time, on the other hand, and is entitled to the benefits thereof and shall be treated as a "Note" thereunder. The principal of this Note represents that portion of the Make-Whole Amount due in respect of the Senior Secured Note due 2008 (such Senior Note, the "Underlying Note") which has been calculated as the Make-Whole Delta Amount under the Intercreditor Agreement and shall include all interest paid in kind as set forth above. This Note is a registered Note and, as provided in the Note Agreement, upon surrender of this Note for registration of transfer, duly endorsed, or accompanied by a written instrument of transfer duly executed, by the registered holder hereof or such holder's attorney duly authorized in writing, a new Note for the then outstanding principal amount will be issued to, and registered in the name of, the transferee. Prior to due presentment for registration of transfer, the Company may treat the person in whose name this Note is registered as the owner hereof for the purpose of receiving payment and for all other purposes, and the Company shall not be affected by any notice to the contrary. This Note is entitled to all the benefits of a Benefited Party (as defined in the Intercreditor Agreement) under the Guaranty and the Collateral Documents. In case an Event of Default shall occur and be continuing, the principal of this Note and any accrued interest thereon may be declared or otherwise become due and payable in the manner and with the effect provided in the Note Agreement. Capitalized terms used and not otherwise defined herein shall have the meanings (if any) provided in the Note Agreement. Notwithstanding anything contained elsewhere herein or in the Note Agreement, this Note is due and payable in full upon the occurrence of a "Final True Up Event" as defined in the Intercreditor Agreement. This Note shall be construed and enforced in accordance with, and the rights of the parties shall be governed by, the law of the State of New York, excluding choice-of-law principles of the law in such State that would require the application of the laws of a jurisdiction other than such State. TRUSERV CORPORATION By: ----------------------------------- Title: -------------------------------- B-1-4 EX-10.E 11 c66649ex10-e.txt TRUSERV SUPPLEMENTAL RETIREMENT PLAN EXHIBIT 10-E TRUSERV CORPORATION SUPPLEMENTAL RETIREMENT PLAN (AS AMENDED AND RESTATED EFFECTIVE JANUARY 1, 2002) TABLE OF CONTENTS PAGE ARTICLE I. PURPOSE AND EFFECTIVE DATE....................................1 1.1. History and Purpose......................................1 1.2. Effective Date...........................................1 ARTICLE II. DEFINITIONS...................................................1 2.1. "Actuarial Equivalent"...................................1 2.2. "Administrator"..........................................1 2.3. "Beneficiary"............................................1 2.4. "Board"..................................................1 2.5. "Cause"..................................................1 2.6. "Change in Corporate Structure"..........................2 2.7. "Code"...................................................2 2.8. "Company"................................................2 2.9. "Compensation"...........................................2 2.10. "ERISA"..................................................2 2.11. "Final Average Compensation".............................2 2.12. "Officer"................................................2 2.13. "Participant"............................................2 2.14. "Predecessor Corporation"................................3 2.15. "Qualified Retirement Plan"..............................3 2.16. "Termination Date".......................................3 2.17. "Years of Service".......................................3 ARTICLE III. PARTICIPATION.................................................3 3.1. Eligibility..............................................3 3.2. Condition of Participation...............................3 ARTICLE IV. PLAN BENEFITS.................................................3 4.1. Amount of Benefit........................................3 4.2. Vesting..................................................4 ARTICLE V. PAYMENT OF BENEFITS...........................................4 5.1. Payment of Benefits......................................4 5.2. Time and Form of Elections...............................4 5.3. Withholding..............................................4 5.4. Change in Corporate Structure............................5 ARTICLE VI. ADMINISTRATION................................................5 6.1. Authority of Administrator...............................5 6.2. Participant's Duty to Furnish Information................5 6.3. Claims Procedure.........................................5 -i- TABLE OF CONTENTS (CONTINUED) PAGE ARTICLE VII. AMENDMENT AND TERMINATION.....................................6 ARTICLE VIII. MISCELLANEOUS.................................................6 8.1. No Implied Rights........................................6 8.2. No Employment Rights.....................................6 8.3. Unfunded Plan............................................6 8.4. Nontransferability.......................................7 8.5. Offset...................................................7 8.6. Facility of Payment......................................7 8.7. Successors and Assigns...................................7 8.8. Applicable Law...........................................7 -ii- TRUSERV CORPORATION SUPPLEMENTAL RETIREMENT PLAN (As Amended and Restated Effective January 1, 2002) ARTICLE I. PURPOSE AND EFFECTIVE DATE 1.1. History and Purpose. The TruServ Corporation Supplemental Retirement Plan was previously established by TruServ Corporation to assist in providing retirement and other benefits to certain employees of the Company and its subsidiaries. The Plan is not intended to qualify under Section 401(a) of the Code or to be subject to Parts 2, 3, or 4 of Title I of ERISA. The Plan is maintained for the purpose of providing supplemental retirement benefits for Corporate Officers within the meaning of Section 301(a)(3) of ERISA. 1.2. Effective Date. The following provisions constitute an amendment and restatement of the Plan as of January 1, 2002; the "Effective Date" of the Plan as set forth herein. ARTICLE II. DEFINITIONS 2.1. "Actuarial Equivalent" means a payment whose actuarial reserve (the amount required to provide such payment) as of a specified date is equal to the actuarial reserve as of the same date to provide another form of payment, determined using the mortality and interest factors set forth in the Qualified Retirement Plan. 2.2. "Administrator" means the Chief Executive Officer of the Company or the individual or committee appointed by the Chief Executive Officer to act as the Administrator under the Plan. 2.3. "Beneficiary" means the person(s) or entity designated to receive a Participant's benefit under the Plan in the event of the Participant's death. If the Participant does not designate one or more Beneficiaries to receive his or her Plan benefits, or none of the Participant's designated Beneficiaries is living at the time of the Participant's death, the Participant's Beneficiary shall be his or her estate. 2.4. "Board" means the Board of Directors of the Company. 2.5. "Cause" means, in the reasonable judgment of the Board, (i) the willful engaging by the Participant in conduct which is demonstrably and materially injurious to the Company, monetarily or otherwise, (ii) the Participant's conviction of a felony in connection with the Participant's employment with the Company, (iii) the Participant's embezzlement or misappropriation of the Company's money or property, or (iv) the finding by the Securities and Exchange Commission or other -1- government regulatory agency that the Participant has violated a rule or policy of such agency in connection with his or her employment with the Company and its subsidiaries. 2.6. "Change in Corporate Structure" means the occurrence of any of the following events: (a) a merger, consolidation, reorganization, or change in control of the Company with or involving any other corporation or entity, in which the Company is not the surviving entity; (b) the sale or disposition of all or substantially all of the Company's assets; or (c) the Company adopts a plan of liquidation or dissolution. 2.7. "Code" means the Internal Revenue Code of 1986, as amended. 2.8. "Company" means TruServ Corporation, a Delaware corporation. 2.9. "Compensation" means, for any calendar year, the base salary plus performance bonuses, which are paid for goal or performance achievements (except as provided below) paid to the Participant in such year, plus pre-tax deferrals of base salary or bonus under Sections 401(k) or 125 of the Code or under a nonqualified deferred compensation plan maintained by the Company during such year, but excluding amounts paid to the Participant under any long-term payouts or phantom equity payouts authorized by the Board during the year, and also excluding distributions to the Participant from any nonqualified plan during the year. The Administrator, in its sole discretion, may determine that payments under specified bonus or incentive plans and arrangements shall not be treated as eligible Compensation under the Plan. 2.10. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended. 2.11. "Final Average Compensation" means, as of any date, the Participant's average annual Compensation during the three calendar years in which the Participant's Compensation was the highest out of the ten calendar years of continuous employment with the Company or a Predecessor Company immediately preceding such date. In the event of a Change in Corporate Structure, if the Participant does not have three calendar years of Compensation in such ten year period, the Participant's average annual Compensation will be calculated based on the number of calendar years of Compensation available. 2.12. "Officer" means an employee who is classified as an officer of the Company. 2.13. "Participant" means an individual who is eligible for participation in the Plan, determined in accordance with Article III. -2- 2.14. "Predecessor Corporation" means, unless the Administrator in its sole discretion determines otherwise, a corporation or other entity which has been acquired by the Company or which becomes a part of the Company through merger, consolidation, reorganization or a similar type transaction. 2.15. "Qualified Retirement Plan" means any pension benefit plan which is maintained by the Company or any subsidiary thereof which is intended to be qualified under Section 401(a) of the Code, excluding the TruServ Corporation Employee Savings and Compensation Deferral Plan and any successor thereto. 2.16. "Termination Date" means the date that a Participant ceases to perform services for the Company and its subsidiaries for any reason. 2.17. "Years of Service" means, as of any date, a Participant's number of eligible "years of service" calculated in accordance with the service crediting rules in the Qualified Retirement Plan under which the Participant is covered, subject to the following provisions of this Section 2.17. For individuals who first become Participants in the Plan on or after the Effective Date, Years of Service shall be calculated using only service from the date the individual first becomes an Officer or if the individual is not an Officer, from the date the individual first becomes eligible for the Plan. ARTICLE III. PARTICIPATION 3.1. Eligibility. Each employee of the Company or its subsidiaries who is an Officer shall be eligible to participate in the Plan as of the date such employee is first employed as an Officer. 3.2. Condition of Participation. Notwithstanding any other provision of the Plan to the contrary, if the Administrator determines that participation by one or more Participants shall cause the Plan to be subject to Part 2, 3 or 4 of Subtitle B of Title I of ERISA, the entire interest of such Participants under the Plan shall be immediately paid to them, or shall otherwise be segregated from the Plan in the discretion of the Administrator, and such Participants shall cease to have any interest under the Plan. ARTICLE IV. PLAN BENEFITS 4.1. Amount of Benefit. A Participant's benefit under the Plan, as of any date, will be an amount equal to (a) below, minus (b) and (c) below: -3- (a) the sum of the Participant's Final Average Pay, multiplied by 33%, multiplied by the Participant's number of Years of Service earned under the Plan, up to a maximum of 660% of the Participant's Final Average Compensation; LESS (b) the lump sum Actuarial Equivalent value of the Participant's accrued benefit under the Qualified Retirement Plan as of such date. 4.2. Vesting. Subject to Section 5.2 and the following provisions of this Section 4.2, a Participant shall become fully vested in his or her benefit under the Plan on the same date that such Participant becomes fully vested in his or her benefit under the Qualified Retirement Plan. If a Participant's Termination Date occurs for reasons of Cause, the Participant's benefit under the Plan shall be permanently forfeited and no amount will be payable to the Participant or his or her Beneficiary. If, within 60 days of the Participant's Termination Date, it is determined by the Board that prior to such Termination Date events (or the absence of events) existed that would have justified the Participant's employment being terminated by the Company for Cause, the Participant's Termination Date will be deemed to be for Cause for purposes of the Plan. ARTICLE V. PAYMENT OF BENEFITS 5.1. Payment of Benefits. A Participant's benefit determined in accordance with Section 4.1 shall be paid in a lump sum cash payment 60 days after the Participant's Termination Date or as soon as administratively practicable thereafter. If the Participant's Termination Date occurs by reason of death, such benefit shall be paid to the Participant's Beneficiary. If payment is not made within 90 days of the Participant's Termination Date, the Participant's benefit shall accrue interest from the 91st day following the Participant's Termination Date until the date on which payment is made, at the applicable short-term federal rate (within the meaning of Section 1274(d) of the Code), compounded annually, for the calendar month in which the Participant's Termination Date occurs. 5.2. Time and Form of Elections. All withdrawal elections under this Article V shall be made at the time and in the form established by the Administrator and shall be subject to such other rules and limitations that the Administrator, in its sole discretion, may establish. 5.3. Withholding. All benefits and payments under the Plan are subject to the withholding of all applicable Federal, state, local and employment taxes. -4- 5.4. Change in Corporate Structure. As of the effective date of a Change in Corporate Structure all Participants shall become fully vested in their benefits under the Plan. Unless the surviving or successor employer in a Change in Corporate Structure agrees to continue the Plan on terms no less favorable as those in effect prior to the Change in Corporate Structure, all Plan benefits shall be paid in a lump sum cash payment as of the effective date of the Change in Corporate Structure. ARTICLE VI. ADMINISTRATION 6.1. Authority of Administrator. The Administrator shall have full power and authority to carry out the terms of the Plan. The Administrator's interpretation, construction and administration of the Plan, including any adjustment of the amount or recipient of the payments to be made, shall be binding and conclusive on all persons for all purposes. Neither the Company, including its officers, employees or directors, nor the Administrator or the Board or any member thereof, shall be liable to any person for any action taken or omitted in connection with the interpretation, construction and administration of the Plan. 6.2. Participant's Duty to Furnish Information. Each Participant shall furnish to the Administrator such information as it may from time to time request for the purpose of the proper administration of this Plan. 6.3. Claims Procedure. If a Participant or Beneficiary ("Claimant") is denied all or a portion of an expected benefit under this Plan for any reason, he or she may file a claim with the Administrator. The Administrator shall notify the Claimant within 90 days of allowance or denial of the claim, unless the Claimant receives written notice from the Administrator prior to the end of the 90-day period stating that special circumstances require an extension (of up to 90 additional days) of the time for decision. The notice of the decision shall be in writing, sent by mail to Claimant's last known address, and if a denial of the claim, shall contain the following information: (a) the specific reasons for the denial; (b) specific reference to pertinent provisions of the Plan on which the denial is based; and (c) if applicable, a description of any additional information or material necessary to perfect the claim, an explanation of why such information or material is necessary, and an explanation of the claims review procedure. A Claimant is entitled to request a review of any denial of his or her claim by the Board. The request for review must be submitted within 60 days of mailing of notice of the denial. Absent a request for review within the 60-day period, the claim shall be deemed to be conclusively denied. The Claimant or his or her representatives shall be entitled to review all pertinent documents, and to submit issues and comments orally and in writing. The Board shall render a review decision in writing within 60 days after receipt of a request for a review, provided that, in special circumstances the Board may extend the time for decision by not more -5- than 60 days upon written notice to the Claimant. The Claimant shall receive written notice of the Board's review decision, together with specific reasons for the decision and reference to the pertinent provisions of the Plan. ARTICLE VII. AMENDMENT AND TERMINATION The Board may amend or terminate the Plan at any time; provided that no such amendment or termination shall have a material adverse effect on any Participant's rights under the Plan accrued as of the date of such amendment or termination. Upon termination of the Plan, the Board may cause a lump-sum payment of all benefits for all Participants at substantially the same time. If the Plan is terminated following a Change in Corporate Structure, all Plan benefits shall be paid to Participants in a lump sum cash payment as soon as practicable following such termination date. ARTICLE VIII. MISCELLANEOUS 8.1. No Implied Rights . Neither the establishment of the Plan nor any amendment thereof shall be construed as giving any Participant, Beneficiary or any other person, individually or as a member of a group, any legal or equitable right unless such right shall be specifically provided for in the Plan or conferred by specific action of the Board or the Administrator in accordance with the terms and provisions of the Plan. Except as expressly provided in this Plan, neither the Company nor any of its subsidiaries shall be required or be liable to make any payment under the Plan. 8.2. No Employment Rights. Nothing herein shall constitute a contract of employment or of continuing service or in any manner obligate the Company or any subsidiary to continue the services of any Participant, or obligate any Participant to continue in the service of the Company or subsidiaries, or as a limitation of the right of the Company or subsidiaries to discharge any of their employees, with or without cause. 8.3. Unfunded Plan. No funds shall be segregated or earmarked for any current or former Participant, Beneficiary or other person under the Plan. However, the Company may establish one or more trusts to assist in meeting its obligations under the Plan, the assets of which shall be subject to the claims of the Company's general creditors. No current or former Participant, Beneficiary or other person, individually or as a member of a group, shall have any right, title or interest in any account, fund, grantor trust, or any asset that may be acquired by the Company in respect of its obligations under the Plan (other than as a general creditor of the Company with an unsecured claim against its general assets). The -6- Company may also choose to use life insurance to assist it in meeting its obligations under the Plan. As a condition of participation in the Plan, each Participant agrees to execute any documents that may be required in connection with obtaining such insurance and to cooperate with any life insurance underwriting requirements; provided, however, that a Participant shall not be required to undergo a medical examination in connection therewith. 8.4. Nontransferability. Except as specifically provided by the Company, prior to payment thereof, no benefit under the Plan shall be assignable or subject to any manner of alienation, sale, transfer, claims of creditors, pledge, attachment or encumbrances of any kind, except pursuant to a domestic relations order awarding benefits to an "alternate payee" (within the meaning of Code Section 414(p)(8)) that the Administrator determines satisfies the criteria set forth in paragraphs (1), (2) and (3) of Code Section 414(p) (a "DRO"). Notwithstanding any provision of the Plan to the contrary, the Plan benefits awarded to an alternate payee under a DRO shall be paid in a single lump sum to the alternate payee as soon as administratively practicable following the date the Administrator determines the order is a DRO, and such amount will be deducted from the Participant's benefit determined under Section 4.1. 8.5. Offset. If, at the time payment is to be made under the Plan, the Participant or Beneficiary is indebted to or obligated to the Company, then any payment to be made to the Participant or Beneficiary, as applicable, may, at the discretion of the Administrator, be reduced by the amount of such indebtedness or obligation; provided that the election by the Administrator not to reduce such payment shall not constitute a waiver of the Company's claim for such indebtedness or obligation. 8.6. Facility of Payment. If the Administrator receives evidence that a Participant or Beneficiary entitled to benefits under the Plan is physically or mentally incompetent in any way so as to be unable to manage his or her financial affairs, and another person or institution is maintaining or has custody of such Participant or Beneficiary, and no guardian, committee or other representative of the estate of such person has been duly appointed by a court of competent jurisdiction, then the Administrator may make payment under the Plan to such other person or institution. Any such determination by the Administrator shall be final and binding on all persons and any payment made pursuant to this Section 8.6 shall be a valid and complete discharge of the obligations of the Company under the Plan. 8.7. Successors and Assigns. The rights, privileges, benefits and obligations under the Plan are intended to be, and shall be treated as legal obligations of and binding upon the Company, its successors and assigns, including successors by merger, consolidation, reorganization or otherwise. 8.8. Applicable Law. This Plan is established under and will be construed according to the laws of the State of Illinois, to the extent not preempted by the laws of the United States. -7- EXHIBIT 10.E * * * IN WITNESS WHEREOF, the undersigned has caused this Plan to be executed in the name of and on behalf of the Company, this 28th day of December, 2001. TRUSERV CORPORATION By /s/ Diane Nauer ---------------------------------- Its Secretary -8- EX-10.H 12 c66649ex10-h.txt EMPLOYMENT AGREEMENT TRU-SERV [LOGO TO COME] EXHIBIT 10-H November 15, 2001 Dear Pamela: This letter documents and confirms the revised terms of your employment with TruServ Corporation (the "Company"), effective as of the later of the date of this letter or the date of its approval by both the Company's Board of Directors (the "Board") and the Company's lender group. Position: You will be employed as Chief Executive Officer and President of the Company. The Company agrees to nominate you for election to the Board without additional compensation. Base Salary: Your annual base salary will be $625,000, earned and payable in substantially equal installments in accordance with the Company's payroll policy from time to time in effect. Annual Bonus: You shall be eligible to participate in the Company's annual bonus plan, subject to the terms of such plan and on such other terms and conditions as may be determined by the Company. In fiscal year 2001, you will be eligible for a target annual bonus equal to sixty percent (60%) of your 2001 annualized base salary. Beginning in fiscal year 2002, you will be eligible for a target annual bonus equal to seventy percent (70%) of your base salary. Payments under the annual bonus plan are not guaranteed, are the subject to the approval of the Board. Long-Term Incentive Bonus: You shall be eligible to receive a long term incentive bonus equal to 50% of your base salary, if you attain a threshold performance level, or 100% of your base salary, if you attain a targeted performance level. The target and threshold performance levels will be based on the Company's net operating income results exclusive of any extraordinary items or based on other business metrics mutually agreed upon by you and the Board. Benefits: You will be entitled to participate in the benefit plans and programs generally available from time to time to executives of the Company, subject to the terms of such plans and programs. The Company reserves the right to amend, modify or terminate the terms of such plans and programs, and anticipates amending the terms of the Company's Supplemental Executive Retirement Plan as of January 1, 2002. Employment Relationship: The terms of this letter agreement do not modify your employment-at-will relationship. It is expressly understood, therefore, that the Company and you are free to terminate your employment relationship at any time. Only the Board has the authority to alter, in writing, the terms of the at-will status of your employment relationship. Severance: If the Company terminates your employment without "cause" at any time, you will be entitled to a severance payment, payable over twenty-four (24) months, in an amount equal to two (2) times your base salary, and the continuation of your standard executive level benefits during such 24-month period, provided the terms of such benefit plans and programs permit such continuation. You will be entitled to this severance payment only if you sign an agreement acceptable to the Company that (i) waives any rights you may otherwise have against the Company, (ii) releases the Company from any actions, suits, claims, proceedings and demands you may have relating to the period of your employment with the Company and/or the termination of your employment, and (iii) contains certain other obligations which will be set forth at the time of the termination. For purposes of this offer letter, you will be considered terminated for "cause" if your employment terminates after (i) you have committed any felony or a crime involving fraud, theft, misappropriation, dishonesty or embezzlement; (ii) you have committed an act or acts that impair the goodwill or business of the Company or cause damage to its property, goodwill or business; (iii) you are unable, refuse to, or fail to, perform the material duties of your position; or (iv) you perform any other act or acts that the Company determines to be sufficiently injurious to its interests to constitute substantial cause for termination. Change of Control: If, within one (1) year following a Change of Control of the Company, you terminate your employment with the Company or any successor for "Good Reason," you will be entitled to a severance payment, payable over twenty-four (24) months, in an amount equal to (i) two (2) times your base salary and (ii) (A) in the event that a termination pursuant to this paragraph occurs on or after the payment of your second annual bonus following the date of this offer letter, fifty percent (50%) of the aggregate amount of annual bonus you received during the two (2) years prior to such termination, if any, or (B) in the event that a termination pursuant to this paragraph occurs on or after the payment of your first annual bonus and prior to the payment of your second annual bonus following the date of this offer letter, fifty percent (50%) of the amount of the annual bonus you received in the year prior to such termination, if any, plus fifty percent (50%) of the amount of targeted annual bonus for the year in which the termination occurs, or (C) in the event that a termination pursuant to this paragraph occurs prior to the payment of your first annual bonus following the date of this offer letter, one hundred percent (100%) of the amount of targeted annual bonus for the year in which the termination occurs. You will be entitled to this severance payment only if you sign an agreement acceptable to the Company that (i) waives any rights you may otherwise have against the Company, (ii) releases the Company from any actions, suits, claims, proceedings and demands you may have relating to the period of your employment with the Company and/or the termination of your employment, and (iii) contains certain other obligations which will be set forth at the time of the termination. For purposes of this offer letter, you may terminate your employment for "Good Reason" if, and only if, within one (1) year following a Change of Control, (x) you are demoted from your position with the Company or any successor as Chief Executive Officer, (y) your compensation or benefits are materially reduced (other than an isolated and inadvertent action that is not taken in bad faith and is remedied by the Company or any successor after it receives written notice from you), or (z) you are required to render services primarily at a location or locations other than within the greater Chicago metropolitan area and for other than a de minimis period of time. For purposes of this letter offer, a Change of Control shall mean the business combination of the Company with any corporation, person or other entity (other than one or more of the then-current shareholders of the Company, or any entity of which the Company or its shareholders owns at least 51% of the voting equity) through the adoption of a plan of merger or consolidation or a share exchange or a sale of all or substantially all of the capital stock or assets of the Company. In order to effectuate a termination of your employment for Good Reason, you must provide the Board or any successor board of directors with written notice within sixty (60) days of the event triggering the Good Reason. Your notice must set forth in reasonable detail the specific conduct that constitutes the Good Reason. A termination of your employment for Good Reason will become effective sixty (60) days following the date when your notice of Good Reason is provided to the Board, unless a later date is agreed to by you and the Board. During such sixty (60) day period, you must continue to provide services to the Company on a full time basis, unless the Board otherwise waives the service requirement. Non-Competition: You hereby agree that, for a period equal the longer of (i) the period in which you are receiving severance payments from the Company hereunder or (ii) one (1) year after the termination of your employment, whether voluntary or involuntary, you will not, directly or indirectly, become associated with any business, whether as an investor (excluding investments representing less than one percent (1%) of the common stock of a public company), lender, owner, stockholder, officer, director, employee, agent or in any other capacity, in any business activities of any franchise, cooperative or wholesale company with a core business in the hardware industry. No Other Understandings: This letter sets forth our entire agreement and understanding and supersedes any and all other agreements, either oral or in writing (including, but not limited to, the offer letter from the Company to you dated February 7, 2001, as amended by the supplemental letter from the Company to you dated February 21, 2001), between the Company, any of its members and/or principals and you. No change to this letter will be valid unless in writing and signed by the Company and you. Governing Law: This offer letter will be governed by and construed in accordance with the internal laws of the State of Illinois. 2 Please confirm your acceptance of our offer by signing on the space provided below and returning this letter to the Company. We appreciate your contributions to the Company and look forward to continuing a mutually successful working relationship with you in the future. /s/ JOE W. BLAGG -------------------------------------- Chairman of the Board Accepted this 15th day of November, 2001. /s/ PAMELA FORBES LIEBERMAN - --------------------------------------------------------- Pamela Forbes Lieberman 3 EX-10.I 13 c66649ex10-i.txt TERMINATION AGREEMENT EXHIBIT 10.I TERMINATION AGREEMENT AND GENERAL RELEASE THIS TERMINATION AGREEMENT AND GENERAL RELEASE (the "RELEASE") is made and entered into as of this 31st day of August, 2001 (the "EFFECTIVE DATE"), by and between TruServ Corporation, a Delaware corporation (the "COMPANY"), and Donald J. Hoye ("HOYE"). RECITALS A. Hoye has been employed by the Company as its Chief Executive Officer. B. Hoye has resigned his employment with the Company and has resigned from all other positions he held with the Company. NOW, THEREFORE, in consideration of the above premises and the following mutual covenants and conditions, the parties agree as follows: 1. Termination of Employment. Effective the close of business on July 6, 2001, Hoye and the Company agree that Hoye resigned his employment with the Company and has resigned from all other positions he held with the Company, including, effective July 3, 2001, membership on its Board of Directors (the "BOARD"), and the Company has accepted each and all such resignations. Hoye further agrees that he will not hereafter seek reinstatement, recall or re-employment with the Company. 2. Payments. As a termination payment, Hoye shall receive the following amounts and entitlements in connection with this Release: (a) Salary Continuation. The Company shall pay Hoye the sum of $1,300,000, payable in substantially equal installments over a period of twenty-four (24) months (the "SEVERANCE PERIOD") in accordance with the Company's payroll policy from time to time in effect, with the first such installment to be paid to Hoye on the first payroll date on or after September 1, 2001 (or, if later, on the date this Release becomes effective as described in Paragraph 10(c)). The termination payment shall be offset by any amounts Hoye receives from July 6, 2001 through August 31, 2001, if such amounts are not attributable to accrued but unused vacation pay as provided for in Paragraph 2(c) below. Ten Thousand dollars ($10,000) of the termination payment hereunder shall be in consideration of the release of any claim under the Age Discrimination in Employment Act of 1967, as amended, and as described in Paragraph 3 hereof, and Hoye agrees that such consideration is in addition to anything of value to which he is already entitled. The remainder of the amounts and entitlements to be made under this Paragraph 2 shall be in consideration of the release of all other claims described below in Paragraph 3, the Protective Agreement described in Paragraph 7, and the obligations described in Paragraph 13. (b) Bonus. Hoye shall be eligible to receive a pro-rata portion of the regular Management Incentive Plan bonus for 2001, should such payments be made to other officers under that specific annual incentive program under the Management Incentive Plan, based upon the actual number of completed calendar months Hoye was employed during fiscal year 2001. The amount, if any, of the pro-rata bonus to be awarded shall be determined in the sole discretion of the Board and any such pro-rata bonus shall be payable in a single lump sum at the same time such bonuses are paid by the Company to all other employees of the Company receiving bonuses for fiscal year 2001 under such plan. The foregoing notwithstanding, Hoye agrees that he is not eligible for any long-term or special performance bonuses. (c) Vacation/Expenses. Hoye agrees that on the date he resigned, he was entitled to a payment of $82,500 for thirty-three (33) days of accrued but unused vacation. Hoye acknowledges and agrees that from July 6, 2001 through August 31, 2001, the payments that have been made to him by the Company were intended to compensate him for such accrued vacation. The difference, if any, between the $82,500 and the amount so paid during such period shall be paid to him within thirty (30) days of the Effective Date. Hoye further acknowledges and agrees that, except as otherwise set forth in this Paragraph 2, he is not owed any amounts as reimbursement for expenses incurred during the course of his employment. (d) Life Insurance. As of the Effective Date or as soon as practicable thereafter, the Company shall provide Hoye with a life insurance policy and/or annuity that has a cash surrender value as of the Effective Date equal to $35,000. The Company shall further provide Hoye, as of the Effective Date or as soon as practicable thereafter, a fully paid-up whole life insurance policy (or combination of policies) on his life with total death benefits of $500,000. (e) Medical Benefits. Until the expiration of the Severance Period, Hoye may elect to continue to participate in the Company's group health insurance plan at the applicable "associates" contribution rate from time to time in effect, to the extent such participation is otherwise permissible under the terms of the Company's group health plan and under applicable law. If Hoye is not otherwise eligible to participate in the Company's group health plan, he may participate in the Company's alumni retiree medical plan, to extent he is eligible for participation under the terms of such plan. If Hoye is not currently eligible to participate in either of such plans, Hoye may elect to continue his health insurance coverage, as mandated by COBRA, which may continue to the extent required by applicable law. If Hoye elects health insurance coverage under any of the foregoing options, the Company agrees that it shall, during the Severance Period, pay for such coverage at the same rate the Company pays for health insurance coverage for its active employees under its group health plan (with Hoye required to pay for any employee paid portion of such coverage). Nothing herein shall be construed to extend the period of time over which any COBRA continuation coverage may be provided to Hoye and/or his dependents beyond that mandated by law. Hoye shall be required to pay the entire cost of his health care coverage following the expiration of the Severance Period, provided, however that any premiums payable by Hoye under the terms of the Company's alumni retiree medical plan shall, after the expiration of the Severance Period, be offset by a credit of $105 per month per covered person for as long as such coverage continues in effect. (f) Outplacement/Financial Planning. The Company shall pay for outplacement services for Hoye consistent with Company policy for similarly situated corporate officers, to be provided by an outplacement service provider selected by the Company. It is agreed that the Company's sole obligation in this respect is to pay for such outplacement services, as contracted with the provider. Any dispute between Hoye and the outplacement agency shall be deemed a dispute solely between Hoye and the outplacement agency and shall not in any way be construed as a breach of this Release. In addition, the Company shall reimburse Hoye for his financial planning expenses related to the 2001 calendar year, in an amount and in the manner consistent with the Company's policy for reimbursing such expenses. At Hoye's sole option, Hoye may elect to receive $15,000 in lieu of such outplacement services and financial planning expenses. (g) SERP. Hoye acknowledges and agrees that the total benefit to which he is entitled under the Company's non-qualified Supplemental Retirement Plan (the "SERP") is equal to $3,036,333.76 (the "SERP BENEFIT"). Two-thirds of the SERP Benefit shall be payable to Hoye within sixty (60) calendar days of the Effective Date and the remaining one-third of the SERP Benefit shall be payable in full no later than six (6) months after the Effective Date. The Company will pay Hoye interest from the Effective Date until the date each such SERP Benefit payment is made hereunder at the rate of eight percent (8%) per annum. (h) Withholding. The Company and Hoye acknowledge and agree that all payments made pursuant to this Paragraph 2 are "wages" for purposes of FICA, FUTA and income tax withholding and the Company shall therefore withhold from any payments hereunder the amounts it determines to be necessary to satisfy all tax withholding obligations. (i) Other. No other sums (contingent or otherwise) shall be paid to Hoye in respect of his employment by the Company, and any such sums (whether or not owed) are hereby expressly waived by Hoye. The foregoing notwithstanding, Hoye shall be entitled to receive his account balance, if any, under the Company's Section 401(k) Plan and the Company's Retirement Plan in accordance with the terms of such Plans. 3. General Release. As a material inducement to the Company to enter into this Release and in consideration of the payments to be made by the Company to Hoye in Paragraph 2 above, Hoye, with full understanding of the contents and legal effect of this Release and having the right and opportunity to consult with his counsel, releases and discharges the Company, its shareholders, officers, directors, supervisors, members, managers, employees, agents, representatives, attorneys, parent companies, divisions, subsidiaries and affiliates, and all related entities of any kind or nature, and its and their predecessors, successors, heirs, executors, administrators, and assigns (collectively, the "RELEASED PARTIES") from any and all claims, actions, causes of action, grievances, suits, charges, or complaints of any kind or nature whatsoever, that he ever had or now has, whether fixed or contingent, liquidated or unliquidated, known or unknown, suspected or unsuspected, and whether arising in tort, contract, statute, or equity, before any federal, state, local or private court, agency, arbitrator, mediator, or other entity, regardless of the relief or remedy. Without limiting the generality of the foregoing, it being the intention of the parties to make this Release as broad and as general as the law permits, this Release specifically includes any and all subject matter and claims arising from any alleged violation by the Released Parties under the Age Discrimination in Employment Act of 1967, as amended; Title VII of the Civil Rights Act of 1964, as amended; the Civil Rights Act of 1866, as amended by the Civil Rights Act of 1991 (42 U.S.C. section 1981); the Rehabilitation Act of 1973, as amended; the Employee Retirement Income Security Act of 1974, as amended; the Illinois Wage Payment and Collection Act; the Illinois Human Rights Act, the Cook County Human Rights Ordinance, the Chicago Human Rights Ordinance, and other similar state or local laws; the Americans with Disabilities Act; the Family and Medical Leave Act; the Equal Pay Act; Executive Order 11246; Executive Order 11141; and any other statutory claim, employment or other contract or implied contract claim (including, but not limited to, any claims arising under that certain Employment Agreement dated September 1, 1996, as previously executed between Hoye and Servistar Coast to Coast Corporation), claim for equity or phantom equity, or common law claim for wrongful discharge, breach of an implied covenant of good faith and fair dealing, defamation, or invasion of privacy arising out of or involving his employment with the Company, the termination of his employment with the Company, or involving any continuing effects of his employment with the Company or termination of employment with the Company. Hoye 3 further acknowledges that he is aware that statutes exist that render null and void releases and discharges of any claims, rights, demands, liabilities, action and causes of action which are unknown to the releasing or discharging party at the time of execution of the release and discharge. Hoye hereby expressly waives, surrenders and agrees to forego any protection to which he would otherwise be entitled by virtue of the existence of any such statute in any jurisdiction including, but not limited to, the State of Illinois. 4. Covenant Not to Sue. Hoye, for himself, his heirs, executors, administrators, successors and assigns agrees not to bring, file, charge, claim, sue or cause, assist, or permit to be brought, filed, charged or claimed any action, cause of action, or proceeding regarding or in any way related to any of the claims described in Paragraph 3 hereof, and further agrees that this Release is, will constitute and may be pleaded as, a bar to any such claim, action, cause of action or proceeding. If any government agency or court assumes jurisdiction of any charge, complaint, or cause of action covered by this Release, Hoye will not seek and will not accept any personal equitable or monetary relief in connection with such investigation, civil action, suit or legal proceeding. 5. Indemnification. Hoye will fully indemnify the Company and its shareholders, members, managers, officers, directors, employees and independent contractors against and will hold its shareholders, members, managers, officers, directors, employees and independent contractors harmless from any and all claims, costs, damages, demands, expenses (including without limitation attorneys' fees), judgments, losses or other liabilities of any kind or nature whatsoever arising from or directly or indirectly related to any or all of this Release and the conduct of Hoye hereunder, including without limitation any material breach or failure to comply with any or all of the provisions of this Release. 6. No Disparaging, Untrue Or Misleading Statements. From and after July 3, 2001, Hoye represents that he has not made, and agrees that he will not make, to any third party any disparaging, untrue, or misleading written or oral statements about or relating to the Company or its products or services (or about or relating to any officer, director, agent, employee, or other person acting on the Company's behalf). Hoye acknowledges that his continuing entitlement to payments and benefits under Paragraph 2 of the Release shall be conditioned upon his continuing compliance with Paragraphs 6, 7, 10(a) and 13 of the Release and any violation of Paragraphs 6, 7, 10(a) or 13 by Hoye shall terminate the Company's obligation to continue to make payments and provide benefits under Paragraph 2. 7. Protective Agreement. (a) Hoye agrees that he will not, for any reason whatsoever, whether voluntarily or involuntarily, use for himself or disclose to any person any "Confidential Information" of the Company acquired by Hoye during his relationship with the Company, its predecessors, or any entity which has been acquired by, or merged into, the Company. Confidential Information includes but is not limited to: (a) any financial, business, planning, operations, services, potential services, products, potential products, technical information and/or know-how, formulas, production, purchasing, marketing, sales, personnel, customer, broker, supplier or other information of the Company; (b) any papers, data, records, processes, methods, techniques, systems, models, samples, devices, equipment, compilations, invoices, customer lists or documents of the Company; (c) any confidential information or trade secrets of any third party provided to the Company in confidence or subject to other use or disclosure restrictions or limitations; and (d) any other information, written, 4 oral or electronic, which pertains to the Company's affairs or interests or with whom or how the Company does business. The Company acknowledges and agrees that Confidential Information does not include (i) information properly in the public domain, or (ii) information in Hoye's possession prior to the date of his original employment with the Company, its predecessors, or any entity which has been acquired by, or merged into, the Company, except to the extent that such information is or has become a trade secret of the Company or is or otherwise has become the property of the Company. Hoye further acknowledges and agrees that he is estopped from and will not dispute in any proceeding the enforceability of this Paragraph 7(a). (b) Except on behalf of the Company, Hoye agrees that he will not, at any time prior to June 30, 2003, directly or indirectly: (1) solicit or accept if offered to him, with or without solicitation, on his own behalf or on behalf of any other person or entity, the services of any person who is a current employee of the Company (or was an employee of the Company during the year preceding such solicitation), nor solicit any of the Company's current employees (or any individual who was an employee of the Company during the year preceding such solicitation) to terminate employment or an engagement with the Company, nor agree to hire any current employee (or any individual who was an employee of the Company during the year preceding such hire) of the Company into employment with him or any other person or entity; or (2) become associated, whether as an investor (excluding investments representing less than one percent (1%) of the common stock of a public company), lender, owner, stockholder, officer, director, employee, agent, consultant or in any other capacity, in any business activities of any franchise, cooperative or wholesale company with a core business in the hardware industry with sales in excess of $1,000,000,000. (c) It is agreed that breach of this Paragraph 7 will result in irreparable harm and continuing damages to the Company and its business and that the Company's remedy at law for any such breach or threatened breach, will be inadequate and, accordingly, in addition to such other remedies as may be available to the Company at law or in equity in such event, any court of competent jurisdiction may issue a temporary and permanent injunction, without the necessity of the Company posting bond and without proving special damages or irreparable injury, enjoining and restricting the breach, or threatened breach, of this Paragraph 7, including, but not limited to, any injunction restraining the breaching party from disclosing, in whole or part, any Confidential Information. In addition to, but not in lieu of, the remedies contained herein, the Company and Hoye agree that for purposes of this Release, damages will be difficult to assess and, in recognition thereof, Hoye shall pay and the Company shall accept as liquidated damages, and not as a penalty, the sum of $50,000. Hoye will pay all of the Company's costs and expenses, including reasonable attorneys' and accountants' fees, incurred in enforcing this Paragraph 7. 8. Severability. If any provision of this Release shall be found by a court to be invalid or unenforceable, in whole or in part, then such provision shall be construed and/or modified or restricted to the extent and in the manner necessary to render the same valid and enforceable, or shall be deemed excised from this Release, as the case may require, and this Release shall be construed and enforced to the maximum extent permitted by law, as if such provision had been originally incorporated herein as so modified or restricted, or as if such provision had not been originally incorporated herein, as the case may be. The parties further agree to seek a lawful substitute for any provision found to be unlawful; provided, that, if the parties are unable to agree upon a lawful substitute, the parties desire and request that a court or other authority called upon to decide the enforceability of this Release modify the Release so that, once modified, the Release will be enforceable to the maximum extent permitted by the law in existence at the time of the requested enforcement. 9. Waiver. A waiver by the Company of a breach of any provision of this Release by Hoye shall not operate or be construed as a waiver or estoppel of any subsequent breach by Hoye. No waiver shall be valid unless in writing and signed by an authorized officer of the Company. 10. Miscellaneous Provisions. (a) Hoye agrees that he will keep the terms and amounts set forth in this Release completely confidential and will not disclose any information concerning this Release's terms and amounts to any person other than his attorney, accountant, tax advisor, or immediate family. Hoye agrees and acknowledges that he will make no announcement about his resignation or about the affairs of the Company, which is in any manner inconsistent with the terms of this Release, and further agrees and acknowledges that any press or other written, oral or electronic public releases, or statements concerning his resignation or about the affairs of the Company shall be issued by the Company only. The foregoing notwithstanding, Hoye shall not be prohibited from recounting his professional accomplishments while employed by the Company for the sole purpose of obtaining future employment. (b) Hoye represents and certifies that he has carefully read and fully understands all of the provisions and effects of this Release, has knowingly and voluntarily entered into this Release freely and without coercion, and acknowledges that on August 21, 2001, the Company advised him to consult with an attorney prior to executing this Release and further advised him that he had twenty-one (21) days (until September 11, 2001) within which to consider this Release. Hoye is voluntarily entering into this Release and neither the Company nor its agents, representatives, or attorneys made any representations concerning the terms or effects of this Release other than those contained in the Release itself. (c) Hoye acknowledges that he has seven (7) days from the date this Release is executed in which to revoke his acceptance of this Release, and this Release will not be effective or enforceable until such seven (7)-day period has expired. 11. Complete Agreement. This Release sets forth the entire agreement between the parties, and fully supersedes any and all prior agreements or understandings between the parties pertaining to actual or potential claims arising from Hoye's employment with the Company or the termination of Hoye's employment with the Company. 12. Reimbursement. If Hoye or his heirs, executors, administrators, successors or assigns (a) in the sole discretion of the Board, breaches Paragraphs 6, 7, 10(a) or 13 of this Release, or (b) attempts to challenge the enforceability of this Release, or (c) files a charge of discrimination, a lawsuit, or a claim of any kind for any matter released herein, all further payments and benefits owed under Paragraph 2 of the Release shall terminate and Hoye or his heirs, executors, administrators, successors or assigns shall be obligated to tender back to the Company all payments made to him or 6 them under Paragraph 2 of this Release (except for $10,000, which represents the consideration received by Hoye in exchange for the release and waiver of rights or claims under the Age Discrimination in Employment Act of 1967, as amended), and to indemnify and hold harmless the Company from and against all liability, costs and expenses, including attorneys' fees, arising out of said breach, challenge or action by Hoye, his heirs, executors, administrators, successors or assigns. 13. Future Cooperation. In connection with any and all claims, disputes, negotiations, governmental or internal investigations, lawsuits or administrative proceedings (the "LEGAL MATTERS") involving the Company, or any of its current or former officers, employees or Board members (collectively, the "DISPUTING PARTIES" or, individually, a "DISPUTING PARTY"), Hoye agrees to make himself available, upon reasonable notice from the Company and without the necessity of subpoena, to provide information or documents, provide declarations or statements regarding a Disputing Party, meet with attorneys or other representatives of a Disputing Party, prepare for and give depositions or testimony, and/or otherwise cooperate in the investigation, defense or prosecution of any or all such Legal Matters, as may, in the sole judgment of the Company, be reasonably requested. The Company agrees to make reasonable efforts to accommodate Hoye's schedule in requesting his services under this Paragraph 13. The Company further agrees to reimburse Hoye's reasonable out of pocket expenses incurred in complying with the terms of this Paragraph 13. If the total number of hours of service required to be performed by Hoye at the request of a Disputing Party under this Paragraph 13 exceeds one hundred (100), Hoye shall be compensated at the rate of $200 per hour for each hour in excess of one hundred upon submission of an itemized statement of services rendered. 14. Arbitration. Any controversy, claim or dispute between the parties relating to Release or Hoye's employment or termination of employment, whether or not the controversy, claim or dispute arises under this Release (other than any controversy or claim arising under Paragraph 7), shall be resolved by arbitration in Chicago, Illinois in accordance with the National Rules for the Resolution of Employment Disputes ("Rules") of the American Arbitration Association through a single arbitrator selected in accordance with the Rules. The decision of the arbitrator shall be rendered within thirty (30) days of the close of the arbitration hearing and shall include written findings of fact and conclusions of law reflecting the appropriate substantive law. Judgment upon the award rendered by the arbitrator may be entered in any court having jurisdiction thereof in the County of Cook, State of Illinois. In reaching his or her decision, the arbitrator shall have no authority (a) to authorize or require the parties to engage in discovery (provided, however, that the arbitrator may schedule the time by which the parties must exchange copies of the exhibits that, and the names of the witnesses whom, the parties intend to present at the hearing), (b) to interpret or enforce Paragraph 7 of the Release (for which Paragraph 18 shall provide the exclusive venue), (c) to change or modify any provision of this Release, or (d) to award punitive damages or any other damages not measured by the prevailing party's actual damages and may not make any ruling, finding or award that does not conform to this Release. Each party shall bear all of his or its own legal fees, costs and expenses of arbitration and one-half (1/2) of the costs of the arbitrator. 15. Amendment. This Release may not be altered, amended, or modified except in writing signed by both Hoye and the Company. 16. Joint Participation. The parties hereto participated jointly in the negotiation and preparation of this Release, and each party has had the opportunity to obtain the advice of legal counsel and to review and comment upon the Release. Accordingly, it is agreed that no rule of construction shall apply against any party or in favor of any party. This Release shall be construed as if the parties jointly prepared this Release, and any uncertainty or ambiguity shall not be interpreted against one party and in favor of the other. 17. Notice. All notices, request, demands, claims and other communications hereunder shall be in writing. Any notice, request, demand, claim or other communication hereunder shall be deemed duly given (i) three (3) business days after it is sent by registered or certified mail, return receipt requested, postage prepaid, (ii) when receipt is electronically confirmed, if sent by fax (provided that a hard copy shall be promptly sent by first class mail), or (iii) one (1) business day following deposit with a recognized national overnight courier service for next day delivery, charges prepaid, and, in each case, addressed to the intended recipient, as set forth below: To the Company: TruServ Corporation 8600 W. Bryn Mawr Avenue Chicago, IL 60631-3505 Attn: Robert Ostrov Senior Vice President, Chief Administrative Officer and General Counsel To the Employee: Donald J. Hoye 18. Applicable Law. This Release shall be governed by, and construed in accordance with, the laws of the State of Illinois, without reference to its conflict of law provisions. Furthermore, as to Paragraph 7, Hoye agrees and consents to submit to personal jurisdiction in the state of Illinois in any state or federal court of competent subject matter jurisdiction situated in Cook County, Illinois. Hoye further agrees that the sole and exclusive venue for any suit arising out of, or seeking to enforce, the terms of Paragraph 7 of this Release shall be in a state or federal court, of competent subject matter jurisdiction situated in Cook County, Illinois. In addition, Hoye waives any right to challenge in another court any judgment entered by such Cook County court or to assert that any action instituted by the Company in any such court is in the improper venue or should be transferred to a more convenient forum. 19. Headings. The headings in this Release are inserted for convenience only and are not to be considered a constriction of the provisions hereof. 8 20. Execution of Release. This Release may be executed in several counterparts, each of which shall be considered an original, but which when taken together, shall constitute one Release. PLEASE READ THIS AGREEMENT AND CAREFULLY CONSIDER ALL OF ITS PROVISIONS BEFORE SIGNING IT. THIS AGREEMENT CONTAINS A RELEASE OF ALL KNOWN AND UNKNOWN CLAIMS, INCLUDING THOSE UNDER THE FEDERAL AGE DISCRIMINATION IN EMPLOYMENT ACT, AND OTHER FEDERAL, STATE AND LOCAL LAWS PROHIBITING DISCRIMINATION IN EMPLOYMENT. IN WITNESS WHEREOF, Hoye and the Company have voluntarily signed this Termination Agreement and General Release consisting of nine (9) pages on the date set forth above. TruServ Corporation By: /s/ ROBERT OSTROV ----------------------------------- Its: Senior Vice President /s/ DONALD J. HOYE ---------------------------------- ----------------------------- Donald J. Hoye 9 EX-21 14 c66649ex21.txt SUBSIDIARIES Exhibit 21 Subsidiaries of Registrant The registrant owns 100% of the issued and outstanding capital stock of 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, TrueValue.com, a Delaware Corporation, Cotter Canada Hardware & Variety Company, Inc., a Canadian corporation, and is the sole member of MaryGreen, LLC, and TruServ Specialty Company, LLC, both Delaware limited liability companies. The accounts of these subsidiaries have been consolidated with the registrant's in December 31, 2001 and 2000. -----END PRIVACY-ENHANCED MESSAGE-----