-----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, A4tIA4aHOLWt9mMedDt1mXyCDPkScwkCLD4ZhWgwxwvty7FfBlSr+DBWKGeN9pXg TvN1sOi1bChaYuxLCUnssw== 0000950137-06-002740.txt : 20060308 0000950137-06-002740.hdr.sgml : 20060308 20060308163954 ACCESSION NUMBER: 0000950137-06-002740 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 20051231 FILED AS OF DATE: 20060308 DATE AS OF CHANGE: 20060308 FILER: COMPANY DATA: COMPANY CONFORMED NAME: TRUE VALUE CO CENTRAL INDEX KEY: 0000025095 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-HARDWARE & PLUMBING & HEATING EQUIPMENT & SUPPLIES [5070] 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: 06673550 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: TRUSERV CORP DATE OF NAME CHANGE: 19970707 FORMER COMPANY: FORMER CONFORMED NAME: COTTER & CO DATE OF NAME CHANGE: 19920703 10-K 1 c02989e10vk.txt FORM 10-K - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 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 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2005 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO ------------------------ COMMISSION FILE NUMBER 2-20910 TRUE VALUE COMPANY (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 IF THE REGISTRANT IS A WELL-KNOWN SEASONED ISSUER, AS DEFINED IN RULE 405 OF THE SECURITIES ACT. YES __. NO X. INDICATE BY CHECK MARK IF THE REGISTRANT IS NOT REQUIRED TO FILE REPORTS PURSUANT TO SECTION 13 OR SECTION 15(D) OF THE ACT. YES X. NO__. 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] INDICATE BY CHECK MARK WHETHER THE REGISTRANT IS A LARGE ACCELERATED FILER, AN ACCELERATED FILER, OR A NON-ACCELERATED FILER. SEE DEFINITION OF "ACCELERATED FILER AND LARGE ACCELERATED FILER" IN RULE 12b-2 OF THE EXCHANGE ACT. (CHECK ONE): LARGE ACCELERATED FILER __ ACCELERATED FILER __ NON-ACCELERATED FILER [X] INDICATE BY CHECK MARK WHETHER THE REGISTRANT IS A SHELL COMPANY (AS DEFINED IN RULE 12b-2 OF THE ACT). YES __. NO X. STATE THE AGGREGATE MARKET VALUE OF THE VOTING AND NON-VOTING COMMON EQUITY HELD BY NON-AFFILIATES COMPUTED BY REFERENCE TO THE PRICE AT WHICH THE COMMON EQUITY WAS LAST SOLD, OR THE AVERAGE BID AND ASKED PRICE OF SUCH COMMON EQUITY, AS OF THE LAST BUSINESS DAY OF THE REGISTRANT'S MOST RECENTLY COMPLETED SECOND FISCAL QUARTER. 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 stock 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 January 28, 2006 Class ---------------- Class A common stock, $100 Par Value................ 313,860 Class B common stock, $100 Par Value................ 1,148,613
DOCUMENTS INCORPORATED BY REFERENCE None. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- TABLE OF CONTENTS
PAGE PART I Item 1. Business.................................................... 1 Item 1A. Risk Factors................................................ 10 Item 2. Properties.................................................. 11 Item 3. Legal Proceedings........................................... 13 Item 4. Submission of Matters to a Vote of Security Holders......... 14 PART II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities........... 14 Item 6. Selected Financial Data..................................... 16 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation.................................... 17 Item 7A. Quantitative and Qualitative Disclosures About Market Risk........................................................ 33 Item 8. Financial Statements and Supplementary Data................. 33 Item 9. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure.................................... 33 Item 9A. Controls and Procedures..................................... 33 Item 9B. Other Information........................................... 33 PART III Item 10. Directors and Executive Officers of the Registrant.......... 34 Item 11. Executive Compensation...................................... 37 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.................. 44 Item 13. Certain Relationships and Related Transactions.............. 44 Item 14. Principal Accounting Fees and Services...................... 44 PART IV Item 15. Exhibits, Financial Statement Schedules..................... 45
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 GUARANTEES 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, SALES GROWTH, CAPITAL REQUIREMENTS OF TRUE VALUE COMPANY AND TRENDS IN OUR INDUSTRY. ITEM 1. BUSINESS. ($ IN THOUSANDS -- EXCEPT PER SHARE INFORMATION) THE COMPANY True Value Company ("True Value") 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 incorporated in 1935, under the name American Hardware Supply Company, with a strong presence in retail lumber and building materials. Following the merger, Cotter & Company was renamed TruServ Corporation. Effective December 31, 2004, TruServ Corporation changed its name to True Value Company. True Value's main executive offices are located at 8600 West Bryn Mawr Avenue, Chicago, Illinois 60631-3505. Its main telephone number is (773) 695-5000. Its web page address is www.truevaluecompany.com. In 2001, True Value sold its ownership interest in TruServ Canada Cooperative, Inc. (the "Canadian Business") and related real estate interests in Winnipeg, Manitoba to the current member group of the cooperative. The proceeds received enabled True Value to recover its capital investment in the Canadian Business as well as the appraised value of the real estate and to retire all indebtedness related to Canadian activities. True Value has a licensing agreement with the Canadian Business to enable it and its members to continue to do business under the principal True Value trademarks. In addition, True Value continues to provide True Value paints and supplies to the Canadian Business. On December 31, 2002, True Value completed a sale leaseback transaction of seven of its distribution centers. The sale generated net proceeds of $121,438, which were used to pay down the revolving credit facility, senior notes and synthetic lease obligation (the "Senior Debt"), pursuant to an intercreditor agreement between all parties of the Senior Debt. The facilities are being leased back by True Value under 20-year lease agreements that contain extension periods on the lease at True Value's option (see "Item 2, Properties - Sale Leaseback Transaction"). GENERAL DESCRIPTION OF THE BUSINESS True Value, organized as a cooperative, is one of the largest member-owned wholesalers of hardware and related merchandise in the United States, serving approximately 5,800 retail and industrial distribution outlets for its members as of December 31, 2005. True Value also manufactures and sells paint and paint applicators. True Value sells its products to hardware retailers, industrial distributors, garden centers and rental stores with whom it has entered into Retail Member Agreements. True Value serves its members by principally functioning as a low cost distributor of goods, 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. True Value also provides to its members value-added services such as marketing, advertising, merchandising, and store location and design services. Generally, members use one of the following True Value trademarks and trade names: True Value(R), Grand Rental Station(R), Taylor Rental(R), Party Central(R), Home & Garden Showplace(R) and Induserve Supply(R) trademarks, service marks and collective membership marks (see "Trademarks, Service Marks and Collective 1 Membership Marks" below). Members have access to certain private label products. When True Value generates annual profits, members are entitled to receive annual patronage dividends based upon their purchases from True Value. In accordance with True Value'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, 2005, True Value serves approximately 5,800 retail and industrial distribution outlets for its members throughout the United States and in 57 other countries. Primary concentrations of members exist in New York (approximately 9%), Pennsylvania (approximately 7%), California (approximately 6%), Texas (approximately 5%), Illinois, Michigan, Minnesota and Wisconsin (approximately 4% each) and Massachusetts, New Jersey, Ohio, and Washington (approximately 3% each). SALES AND SUPPLIERS True Value provides each of its members with an illustrated price catalog showing the products available from True Value, which the members can access through the member Internet site. Upon request, a member will also receive a printed or CD version of the catalog. These products, comprised of more than 66,000 stockkeeping units ("SKUs") maintained at True Value's distribution centers, are divided into seven categories of merchandise. In addition to purchasing products, which are maintained at the distribution centers, members can purchase additional SKUs directly from True Value-approved vendors and have those purchases drop-shipped directly to them, but have the product billed through True Value. Collectively, these products represent the products sold by True Value's two operating segments (see Note 10, "Segment Information," to the Consolidated Financial Statements beginning at page F-1 for additional segment information). The seven product categories are set forth in the following table, along with the corresponding dollars of total revenue for each category during the last three years:
FOR THE YEARS ENDED DECEMBER 31, ------------------------------------ 2005 2004 2003 ---------- ---------- ---------- ($ IN THOUSANDS) Hardware goods....................... $ 510,241 $ 495,029 $ 485,374 Farm and garden...................... 434,871 430,840 429,161 Electrical and plumbing.............. 356,290 350,685 353,332 Painting and cleaning................ 323,910 320,320 312,834 Appliances and housewares............ 214,446 218,489 228,929 Sporting goods and toys.............. 93,496 102,817 107,862 Other................................ 109,780 105,707 106,848 ---------- ---------- ---------- $2,043,034 $2,023,887 $2,024,340 ========== ========== ==========
True Value's merchandise sales to its members are divided into three logistics categories as follows:
2005 2004 2003 ---- ---- ---- Warehouse shipment sales.............................. 67% 66% 65% Direct shipment sales................................. 30% 31% 31% Relay shipment sales.................................. 3% 3% 4%
Warehouse shipment sales are sales of products that are purchased, warehoused and resold by True Value in response to orders from the members. Direct shipment sales are sales of products that are purchased through True Value by the members, but delivered directly to members from vendors and on which True 2 Value accepts the credit risk. Relay sales are sales of products that are purchased through True Value in response to the requests of several members for a product that typically is: - to be included in future promotions, - seasonal in nature, - not normally held in inventory, or - not conducive to direct shipment. Generally, True Value 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 True Value, it is not warehoused; rather, True Value breaks up the shipment and "relays" the appropriate quantities to the members who placed orders. True Value has numerous individual agreements with or commitments from its vendors, most of which are terminable by the vendors or True Value without cause. These termination provisions, either individually or in the aggregate, have not had any material adverse effect on True Value's ability to conduct its business. The goods and services purchased by True Value from these suppliers are generally available from a wide variety of sources. True Value is not dependent upon any one supplier or group of suppliers. True Value also manufactures and sells paint and paint applicators. The principal raw materials used by True Value in its paint manufacturing activities are chemicals. All raw materials are purchased from outside sources. In the past, True Value has been able to obtain adequate sources of raw materials and other items used in production. True Value does not currently anticipate shortages of materials that would materially impact its paint manufacturing operations. OTHER SERVICES True Value annually sponsors two principal "markets" and a separate rental market all funded primarily by vendors through booth fees, at which it features the products available for purchase by members, including new merchandise and seasonal items. In addition, the markets permit members and prospective members to keep better informed as to industry trends, attend continuing education classes and network with other members. In 2006, one of the principal markets will be held in Houston, Texas, in March and the other will be held in Las Vegas, Nevada, in September. As the markets generate income and stimulate member purchases, the timing of markets impacts the timing of sales and income recognition for True Value. All members are invited to the markets and attending members generally place substantial orders for delivery of merchandise during the period between markets. BACKLOG As of January 28, 2006 and January 29, 2005, respectively, True Value had a backlog of firm orders (including relay orders) of approximately $27,133 and $34,383. True Value's backlog at any given time is made up of two principal components: - normal re-supply orders, and - market orders for future delivery. Normal re-supply orders are orders from members for merchandise to keep store inventories at normal levels. Generally, such orders are filled the day following receipt, except that relay orders for future delivery are not intended to be filled for several months. Market orders for future delivery are member orders placed at True Value's markets for new or seasonal merchandise to be delivered during the subsequent period between markets. Thus, True Value generally has a relatively high backlog at the end of each market, which decreases in subsequent months until the next market occurs. The decrease in the 2006 backlog compared to 2005 was primarily in the relay sales category and was mainly due to the timing of seasonal products. 3 COMPETITION The retail hardware industry is characterized by intense competition. Independent retail hardware businesses, including those served by True Value, 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 retail occupancy costs, have cut into operating margins for members and brought pressure on True Value to achieve lower merchandise costs for its members. In 2004, under new leadership in the merchandising function, True Value initiated a multi-year process to perform comprehensive vendor line reviews. The focus of these reviews is to improve product assortments and enhance wholesale and retail pricing. These reviews will continue to fund wholesale price reductions to the membership. In addition, True Value is expanding its import program to source more products from lower cost foreign manufacturers in order to enhance wholesale and retail pricing. Also, True Value works with its members to drive profitability through operational improvement programs such as AIM (advanced inventory management), which focuses on assortments of fast turning products, as well as retail programs that focus on areas such as pricing, merchandising, store design and signage. 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. True Value competes with other member-owned and non-member-owned wholesalers to be 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, merchandise selection, quality and patronage dividends. True Value is concentrating on its supply channel strategies and practices for gaining sustainable competitive advantage. In many markets in the United States, True Value competes directly with other member-owned wholesalers such as Ace Hardware Corporation and Do-it-Best Corporation, as well as independently owned wholesalers. TRADEMARKS, SERVICE MARKS AND COLLECTIVE MEMBERSHIP MARKS True Value's trademarks, service marks and collective membership marks are of prime importance to True Value. Many of the marks are highly recognized and utilized in extensive advertising and marketing campaigns, and True Value vigorously defends its marks. As of December 31, 2005, True Value's members have approximately 5,800 retail and industrial distribution outlets that operate predominantly as hardware retail stores, industrial distributors, garden centers and rental stores throughout the United States and in 57 countries, most of which sell merchandise and services under the marks. The marks include the True Value(R) marks, 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, the Just Ask(R) mark and the Commercial Sales(R) mark. The marks also include E-Z Kare(R), Weatherall(R) and Easy Color(R) for paint. All of the marks are currently used in commerce and True Value intends to use the marks in commerce in the future. Each of the marks is renewable at True Value's option and True Value 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 the 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, 2005, True Value employed approximately 2,800 persons in the United States on a full-time basis. Due to the widespread geographical distribution of True Value'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 35% of True Value's 2,100 hourly-wage employees are covered by collective bargaining agreements that are generally effective for periods of three or four years. In general, True Value considers its relationship with its employees to be good. 4 RETAIL MEMBER AGREEMENT The True Value Retail Member Agreement provides, among other things, that each member: - 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 300 shares for five or more stores that are owned by a member; - will conduct its businesses subject to the terms of the Retail Member Agreement; - will conduct a retail hardware store, home or garden center, a commercial/industrial distribution business or a full-service rental operation at a designated location; - will comply with True Value's By-Laws, as may be amended from time to time; - will accept patronage dividends in a form complying with the requirements of the Internal Revenue Code (the "Code") for deduction from gross income by True Value; - may receive different services, charges or freight rates based upon the amount of merchandise purchased by the member; - agrees to have its Retail Member Agreement terminated unilaterally in certain circumstances by the affirmative vote or two-thirds or more of the directors of True Value; - agrees to have its Retail Member Agreement automatically modified upon notice from True Value to the member of any relevant change in the Certificate of Incorporation and/or By-Laws of True Value, or by resolution of the board of directors; - agrees to utilize True Value as its primary supplier for the types of merchandise offered by True Value; - agrees to pay, in full on the date due, all invoices to True Value and to accept a service charge on past due balances; - agrees that True Value has not granted any exclusive territorial or geographical rights to the member; - agrees to have its Retail Member Agreement governed by Illinois law, enforced 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 - may terminate the Retail Member Agreement upon 60 days written notice mailed to the Chief Executive Officer or Treasurer of True Value at True Value's principal office. CAPITAL STOCK Members of True Value 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 True Value member is required to purchase one unit of Class A common stock for each store owned; however, no True Value member is permitted to acquire more than five units of Class A common stock. The Class B common stock is issued only to members in connection with the patronage dividend distributed to them for purchases in the year of the patronage dividend, as discussed below (see "Distribution of Patronage Dividends" below). Neither class of True Value common stock accrues dividends and each has limited transferability. True Value has a right of first offer to repurchase at par value a member's stock before the member can offer the stock to another member. Historically, True Value has always exercised this right. In any event, a member may not transfer stock to anyone without True Value's consent. True Value also retains an automatic lien on both classes of stock for any indebtedness due to True Value by a member. Therefore, there is no existing market for either class of True Value common stock. 5 Participation in the earnings or losses 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 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 for that year and are paid no later than September 15th of the following year. True Value pays patronage dividends in a combination of cash, Class B common stock, and occasionally subordinated promissory notes. True Value paid patronage dividends for the past three years and paid a dividend for 2005 results in March 2006. The 2005 dividend was issued in a combination of cash, Class B common stock and subordinated promissory notes. The Class B common stock earned from patronage dividends was used to reduce the loss allocation account (for members who have such an account). See "Loss Allocation to Members and Accumulated Deficit" below. In order to avoid the administrative inconvenience and expense of issuing separate certificates representing shares of Class A and Class B common stock to each member, True Value deposits a certificate, representing all the shares of Class A and Class B common stock then being issued, with Harris Trust and Savings Bank, Chicago, Illinois, for safekeeping for and on behalf of its members. True Value keeps the allocations of Class A and Class B common stock in book entry form. True Value notifies each member of these deposits and the allocation thereof to the member. CAPITAL STOCK REDEMPTION In accordance with True Value's By-Laws, True Value redeems former members' equity investments in Class A common stock and Redeemable nonqualified Class B common stock in cash at the time of redemption and equity investments of Redeemable qualified Class B common stock are paid with a subordinated promissory installment note. The subordinated promissory installment notes are payable in five equal annual installments and pay interest annually at a fixed rate. The interest rate on subordinated promissory installment notes created during the year is determined annually on the first business day of the year based on the five-year U.S. Treasury bill rate plus 1.0%. For notes issued in 2005, the rate was 4.64% and for notes issued in 2006, the rate is 5.30%. In accordance with True Value's By-Laws, True Value first reduces its aggregate stock redemption obligation payable in both cash or subordinated promissory installment note by its right to legally offset any amounts the former members may owe True Value, including accounts and notes receivable, loss allocations and/or accumulated deficit. Effective July 6, 2004, the board of directors rescinded True Value's moratorium on stock redemptions that had been effective since March 2000. In accordance with the Stipulation of Settlement related to the "Derivative Action" (an action brought by a former True Value member against certain present and former directors, certain former officers of True Value and against True Value), upon rescinding the moratorium, True Value reduced loss allocation accounts of the parties to the Stipulation of Settlement by approximately $5,000 on a pro-rata basis (see "Loss Allocation to Members and Accumulated Deficit" below). Since the rescinding of the moratorium, True Value satisfied $7,779 of stock redemption liability in cash and $26,351 by issuing subordinated promissory installment notes in 2004. In 2005, True Value paid $1,738 of stock redemption liability in cash and $5,506 by issuing subordinated promissory installment notes. Principal payments on subordinated promissory installment notes are paid on December 31st of each year and totaled $6,295 and $5,241 in 2005 and 2004, respectively. True Value had shareholders that, at year end, had discontinued their purchasing activities with True Value and requested that their stock be redeemed but had not completed the redemption procedures, resulting in a stock redemption liability of $2,200 and $4,886 in 2005 and 2004, respectively. True Value classified this liability in its Consolidated Balance Sheet under the 6 captions as shown in the following table, based on management's estimates of the time needed to complete the redemption procedures.
2005 2004 ------- ------- ($ IN THOUSANDS) Current maturities of long-term debt, notes and capital lease obligations......................................... $ 810 $1,718 Long-term debt including notes and capital lease obligations, less current maturities...................... 1,390 2,476 Other long-term liabilities................................. -- 692 ------ ------ Total stock redemption liability............................ $2,200 $4,886 ====== ======
DISTRIBUTION OF PATRONAGE DIVIDENDS True Value operates on a cooperative basis with respect to business transacted with or for members. All members are entitled to receive patronage dividend distributions from True Value, calculated on a pro-rata basis of gross margins on merchandise purchased by each member. In accordance with True Value'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 margins calculated in accordance with accounting principles generally accepted in the United States of America after reducing or increasing net margins for non-member income/(losses), reasonable reserves and deferred patronage amortization. Commencing with the 2004 patronage dividend that was paid in 2005, the board of directors has authorized retaining 5% of net patronage source income, as a reasonable reserve, to reduce the accumulated deficit account. 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 have historically been paid to members within 90 days after the close of True Value's fiscal year; however, the Code permits distribution of patronage dividends as late as the 15th day of the ninth month after the close of True Value's fiscal year. True Value distributed the patronage dividend for 2005 in March 2006. True Value'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, subordinated promissory notes, or other property. The board of directors reserves the right to make payments in cash in unusual circumstances of individual hardship. Subordinated promissory notes are customarily issued for up to a five-year term and bear interest at a fixed rate until maturity. The rate and term of the notes are determined at issuance. For the 2005 dividend paid in 2006, notes were issued with a 7% interest rate and a five-year term. For the 2004 dividend paid in 2005, notes were issued with a 6% interest rate and a three-year term. The notes are subordinated to all other indebtedness of True Value. True Value may also issue "nonqualified written notices of allocation" to its members as part of its annual patronage dividend. "Nonqualified 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 True Value, which may be varied from time to time, is determined by the board of directors based on an evaluation of True Value's financial needs and the needs of its membership. The board establishes a minimum Class B common stock ownership requirement for each type of retail member. Commencing with the 2005 dividend paid in 2006, this minimum is generally the greater of: (1) $25 or (2) the aggregate of a member's various types of annual purchases, each multiplied by a specific percentage, which varies from 3% to 18% and which decreases as total dollar purchases by category increase. Not all members have achieved this minimum target. From 1996 to 2004, this minimum was generally the greater of: (1) $25 or (2) the aggregate 7 of a member's various types of annual purchases, each multiplied by a specific percentage, which varied from 2% to 14% and which decreased as total dollar purchased by category increased. LOSS ALLOCATION TO MEMBERS AND ACCUMULATED DEFICIT During the third quarter of 2000, True Value 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. True Value has distributed the 1999 loss allocation among its members by establishing a loss allocation account as a contra-equity account in the Consolidated Balance Sheet with the offsetting credit recorded to the accumulated deficit account. The loss allocation account reflects the sum of each member's proportionate share of the 1999 loss, after being reduced by certain amounts that were not allocated to members. The allocation was generally based on a member's proportionate Class B stock investment relative to the total Class B stock investments of all the members, and therefore a member could not be allocated a loss in excess of its equity investment. The loss allocation account will be satisfied, on a member-by-member basis, by applying the portion of future non-cash patronage dividends as a reduction to the loss allocation account until fully satisfied. The loss allocation amount may also be satisfied, on a member-by-member basis, by applying the par value of maturing member notes and related interest payments as a reduction to the loss allocation account until such account is fully satisfied. However, in the event a member should terminate as a stockholder of True Value, 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 True Value. As of December 31, 2005, $102,830, or approximately 90%, of the $113,918 1999 loss allocation was satisfied. As of December 31, 2004, $94,498, or approximately 83%, of the 1999 loss allocation was satisfied. The board of directors determined that True Value would retain the 2001 loss as part of the accumulated deficit account. All or a portion of patronage income and all non-patronage income, if any, may be retained in the future to reduce the accumulated deficit account. In the event a member terminates its status as a stockholder of True Value, any remaining 2001 loss in the accumulated deficit account that is allocable to the terminated member will be distributed to the terminating member and satisfied by reducing the redemption amount paid for the member's stock investment in True Value. True Value has determined for each member that was both a stockholder and purchased from True Value in 2001, its share of the 2001 loss that has been retained in the accumulated deficit account. Stockholders that had ceased their membership in True Value prior to 2001 and were solely stockholders due to the moratorium on stock redemptions were excluded from the 2001 loss allocation. Approximately 18% of the $50,687 2001 loss was allocated based upon the member's proportionate equity investment, net of any 1999 loss allocation account, relative to the total equity investments of all members that were both stockholders and purchased from True Value in 2001. Approximately 82% of the total 2001 loss was effectively allocated based on the member's purchases from True Value in 2001 using the same methodology as described above in "Distribution of Patronage Dividends." No member was allocated a loss amount greater than its net equity investments held as of year-end 2001. A member's proportionate share of the 1999 and/or 2001 losses have been limited to the extent of its equity investment in True Value. Any portion of a loss allocation that exceeds a member's equity investment is retained by True Value in the accumulated deficit account. Commencing with the 2004 patronage dividend that was paid in 2005, the board of directors has authorized retaining 5% of net patronage source income, as a reasonable reserve, to reduce the accumulated deficit account. Such reduction will be applied first against the oldest components of the deficit and the annual retention of the 5% of patronage source income will continue until the deficit no longer exists. In 2003, True Value settled its Derivative Action. The Stipulation of Settlement stated that, at the time the moratorium on stock redemptions was lifted, the Loss allocation accounts for all current and former members who were parties to the Stipulation of Settlement would be reduced by approximately $5,000 on a pro-rata basis. The moratorium was lifted in July 2004 and such reduction occurred. 8 PAYMENT OF PATRONAGE DIVIDENDS IN ACCORDANCE WITH THE INTERNAL REVENUE CODE The Code specifically provides for the taxation of cooperatives (such as True Value) and their patrons (such as True Value'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 True Value to its members, that disclose to the recipient the stated amount allocated to the member by True Value 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 True Value 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. True Value deducts all patronage dividends, including cash, the face value of qualified written notices and the fair market value of any other property distributed to the members (except nonqualified written notices of allocation) from its earnings in determining its taxable income. Accordingly, all of these items, including such qualified written notices of allocation, are includable in the gross income of the members. Section 1385(a) of the Code provides, in substance, that the total patronage dividend shall be included in the gross income of the patron (member) for the taxable year in which the patron (member) receives such distribution. This includes amounts paid in cash, in qualified written notices of allocation and in other property (except nonqualified written notices of allocation). In general, for nonqualified written notices of allocation, no amounts are either deductible by True Value or includable in a member's gross income until the notices are redeemed by True Value. True Value 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 (which is determined to be qualified for tax purposes) and subordinated promissory notes, 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 as a result of the full amount of the patronage dividend, including cash, notes and Class B common stock. True Value has historically paid approximately 30% of the patronage dividend to its members in cash (excluding nonqualified written notices of allocation). However, True Value 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. True Value'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 True Value) 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 True Value, or who remains a member after adoption of the By-Laws providing that membership in True Value 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) 9 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 prior to becoming a member. Such consent is then effective as to patronage dividends. Such consent may be revoked by the member only by terminating its membership in True Value in the manner provided in his or its Retail Member Agreement (see "Retail Member Agreement" above). SET-OFF RIGHTS OF TRUE VALUE True Value's Certificate of Incorporation and By-Laws specifically provide that True Value, but not the member, 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 True Value. Upon rescinding its moratorium on stock redemptions in 2004, True Value exercised its set-off rights in 2005 and 2004 when it reduced the amounts paid to former members for their equity investments at the time of redemption by: - the amount of any outstanding merchandise accounts receivable to True Value; - the amount of any unpaid loans to or advances from True Value; - any remaining balance in their 1999 loss allocation account; and - their distribution of the 2001 loss allocation, if applicable. True Value also exercised its set-off rights in 2005 and 2004, when True Value notes and interest came due to former members with outstanding merchandise accounts receivable to True Value and current members with past due merchandise accounts receivable to True Value. True Value had also set off note and interest obligations to former members against their related loss allocation balance. In 2005 and 2004, True Value set off the unpaid portions of cash dividends payable against the outstanding merchandise accounts receivable balances of those members that were past due. The set-off rights were exercised in an aggregate amount of $17,962 during 2005 and $58,815 during 2004. As True Value maintains stock records for its members on a store-by-store basis, members with multiple stores who elect to sell one or more, but not all, of their stores may transfer the stock registered on True Value's records with respect to a store location that is terminating its relationship with True Value to the store locations that are not being terminated, with proper evidence of succession, assignment or authority to transfer and with True Value's express consent. Otherwise, True Value may exercise its set-off rights upon redemption against the stock investment recorded for the store location to be closed, including the set-off rights for all loss allocation account balances. ITEM 1A. RISK FACTORS. You should consider the following risks before investing in True Value's Class A common stock: THERE IS NO MARKET FOR THE CLASS A COMMON STOCK, THE CLASS A COMMON STOCK IS SUBJECT TO VARIOUS RESTRICTIONS INCLUDING A RIGHT OF SETOFF BY TRUE VALUE, AND INVESTORS MAY NOT BE ABLE TO SELL THEIR CLASS A COMMON STOCK. There is currently no trading market for any True Value common stock and True Value does not foresee a market developing at any time in the future. Therefore, investors may only liquidate their investment in the common stock by having that stock redeemed by True Value. From March 2000 through July 5, 2004, True Value had a moratorium on redemption of its capital stock. The board of directors declared the moratorium as the capital stock was then worth substantially less than its par value and redemption at par value would likely violate legal prohibitions against an impairment of capital. The board of directors concluded that it would be a violation of its fiduciary duties to proceed with redemptions of capital stock whereas no such moratorium exists today; if the future financial condition of True Value were to deteriorate significantly from its current performance, its capital may again be impaired and the board of directors may be required to reinstate a moratorium on stock redemptions. 10 Investors should be aware that True Value retains automatic liens on the Class A common stock and any patronage dividends, including all shares of Class B common stock, which might have accrued to the members. The By-Laws, the Retail Member Agreement and the Subscription to Shares Agreement that each member signs with True Value provide that True Value shall have a lien on, and a right of set off against, any stock or notes issued to the member, including those issued as patronage dividends. With regard to patronage dividends, this lien and right of set off encompasses any portion of the patronage dividend that is issued and exceeds 20% of the overall patronage dividend payable in any year. True Value takes this lien/right of set off in order to secure any member indebtedness that may, for whatever reason, exist in favor of True Value or its subsidiaries. TRUE VALUE HAS OUTSTANDING DEBT THAT IS SENIOR TO THE CLASS A COMMON STOCK AND, IN THE EVENT OF THE BUSINESS FAILURE OF TRUE VALUE, IT MAY NOT HAVE SUFFICIENT ASSETS TO REDEEM THE CLASS A COMMON STOCK. True Value is financed by debt capital obtained from various external sources principally under its asset-based revolving credit facility ("Bank Facility"), real estate mortgage and trade creditors. As an investor, your investment is subordinate to senior, secured debt, trade creditors and other unsecured liabilities and subordinated debt of True Value. In the event of the business failure of True Value, there may not be sufficient assets to redeem all or a portion of the Class A common stock after payment of True Value debt and other liabilities. As of December 31, 2005, the book value of net tangible assets was $660,055 and debt and other liabilities were $648,047. The liquidation value of the assets, especially if the assets are not sold as part of the ordinary course of business, may be less than the book value of the assets. These balances will change in the ordinary course of business. TRUE VALUE HAS EXPERIENCED A DECLINE IN ITS MEMBER BASE AND ITS MEMBERS FACE STIFF RETAIL COMPETITION, AND TRUE VALUE'S SUCCESS DEPENDS ON THE SUCCESS OF ITS MEMBERS IN THE RETAIL MARKETPLACE. The success of True Value is dependent upon continued support from its members in the form of merchandise purchases for their retail outlets to generate positive net margin and cash flow for True Value. True Value had a net decline of approximately 3.1% and 2.5% of its total number of outlets in 2005 and 2004, respectively. The number of retail and industrial distribution outlets that were members of True Value at December 31, 2005 was approximately 5,800. The reduction in membership is due to retailer competition, True Value's discontinuing relationships with members for breach of their Retail Member Agreement obligations and members leaving True Value to find an alternate source of supply. The retail hardware industry is characterized by intense competition. Independent hardware retailers, such as True Value members, must remain competitive with the so-called "Big Box" stores such as Home Depot, Menards and Lowe's, as well as the diversified retailers such as Sears and Wal-Mart. These retail competitors may have greater resources, larger market shares and more widespread presence than True Value members. The success of True Value is highly dependent upon the success of its members' retail and industrial outlets in the marketplace. ITEM 2. PROPERTIES. ($ IN THOUSANDS) WAREHOUSING, MANUFACTURING AND OFFICE FACILITIES True Value's worldwide headquarters is located in Chicago, Illinois. True Value's facilities are suitable for their respective uses and are, in general, adequate for True Value's present needs. Information with respect 11 to True Value's owned and leased warehousing, manufacturing and office facilities at December 31, 2005 is set forth below:
SQUARE FEET OF WAREHOUSE, MANUFACTURING LEASE LOCATION AND OFFICE AREA INTEREST EXPIRATION DATE -------- --------------- -------- --------------- Chicago, Illinois(1)(5)..................... 195,295 Leased December 31, 2010 Corsicana, Texas(2)(6)...................... 754,000 Leased December 31, 2022 Denver, Colorado(6)......................... 355,000 Leased June 30, 2008 Fogelsville (Allentown), Pennsylvania(2)(6)........................ 528,000 Leased December 31, 2022 Harvard, Illinois(6)........................ 1,032,000 Leased November 24, 2013 Harvard, Illinois(6)........................ 163,000 Leased November 24, 2010 Jonesboro (Atlanta), Georgia(2)(6).......... 619,000 Leased December 31, 2022 Kansas City, Missouri(2)(6)................. 398,000 Leased December 31, 2022 Kingman, Arizona(2)(6)...................... 354,000 Leased December 31, 2022 Springfield, Oregon(2)(6)................... 523,000 Leased December 31, 2022 Woodland, California(2)(6).................. 341,000 Leased December 31, 2022 Cary, Illinois(4)(7)........................ 615,000 Owned Manchester, New Hampshire(3)(6)............. 701,000 Owned Mankato, Minnesota(4)(6).................... 310,000 Owned Westlake (Cleveland), Ohio(4)(6)............ 393,000 Owned
- --------------- (1) True Value has subleases with third parties for approximately 25,300 of the 195,295 square feet of the Chicago, Illinois space. (2) Facility was part of the December 31, 2002 sale leaseback transaction (see "Properties - Sale Leaseback Transaction" below). (3) Facility is assigned as collateral under a December 29, 2005 mortgage transaction on True Value's Manchester, New Hampshire, facility (the "Manchester Mortgage"). The $21,600 mortgage on this facility is a 20-year fully amortizing loan at a fixed rate of 6.74% with a maturity date of January 1, 2026. (4) Facility is assigned as collateral under the Bank Facility. (5) Office facility (6) Warehouse and office facility (7) Paint and paint applicators manufacturing facility SALE LEASEBACK TRANSACTION On December 31, 2002, True Value sold seven of its distribution centers to unrelated third parties generating net proceeds to True Value of $121,438. True Value concurrently agreed to lease the distribution centers for a period of 20 years. The transaction was recorded as a real property sale and as operating leases in True Value's financial statements. The resulting gain on sale of $55,564 was recorded as deferred gain in the Consolidated Balance Sheet and is being amortized to income on a straight-line basis over the initial 20-year lease term. True Value has the right but not the obligation to extend each lease for two additional periods of approximately 10 years each and may exercise such renewal rights on each property individually. Subject to certain conditions described in the leases, True Value has the right to assign the lease or sublet all or any part of any property without the landlord's prior written consent. OTHER PROPERTY SALES On April 20, 2005, True Value sold its 640,000-square-foot East Butler, Pennsylvania, warehouse and office facility to a third party for a purchase price of $6,188. In the first quarter of 2005, True Value recorded 12 an impairment charge of $942 to write-down this facility to fair value. True Value currently leases back, under an operating lease, approximately 25,000 square feet of warehouse space through March 2006 and approximately 15,000 square feet of office space through December 2006. On December 28, 2005, True Value sold its 105,000-square-foot Chicago, Illinois, oil-based paint manufacturing facility to a third party for a purchase price of $10,125. True Value recorded a net gain of $9,080 on the sale. The sale of the property followed the relocation of the oil-based paint manufacturing operations to the Cary, Illinois, facility. True Value continues to evaluate opportunities to capitalize on the increase in market value over the historical book value of its owned real estate assets through additional sale leaseback transactions, mortgages or other financing methods. OTHER LEASES True Value owns and leases transportation equipment for use at its distribution centers for the primary purpose of delivering merchandise from True Value's distribution centers to its members. Additional information concerning these leases can be found in Note 5, "Lease Commitments," to the Consolidated Financial Statements beginning at page F-1. ITEM 3. LEGAL PROCEEDINGS. ($ IN THOUSANDS) ACTIVE LEGAL MATTERS: FLEGLES ACTION On February 12, 2003, a former True Value member, Flegles Inc. ("Flegles"), filed suit against True Value in the Circuit Court of Carlisle County, Kentucky. The complaint alleges that True Value is liable to Flegles for the role True Value played with respect to Flegles' construction of a new retail store facility in Bardwell, Kentucky, that has allegedly incurred financial losses. Flegles sought $2,400 in compensatory damages and also an award of punitive damages. On July 30, 2004, a jury found True Value liable to Flegles for certain losses incurred by Flegles and awarded Flegles $1,300 in compensatory damages. The jury did not award any punitive damages. As True Value believes that the verdict was rendered in error, it pursued post-trial motions before the Circuit Court, including a request that the verdict be set aside or that True Value be awarded a new trial. Such relief was denied by the Circuit Court and True Value is now pursuing its appeal for such relief in the Kentucky Appellate Court. True Value posted with the court a bond in an amount necessary to prevent Flegles from enforcing its judgment during the appeal. The parties have filed briefs with the Kentucky Appellate Court and are awaiting a date for oral arguments. True Value intends to continue to vigorously defend this case and does not believe that the ultimate resolution will have a material effect on results from operations or financial position. CLAIMS AGAINST ERNST & YOUNG LLP True Value pursued claims against its former outside auditors, Ernst & Young LLP ("E&Y"), for professional malpractice, breach of contract, deceptive business practices and fraud. True Value contended that E&Y failed to properly discharge its duties to True Value and failed to identify, in a timely manner, and indeed concealed, certain material weaknesses in True Value's internal financial and operational controls. As a result, True Value was forced to make an unanticipated accounting adjustment in the fourth quarter of 1999 in the total amount of $121,333 (the "Fourth Quarter Charge"). True Value accordingly reported a Net loss of $130,803 for the fiscal year ended December 31, 1999. True Value alleged that had E&Y properly discharged its duties, the scope and breadth of the Fourth Quarter Charge, as well as the accounting and operational control deficiencies that necessitated the charge, would have been substantially lessened. True Value began discussion of its claims with E&Y early in the fall of 2001. Pursuant to the dispute resolution procedures required by True Value's engagement letter with E&Y, True Value and E&Y attempted to mediate this dispute during the first six months of 2002. When those attempts proved unsuccessful and again pursuant to 13 the dispute resolution procedures, True Value filed its claim with the American Arbitration Association on July 31, 2002. The arbitration is subject to certain confidentiality requirements. Another effort at non-binding mediation between the parties began in December 2004 and was unsuccessful. Hearings before the arbitration panel occurred in early 2005. On July 28, 2005, an arbitration panel denied True Value's claims against E&Y in their entirety. This decision of the arbitration panel also requires True Value to reimburse E&Y for reasonable attorneys' fees and expenses related to this matter. On August 17, 2005, True Value filed a motion asking the panel to reconsider its award of attorneys' fees and expenses. In its motion, True Value claimed that the panel exceeded its authority when it awarded attorneys' fees and expenses to E&Y. On October 19, 2005, the panel denied this motion. E&Y has requested attorneys' fees and expenses in this matter of approximately $18,200. True Value is challenging the reasonableness of this amount with the arbitration panel, but has recorded the requested amount as a reserve in the third quarter 2005 results. It is expected that the panel will make a final award of reasonable fees and expenses in the first half of 2006. Any adjustment to the reserve resulting from the final award will be reflected in the financial statements at that time. True Value will continue to explore all of its options to challenge both the reasonableness of E&Y's attorneys' fees and expenses and the authority of the panel to award attorneys' fees and expenses in any amount. On January 17, 2006, True Value filed a petition with the Circuit Court of Cook County to preserve its rights to further challenge the panel's authority to award any attorneys' fees and expenses and to vacate the final award when it is entered. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES. There is no existing market for the common stock of True Value and there is no expectation that any market will develop. True Value's Class A common stock is owned exclusively by retailers of hardware and related products, garden center retailers and industrial distributors as well as rental retailers, each of whom is a member or former member of True Value and purchased at least 60 shares of True Value's Class A common stock (the only class of voting stock) upon becoming a member. True Value is organized as a Delaware stock corporation and operates as a member-owned wholesaler cooperative corporation. The shares of True Value's Class B common stock now outstanding were issued to members in partial payment of the annual patronage dividend that accrued as a result of patronage business transacted by such members with True Value. In accordance with True Value'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. 14 The number of holders of record as of January 28, 2006 of each class of stock of True Value was as follows:
NUMBER OF HOLDERS TITLE OF CLASS OF RECORD(1) -------------- ------------- Class A common stock, $100 Par Value........................ 4,701 Class B common stock, $100 Par Value........................ 4,535
- --------------- (1) Does not include holders of record whose shares have been reclassified from member's equity to liabilities resulting from the members' withdrawal from True Value membership and for which stock redemption procedures have not been completed. Dividends (other than patronage dividends) on the Class A common stock and Class B common stock, subject to the provisions of True Value's Certificate of Incorporation, may be declared out of retained earnings of True Value, as may be authorized by the board of directors. Dividends may be paid in cash, in property, in subordinated promissory notes, 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, True Value has not paid dividends on its Class A common stock or Class B common stock. The board of directors does not plan to pay non-patronage dividends on either class of stock. In February 2006, the board of directors authorized the payment of a patronage dividend related to 2005. The patronage dividend was paid in March 2006 (see Item 1, "Business -- Distribution of Patronage Dividends" and "Business -- Loss Allocation to Members and Accumulated Deficit"). ISSUER PURCHASES OF EQUITY SECURITIES The number of shares of True Value's Class A common stock redeemed and the average price paid per share for each month in the fourth quarter of 2005 were as follows:
AVERAGE TOTAL NUMBER APPROXIMATE $ TOTAL NUMBER PRICE PAID OF SHARES AS VALUE THAT MAY OF SHARES PER SHARE PART OF YET BE PURCHASED REDEEMED BEFORE OFFSETS ANNOUNCED PLAN UNDER PLAN ------------ -------------- -------------- ---------------- CLASS A COMMON STOCK October 2 -- October 29, 2005......... 2,340 $100 -- $ -- October 30 -- November 26, 2005....... 1,860 100 -- -- November 27 -- December 31, 2005...... 4,440 100 -- -- ------ ---- ----- Total................................. 8,640 -- $ -- ====== ==== =====
In accordance with True Value's By-Laws, True Value offsets amounts due by its members against any amounts that it pays to the members on redemption of either their stock or their notes. Stock redemption liability is the aggregate value of the former members' equity investments after the offset of the loss allocation resulting from the 1999 loss, the 2001 loss and the accounts receivable owed by the former members. The value of Class A common stock, after all offsets, is paid in cash at the time of redemption. 15 ITEM 6. SELECTED FINANCIAL DATA. ($ IN THOUSANDS)
SELECTED FINANCIAL DATA AS OF AND FOR THE YEAR ENDED DECEMBER 31, -------------------------------------------------------------- 2005 2004 2003 2002 2001 ---------- ---------- ---------- ---------- ---------- Net revenue...................... $2,043,034 $2,023,887 $2,024,340 $2,175,451 $2,619,434 Gross margin..................... 232,852 222,077 220,436 246,918 271,794 Net margin/(loss)(1)............. 47,555 43,213 21,221 21,153 (50,687) Patronage dividends(2)........... 43,870 41,375 18,269 20,541 -- Total assets..................... 751,529 655,519 681,460 703,371 1,020,837 Current and non-current long-term third party debt and borrowings..................... 120,993 90,155 132,423 191,315 431,681 Current and non-current subordinated promissory and subordinated promissory installment notes payable...... 73,071 80,146 59,859 64,886 82,606 Deferred stock redemptions and Redeemable nonqualified Class B non-voting common stock(3)(4).................... 20,410 21,626 56,864 -- -- Class A common stock(3).......... 30,464 30,490 31,440 50,120 49,896 Class B common stock(3).......... 118,885 102,187 96,542 176,945 174,448
- --------------- (1) The 2004 increase in Net margin compared to 2003 was primarily due to the reduction in interest related to the August 29, 2003 refinancing of True Value's third-party debt. The 2001 Net loss of $50,687 was primarily due to Restructuring charges and other related expenses of $38,522 and the decline in participating members. (2) No patronage dividend was issued for 2001 due to a net loss of $50,687, which was reported for that year. (3) In 2003, True Value adopted Statement of Financial Accounting Standards ("SFAS") No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity." SFAS No. 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. Adoption of this standard impacted the classification of Class B common stock that is "non-qualified" (the "Nonqualified Class B common stock") and stock presented for redemption but deferred due to the moratorium. In 2003, Class A common stock and Class B common stock excludes approximately $18,841 and $82,718, respectively, of amounts not redeemed due to the stock moratorium. Class B common stock also excludes $33,868 of nonqualified Class B common stock. These amounts are included in Deferred stock redemptions and Redeemable nonqualified Class B common stock and are offset by Loss allocation of $27,941, Accumulated deficit of $9,933 and an offset of accounts receivable of $6,821 pursuant to True Value's agreements with its members. In 2002, Class A common stock and Class B common stock include approximately $15,475 and $47,033, respectively, of amounts not redeemed due to the stock moratorium. In 2001, Class A common stock and Class B common stock include approximately $11,699 and $34,712, respectively, of amounts not redeemed due to the stock moratorium (see Note 1, "Description of Business and Accounting Policies -- Capital Stock Redemption," to the Consolidated Financial Statements beginning at page F-1). (4) In 2004, True Value lifted the moratorium on stock redemptions and redeemed shares for former shareholders who completed required stock redemption procedures. Accordingly, only Redeemable nonqualified Class B non-voting common stock was in this line for 2004 and 2005. 16 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION. ($ IN THOUSANDS) OVERVIEW In 2005, True Value continued its multi-year improvement trend in its business, including the first Net revenue increase since 1999 and the fourth consecutive year-over-year Net margin increase. The 2005 Net margin of $47,555 was the highest since 1996. The 2005 Net revenue increase of $19,147 was the net result of two factors. First, same-store sales were up $39,171 due to new products and assortments and inflationary price increases. This was partially offset by a $20,704 revenue decline from net member attrition of 1%, almost half of the 1.9% decline experienced in 2004. The 2005 Net margin increased by $4,342 despite the net impact of two unusual items in 2005. In September, True Value recorded an $18,200 arbitration provision related to the E&Y matter (see Item 3, "Legal Proceedings -- Claims Against Ernst & Young LLP"). This impact to Net margin was reduced in half in December by a $9,080 gain on the sale of the Chicago, Illinois, oil-based paint manufacturing facility. After accounting for the net impact of the two unusual items in 2005, the Net margin increase was primarily due to the favorable results from the line review activities and continued expense reductions. Management expects both modest Net revenue growth and continued improvement in Net margin in 2006. Management utilizes a variety of key performance measures to monitor the health and progress of True Value's business. These measures are store count, revenue, gross margin percentage, operational and interest expense and debt. The following is a summary of the trends of the most significant key performance measures identified above: STORE COUNT: (BAR CHART - YEAR-END STORE COUNT) YEAR-END STORE COUNT 2002 6,567 2003 6,178 2004 6,025 2005 5,836
Management begins its analysis of the financial health of True Value by measuring the number of stores and the level of patronage from True Value members. For several years after the 1999 loss, True Value experienced a sharp decline in its membership base. Since 2003, True Value has experienced success in stabilizing its membership base, which is one of the critical elements of its recent success. As demonstrated on the preceding chart, the rate of True Value's net store count decline has remained consistent over the last few years. Year-end store count figures include store terminations of 601, 355 and 401 in 2003, 2004 and 2005, respectively. Approximately 64%, 72% and 73% of these terminations were members who on average had warehouse and relay purchases of less than $75 from True Value in 2003, 2004 and 2005, respectively. Year-end store count figures also include new store gains of 212, 202 and 212 in 2003, 2004 and 2005, respectively. Management is projecting a modest 1.8% net decline in overall store count in 2006, assuming stable economic and competitive conditions and the continued improvement in the financial condition of True Value. 17 Management considers this a modest decline, as the number of industry-wide independent hardware stores is projected to decline at about a 1.0% rate for the next several years. In regard to the level of patronage from True Value members in 2005, approximately one quarter of the stores accounted for less than 5% of Net revenue. This relationship has been fairly consistent over the last several years. If True Value were to experience a significant decrease in this quartile of current members, the financial impact would not be significant. NET REVENUE: (BAR CHART - NET REVENUE)
NET REVENUE ($ IN MILLIONS) --------------------------- 2002 $2,175 2003 $2,024 2004 $2,024 2005 $2,043
Following several years of declining Net revenue after the 1999 loss, driven primarily by declining membership, True Value's Net revenue stabilized in 2004 and increased in 2005. This 2005 increase in Net revenue was primarily due to an increase in same-store sales, which were driven by new products and assortments and inflationary price increases. A key metric utilized by management to assess the strength of Net revenue is year-to-year same-store sales. This metric represents year-to-year sales performance for member stores with at least two full fiscal years as members of True Value. Same-store sales increased for the second year in a row. In 2005, same-store sales increased by $39,171, or 1.9%, which is comparable to the 2004 increase of $38,005, or 1.9%, after declining by $40,076, or 1.8%, in 2003 and by $119,584, or 4.6%, in 2002. True Value's management estimates that the modest 2005 Net revenue increase will continue in 2006. GROSS MARGIN %: (BAR CHART)
GROSS MARGIN % -------------- 2002 11.4% 2003 10.9% 2004 11.0% 2005 11.4%
A leading indicator of profitability, True Value's Gross margin, as a percentage of revenue, was 11.4% in 2005, up from 11.0% in 2004 and 10.9% in 2003. This increase in Gross margin percentage is directly attributable to the net effect of the vendor line review process, which began in the fall of 2004 to improve product assortments, enhance wholesale and retail pricing and drive additional warehouse sales. The vendor line reviews generated an increase in same-store sales, as discussed above, which led to an increase in Gross margin. In 2005, the line reviews continued to fund wholesale price reductions to the membership. 18 OPERATING AND INTEREST EXPENSES: (BAR CHART - OPERATING AND INTEREST EXPENSES)
OPERATING AND INTEREST EXPENSES ($ IN MILLIONS) ----------------------------------------------- 2002 $229 2003 $219 2004 $181 2005 $178
A key component of True Value's turnaround success since 2000 has been its ability to reduce its cost structure. Management's actions, including restructuring actions, have focused on reducing the following expenses: logistics and manufacturing, selling, general and administrative, and interest paid to members and third parties. In 2005, True Value's lower operating expenses were partially offset by higher interest expense. Interest expense was higher due to an increase in interest rates, along with higher debt as a result of an increase in inventory levels. Third-party interest expense declined significantly in 2004 due to a full year effect from the August 29, 2003 refinancing. Also in 2004, member interest expense was slightly higher due to additional debt created by lifting the moratorium that was declared on stock redemptions in March 2000 due to the 1999 loss. In 2003, third-party interest expense includes the cost of $26,927 incurred with the refinancing of the Senior Debt, resulting from the write-off of the remaining unamortized balance of prepaid bank fees and old and new senior note make-whole interest costs. Management estimates stable expenses and a further profit increase in 2006. DEBT: (BAR CHART - DEBT)
TOTAL YEAR-END DEBT INCLUDING MEMBER DEBT ($ IN MILLIONS) --------------------------------------------------------- THIRD-PARTY DEBT MEMBER DEBT TOTAL ---------------- ----------- ----- 2002 $191 $65 $256 2003 $132 $60 $192 2004 $ 90 $80 $170 2005 $121 $73 $194
Total debt, shown above, includes all third-party debt and the current and long-term portions of subordinated member debt. In 2005, total debt increased over the prior year primarily due to an increase in inventory levels partially offset by the sale of the East Butler, Pennsylvania, warehouse and office facility and the Chicago, Illinois, paint manufacturing facility. Inventory was increased in order to improve seasonal and promotional product fill rates and for the establishment of two China warehouse operations to handle increased importing activities. True Value's management is enhancing its focus on improving the productivity of its inventory investment while still maintaining an acceptable product fill rate. Between 2002 and 2004, the primary contributors to True Value's debt reduction included: the sale leaseback of seven distribution centers, the sale of idle or underutilized assets, improved working capital management and lower operating expenses resulting from headcount and other expense reductions. The combination of improved operating performance 19 and lower debt levels allowed True Value to refinance its third-party senior notes and revolving credit facility on August 29, 2003. Overall debt reductions in 2004 were achieved despite the increase in debt required to fund stock redemptions resulting from the lifting of the stock moratorium. In 2006, management anticipates a modest decrease in debt due to cash generated from operations. True Value's primary source of revenue is derived from the sale of hardware, paint and paint-related products, and general merchandise to member stores. These revenues result from shipments that originate from True Value's distribution facilities, as well as from shipments that go direct from True Value's vendors to member stores. In addition, True Value recognizes revenue for services provided to members and vendors, including primarily advertising and transportation fees. Costs of revenue include acquisition cost of merchandise (net of discounts and vendor incentives), warehousing and transportation costs, manufacturing costs for paint and paint-related products and costs related to other services provided to members. Selling and general administrative costs include headquarter and field personnel expenses, as well as marketing and information technology costs. True Value's cash flows are generated primarily from profits on sales of merchandise and services, as discussed above, and are utilized primarily to service debt and fund patronage dividends to members. The success of True Value is dependent upon continued support from its members in the form of purchases of merchandise and services for their retail and/or industrial distribution outlets. Significant declines in membership or in the levels at which members purchase from True Value, or both; an increase in market share of the various entities that compete in the hardware industry; and a decline in the general U.S. economy could have a significant negative effect on True Value's profitability. The following discussion and analysis provides information that management believes to be relevant to understanding True Value's financial condition and results of operations. This discussion should be read in conjunction with True Value's consolidated financial statements and the related notes thereto included in this report, beginning at page F-1. RESULTS OF OPERATIONS FOR 2005 COMPARED TO 2004 In 2005, True Value's Net revenue and Net margin increased slightly from 2004. This was True Value's first Net revenue increase since 1999 and its fourth consecutive year-over-year Net margin increase. True Value also experienced a 3.1% net decline in member retail outlets with a corresponding 1.0% reduction in revenue. 20 NET REVENUE A reconciliation of Net revenue between 2005 and 2004 follows:
% OF NET 2004 NET REVENUE REVENUE ---------- -------- ($ IN THOUSANDS) 2004 RESULTS................................................ $2,023,887 100.0% ---------- ----- Same-store sales: Warehouse and relay revenue............................... 42,842 2.1% Vendor-direct revenue..................................... (3,153) (0.2)% Paint revenue............................................. (518) (0.0)% ---------- ----- Net same-store sales................................... 39,171 1.9% ---------- ----- Change in participating members: Terminated members: Warehouse and relay revenue............................ (37,688) (1.9)% Vendor-direct revenue.................................. (17,839) (0.9)% Paint revenue.......................................... (3,132) (0.1)% ---------- ----- Net terminated members............................... (58,659) (2.9)% ---------- ----- New members: Warehouse and relay revenue............................ 20,834 1.0% Vendor-direct revenue.................................. 15,375 0.8% Paint revenue.......................................... 1,746 0.1% ---------- ----- Net new members...................................... 37,955 1.9% ---------- ----- Net change in participating members............... (20,704) (1.0)% Other revenue and cost of revenue........................... 680 0.0% ---------- ----- Total change.............................................. 19,147 0.9% ---------- ----- 2005 RESULTS................................................ $2,043,034 100.9% ========== =====
Net revenue for the year ended December 31, 2005 totaled $2,043,034, which was up $19,147, or 0.9%, compared to the same period last year. The Net revenue increase in the same-store sales category was partially offset by a Net revenue decline in the change in participating members' category. True Value's same-store sales increased $39,171, or 1.9%. Same-store sales were favorably impacted by various True Value programs and initiatives to drive merchandise sales, inflation and a continued improvement in the economy and member confidence in True Value. The primary initiative was the continued rollout of new product assortments resulting from the recent vendor line review activities. Partially offsetting the increase in same-store sales was a 3.1% net decline in the number of participating member retail outlets, resulting in revenue reduction of $20,704, or 1.0%. The 2005 net decline in revenue resulting from the change in participating member stores is almost a 50% improvement relative to the net decline experienced in 2004 of $37,508, or 1.9%. 21 GROSS MARGIN A reconciliation of Gross margin between 2005 and 2004 follows:
GROSS GROSS MARGIN % MARGIN OF REVENUE -------- ---------- ($ IN THOUSANDS) 2004 RESULTS................................................ $222,077 11.0% Hardware product............................................ 3,866 Advertising................................................. 6,253 Accounting change (EITF 02-16).............................. 4,304 Paint product............................................... (2,815) Inventory reserves.......................................... (1,442) Other....................................................... 609 -------- 2005 RESULTS................................................ $232,852 11.4% ======== ====
Gross margin for the year ended December 31, 2005, increased by $10,775, or 4.9%, over the prior year, though product volume was essentially flat. Gross margin was favorably impacted by the hardware product category of $3,866, which consisted of warehouse, relay and direct merchandise products. The hardware product category was favorably impacted by the net benefit provided by vendor line review activities partially offset by higher freight-in costs. The line review activities help support True Value's primary initiative to continue the rollout of new product assortments and to lower wholesale pricing to the membership to drive warehouse sales. The higher freight-in costs were primarily due to increased importing and higher fuel cost. Also, a favorable advertising margin impacted Gross margin by $6,253 primarily due to a lower subsidy by True Value of regional advertising performed by member regional advertising groups and lower media and production costs in 2005 compared to 2004. In addition, the negative impact of $4,304 to the 2004 Gross margin from the application of Emerging Issues Task Force ("EITF") Issue No. 02-16, "Accounting by a Customer (including a Reseller) for Certain Consideration Received from a Vendor ("EITF 02-16") did not reoccur in 2005 (see Note 1, "Description of Business and Accounting Policies -- Consideration Given by a Vendor," to the Consolidated Financial Statements beginning at page F-1). The favorable Gross margin components discussed above were partially offset by unfavorable paint margin of $2,815 and inventory reserves of $1,442. The unfavorable paint margin of $2,815 was mainly due to higher raw material and production costs, lower volume, expenses incurred for outsourcing the manufacturing of brushes and for the relocation of the Chicago, Illinois, oil-based paint manufacturing operations to the Cary, Illinois, paint manufacturing plant. The unfavorable inventory reserve of $1,442 was related to increased levels of unproductive inventory.
$ EXPENSE 2005 2004 (DECREASE) ------- ------- ---------- Logistics and manufacturing expenses................... $61,236 $63,411 $(2,175)
Logistics and manufacturing expenses decreased by $2,175, or 3.4%, as compared to the same period last year. This decrease in expense is primarily due to efficiencies in logistics' outbound shipping, lower manufacturing administrative post-employment charges and the 2004 write-off of licensing fees related to True Value's Trading Spaces(TM) brand of paint products that did not reoccur in 2005. Partially offsetting these favorable items was increased staffing expense to support True Value's import and vendor compliance initiatives.
$ EXPENSE 2005 2004 (DECREASE) -------- -------- ---------- Selling, general and administrative expenses......... $102,527 $104,772 $(2,245)
Selling, general and administrative ("SG&A") expenses decreased by $2,245, or 2.1%, as compared to the prior year. SG&A expenses decreased primarily due to lower rents and leases of $2,590 mainly as a result 22 of a Hagerstown, Maryland, facility lease that was terminated in November 2004. In addition, depreciation and amortization expense was lower by $3,626 as the conversion fund (see Note 1, "Description of Business and Accounting Policies -- Conversion Funds," to the Consolidated Financial Statements beginning at page F-1) and certain capital investments in software became fully amortized. Partially offsetting these favorable items was a lower bad debt benefit of $2,355, as 2004 included favorable collections on terminated member accounts and notes receivable that did not occur at the same level in 2005 (see Note 1, "Description of Business and Accounting Policies -- Allowance for Doubtful Accounts," to the Consolidated Financial Statements beginning at page F-1). Also, labor was unfavorable by $1,068 primarily due to higher bonus expense and 401(k) contributions as a result of higher achievement of performance targets in 2005 versus 2004. These unfavorable components of labor were partially offset by lower severance charges and favorable claims related to group medical insurance and workers' compensation.
$ EXPENSE 2005 2004 INCREASE ------- ---- --------- Arbitration provision..................................... $18,200 $ -- $18,200
True Value recorded a reserve in the third quarter of 2005 related to the arbitration panel's decision in the E&Y matter (see Item 3, "Legal Proceedings -- Claims Against Ernst & Young LLP," for further details).
2005 2004 $ INCREASE ------- ---- ---------- (Gain)/loss on sale of assets............................. $(8,333) $228 $8,561
(Gain)/loss on sale of assets was income of $8,333 for 2005 compared to $228 of expense in 2004. This change was predominantly due to the $9,080 gain on sale of the Chicago, Illinois, manufacturing facility that was sold on December 28, 2005.
$ EXPENSE 2005 2004 INCREASE ------ ------ --------- Third-party interest expense.............................. $8,706 $7,379 $1,327
Third-party interest expense increased by $1,327, or 18.0%, as compared to the same period last year. This increase in expense is primarily due to higher interest rates and a higher average debt level as a result of increased inventory levels.
$ NET MARGIN 2005 2004 INCREASE ------- ------- ------------- Net margin.......................................... $47,555 $43,213 $4,342
The 2005 Net margin of $47,555 increased from a Net margin of $43,213 for the same period a year ago. The primary reasons for the $4,342 increase were a higher Gross margin and the gain on asset sale, partially offset by the arbitration provision as discussed above. RESULTS OF OPERATIONS FOR 2004 COMPARED TO 2003 In 2004, True Value's revenue stabilized and Net margin more than doubled from 2003. True Value also lifted the moratorium on stock redemptions, reduced total debt and experienced a 2.5% net decline in member retail outlets, the lowest level of decline in several years. 23 NET REVENUE AND GROSS MARGIN A reconciliation of Net revenue and Gross margin between 2004 and 2003 follows:
% OF GROSS NET 2003 NET GROSS MARGIN % REVENUE REVENUE MARGIN OF REVENUE ---------- -------- -------- ---------- ($ IN THOUSANDS) 2003 RESULTS.............................. $2,024,340 100.0% $220,436 10.9% ---------- ----- -------- ---- Same-store sales: Warehouse and relay revenue............. 15,034 0.7% 6,142 Vendor-direct revenue................... 15,408 0.8% (53) Paint revenue........................... 7,563 0.4% (2,263) ---------- ----- -------- Net same-store sales................. 38,005 1.9% 3,826 ---------- ----- -------- Change in participating members: Terminated members: Warehouse and relay revenue.......... (42,997) (2.1)% (7,150) Vendor-direct revenue................ (18,662) (0.9)% (205) Paint revenue........................ (3,683) (0.2)% (1,673) ---------- ----- -------- Net terminated members............. (65,342) (3.2)% (9,028) ---------- ----- -------- New members: Warehouse and relay revenue.......... 17,619 0.8% 2,540 Vendor-direct revenue................ 8,611 0.4% 40 Paint revenue........................ 1,604 0.1% 537 ---------- ----- -------- Net new members.................... 27,834 1.3% 3,117 ---------- ----- -------- Net change in participating members....................... (37,508) (1.9)% (5,911) Other revenue and cost of revenue......... (950) (0.0)% 3,726 ---------- ----- -------- Total change............................ (453) (0.0)% 1,641 ---------- ----- -------- 2004 RESULTS.............................. $2,023,887 100.0% $222,077 11.0% ========== ===== ======== ====
Net revenue for the year ended December 31, 2004, totaled $2,023,887, which was flat compared to 2003. The Net revenue increase in the same-store sales category was offset by declines in the participating member store sales and other revenue categories. True Value's same-store sales increased $38,005, or 1.9%. Same-store sales were favorably impacted by various True Value programs and initiatives to drive merchandise sales, as well as an improved economy and renewed member confidence in True Value. Partially offsetting the increase in same-store sales was a 2.5% net decline in the number of participating member retail outlets, resulting in revenue reduction of $37,508, or 1.9%. The 2004 net decline in revenue resulting from the change in participating member stores is an improvement relative to the net decline experienced in 2003 of $94,013, or 4.3%. The remaining revenue reduction in other revenue of $950 was primarily due to the impact of EITF 02-16 on advertising revenue (see Note 1, "Description of Business and Accounting Policies -- Consideration Given by a Vendor," to the Consolidated Financial Statements beginning at page F-1). In addition, Net revenue was favorably impacted by two extra ship days in 2004 compared to 2003; this effect was predominantly offset by wholesale product price reductions (excluding commodity items) that lowered revenue by an incremental $9,019, as compared to the prior year. Gross margin for the year ended December 31, 2004, increased by $1,641, or 0.7%, over the prior year. Same-store sales gross margin increased $3,826 due to volume increases discussed above, offset by lower paint margins due to raw material price increases and costs of $2,377 incurred to implement the new "Color Made Simple" paint program. Another contributing factor reducing Gross margin was the net decline in participat- 24 ing member stores, lowering Gross margin by $5,911. Although the net decline in participating member stores caused a Gross margin reduction, it was an improvement, as 2003 had a Gross margin loss of $13,374 from a net decline in participating member stores. The wholesale product price reductions that lowered revenue did not unfavorably impact Gross margin, as lower product acquisition cost from suppliers more than offset the wholesale product price reductions. The other cost of revenue category, which consists mainly of advertising, transportation, freight-in, vendor rebates, cash discounts and other costs incurred to prepare goods for resale, increased by $3,726. The primary reason for this increase was the net impact of EITF 02-16 related to the change in recognition of vendor compensation and market related items (see Note 1, "Description of Business and Accounting Policies -- Consideration Given by a Vendor," to the Consolidated Financial Statements beginning at page F-1). Also favorably impacting the other gross margin category was lower advertising cost related to discontinuing in 2004 the sponsorship of "IROC" (International Race of Champions). Partially offsetting this favorable variance were higher inventory reserve requirements related to the increased levels of unproductive inventory and higher costs incurred to prepare goods for resale.
$ EXPENSE 2004 2003 INCREASE ------- ------- --------- Logistics and manufacturing expenses.................... $63,411 $62,066 $ 1,345
Logistics and manufacturing expenses increased by $1,345, or 2.2%, as compared to the prior year. This increase in expense is mainly due to transportation administrative cost increases of $913 primarily related to staffing in the vendor compliance and global sourcing departments. In addition, manufacturing expenses increased $870 principally due to post-employment charges and the write-off of licensing fees related to True Value's Trading Spaces(TM) brand of paint products. Partially offsetting this increase were 2003 expenses that did not reoccur in 2004, including severance and facility exit costs of $490.
$ EXPENSE 2004 2003 INCREASE -------- ------- --------- Selling, general and administrative expenses........... $104,772 $99,170 $5,602
SG&A expenses increased by $5,602, or 5.6%, as compared to 2003. The increase in SG&A expenses was primarily due to the application of EITF 02-16 (see Note 1, "Description of Business and Accounting Policies -- Consideration Given by a Vendor," to the Consolidated Financial Statements beginning at page F-1). In 2003, amounts both earned and expensed related to markets of $13,607 were recorded net in SG&A expenses; in 2004, these amounts were recorded in Net revenue and Cost of revenue as applicable. Excluding the EITF 02-16 impact, SG&A expenses would have decreased by $8,617. Reductions in depreciation and amortization and bad debt expense were offset by increases in labor and related items. Depreciation and amortization expense was lower by $8,572 primarily due to capital investments incurred after the 1997 merger becoming fully depreciated or amortized during 2003 and 2004. Bad debt provisions generated a reduction in SG&A expense of $3,425 compared to 2003 primarily due to favorable collections experience on current and terminated member accounts and notes receivables. Labor costs increased $2,295 due to annual merit increases, post-employment charges due to departmental reorganizations, group medical insurance costs and modest increases in additional headcount to facilitate True Value merchandise sales initiatives. These increases were partially offset by lower bonus expense and 401(k) contributions due to lower achievement of performance targets in 2004 versus 2003.
$ EXPENSE 2004 2003 (DECREASE) ------ ------- ---------- Third-party interest expense............................ $7,379 $51,724 $(44,345)
Third-party interest expense decreased $44,345, or 85.7%, as compared to the prior year. The primary reasons for the decrease were related to the August 29, 2003 refinancing. The lower interest rate achieved in the refinancing resulted in lower interest costs in 2004 versus 2003 of $9,167. In addition, costs related to the August 2003 refinancing and to prior debt agreements did not reoccur in 2004. These costs included the write-off of deferred fees related to the prior debt agreements of $26,927, amortization of senior note make-whole 25 interest cost related to prior year's senior note prepayments of $4,579 and amortization of bank fees of $2,703. See "Other income, net" for related debt forgiveness.
$ INCOME 2004 2003 (DECREASE) ------- -------- ---------- Other income, net..................................... $(3,018) $(20,304) $(17,286)
Other income, net, decreased $17,286, or 85.1%, as compared to the prior year. This decrease in other income was primarily the result of three 2003 gains that did not reoccur in 2004. In April 2003, True Value recognized a gain of $7,133 of unamortized income related to terminated agreements associated with the sale of the lumber business to Builder Marts of America, Inc. ("BMA") in December 2000. True Value also recognized a gain on debt forgiveness of $7,706 related to the debt refinancing on August 29, 2003. Finally, litigation settlements in 2003 resulted in gains of $5,538. These gains were partially offset by a 2003 impairment charge of $2,005 primarily related to equipment held for sale at the East Butler, Pennsylvania, facility that did not reoccur in 2004.
$ NET MARGIN 2004 2003 INCREASE ------- ------- ------------ Net margin........................................... $43,213 $21,221 $21,992
The 2004 Net margin of $43,213 increased from the 2003 Net margin of $21,221. The primary reason was the reduction in interest related to the August 29, 2003 refinancing of True Value's third-party debt and other changes as discussed above. LIQUIDITY AND CAPITAL RESOURCES True Value used cash of $8,823 from operating activities for 2005 while it generated cash from operating activities for 2004 and 2003 in the amounts of $66,344 and $32,807, respectively. The change in cash generated from operating activities in 2004 to cash used from operating activities in 2005 was primarily due to increased inventory in order to improve seasonal and promotional product fill rates and new product offerings. In addition, inventory increased with the establishment of two China warehouse operations in the third quarter of 2005 to handle increased importing activities. True Value's management is enhancing its focus on improving the productivity of its inventory investment while still maintaining an acceptable product fill rate. The increase in cash generated from operating activities in 2004 compared to 2003 was due to the improvement in Net margin of $21,992 in 2004 from 2003. This increase was predominantly due to the reduction in interest expense in 2004 from 2003 that was generated from the refinancing of its Senior Debt on August 29, 2003. True Value's major working capital components individually move in the same direction with the seasonality of the business. The spring and early fall are the most active periods for True Value and require the highest levels of working capital. The low point for accounts receivable, inventory and accounts payable is at the end of the calendar year. The cash needed to meet the future payments for accounts payable will be provided by the cash generated from collections of accounts receivable and from the future sale of inventory. In 2005, True Value's major working capital components unfavorably impacted cash from operations compared to 2004 as the increase in Inventory of $84,835 and Accounts receivable of $28,280 was only partially offset by the increase in Accounts payable of $18,975. Inventory increased significantly over 2004 as discussed above and was slightly offset by an increase in Accounts payable. Accounts payable did not increase proportionately to Inventory as True Value's "DPO" (Days Payable Outstanding) decreased to 58.3 in 2005 compared to 61.7 in 2004. The lower DPO was mainly due to the required prepayment for imported merchandise. Also, True Value's DPO was unfavorable due to a lower 2005 inventory turnover ratio of 3.8 compared to 4.3 in 2004, which required the payment for a greater amount of merchandise inventory before it was sold compared to 2004. Accounts receivable increased mainly due to increased sales in the fourth quarter of 2005 compared to 2004 and the timing of collections on vendor receivables, partially offset by an improved 13-month average member receivable "DSO" (Days Sales Outstanding) that declined to 37.8 in 2005 compared to 38.5 in 2004. 26 In 2004, True Value's major working capital components did not significantly impact cash from operations as Accounts receivable, Inventory and Accounts payable remained flat compared to 2003. Even though True Value's 13-month average member receivable DSO declined to 38.5 compared to 39.6 in 2003, it did not generate additional cash flow, as the lifting of the moratorium on common stock redemptions in July 2004 allowed True Value to set off a substantial amount of the older accounts receivable against the member's common stock investment. In 2003, True Value's major working capital components did not significantly impact cash from operations as Accounts receivable remained flat compared to 2002. True Value's 13-month average member receivable DSO was also flat at 39.6 for 2003 compared to 39.7 days for 2002. Additionally, Inventory and Accounts payable in 2003 increased compared to 2002 by $50,880 and $38,614, respectively, as a result of programs implemented to improve fill rates and increase levels of imported product. True Value generated cash from investing activities in 2005 and 2003 of $7,223 and $13,065, respectively, while it used cash from investing activities in 2004 in the amount of $9,827. Investing activities include capital expenditures, proceeds from sales of properties and restricted cash activities. The change to cash generated from investing activities in 2005 from cash used from investing activities in 2004 was predominantly due to the increase in proceeds from the sale of properties in 2005, which increased to $22,098 from $549 in 2004. This increase in proceeds from the sale of properties in 2005 was principally related to the sale of the Chicago, Illinois, oil-based paint manufacturing facility on December 28, 2005, and the sale of the East Butler, Pennsylvania, facility on April 20, 2005. The change to cash used from investing activities in 2004 from cash generated from investing activities in 2003 was due to the elimination of restricted cash in 2003 as a result of the debt refinancing, which provided cash of $15,755. Total capital expenditures, excluding expenditures under capital leases, were $14,875, $11,874 and $6,825 for the years 2005, 2004 and 2003, respectively. Capital expenditures are comprised of various building improvements and purchases of additional equipment and technology at True Value's distribution centers, manufacturing facilities and at its corporate headquarters. True Value's management has forecasted that the capital expenditure investment for 2006 will exceed $18,000 due primarily to increased investment spending on information systems enhancements, transportation equipment and paint manufacturing facilities and equipment. True Value generated cash from its financing activities in 2005 of $4,386. The cash was generated from proceeds from the Manchester Mortgage in the amount of $21,600 (see Note 4, "Debt Arrangements -- Mortgage Transaction," to the Consolidated Financial Statements beginning at page F-1) and increased borrowings from the Bank Facility in the amount of $5,600. These proceeds were used to fund the additional amount of True Value's operating activities that were not covered by its investing activities, as well as for payments of notes, long-term debt, lease obligations and the patronage dividend. The net excess cash generated from operating and investing activities in 2004 and 2003 was used primarily for financing activities, which used cash of $58,529 and $45,639 for 2004 and 2003, respectively. In particular, True Value applied the cash to reducing its long-term and short-term financing in both years. In addition, in 2004 True Value used cash for payment of the patronage dividend and the redemption of Class A and Class B common stock related to lifting the moratorium (see Item 1,"Business -- Capital Stock Redemption"). In 2003, cash was also used for payment of the patronage dividend. Cash and cash equivalents at December 31, 2005, 2004 and 2003 were $10,008, $7,222 and $9,234, respectively. As of December 31, 2005 and 2004, the borrowings under the Bank Facility were $93,900 and $88,300, respectively. True Value's net working capital at December 31, 2005, 2004 and 2003, was $139,769, $87,047 and $50,602, respectively. The current ratio at December 31, 2005, 2004 and 2003 was 1.31, 1.22 and 1.11, respectively. The change in both the working capital and current ratio between 2005 and 2004 was primarily due to the higher inventory levels that were not fully offset by the increase in Accounts payable. The Manchester Mortgage transaction that classified $21,070 from current maturities to long-term debt was 27 significantly offset by the arbitration provision included in Accrued expenses. The change in both the working capital and current ratio between 2004 and 2003 was primarily due to the classification of the Bank Facility borrowings between long-term debt and current maturities. The classification is based on True Value's projection of seasonal working capital needs. For each year presented, the amount of the Bank Facility classified as long-term debt represents the expected lowest level of borrowings during the next 12 months. At December 31, 2005, $13,900 of the $93,900 in Bank Facility borrowings was estimated to be paid down during the next 12 months; accordingly, $80,000 was classified as long-term. At December 31, 2004, the Bank Facility borrowings of $88,300 were estimated to be the lowest level of borrowings for the next 12 months; accordingly, the entire balance was classified as long-term. At December 31, 2003, $71,600 of the $131,600 in the Bank Facility borrowings was estimated to be paid down during the following 12 months; accordingly, $60,000 was classified as long-term. True Value's management believes that its cash from operations and existing credit facilities will provide sufficient liquidity to meet its working capital needs, planned capital expenditures and debt obligations due to be repaid in 2006. The Bank Facility should provide sufficient liquidity for future needs until it expires in 2008. CASH REQUIREMENTS Below is the current schedule of the expected cash outflows necessary to meet financial commitments for 2006 and thereafter:
2007 & 2009 & 2006 2008 2010 THEREAFTER TOTAL -------- -------- ------- ---------- -------- ($ IN THOUSANDS) Bank Facility(1)......................... $ -- $ 93,900 $ -- $ -- $ 93,900 Real Estate Mortgage(2).................. 530 1,172 1,341 18,557 21,600 Interest on Real Estate Mortgage......... 1,440 2,766 2,597 10,983 17,786 Subordinated promissory installment notes.................................. 6,329 12,658 1,085 -- 20,072 Subordinated promissory notes(3)......... 16,326 33,245 1,228 -- 50,799 Interest on subordinated promissory and subordinated promissory installment notes.................................. 4,448 4,487 222 -- 9,157 Accrued stock redemption liability(4).... 810 695 695 -- 2,200 Capital lease obligations................ 1,349 1,862 1,214 1,068 5,493 Operating lease obligations.............. 32,568 57,072 52,387 196,874 338,901 Purchase obligations(5).................. 95,988 -- -- -- 95,988 Redeemable nonqualified Class B non-voting common stock................ -- -- -- 20,410 20,410 -------- -------- ------- -------- -------- Total.................................... $159,788 $207,857 $60,769 $247,892 $676,306 ======== ======== ======= ======== ========
- ------------------------- (1) Borrowings under the Bank Facility fluctuate with the seasonal needs of the business. There are no required payments until the maturity of the Bank Facility in August 2008. Interest on the Bank Facility is variable at either the London Interbank Offering Rate ("LIBOR") or prime plus, in either case, an additional amount of interest determined based on a performance-based pricing grid. (2) On December 29, 2005, True Value entered into the Manchester Mortgage of $21,600. The Manchester Mortgage is a 20-year fully amortizing loan at a fixed rate of 6.74% with a maturity date of January 1, 2026. Net proceeds were used to reduce borrowings under True Value's variable rate revolving credit facility. (3) The amounts reflect payments as scheduled; however, prior experience indicates that a significant portion of the subordinated promissory notes will likely be renewed, extending the maturity for an additional three years. In 2005 and 2004, this renewal rate was approximately 77% and 70%, respectively. (4) As of December 31, 2005, True Value had shareholders that discontinued their purchasing activities with True Value and requested that their stock be redeemed but who had not completed the redemption procedures. True Value classified this $2,200 of stock redemption liability as $810 in Current maturities 28 of long-term debt, notes and capital lease obligations and $1,390 in Long-term debt including notes and capital lease obligations, less current maturities. (5) Purchase obligations represent commitments under open purchase orders, are typically short-term and fluctuate with the seasonality of True Value's business. Also, purchase obligations are part of a cycle where they are continuously converted into inventory and new purchase obligations are created. DEBT DISCUSSION True Value's total debt was $194,064 and $170,301 at December 31, 2005 and 2004, respectively. In 2005, True Value increased its debt level primarily for use in its operations. True Value's debt consisted of the following at December 31:
2005 2004 -------- -------- ($ IN THOUSANDS) Bank Facility............................................... $ 93,900 $ 88,300 Real Estate Mortgage........................................ 21,600 -- Capital lease obligations................................... 5,493 1,855 -------- -------- Total third-party debt...................................... 120,993 90,155 Member debt: Subordinated promissory and subordinated promissory installment notes................. 73,071 80,146 -------- -------- Total debt.................................................. $194,064 $170,301 ======== ========
The change in True Value's debt balances was as follows for years ending December 31:
2005 2004 -------- -------- ($ IN THOUSANDS) Beginning balance........................................... $170,301 $192,282 Increase/(paydown) from cash generated/used from operations, net of other uses......................................... 34,519 (60,207) Redemption of stock......................................... 5,169 38,226 Miscellaneous asset sale proceeds........................... (15,925) -- -------- -------- Ending balance.............................................. $194,064 $170,301 ======== ========
True Value had outstanding borrowings under the Bank Facility of $93,900 and $88,300 at December 31, 2005 and 2004, respectively. The weighted average interest rate on these borrowings was 6.1% and 4.7% at December 31, 2005 and 2004, respectively. True Value's weighted average interest rate on its total debt was 6.25% and 5.7% at December 31, 2005 and 2004, respectively. BANK FACILITY On August 29, 2003, True Value entered into a four-year $275,000 Bank Facility. The Bank Facility was used to refinance the then existing third-party senior debt at a substantially lower interest rate. Availability under the Bank Facility is limited to the lesser of $275,000 or the collateral value of eligible assets (the "borrowing base"), less outstanding borrowings, letters of credit and reserves. The reserve amounts, if any, are set at the discretion of the lenders. True Value's availability at December 31, 2005, was $150,006. True Value amended its Bank Facility on May 6, 2005, primarily to lower the interest rates charged on this debt, extend the term of the Bank Facility for one year to August of 2008 and ease certain restrictive language, which had the primary effect of increasing the spending limitations on capital expenditures, leases and various distributions to members. The interest rate charged for Bank Facility borrowings is variable at either LIBOR or prime, plus in either case, an additional amount of interest determined based on a performance-based pricing grid. True Value has the option to select LIBOR or prime as the base rate. The performance grid is based upon True Value's fixed 29 charge coverage ratio, measured quarterly. Based on this performance pricing grid, True Value achieved 0.25% of improved variable pricing effective May 1, 2004. The performance-based pricing grid was amended in May 2005 to (1) lower the interest rate that is added to LIBOR or prime borrowings and (2) decrease the fixed charge ratio needed to achieve improved pricing. Based on this amended performance pricing grid, True Value achieved 0.75% of improved variable pricing effective May 11, 2005. As of December 31, 2005 and 2004, the Bank Facility interest rate was 6.1% and 4.7%, respectively, as the decrease to interest cost resulting from the amended performance grid was more than offset by an increase in the underlying LIBOR and prime rates. The unused commitment fee is 0.375%. Letters of credit issued under the Bank Facility have a fee based on the performance pricing grid and this fee was 1.625% and 1.875% at December 31, 2005 and 2004, respectively. Fees paid for obtaining the Bank Facility totaled $3,752, and these fees are being amortized by True Value over the term of the Bank Facility. The Bank Facility has no financial covenants unless daily average excess availability for the last 60 days of each quarter drops below $35,000. If the average is below $35,000, True Value is subject to a fixed charge coverage ratio of 1.1 to 1. As of December 31, 2005, True Value's average excess availability for the last 60 days was greater than $35,000 and True Value is therefore not subject to the fixed charge coverage ratio test. Additionally, True Value is required to maintain $15,000 of excess availability at all times. Management believes it is in compliance with this requirement and is in compliance with all terms and conditions of the Bank Facility. In December 2005, True Value amended the Bank Facility to allow True Value to enter into additional third-party debt secured by assets previously collateralizing the Bank Facility. See "Mortgage Transaction" below. In February 2006, True Value amended the Bank Facility to modify certain terms in the calculation of the borrowing base and the fixed charge coverage ratio, to remove the limitation on lease transactions and to ease restrictions on transactions with members. The borrowing base formula was modified to increase the maximum collateral value of inventory assets from $160,000 to $175,000. The modification to the fixed charge coverage calculation clarified terms, improved the reported ratio and had no impact on the performance pricing grid or compliance. MORTGAGE TRANSACTION On December 29, 2005, True Value entered into the Manchester Mortgage of $21,600. The Manchester, New Hampshire, facility has a net book value of $10,143. The Manchester Mortgage is a 20-year fully amortizing loan at a fixed rate of 6.74% with a maturity date of January 1, 2026. Net proceeds were used to reduce borrowings under True Value's variable rate Bank Facility. SUBORDINATED PROMISSORY AND SUBORDINATED PROMISSORY INSTALLMENT NOTES Subordinated promissory notes are issued from time to time for partial payment of the annual patronage dividend. Subordinated promissory notes are subordinated to indebtedness to banking institutions, trade creditors and other indebtedness of True Value 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 often extended at the option of the member, for a three-year period, at interest rates established by True Value and substantially equivalent to competitive market rates of comparable instruments. In 2005 and 2004, approximately 77% and 70%, respectively, of notes scheduled to mature in those years were extended for an additional three years. True Value anticipates that this practice of extending notes, based on historical results, will continue. Subordinated promissory installment notes are issued in payment of the redemption of qualified Class B common stock upon termination of membership in the cooperative (see Item 1, "Business -- Capital Stock Redemption"). 30 CRITICAL ACCOUNTING POLICIES True Value's significant accounting policies are contained in the accompanying Notes to Consolidated Financial Statements. The financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America 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. - Accounts and notes receivable, net of allowance for doubtful accounts -- At December 31, 2005, accounts receivable, net of $1,420 in allowance for doubtful accounts, was $226,899. True Value determined the allowance based upon its evaluation of known requirements, aging of receivables, historical experience, the current economic environment and its ability to set off against any unpaid receivable amounts due to members for stock, notes, interest and declared and unpaid dividends. While True Value believes it has appropriately considered known or expected outcomes, its members' ability to pay their obligations, including those to True Value, 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 stores. - Inventories, net of valuation reserves -- At December 31, 2005, inventories, net of $17,524 in valuation reserves, were $334,018, 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. True Value estimated realizable value based on an analysis of historical trends related to its distressed inventory. This analysis compares current levels of active, new and discontinued inventory items to the prior 12-month actual demand, ages these items based on such demand and then applies historical loss rates to the aged items. In addition, based upon known facts and circumstances, reserves for specific inventory items were made. Also, a review of all inventory items over certain thresholds was performed to ascertain if specific reserves were required. Additional downward valuation adjustments could be required should any of the following events occur: 1) a significant contraction in the current economic climate, resulting in retailers being unwilling to accept deliveries of advance orders placed, 2) True Value electing not to ship inventories to retailers who pose a greater credit risk than appropriate or 3) an unanticipated decline in retail outlets or a significant contraction in True Value's warehouse stock replenishment business for selected product categories. Potential additional downward valuation adjustments would also be required by True Value in the event of 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. - Asset impairment -- For purposes of determining property impairment, management reviews long-lived assets based on a geographic region or a revenue producing activity, as appropriate. The 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 of the region or activity, such assets would be determined to be impaired and would be written down to their fair value. In 2005, True Value recorded an impairment charge of $942 to write-down its East Butler, Pennsylvania, facility to fair value. No asset impairment charges were recorded in 2004. In 2003, True Value recorded asset impairment charges of $2,005 relating primarily to equipment held for use at the East Butler, Pennsylvania, facility. The asset impairment charges impacted True Value's hardware segment and are included in Operating expenses under the "Other income, net" caption in the accompanying Consolidated Statement of Operations. - Goodwill -- At December 31, 2005, the accompanying Consolidated Balance Sheet reflects $91,474 of goodwill. Goodwill is tested for impairment using a discounted cash flow analysis by each reporting unit (Hardware and Paint manufacturing). This test is completed annually unless significant events necessitate a more frequent test. True Value determined as of December 31, 2005, that no impairment 31 exists. There are inherent uncertainties related to the factors utilized to assess impairment and in management's judgment in applying them to the analysis of goodwill impairment. It is possible that assumptions underlying the impairment analysis will change in such a manner that impairment in value may occur in the future. - Deferred tax assets -- At December 31, 2005, the accompanying Consolidated Balance Sheet reflects $60,615 of deferred tax assets, principally related to net operating loss carryforwards, deferred gain recognition and nonqualified notices of allocation. These deferred tax assets, net of deferred tax liabilities of $2,578, are offset by a full valuation allowance at December 31, 2005. True Value had approximately $26,038 of tax operating loss carryforwards available to offset future taxable income. In general, such carryforwards must be utilized within 20 years of incurring the net operating loss. At December 31, 2005, True Value concluded that, based on the weight of available evidence, it is more likely than not that the deferred tax assets will not be realized and that a full valuation allowance is required. Deferred tax assets will only be realized to the extent future earnings are retained by True Value and not distributed to members as patronage dividends. - Accrued expenses -- At December 31, 2005, the accompanying Consolidated Balance Sheet reflects $88,811 of accrued expenses, principally related to compensation, benefits, arbitration provision and other operating expenses. True Value works with an actuarial firm in the valuation of benefit obligations. True Value 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. The discount rate was based on an analysis of bond rates with terms that have similar duration as the pension liabilities. The medical trend rate was based on an analysis of inflation rates and medical inflation rates and the long-term trend for these rates. The expected return on assets was based on an analysis of historical real returns on True Value's portfolio mix over 30-year periods. This analysis produced a range of rates that True Value adjusted for a future inflation factor and the impact of trust fees. True Value used a rate within this range of rates. To the extent that the actual rates and mortality vary from the assumptions used to determine the present actuarial valuation of these benefits, True Value may have to increase its provision for expenses. The assumptions used to determine True Value's pension obligations for all plans were as follows for the years ended December 31:
2005 2004 ----- ----- Weighted average assumptions: Discount rate............................................. 5.25% 5.50% Expected return on assets................................. 8.00% 8.00% Rate of compensation increase............................. 3.50% 3.50%
Assumed discount rates and expected return on assets have a significant effect on the amounts reported for the pension plans. A one-percentage point change in assumed discount rates and expected return on assets would have the following effects:
ONE PERCENT ONE PERCENT DECREASE INCREASE ----------- ----------- ($ IN THOUSANDS) Sensitivity to Discount Rate Projected Benefit Obligation as of 12/31/2005............. $8,425 $(7,669) ------ ------- 2005 Pension expense...................................... 804 (789) 2005 Settlement expense................................... 757 (701) ------ ------- Total 2005 Pension expense................................ 1,561 (1,490) ====== ======= Sensitivity to Expected Return on Assets 2005 Expected Return on Assets............................ (646) 646
32 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. ($ IN THOUSANDS) True Value's operations are subject to certain market risks, primarily interest rate risk and credit risk. Interest rate risk pertains to True Value's variable rate debt, which had approximately $93,900 outstanding at December 31, 2005. A 50 basis point movement in interest rates would result in an approximate $470 annualized increase or decrease in interest expense and cash flows based on the outstanding balance at December 31, 2005. For the most part, True Value manages interest rate risk through a combination of variable and fixed-rate debt instruments with varying maturities. True Value demonstrated this method of managing interest rate risk when it entered into a 20-year fixed rate mortgage on its Manchester, New Hampshire distribution facility in December 2005 and used the proceeds to reduce borrowing under its variable rate Bank Facility that expires in 2008. As required by the Bank Facility, True Value has purchased interest rate caps that limit its risk on $25,000 of variable rate debt to maximum underlying LIBOR rates of 3.5% through August 2007 and 4.5% for the remaining term, which expires in August 2008. The three-month LIBOR at December 31, 2005 was approximately 4.5%. True Value marks to market the interest rate caps and the 2005 and 2004 gains of $233 and $293, respectively, are reflected as a component of Third-party interest expense. Credit risk pertains primarily to True Value's trade receivables. True Value extends credit to its members as part of its day-to-day operations. True Value's management believes that, as no specific receivable or group of receivables comprises a significant percentage of total trade accounts, its risk in respect to trade receivables is limited. Additionally, True Value's management believes that its allowance for doubtful accounts is adequate with respect to member credit risks. True Value performs no speculative hedging activities. True Value does not have any interest in variable interest entities and all related party transactions (i.e., transactions with members) are at arm's length. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. ($ IN THOUSANDS) True Value's consolidated financial statements and report of independent registered public accounting firm are listed in the index on page F-1. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. ITEM 9A. CONTROLS AND PROCEDURES. True Value's Chief Executive Officer and Chief Financial Officer have concluded that as of December 31, 2005, True Value's disclosure controls and procedures (as defined in Rules 13a - 15(e) or 15d - 15(e) under the Securities Exchange Act of 1934, as amended) are effective based on the evaluation required by paragraph (b) of Rules 13a - 15 or 15d - 15. There has been no change in True Value's internal control over financial reporting identified in connection with reaching the conclusion described above that occurred during True Value's fiscal quarter ended December 31, 2005 that has materially affected, or is reasonably likely to materially affect, True Value's internal control over financial reporting. ITEM 9B. OTHER INFORMATION. True Value believes it is in compliance with all Securities and Exchange Commission ("SEC") Form 8-K filings and although deregistration does not require the filing of a separate Form 8-K, True Value believes it is significant to disclose in this SEC Form 10-K. On December 14, 2005, with the unanimous approval of the board of directors, True Value filed Form 15 with the SEC to deregister its Class A common stock. This deregistration alleviates True Value of the SEC requirements and costs associated with SEC reporting. 33 Though True Value was never a publicly traded company, it was a registrant of the SEC since 1963 because of the deemed benefits afforded by registration at the time. Additionally, while True Value in the past has issued public debt, the last of such debt was redeemed in 2003. Since True Value no longer has public debt nor intends to have public debt, the board of directors viewed this as an appropriate time to deregister. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. DIRECTORS AND EXECUTIVE OFFICERS The directors and senior executive officers (officers who report directly to the CEO) of True Value or are nominated or selected to be directors or senior executive officers of True Value as of the date of this filing are:
NAME AGE POSITIONS HELD AND BUSINESS EXPERIENCE ---- --- -------------------------------------- Bryan R. Ableidinger................ 57 Chairman since April 29, 2003. Director since August 2000. Owner/operator of retail hardware business since 1975. Cathy C. Anderson................... 56 Senior Vice President, General Counsel and Corporate Secretary since February 17, 2003. Previous position was Executive Vice President, General Counsel and Secretary, Alliant Foodservice, Inc., 1995 -- 2002. Richard E. George, Jr............... 66 Director since November 2005. President and CEO of R.G. Trends, Inc. Prior positions include Chairman and CEO of Ulta 3 Cosmetics & Salon, Inc. and President and CEO of Osco Drug, Inc. Active member of Alpha Capital's CEO Advisor Group. Also serves as a non-executive Chairman of the Board for Factory Card & Party Outlet Corp and Factory Connection LLC. Michael S. Glode.................... 56 Director since April 2003. Owner/operator of retail hardware business since 1970. Michael Haining..................... 50 Senior Vice President, Logistics and Manufacturing since January 1, 2005. Senior Vice President, Distribution/ Logistics and Manufacturing, January 1, 2004 -- December 31, 2004. Previous position with True Value was Senior Vice President, Distribution and Logistics, April 21, 2003 -- December 31, 2003. Prior positions include independent consultant providing supply chain consulting to Fortune 500 companies, 2002 -- 2003; and at Kraft Foods North America, Vice President Supply Chain, 1999 -- 2002, Senior Director, Distribution and Supply Chain, 1998 -- 1999, and Director of Operations, Strategic, 1996 -- 1998. Thomas S. Hanemann.................. 66 Director since October 2002. President and Chief Executive Officer November 2, 2004 -- June 11, 2005. Chief manager of Chandler-Hanemann, LLC, an upscale prepared food business, since 1999. Prior positions include President and Director of AutoZone, a Fortune 500 national chain of auto parts stores, and President of Super D Drugstores, a division of Malone & Hyde.
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NAME AGE POSITIONS HELD AND BUSINESS EXPERIENCE ---- --- -------------------------------------- Judith S. Harrison.................. 52 Director since August 2002. Principal of and Senior Consultant for WayPoint Partners, Inc., a management consulting firm that provides strategic, operations and investment advice, since 2000. Prior positions include Chief Executive Officer of Zanybrainy.com, 1999 -- 2000; President of General Cigar Enterprises, 1998 -- 1999; and President and Chief Executive Officer of the Monet Group, 1994 -- 1997. Lyle G. Heidemann................... 61 President and Chief Executive Officer since June 6, 2005. Prior positions at Sears Roebuck & Co. included Executive Vice President and General Manager of Home and Off-Mall stores from 1999 -- 2003 and Senior Vice President, Appliances and Electronics, from 1997 -- 1999. Fred L. Kirst....................... 54 Vice President, Retail and Specialty Business Development since February 2, 2005. Previous positions with True Value include Vice President, Specialty Business, October 2003 -- February 2005, Vice President of Maintenance, Repair and Operations and Home & Garden Showplace, December 2001 -- October 2003,Vice President, Advertising and Merchandising, April 2001 -- December 2001, Vice President, Global Development and Emerging Business, June 2000 -- March 2001, and Assistant Vice President, International, March 1997 -- May 2000. Steven L. Mahurin................... 46 Senior Vice President and Chief Merchandising Officer since March 3, 2004. Previous positions include Vice President -- Merchandising, Building Materials, 2001 -- 2002, Senior Vice President -- Merchandising, Decor, 2000 -- 2001, and Senior Vice President -- Merchandising, Hardlines, 1999 -- 2000 for The Home Depot, Inc. Amy W. Mysel........................ 53 Senior Vice President of Human Resources and Communications since October 1, 2003. Previous position with True Value was Vice President of Human Resources, September 2002 -- October 2003. Previous position was Executive Vice President, Human Resources, Planning and Communication for Market Day, Inc., 1996 -- 2002. Kenneth A. Niefeld.................. 63 Director since March 2004. Owner/operator of retail hardware business since 1974. David Y. Schwartz................... 65 Director since April 2002. Independent business advisor and consultant, primarily in the retail, distribution and services industries, since 1997. Prior position was Senior Partner and Managing Partner of the Chicago Office of the Audit and Business Consulting Practice for Arthur Andersen, LLP. He is also a member of the board of directors of Walgreen Co. and Foot Locker, Inc. and sits on the boards of several privately-held companies.
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NAME AGE POSITIONS HELD AND BUSINESS EXPERIENCE ---- --- -------------------------------------- David A. Shadduck................... 45 Senior Vice President and Chief Financial Officer since November 16, 2001. Prior position with True Value was Vice President, Corporate Controller, May 30, 2001 -- November 15, 2001. Prior positions were Controller for Tenneco Automotive North American Aftermarket and Controller for Original Equipment Business at Fel-Pro Incorporated. Gilbert L. Wachsman................. 58 Director since March 2002. Retired Vice Chairman and Director of Musicland Group, Inc. Prior position includes Senior Vice President of Kmart Corporation, 1995 -- 1996. Brian A. Webb....................... 49 Vice-Chairman since July 2005. Director since March 2004. Owner/operator of retail hardware business. Leslie A. Weber..................... 49 Senior Vice President and Chief Information Officer since September 2, 2003. Previous positions include Chief Information Officer at Wheels, Inc., 2001 -- 2003, and Chief Information Officer at Quill Corporation, 1998 -- 2001. Charles W. Welch.................... 55 Director since April 2003. Owner/operator of retail hardware business since 1974. Carol Wentworth..................... 48 Vice President, Marketing, since October 1, 2004. Vice President of Marketing and Advertising, June 3, 2002 -- September 30, 2004. Previous positions include Vice President of Sales Promotion and Marketing, 1998 -- 2002, and Assistant Vice President of Sales Promotion, 1997 -- 1998, at Fred Meyer in Portland, Oregon.
Each current director's term expires at the annual stockholders' meeting to be held on March 18, 2006 and all have been nominated for re-election except Judith S. Harrison and Gilbert L. Wachsman who have decided not to stand for re-election. BOARD NOMINATING COMMITTEE The nominating committee of True Value's board of directors was established to assist the board in identifying and evaluating potential director candidates to serve on the board. The nominating committee is comprised of four non-employee directors and generally will meet as often as it determines necessary to carry out its responsibilities to the board. The nominating committee held three meetings in 2005. Michael S. Glode serves as the chairman of the nominating committee and the other three members are Thomas S. Hanemann, David Y. Schwartz and Charles W. Welch. The nominating committee currently does not have a charter. The nominating committee utilizes an executive recruiting firm to identify, screen and rate potential director candidates and the nominating committee currently does not consider director candidates recommended by True Value members or other third parties. Generally, the nominating committee considers the skills of the proposed director candidate, his or her depth and breath of business experience, his or her independence and the needs of the board of directors. BOARD AUDIT COMMITTEE The audit committee of True Value's board of directors is comprised of three non-employee and independent directors. David Y. Schwartz is the "audit committee financial expert" serving on the audit committee. Mr. Schwartz is an independent member of the board of directors of True Value, as that term is used in Item 7 (d) (3) (iv) of Schedule 14A under the Exchange Act and is defined in Sec- 36 tion 303A.02 of the New York Stock Exchange, Inc. Listed Company Manual. The other two audit committee members are Judith S. Harrison and Thomas S. Hanemann. CODE OF ETHICS True Value has adopted a code of ethics that applies to its principal executive officer, principal financial officer, principal accounting officer or controller and any other person performing a similar function. The code of ethics was filed as an exhibit (Ex. 99.3) to the Annual Report on Form 10-K for the year ended December 31, 2002. ITEM 11. EXECUTIVE COMPENSATION. COMPENSATION COMMITTEE The Compensation Committee of the board of directors consists of three non-employee directors. The committee assists the board of directors in fulfilling its responsibilities for setting and administering the policies which govern annual executive compensation and monitoring True Value's 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 True Value 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 True Value. To achieve its goals, the committee has developed three executive compensation policies for True Value: - Salaried compensation should be competitive with the median for executives of companies of a comparable size within True Value's industry; - Annual incentive compensation should vary and reflect True Value's performance; and - A long-term (multiple year) incentive program should be available to help True Value retain selected executives. The combination of these three compensation policies is intended to provide competitive earning opportunities when performance reaches desired levels. Both the annual and long-term incentive plans may be terminated by the board of directors at any time. The annual incentive and long-term components of the total compensation package are accrued for during the year in which they are earned based upon a forecast of the year's performance. A final computation is made in the year following the year in which the incentives are earned. The annual incentive, if earned, will be paid out on or before March 31st of the following year. Any potential pay out on the long-term incentive plan would occur on or before March 31st following the last year of a performance cycle and when the cumulative performance over the performance period of these three-year plans has met the required achievement, at least at the threshold level. True Value provides salary levels that are intended to fall at the median (the 50th percentile) of the executive marketplace of comparable size in True Value's industry. The following types of organizations are considered within True Value's industry: member-owned organizations, wholesale distribution firms, mass merchandising retail 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 2005 compensation of Lyle G. Heidemann, True Value's President and Chief Executive Officer since June 2005, consisted of a salary paid on an annualized amount of $725,000, which started on June 6, 2005, plus a one-time signing bonus of $250,000. This amount is comparable to base salaries for persons holding this position at companies of comparable size within True Value's industry. In addition, Mr. Heidemann received a one-time special payment of $213,372 that was equal to the fair market value of 1,630 shares of Sears Holdings Corporation ("SHLD"). Mr. Heidemann will also be entitled to receive a retention bonus of 37 $250,000 on June 6, 2006, his one-year anniversary, and a second retention bonus of $200,000 on June 6, 2007, his second anniversary, both of which are contingent upon Mr. Heidemann being employed by True Value. For fiscal year 2005, both the annual and long-term incentive components of Mr. Heidemann's compensation were guaranteed and were paid out in February 2006. The annual incentive component was equal to 70% of his base salary while the long-term incentive component was equal to the target of 100% of his base salary, both prorated for his service during the year. From November 2, 2004 through June 6, 2005, Thomas S. Hanemann served as the President and Chief Executive Officer of True Value, pursuant to a Consulting Agreement executed in November 2004. Under such Consulting Agreement, Mr. Hanemann received a weekly consulting fee of $14,000, as well as reimbursement or payment by True Value of certain other expenses. There was no incentive portion of Mr. Hanemann's compensation. COMPENSATION COMMITTEE Gilbert L. Wachsman, Chairman Kenneth A. Niefeld Charles W. Welch EXECUTIVE COMPENSATION The following table sets forth the total annual compensation earned by individuals serving as True Value's Chief Executive Officer and the four most highly compensated executive officers of True Value during 2005 and the total compensation earned by each such individual for True Value's two previous years: SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION NAME AND -------------------- LTIP ALL OTHER PRINCIPAL POSITION YEAR SALARY(1) BONUS(2) PAYOUTS COMP.(3) ------------------ ---- --------- -------- -------- --------- Lyle G. Heidemann............................. 2005(4) $415,016 $540,511 $ -- $257,001 President and Chief Executive............... 2004 -- -- -- -- Officer..................................... 2003 -- -- -- -- Thomas S. Hanemann............................ 2005 -- -- -- 402,048 Director and Former President and........... 2004 -- -- -- 192,916 Chief Executive Officer..................... 2003 -- -- -- 46,500 Steven L. Mahurin............................. 2005 343,750 159,185 36,876 29,860 Senior Vice President and................... 2004(4) 268,542 67,708 -- 177,330 Chief Merchandising Officer................. 2003 -- -- -- -- David A. Shadduck............................. 2005 317,750 151,441 118,150 27,275 Senior Vice President and................... 2004 308,250 134,769 110,222 14,702 Chief Financial Officer..................... 2003 293,000 164,962 -- 26,672 Cathy C. Anderson............................. 2005 312,250 133,207 77,405 38,441 Senior Vice President,...................... 2004 301,250 85,555 42,760 22,056 General Counsel and Secretary............... 2003(4) 255,375 115,403 -- 60,024 Michael Haining............................... 2005 272,000 108,992 58,060 53,590 Senior Vice President,...................... 2004 259,750 101,496 26,667 17,865 Logistics and Manufacturing................. 2003(4) 174,359 79,354 -- 48,575
- --------------- (1) Earned and paid in year shown. (2) Annual incentive amounts are earned and accrued during the years indicated, and paid subsequent to the end of each year. To attain achievement of the business plan objectives necessary for the success of True Value, the board of directors approved, effective January 1, 2005, an annual incentive plan for identified key associates and officers employed by True Value in 2005 or who joined True Value by September 30, 2005, and remained employed through the end of 2005. The 2005 and 2004 incentive plan had targets related to sales, Net margin and individual-specific goals in support of one or more of True Value's key 38 initiatives. The 2003 incentive plan had targets related to individual-specific goals associated with leadership and one or more of True Value's initiatives and either sales and EBITDA or sales, Net margin and net debt established as of the effective date of the plan. (3) Other compensation consists of True Value's contributions to the True Value Company Employee's Savings and Compensation Deferral Plan (the "401k Plan"), life insurance plan, financial planning services and automobile allowances. Under the 401k Plan and in accordance with IRS regulations, each participant may elect to make a contribution in an amount of up to 50% of the participant's annual compensation, not to exceed $14,000, $13,000 and $12,000 per year for 2005, 2004 and 2003, respectively. Also, plan participants who are 50 years of age or older may elect to make additional catch-up contributions not to exceed $4,000, $3,000 and $2,000 for 2005, 2004 and 2003, respectively. The total participants' deferred compensation including True Value's contributions to the participants' balances may not exceed $42,000, $41,000 and $40,000 in 2005, 2004 and 2003, respectively. The 401k Plan included a guaranteed match of one-third of a participant's contribution up to a total of 2% of the participant's annual compensation. Based on True Value achieving certain financial goals, a match of greater than one-third of a participant's contribution can be earned. A match equaling two-thirds of a participant's contribution, up to a total of 4% of the participant's annual compensation, was earned for 2003 and funded by March 2004. For 2004, a match equaling one-third of a participant's contribution, up to a total of 2% of the participant's annual compensation, was earned and funded in March 2005. For 2005, a match equaling two-thirds of a participant's contribution, up to a total of 4% of the participant's annual compensation, was earned and will be funded by March 2006. Lyle G. Heidemann's other compensation in 2005 also included a one-time payment of $213,372 for the reimbursement of the market value of 1,630 shares of SHLD. Thomas S. Hanemann's other compensation in 2005 and 2004 consisted of $366,123 and $135,916, respectively, related to fees paid, housing, travel and use of a car while providing consulting services to serve in the President and Chief Executive Officer position. Additionally in 2005 and 2004, Mr. Hanemann received $35,925 and $57,000, respectively, for his service on the board of directors. Mr. Hanemann's other compensation in 2003 was for his service on the board of directors. (4) Lyle G. Heidemann, Steven L. Mahurin, Cathy C. Anderson and Michael Haining joined True Value June 6, 2005, March 3, 2004, February 17, 2003, and April 21, 2003, respectively; compensation is for a partial year. True Value has a severance policy providing termination benefits based upon annual compensation and years of service. Certain officers of True Value are also offered agreements providing for severance in the event of involuntary termination without cause with the imposition of certain restrictions regarding competition and confidentiality. The officer severance agreements provide for payments that vary from 12 to 24 months of base compensation. True Value did not make loans to its executive officers or to its directors during the last three years. LONG-TERM PERFORMANCE CASH AWARDS Under the long-term incentive compensation plan for selected officers of True Value, such officers are eligible for cash pay-outs calculated on a percentage of their annual salary based upon cumulative performance over the performance period of these multi-year plans. Any potential pay-out would occur on or before March 31st following the last year of a performance cycle. Performance goals for the current plans relate to achieving financial goals pertaining to a combination of sales and EBITDA or Net margin, depending on the appropriate three-year Performance Period. The officers of True Value received a payout in February 2006 based upon their aggregate performance in 2003, 2004 and 2005 [Performance Period Three]. Other awards under the Long-Term Incentive Plan ("LTIP") occurred in 2005 for performance in 2002, 2003 and 2004 [Performance Period Two] and in 2004 for performance in years 2002 and 2003 [Performance Period One]. There were no payouts of long-term incentive compensation to True Value officers in 2003. 39 Target pay-outs, shown as a percentage of eligible base salary, which could be earned by the current officers listed in the Summary Compensation Table for the current plans are as follows: Lyle G. Heidemann at 100%; Steven L. Mahurin, David A. Shadduck, Cathy C. Anderson, and Michael Haining at 60%. BOARD COMPENSATION True Value compensates members of the board of directors based on their roles, committee participation and other circumstances as noted below. Annual Retainers: Chairman.................................................. $125,000 Vice Chairman............................................. 70,000 Board Member.............................................. 50,000 Committee Chair Retainers: Audit and Compensation.................................... 10,000 Corporate Governance...................................... 5,000 Teleconference Fees, per meeting............................ 500 Committee Meeting Fees, per meeting......................... 1,000 Board Meeting Fees, per meeting............................. 1,500
The President and Chief Executive Officer does not receive additional compensation for serving in the capacity of director. During their first term, outside directors are paid an additional $500 for each of up to four company-related events they attend. All directors are reimbursed for company-related travel expenses. DEFINED BENEFIT RETIREMENT PLANS True Value has a defined benefit pension plan, the True Value Company Defined Lump Sum Pension Plan (the "Qualified Plan"), which is qualified under the Code. The Qualified Plan was amended and restated effective January 1, 2006, to incorporate new government regulations. The amount of True Value's annual contribution to the Qualified Plan is determined for the total of all participants covered by the Qualified 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 Qualified Plan. The Qualified Plan provides fully vested lump sum benefits to eligible employees who have been employed a minimum of five years. 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 Qualified Plan. In accordance with the Qualified Plan, as amended as of February 28, 2002, for service after December 31, 2001, the percentage ranges from 1% of "Final Average Compensation" (the average compensation that includes salary, overtime pay, commissions, short-term incentive based bonuses, deferral contributions under the 401k Plan and pre-tax Section 125 plan premiums paid to an eligible employee during the three highest calendar years within the 10 calendar years immediately preceding the date of termination of employment) for years of service performed prior to age 26 to 9% of Final Average Compensation for years of service performed at or after age 56. For service prior to January 1, 2002, the percentages range from 2% of Final Average Compensation for years of service performed prior to age 26 to 12% of Final Average Compensation for years of service performed at or after age 61. Participants with Final 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 one-half of the percentage earned as of December 31, 2001. For participants who had attained age 50 and completed at least 15 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 Qualified Plan cannot be less than the benefits already earned by the participant under the Qualified Plan as it existed prior to its amendment. The Qualified Plan was amended effective January 1, 1998, to include former employees of ServiStar Coast to Coast (SCC). These employees received credit under the Qualified Plan for all years for which they 40 received credit under the SCC Retirement Income Plan (the "ServiStar Plan"). In addition, for any ServiStar (but not Coast to Coast) employees who had attained age 50 and completed at least 15 years of service as of January 1, 1998, the sum of their annual pension credit percentage is increased by 25 percentage points. Also, the benefits under the Qualified Plan cannot be less than benefits already earned by the participant under the ServiStar Plan as of December 31, 1997. The estimated annual retirement benefits that 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 Code, which outlines the maximum earnings amounts that may be considered under the Qualified Plan in determining retirement benefits. This limit was $210,000 for 2005 and $205,000 for 2004. Section 415 of the Code outlines the maximum annual benefit that may be payable from the Qualified Plan during the year. The dollar limit was $170,000 for 2005 and $165,000 for 2004 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. True Value maintains a Supplemental Retirement Plan for Officers of True Value (the "Supplemental Plan"). The Supplemental Plan provides participants with a benefit equal to 33% of their Final Average Compensation multiplied by their years of service, reduced by any benefits payable under the Qualified Plan. Service is limited to 20 years and the maximum aggregate percentage is 660%. Final Average Compensation for the Supplemental Plan is defined similarly to the Qualified Plan, as discussed above. Benefits are payable in a lump sum, following termination of employment. On January 1, 2005, the Supplemental Plan was amended and restated. The amendment and restatement provides for prospective changes in various elements of the Supplemental Plan as they apply to Current Participants (participants of the Supplemental Plan as of December 31, 2004) or eligible participants entering the service of True Value on or after January 1, 2005. The amendment and restatement provides for the following modifications effective January 1, 2005: - For the purposes of the Supplemental Plan, "Compensation" means, for any calendar year, the base salary plus short-term incentive pay that is paid for goal or performance achievements, with Supplemental Plan defined exceptions, to the participant in such year related to prior year performance, plus pre-tax deferrals. - Final Average Compensation, for the Supplemental Plan, was amended to add the provision that the highest three of the last ten calendar years were contiguous years. - Eligibility: Current Participants' eligibility in the Supplemental Plan will continue on a "grandfathered" basis. Future participation will be restricted to those individuals employed in the position of Senior Vice President or above. - Any Current Participant's benefit accrued prior to January 1, 2005 will be governed under the provisions of the Supplemental Plan in place when the benefit was earned. Benefits accrued on January 1, 2005 and thereafter will be governed by the Supplemental Plan provisions in effect on January 1, 2005 unless future amendments are applicable. - The amended Supplemental Plan provides participants with a benefit equal to 25% of their Final Average Compensation multiplied by their years of service, reduced by any benefits payable under the Qualified Plan. Service is limited to 20 years and the maximum aggregate percentage is 500% for participation on or after the effective date of the amendment. - The amendment also provides for a reduction of the benefits, for benefits earned on or after the effective date of the amendment, if the eligible participant retires before attaining age 65, provided, however, the participant's benefit shall not be less than the amount calculated for such participants as of December 31, 2004. 41 - The amendment introduced the ability for the Plan Administrator to pay such benefits in a lump-sum or in a series of substantially equal payments made no less frequently than annually over a period not to exceed ten years. If the benefit is paid pursuant to a series of payments, the benefit will earn interest. The Supplemental Plan is not a qualified plan under the Code. Benefits payable under the Supplemental Plan are financed through operations. The following table reflects the combined estimated annual retirement benefits that 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 ----------------------------------------- COMPENSATION 5 10 15 20 - ------------ -------- -------- -------- -------- $1,500,000......................................... $205,076 $360,437 $515,797 $621,442 1,450,000......................................... 198,240 348,422 498,604 600,728 1,400,000......................................... 191,404 336,407 481,411 580,013 1,350,000......................................... 184,568 324,393 464,217 559,298 1,300,000......................................... 177,732 312,378 447,024 538,583 1,250,000......................................... 170,897 300,364 429,831 517,869 1,200,000......................................... 164,061 288,349 412,638 497,154 1,150,000......................................... 157,225 276,335 395,444 476,439 1,100,000......................................... 150,389 264,320 378,251 455,724 1,050,000......................................... 143,553 252,306 361,058 435,010 1,000,000......................................... 136,717 240,291 343,865 414,295 950,000......................................... 129,881 228,276 326,671 393,580 900,000......................................... 123,046 216,262 309,478 372,865 850,000......................................... 116,210 204,247 292,285 352,151 800,000......................................... 109,374 192,233 275,092 331,436 750,000......................................... 102,538 180,218 257,899 310,721 700,000......................................... 95,702 168,204 240,705 290,006 650,000......................................... 88,866 156,189 223,512 269,292 600,000......................................... 82,030 144,175 206,319 248,577 550,000......................................... 75,195 132,160 189,126 227,862 500,000......................................... 68,359 120,146 171,932 207,147 450,000......................................... 61,523 108,131 154,739 186,433 400,000......................................... 54,687 96,116 137,546 165,718
The present credited years of service for the current officers of True Value listed in the Summary Compensation Table are as follows: David A. Shadduck, 4.6 years; Cathy C. Anderson, 2.9 years; Michael Haining, 2.7 years; Steven L. Mahurin, 1.8 years; Lyle G. Heidemann, 0.6 year. True Value implemented a Transition Incentive Plan ("TIP") effective March 1, 2005 for the ten elected officers who were participants in True Value's Supplemental Plan as of that date. The TIP is a limited duration, transitional incentive plan that will expire effective February 29, 2008. The purpose of the TIP is to provide a short-term offset resulting from the reduction of benefits under the amended Supplemental Plan and is intended to provide a retention incentive for True Value's top officers. Contingent upon remaining an employee through February 29, 2008, each of the eligible officers covered by the TIP will receive a one-time cash award equal to 16% of their eligible earnings received in calendar years 2005, 2006 and 2007. Eligible earnings, for the purposes of the TIP, are the combination of base salary and awards paid during the calendar year under the annual incentive plan. 42 PERFORMANCE GRAPH There is no existing market for True Value's common stock and there is no expectation that any market will develop. There are no broad market or peer group indices True Value believes would render meaningful comparisons. Accordingly, a performance graph of True Value's cumulative total stockholder return for the previous five years, with a performance indicator of the overall stock market for True Value's peer group, has not been prepared. EMPLOYMENT AGREEMENTS On November 2, 2004, True Value entered into a Consulting Agreement with Thomas S. Hanemann whereby Mr. Hanemann was engaged to serve as the President and Chief Executive Officer of True Value. As consideration for Mr. Hanemann's services, he was entitled to a consulting fee in the amount of $14,000 per week. As a consultant, Mr. Hanemann agreed that he was not entitled to receive any other benefits or participate in any True Value benefit plans; however, the Consulting Agreement required True Value to provide Mr. Hanemann with housing and use of a company car, as well as reimbursement of business and weekly travel expenses. Mr. Hanemann agreed, pursuant to the Consulting Agreement, to perform such services consistent with this position, as well as services requested by True Value's board of directors. Furthermore, Mr. Hanemann agreed that during the term of the Consulting Agreement and for one year thereafter, he shall abide by certain non-compete and non-solicitation restrictions. True Value's consulting agreement with Mr. Hanemann was terminated on June 11, 2005. On May 26, 2005, True Value entered into an employment agreement effective June 6, 2005, with Lyle G. Heidemann, pursuant to which he assumed the duties of President and Chief Executive Officer of True Value. The employment agreement specifies that Mr. Heidemann will serve in those capacities at the will of the board of directors. Pursuant to the employment agreement, the board of directors awarded to Mr. Heidemann an annual base salary of $725,000 starting on June 6, 2005. In 2005, Mr. Heidemann received a one-time signing bonus of $250,000, which is repayable to True Value under certain termination conditions, and a one-time special payment of $213,372 equal to the fair market value of 1,630 shares of SHLD. The fair market value of the SHLD shares was based upon the volume weighted average price for the five trading days preceding and the five trading days on and following the public release of SHLD's earnings for the second quarter of 2005. Mr. Heidemann is also entitled to receive a retention bonus of $250,000 on June 6, 2006, his one-year anniversary, and a second retention bonus of $200,000 on June 6, 2007, his second anniversary, both of which are contingent upon Mr. Heidemann being employed by True Value. In addition, Mr. Heidemann will be eligible for annual incentives. For fiscal year 2005, Mr. Heidemann's incentive component was guaranteed at 70% of his base salary, prorated for his service during the year. The annual incentive portion of the 2005 compensation was paid to Mr. Heidemann in February 2006. Other than for 2005, incentive payments are not guaranteed in subsequent years and are subject to board approval. Mr. Heidemann will also be eligible to receive a long-term incentive of 50% of his annual base salary if True Value meets a certain threshold financial performance level and 100% of his base salary if True Value attains a certain targeted financial performance level. Payment of the 2005 portion of the long-term incentive plan for Performance Period Three (2003/2004/2005), which was at target (100%) and was prorated for his service during the year, was guaranteed and was paid out in February 2006. Other than for 2005, long-term incentive payments are not guaranteed in subsequent years and are subject to board approval (see the "Summary Compensation Table" under "Executive Compensation" for the amount of salary and incentives earned by Mr. Heidemann in 2005). In the event that True Value terminates Mr. Heidemann's employment without "cause," he is entitled to receive a severance payment, payable over 12 months, in an amount equal to his base salary during that period, provided however that such payments will be reduced dollar for dollar for any compensation in any form he receives from a subsequent employer or from self-employment. In addition, True Value will continue to provide, for a period of 12 months, medical benefits to which he and his dependents received at the time of termination. "Cause" includes his inability or unwillingness to perform the material duties of his position or his performance of any action injurious to True Value. 43 If within one year following a "change of control" of True Value, Mr. Heidemann terminates his employment with True Value for "good reason," he may also be entitled to a severance payment, payable in equal installments over 12 months, equal to his most recent payment pursuant to True Value's annual Executive Incentive Plan, provided however that such payments will be reduced dollar for dollar for any compensation in any form he receives from a subsequent employer or from self-employment. "Change of control" is defined as a business combination through a merger, consolidation, reorganization or share exchange in which True Value 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 compensation and benefits within one year after the change of control. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS. As of January 28, 2006, each of the member directors of True Value was the owner of at least 60 shares of Class A common stock of True Value (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 January 28, 2006. No non-member director or senior officer owns any shares of Class B common stock. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. Other than as disclosed below, True Value does not enter into any transaction with directors or officers other than in their capacity as such. True Value sells hardware and related merchandise and provides value-added services such as marketing, advertising, merchandising, and store location and design services to member directors of True Value on the same basis as it provides these merchandise and services to other members. ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES. FEES OF INDEPENDENT AUDITORS AUDIT FEES The aggregate audit fees for 2005 and 2004 were approximately $525,900 and $518,250, respectively. These amounts include fees for professional services rendered by PricewaterhouseCoopers LLP in connection with the audit of our consolidated financial statements and reviews of our unaudited consolidated interim financial statements. AUDIT-RELATED FEES The aggregate fees for audit-related services rendered by PricewaterhouseCoopers LLP for 2005 and 2004 were approximately $28,900 and $65,500, respectively. The fees under this category relate to audits of employee benefit plans and True Value Specialty Company and various Commission reporting and filing matters. TAX FEES The aggregate fees for tax services rendered by PricewaterhouseCoopers LLP for 2005 and 2004 were approximately $10,623 and $3,272, respectively. Tax fees relate to tax compliance and advisory services and assistance with tax audits. 44 ALL OTHER FEES The aggregate fees for all other services rendered by PricewaterhouseCoopers LLP for 2005 and 2004 were approximately $1,500 and $6,200, respectively. These fees relate to software licensing and miscellaneous services. All services described under the headings "Audit-Related Fees," "Tax Fees" or "All Other Fees" were pre-approved by the Audit Committee pursuant to the procedures set forth in 17 CFR 210.2-01(c)(7)(i)(C). The Audit Committee's "Polices and Procedures Regarding Approval of Services Provided by the Independent Auditor" are set forth below: All services provided by PricewaterhouseCoopers LLP, both audit and non-audit, must be pre-approved by the Chairman of the Audit Committee or a designee, and are subject to review by the Audit Committee at the discretion of the Audit Committee Chairman. The decisions of the Audit Committee Chairman, or Designated Member, to pre-approve a permitted service shall be reported to the Audit Committee at each of its regularly scheduled meetings. Consistent with current practice, management will submit to the Audit Committee for pre-approval the scope and estimated fees associated with the current year audit at the July Audit Committee meeting. The pre-approval of nonaudit services may be given at any time up to a year before commencement of the specified service. Although the Act permits de minimis exceptions, True Value's policy is to pre-approve all audit and nonaudit services. PART IV ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES. 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-32 is filed as part of this annual report. 3. EXHIBITS The exhibits listed in the index on pages E-1 - E-3 are filed as part of this annual report. 45 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. TRUE VALUE COMPANY By: /s/ DAVID A. SHADDUCK ------------------------------------ David A. Shadduck Senior Vice President and Chief Financial Officer DATED: March 8, 2006 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/ BRYAN R. ABLEIDINGER Chairman of the Board and March 8, 2006 - ----------------------------------------------------- Director Bryan R. Ableidinger /s/ LYLE G. HEIDEMANN President, Chief Executive March 8, 2006 - ----------------------------------------------------- Officer and Director Lyle G. Heidemann /s/ DAVID A. SHADDUCK Senior Vice President and Chief March 8, 2006 - ----------------------------------------------------- Financial Officer (Chief David A. Shadduck Accounting Officer) /s/ RICHARD E. GEORGE, JR. Director March 8, 2006 - ----------------------------------------------------- Richard E. George, Jr. /s/ MICHAEL S. GLODE Director March 8, 2006 - ----------------------------------------------------- Michael S. Glode /s/ THOMAS S. HANEMANN Director March 8, 2006 - ----------------------------------------------------- Thomas S. Hanemann /s/ JUDITH S. HARRISON Director March 8, 2006 - ----------------------------------------------------- Judith S. Harrison /s/ KENNETH A. NIEFELD Director March 8, 2006 - ----------------------------------------------------- Kenneth A. Niefeld /s/ DAVID Y. SCHWARTZ Director March 8, 2006 - ----------------------------------------------------- David Y. Schwartz /s/ GILBERT L. WACHSMAN Director March 8, 2006 - ----------------------------------------------------- Gilbert L. Wachsman /s/ BRIAN A. WEBB Director March 8, 2006 - ----------------------------------------------------- Brian A. Webb /s/ CHARLES W. WELCH Director March 8, 2006 - ----------------------------------------------------- Charles W. Welch
46 ITEM 15(a)(1). INDEX TO CONSOLIDATED FINANCIAL STATEMENTS.
PAGE(S) ------- Report of Independent Registered Public Accounting Firm..... F-2 Consolidated Balance Sheet at December 31, 2005 and December 31, 2004.................................................. F-3 Consolidated Statement of Operations for each of the three years in the period ended December 31, 2005............... F-4 Consolidated Statement of Cash Flows for each of the three years in the period ended December 31, 2005............... F-5 Consolidated Statement of Members' Equity for each of the three years in the period ended December 31, 2005......... F-6 Notes to Consolidated Financial Statements.................. F-7 to F-31
F-1 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Members of True Value Company: In our opinion, the consolidated financial statements listed in the index appearing under Item 15(a)(1) present fairly, in all material respects, the financial position of True Value Company and its subsidiaries at December 31, 2005 and 2004, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2005 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the index appearing under Item 15(a)(2) 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 audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (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, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. /s/ PRICEWATERHOUSECOOPERS LLP PricewaterhouseCoopers LLP Chicago, Illinois March 6, 2006 F-2 TRUE VALUE COMPANY CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 2005 AND 2004 ($ IN THOUSANDS, EXCEPT PER SHARE INFORMATION) ASSETS
2005 2004 -------- -------- Current assets: Cash and cash equivalents................................. $ 10,008 $ 7,222 Accounts and notes receivable, net of allowance for doubtful accounts of $1,420 and $3,835................. 226,899 200,958 Inventories, net of valuation reserves of $17,524 and $10,196................................................ 334,018 264,235 Prepaid expenses.......................................... 15,927 15,070 -------- -------- Total current assets.............................. 586,852 487,485 Properties, net............................................. 63,207 70,448 Goodwill.................................................... 91,474 91,474 Other assets................................................ 9,996 6,112 -------- -------- Total assets................................................ $751,529 $655,519 ======== ======== LIABILITIES AND MEMBERS' EQUITY Current liabilities: Accounts payable.......................................... $249,021 $230,046 Drafts payable............................................ 56,750 56,209 Accrued expenses.......................................... 88,811 70,405 Current maturities of long-term debt, notes and capital lease obligations...................................... 39,244 31,109 Patronage dividend payable in cash........................ 13,257 12,669 -------- -------- Total current liabilities......................... 447,083 400,438 -------- -------- Long-term liabilities and deferred credits: Long-term debt including notes and capital lease obligations, less current maturities................... 154,820 139,192 Deferred gain on sale leaseback........................... 44,451 47,230 Other long-term liabilities............................... 25,734 18,837 Redeemable nonqualified Class B non-voting common stock, $100 par value; 204,096 and 216,261 shares issued and fully paid............................................. 20,410 21,626 -------- -------- Total long-term liabilities and deferred credits.......................................... 245,415 226,885 -------- -------- Total liabilities and deferred credits............ 692,498 627,323 -------- -------- Commitments and contingencies............................... -- -- Members' equity: Redeemable Class A voting common stock, $100 par value; 750,000 shares authorized; 290,280 and 296,820 shares issued and fully paid; 25,200 and 22,920 shares issued (net of subscriptions receivable of $1,084 and $1,484)................................................ 30,464 30,490 Redeemable qualified Class B non-voting common stock and paid-in capital, $100 par value; 4,000,000 shares authorized; 1,175,863 and 1,008,882 shares issued and fully paid............................................. 118,885 102,187 Loss allocation........................................... (11,088) (19,420) Deferred patronage........................................ (23,550) (24,298) Accumulated deficit....................................... (53,950) (58,860) Accumulated other comprehensive loss...................... (1,730) (1,903) -------- -------- Total members' equity............................. 59,031 28,196 -------- -------- Total liabilities and members' equity....................... $751,529 $655,519 ======== ========
The accompanying notes are an integral part of the Consolidated Financial Statements. F-3 TRUE VALUE COMPANY CONSOLIDATED STATEMENT OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
2005 2004 2003 ---------- ---------- ---------- ($ IN THOUSANDS) Net revenue.............................................. $2,043,034 $2,023,887 $2,024,340 Cost of revenue.......................................... 1,810,182 1,801,810 1,803,904 ---------- ---------- ---------- Gross margin............................................. 232,852 222,077 220,436 Operating expenses: Logistics and manufacturing expenses................... 61,236 63,411 62,066 Selling, general and administrative expenses........... 102,527 104,772 99,170 Arbitration provision.................................. 18,200 -- -- (Gain)/loss on sale of assets.......................... (8,333) 228 427 Other income, net...................................... (2,597) (3,018) (20,304) ---------- ---------- ---------- Operating income......................................... 61,819 56,684 79,077 Interest expense to members............................ 5,507 5,915 5,799 Third-party interest expense........................... 8,706 7,379 51,724 ---------- ---------- ---------- Net margin before income taxes........................... 47,606 43,390 21,554 Income tax expense....................................... 51 177 333 ---------- ---------- ---------- Net margin............................................... $ 47,555 $ 43,213 $ 21,221 ========== ========== ==========
The accompanying notes are an integral part of the Consolidated Financial Statements. F-4 TRUE VALUE COMPANY CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE THREE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
2005 2004 2003 -------- -------- --------- ($ IN THOUSANDS) Operating activities: Net margin................................................ $ 47,555 $ 43,213 $ 21,221 Adjustments to reconcile net margin to net cash and cash equivalents from operating activities: Depreciation and amortization.......................... 13,181 16,467 26,060 Provision/(benefit) for losses on accounts and notes receivable........................................... (143) (2,498) 927 Provision for inventory reserves....................... 15,052 12,574 8,603 (Gain)/loss on sale of assets.......................... (8,333) 228 427 Amortization of deferred gain on sale leaseback........ (2,778) (2,713) (2,646) Arbitration provision.................................. 18,200 -- -- Gain on debt forgiveness............................... -- -- (7,706) Write-off of make-whole and prepaid bank fees.......... -- -- 17,708 Termination of deferred credit agreements.............. -- -- (7,133) Asset impairment charge................................ 942 -- 2,005 Changes in operating assets and liabilities: Accounts and notes receivable........................ (28,280) 1,180 (3,842) Inventories.......................................... (84,835) (84) (50,880) Other current assets................................. (482) 4,217 (94) Accounts payable..................................... 18,975 (8,134) 38,614 Accrued expenses..................................... 528 1,342 (10,743) Other adjustments, net............................... 1,595 552 286 -------- -------- --------- Net cash and cash equivalents provided by/(used for) operating activities....................... (8,823) 66,344 32,807 -------- -------- --------- Investing activities: Additions to properties................................... (14,875) (11,874) (6,825) Proceeds from sale of properties.......................... 22,098 549 513 Changes in restricted cash................................ -- -- 15,755 Other..................................................... -- 1,498 3,622 -------- -------- --------- Net cash and cash equivalents provided by/(used for) investing activities....................... 7,223 (9,827) 13,065 -------- -------- --------- Financing activities: Payment of patronage dividend............................. (11,939) (8,452) (5,790) Payment of notes, long-term debt and lease obligations.... (11,766) (12,145) (163,072) Increase in drafts payable................................ 541 11,669 15,656 Proceeds from real estate mortgage........................ 21,600 -- -- Decrease in senior revolving credit facility, net......... -- -- (24,194) Increase/(decrease) in asset-based revolving credit facility, net.......................................... 5,600 (43,300) 131,600 Proceeds from sale of Redeemable Class A common stock and subscriptions receivable............................... 2,086 1,478 161 Purchase of Class A and Class B common stock.............. (1,736) (7,779) -- -------- -------- --------- Net cash and cash equivalents provided by/(used for) financing activities....................... 4,386 (58,529) (45,639) -------- -------- --------- Net increase/(decrease) in cash and cash equivalents........ 2,786 (2,012) 233 Cash and cash equivalents at beginning of year.............. 7,222 9,234 9,001 -------- -------- --------- Cash and cash equivalents at end of year.................... $ 10,008 $ 7,222 $ 9,234 ======== ======== =========
The accompanying notes are an integral part of the Consolidated Financial Statements. F-5 TRUE VALUE COMPANY CONSOLIDATED STATEMENT OF MEMBERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
REDEEMABLE COMMON STOCK ----------------------------------------------- CLASS A CLASS B ---------------------- ---------------------- LOSS DEFERRED # OF SHARES AMOUNT # OF SHARES AMOUNT ALLOCATION PATRONAGE ----------- -------- ----------- -------- ---------- --------- ($ IN THOUSANDS, EXCEPT PER SHARE INFORMATION) Balances at and for the year ended December 31, 2002................ 510,060 $ 50,120 1,756,457 $176,945 $(75,966) $(25,793) Net margin......................... -- -- -- -- -- -- Reclass nonqualified Class B stock to liabilities................... -- -- (231,392) (23,139) -- -- Reclass deferred stock redemptions to liabilities................... (195,660) (18,841) (595,785) (59,579) 27,941 -- Amortization of deferred patronage........................ -- -- -- -- -- 748 Minimum pension liability adjustment....................... -- -- -- -- -- -- Patronage dividend................. -- -- 92,861 9,286 -- -- Payments from stock subscriptions receivable....................... -- 161 -- -- -- -- Class B stock applied against loss allocation....................... -- -- (69,705) (6,971) 6,971 -- Matured notes applied against loss allocation....................... -- -- -- -- 552 -- -------- -------- --------- -------- -------- -------- Balances at and for the year ended December 31, 2003................ 314,400 31,440 952,436 96,542 (40,502) (25,045) Net margin......................... -- -- -- -- -- -- Reclass stock presented for redemptions to liabilities....... (24,960) (2,421) (65,302) (6,530) 1,045 -- Amortization of deferred patronage........................ -- -- -- -- -- 747 Minimum pension liability adjustment....................... -- -- -- -- -- -- Patronage dividend................. -- -- 272,122 27,212 -- -- Class B stock applied against loss allocation....................... -- -- (150,374) (15,037) 15,037 -- Payments from stock subscriptions receivable....................... 30,300 1,471 -- -- -- -- Stipulation of Settlement related to the Derivative Action......... -- -- -- -- 5,000 -- -------- -------- --------- -------- -------- -------- Balances at and for the year ended December 31, 2004................ 319,740 30,490 1,008,882 102,187 (19,420) (24,298) Net margin......................... -- -- -- -- -- -- Reclass stock presented for redemptions to liabilities....... (20,280) (2,122) (58,497) (5,850) 1,495 -- Amortization of deferred patronage........................ -- -- -- -- -- 748 Minimum pension liability adjustment....................... -- -- -- -- -- -- Patronage dividend................. -- -- 293,852 29,385 -- -- Class B stock applied against loss allocation....................... -- -- (68,374) (6,837) 6,837 -- A stock purchases.................. 16,020 2,096 -- -- -- -- -------- -------- --------- -------- -------- -------- Balances at and for the year ended December 31, 2005................ 315,480 $ 30,464 1,175,863 $118,885 $(11,088) $(23,550) ======== ======== ========= ======== ======== ======== ACCUMULATED OTHER TOTAL TOTAL ACCUMULATED COMPREHENSIVE MEMBERS' COMPREHENSIVE DEFICIT LOSS EQUITY INCOME/(LOSS) ----------- ------------- -------- ------------- ($ IN THOUSANDS, EXCEPT PER SHARE INFORMATION) Balances at and for the year ended December 31, 2002................ $(68,704) $(1,153) $55,449 $20,003 ======= Net margin......................... 21,221 -- 21,221 $21,221 Reclass nonqualified Class B stock to liabilities................... -- -- (23,139) -- Reclass deferred stock redemptions to liabilities................... 9,933 -- (40,546) -- Amortization of deferred patronage........................ (748) -- -- -- Minimum pension liability adjustment....................... -- (826) (826) (826) Patronage dividend................. (18,269) -- (8,983) -- Payments from stock subscriptions receivable....................... -- -- 161 -- Class B stock applied against loss allocation....................... -- -- -- -- Matured notes applied against loss allocation....................... -- -- 552 -- -------- ------- -------- ------- Balances at and for the year ended December 31, 2003................ (56,567) (1,979) 3,889 $20,395 ======= Net margin......................... 43,213 -- 43,213 $43,213 Reclass stock presented for redemptions to liabilities....... 1,616 -- (6,290) -- Amortization of deferred patronage........................ (747) -- -- -- Minimum pension liability adjustment....................... -- 76 76 76 Patronage dividend................. (41,375) -- (14,163) -- Class B stock applied against loss allocation....................... -- -- -- -- Payments from stock subscriptions receivable....................... -- -- 1,471 -- Stipulation of Settlement related to the Derivative Action......... (5,000) -- -- -- -------- ------- -------- ------- Balances at and for the year ended December 31, 2004................ (58,860) (1,903) 28,196 $43,289 ======= Net margin......................... 47,555 -- 47,555 $47,555 Reclass stock presented for redemptions to liabilities....... 1,973 -- (4,504) -- Amortization of deferred patronage........................ (748) -- -- -- Minimum pension liability adjustment....................... -- 173 173 173 Patronage dividend................. (43,870) -- (14,485) -- Class B stock applied against loss allocation....................... -- -- -- -- A stock purchases.................. -- -- 2,096 -- -------- ------- -------- ------- Balances at and for the year ended December 31, 2005................ $(53,950) $(1,730) $59,031 $47,728 ======== ======= ======== =======
Redeemable Class A common stock amounts are net of unpaid subscription amounts of $1,084 relating to 25,200 issued shares at December 31, 2005; $1,484 relating to 22,920 issued shares at December 31, 2004; $112 relating to 9,840 issued shares at December 31, 2003; and $866 relating to 35,700 issued shares at December 31, 2002. The accompanying notes are an integral part of the Consolidated Financial Statements. F-6 TRUE VALUE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ($ IN THOUSANDS) 1. DESCRIPTION OF BUSINESS AND ACCOUNTING POLICIES Principal Business Activity True Value Company ("True Value") is a member-owned wholesaler cooperative of hardware and related merchandise. True Value changed its name from TruServ Corporation on December 31, 2004. True Value also manufactures and sells paint and paint applicators. True Value's goods and services are sold predominantly within the United States, primarily to retailers of hardware, industrial distributors, garden centers and rental retailers who have entered into retail agreements with it. True Value also provides to its members value-added services such as marketing, advertising, merchandising and store location and design services. Consolidation The Consolidated Financial Statements include the accounts of True Value and all wholly owned subsidiaries. Reclassifications Certain reclassifications have been made to the prior years' Consolidated Financial Statements and the notes thereto to conform to the current year's presentation. These reclassifications had no effect on Net margin for any period or on Total members' equity at the balance sheet dates. Capitalization True Value's capitalization from its members is classified in Members' equity and Liabilities. Members' equity is comprised of Redeemable Class A voting common stock, Redeemable qualified Class B non-voting common stock, Accumulated deficit, Loss allocation, Deferred patronage and Accumulated other comprehensive loss. Members are required to purchase upon becoming a member, 60 shares of True Value's Class A common stock per store, up to a maximum of five stores (300 shares). The Class A common stock is redeemable by True Value and has voting rights (the "Redeemable Class A voting common stock"). True Value issues Class B common stock as part of its patronage dividend. The Class B common stock is redeemable and has no voting rights (the "Redeemable Class B non-voting common stock"). Redeemable Class B non-voting common stock had been issued in connection with True Value's annual patronage dividend. The By-Laws provide True Value the right to allow a member to meet the stock ownership requirements for True Value's Redeemable Class B non-voting common stock by the issuance of Redeemable Class B non-voting common stock in payment of the year-end patronage dividend. The shares of Redeemable Class B non-voting common stock and other written notices distributed by True Value to its members, which disclose to the recipient the stated amount allocated to the member by True Value and the portion thereof that is a patronage dividend, are "written notices of allocation" as that phrase is used in the Internal Revenue Code (the "Code"). For such written notices to be "qualified written notices of allocation" within the meaning of the Code, it is necessary that True Value 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. True Value has customarily issued Redeemable Class B non-voting common stock that is "qualified written notices of allocation" (the "Redeemable qualified Class B non-voting common stock") with its patronage dividend and the current amount issued and outstanding are classified in the Consolidated Balance Sheet as Redeemable qualified Class B non-voting common stock. Any written notices that do not meet these requirements are "nonqualified written notices of allocation" within the meaning of the Code. True Value has issued Redeemable Class B non-voting common stock that are "nonqualified written notices of allocation" (the "Redeemable nonqualified Class B non-voting F-7 TRUE VALUE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) common stock") as part of prior patronage dividends. Amounts issued and outstanding are classified as a long-term liability in the Consolidated Balance Sheet as Redeemable nonqualified Class B non-voting common stock. These shares are classified in long-term liabilities because they have a planned redemption schedule. The redemption schedule calls for at least 10% of the shares to be redeemed by December 31, 2011; 40% of the shares by December 31, 2019; and all of the shares by December 31, 2029. True Value follows the practice of accounting for deferred patronage charges and credits as a separate component of equity. Deferred patronage consists of net charges and expenses, primarily related to costs associated with the July 1997 merger of Cotter & Company and ServiStar Coast to Coast Corporation to form True Value (the "Merger"), which are included in the computation of Net margin in different periods for financial statement purposes than for patronage purposes. Either True Value or the member, upon 60 days' written notice, may terminate membership without cause. In the event membership is terminated, True Value undertakes to purchase, and the member is required to sell to True Value, all of the member's Redeemable Class A voting common stock and Redeemable Class B non-voting common stock at par value. Payment for the Redeemable Class A voting common stock and Redeemable nonqualified Class B non-voting common stock has historically been in cash. In accordance with True Value's By-Laws, payment for the Redeemable qualified Class B non-voting common stock is in the form of a note payable in five equal annual installments and with interest set at comparable treasury rates plus 1.0%. Historically, True Value has offset amounts due by its members against amounts that it pays to the members on redemption of their stock. Patronage Dividend True Value operates on a cooperative basis with respect to business transacted with or for members. When there are annual profits, members in good standing are entitled to receive patronage dividend distributions from True Value on the basis of gross margins of merchandise purchased by each member. In accordance with True Value'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 margins calculated in accordance with accounting principles generally accepted in the United States of America after reducing or increasing net margins for non-member income/(losses), reasonable reserves, earnings retained by the cooperative and deferred patronage amortization. Commencing with the 2004 patronage dividend that was paid in 2005, the board of directors has authorized retaining 5% of net patronage source income, as a reasonable reserve, to reduce the accumulated deficit account. The total dividend is then 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 related to the year ended December 31, 2005, were $43,870. Approximately $13,257 of the dividend was paid in cash, which was approximately 30% of the estimated patronage income for the year. True Value's By-Laws and the Internal Revenue Service (the "IRS") require that the payment of at least 20% of patronage dividends be in cash. True Value paid the remainder through the issuance of True Value's Redeemable qualified Class B non-voting common stock and subordinated promissory notes. For those members who have loss allocation accounts, the Redeemable qualified Class B non-voting common stock was offset against those accounts. Patronage dividends of $41,375 related to the year ended December 31, 2004, were paid in February 2005; approximately 30% of which were paid in cash. True Value paid the remainder through the issuance of True Value's Redeemable qualified Class B non-voting common stock, offsetting that against the loss allocation accounts of those members that had such accounts. Patronage dividends of $18,269 related to the year ended December 31, 2003, were paid in March 2004; approximately F-8 TRUE VALUE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 49% of which were paid in cash, which was 30% of the dividend before the net effect of the refinancing of the revolving credit facility, senior notes and synthetic lease obligation (the "Senior Debt"). True Value paid the remainder through the issuance of True Value's Redeemable qualified Class B non-voting common stock, offsetting that against the loss allocation accounts of those members that had such accounts. Capital Stock Redemption In accordance with True Value's By-Laws, True Value redeems former members' Class A common stock and Redeemable nonqualified Class B common stock in cash at the time of redemption and Redeemable qualified Class B common stock are paid with a subordinated promissory installment note. The subordinated promissory installment notes are payable in five equal annual installments and pay interest annually at a fixed rate. The interest rate on subordinated promissory installment notes created during the year is determined annually on the first business day of the year based on the five-year U.S. Treasury bill rate plus 1.0%. For notes issued in 2005, the rate was 4.64% and for notes issued in 2006, the rate is 5.30%. In accordance with True Value's By-Laws, True Value first reduces its aggregate stock redemption obligation payable in both cash or subordinated promissory installment note by its right to legally offset any amounts the former members may owe True Value, including accounts and notes receivable, loss allocations and/or accumulated deficit. Effective July 6, 2004, the board of directors rescinded True Value's moratorium on stock redemptions that had been effective since March 2000. In accordance with the Stipulation of Settlement related to the "Derivative Action" (an action brought by a former True Value member against certain present and former directors, certain former officers of True Value and against True Value), upon rescinding the moratorium, True Value reduced the loss allocation accounts of the parties to the Stipulation of Settlement by approximately $5,000 on a pro-rata basis (see "Loss Allocation to Members and Accumulated Deficit" below). Since the rescinding of the moratorium, True Value satisfied $7,779 of stock redemption liability in cash and $26,351 by issuing subordinated promissory installment notes in 2004. In 2005, True Value paid $1,738 of stock redemption liability in cash and $5,506 by issuing subordinated promissory installment notes. Principal payments on subordinated promissory installment notes are paid on December 31 of each year and totaled $6,295 and $5,241 in 2005 and 2004, respectively. True Value had shareholders that, at year-end, had discontinued their purchasing activities with True Value and requested that their stock be redeemed but had not completed the redemption procedures, resulting in a stock redemption liability of $2,200 and $4,886 in 2005 and 2004, respectively. True Value classified this liability in its Consolidated Balance Sheet under the captions as shown in the following table based on management's estimates of the time needed to complete redemption procedures.
2005 2004 ------- ------- ($ IN THOUSANDS) Current maturities of long-term debt, notes and capital lease obligations......................................... $ 810 $1,718 Long-term debt including notes and capital lease obligations, less current maturities...................... 1,390 2,476 Other long-term liabilities................................. -- 692 ------ ------ Total stock redemption liability............................ $2,200 $4,886 ====== ======
Loss Allocation to Members and Accumulated Deficit During the third quarter of 2000, True Value 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. True Value has distributed the 1999 loss among its members by establishing a loss allocation account as a contra-equity account in the Consolidated Balance Sheet with the offsetting credit recorded to the accumulated deficit account. The loss allocation account reflects the sum of each member's F-9 TRUE VALUE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) proportionate share of the 1999 loss, after being reduced by certain amounts that were not allocated to members. The allocation was generally based on a member's proportionate Class B stock investment relative to the total Class B stock investments of all the members, and therefore a member could not be allocated a loss in excess of its equity investment. The loss allocation account will be satisfied, on a member-by-member basis, by applying the portion of future non-cash patronage dividends as a reduction to the loss allocation account until fully satisfied. The loss allocation amount may also be satisfied, on a member-by-member basis, by applying the par value of maturing member notes and related interest payments as a reduction to the loss allocation account until such account is fully satisfied. However, in the event a member should terminate as a stockholder of True Value, 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 True Value. As of December 31, 2005, $102,830, or approximately 90%, of the $113,918 1999 loss allocation was satisfied. As of December 31, 2004, $94,498, or approximately 83%, of the 1999 loss allocation was satisfied. The board of directors determined that True Value would retain the 2001 loss as part of the accumulated deficit account. All or a portion of patronage income and all non-patronage income, if any, may be retained in the future to reduce the accumulated deficit account. In the event a member terminates its status as a stockholder of True Value, any remaining 2001 loss in the accumulated deficit account that is allocable to the terminated member will be distributed to the terminating member and satisfied by reducing the redemption amount paid for the member's stock investment in True Value. True Value has determined for each member that was both a stockholder and purchased from True Value in 2001, its share of the 2001 loss that has been retained in the accumulated deficit account. Stockholders that had ceased their membership in True Value prior to 2001 and were solely stockholders due to the moratorium on stock redemptions were excluded from the 2001 loss allocation. Approximately 18% of the $50,687 2001 loss was allocated based upon the member's proportionate equity investment, net of any 1999 loss allocation account, relative to the total equity investments of all members that were both stockholders and purchased from True Value in 2001. Approximately 82% of the total 2001 loss was effectively allocated based on the member's purchases from True Value in 2001 using the same methodology as described above in "Patronage Dividend." No member was allocated a loss amount greater than its net equity investments held as of year-end 2001. A member's proportionate share of the 1999 and/or 2001 losses have been limited to the extent of its equity investment in True Value. Any portion of a loss allocation that exceeds a member's equity investment is retained by True Value in the accumulated deficit account. Commencing with the 2004 patronage dividend that was paid in 2005, the board of directors has authorized retaining 5% of net patronage source income, as a reasonable reserve, to reduce the accumulated deficit account. Such reduction will be applied first against the oldest components of the deficit and the annual retention of the 5% of patronage source income will continue until the deficit no longer exists. In 2003, True Value settled its Derivative Action. The Stipulation of Settlement from the Derivative Action stated that, at the time the moratorium on stock redemptions was lifted, the Loss allocation accounts for all current and former members who were parties to the Stipulation of Settlement would be reduced by approximately $5,000 on a pro-rata basis. The moratorium was lifted in July 2004 and such reduction occurred. Cash Equivalents True Value classifies all highly liquid investments with an original maturity of three months or less as cash equivalents. Allowance for Doubtful Accounts The allowance for doubtful accounts is determined principally on the basis of past collection experience applied to ongoing evaluations of True Value's receivables and the risks of repayment. The allowance was F-10 TRUE VALUE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) $1,420 and $3,835 as of December 31, 2005 and 2004, respectively. Primary reasons for the reduction in the reserve during 2005 included favorable collections experience, the settlement or charge-off of older accounts, certain of which relate to the rescinding of the stock moratorium and overall improvement in the aging and risk characteristics of the portfolio. True Value considers accounts receivable past due if invoices remain unpaid past their due date and charges off uncollectible receivables after exhausting all collection efforts. Inventories Inventories are stated at the lower of cost, determined on the first-in, first-out basis, or market value. The lower of cost or market value considers the estimated realizable value in the current economic environment associated with disposing of surplus and/or damaged/obsolete inventories. True Value's 2005 inventory valuation reserve of $17,524 increased by $7,328 from the 2004 reserve of $10,196 due to increased levels of unproductive inventory. True Value calculated the estimated realizable value based on an analysis of historical trends related to its distressed inventory. In its analysis, True Value considers historical data on its ability to return inventory to suppliers, to transfer inventory to other distribution centers, to sell inventory to members through the price reduction process and to sell remaining inventory to liquidators. The cost of inventory also includes indirect costs (such as logistics, manufacturing, freight-in, vendor rebates 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 revenue as the product is sold (see Note 2, "Inventories"). 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 -- 3 to 10 years; transportation equipment -- 3 to 12 years; and leasehold improvements -- the lesser of the life of the lease, without regard to options for renewal, or the useful life of the underlying property. Goodwill Goodwill represents the excess of cost over the fair value of net assets acquired. Goodwill is tested for impairment using a discounted cash flow analysis for each reporting unit (Hardware and Paint manufacturing). This test is completed annually unless significant events necessitate a more frequent test. The test completed at December 31, 2005, used a discount rate of 10% and assumed a modest revenue increase in future years. Rates used to discount cash flows are dependent upon interest rates and the cost of capital at a point in time. A 100 basis point movement in the discount rate did not significantly impact the analysis. In evaluating the recoverability of goodwill, management estimates each reporting unit's fair value. In making this estimate, True Value's management relies on a number of factors including operating results, business plans and present value techniques, to discount anticipated future cash flows. True Value completes its annual impairment assessment at the end of each year and has determined that no impairment existed at December 31, 2005 or 2004. At December 31, 2005 and 2004, Goodwill was comprised of $78,429 for the hardware segment and $13,045 for the paint segment. Conversion Funds In connection with the Merger, True Value made funds available to the members to defray various conversion costs (i.e., costs to change store signage and branding to True Value) associated with the Merger and costs associated with certain upgrades and expansions of their stores. The total amount of funds distributed was $27,175 for these conversion costs. The funds were amortized over a five-year period, the period of time during which members committed to stay with True Value. The members agreed to refund to F-11 TRUE VALUE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) True Value all or a portion of the conversion funds in the event they defaulted on their obligations to True Value or terminated their membership during the five years following the date of the agreement. The annual amortization expense for 2004 and 2003 was $1,027 and $4,060, respectively. All amounts were fully amortized at December 31, 2004. Asset Impairment For purposes of determining impairment, management reviews long-lived assets based on a geographic region or a revenue producing activity, as appropriate. The 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 of the region or activity, such assets would be determined to be impaired and would be written down to their fair value. In March 2005, True Value recorded an impairment charge of $942 to write-down the East Butler, Pennsylvania, facility that was classified as held for sale to fair value. No asset impairment charges were recorded in 2004. In 2003, True Value recorded asset impairment charges of $2,005 relating primarily to equipment held for use at the East Butler, Pennsylvania, facility. The asset impairment charges impacted True Value's hardware segment and are included in Operating expenses under the "Other income, net" caption in the Consolidated Statement of Operations. Revenue Recognition True Value's policy is to recognize revenue from product sales and services when earned, in accordance with SEC Staff Accounting Bulletin ("SAB") No. 104. Specifically, product revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred, 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 and other cash consideration given to customers, and returns are provided for at the time the related sales are recorded and are reflected as a reduction of sales. Service revenue is comprised of advertising and transportation and amounted to $57,047 and $53,922 for 2005, respectively, $58,870 and $49,987 for 2004, respectively, and $58,131 and $49,305 for 2003, respectively. Advertising revenue is recognized when the underlying advertisement is run or when the related circulars are dropped. Transportation revenue is recognized when the services are provided. Effective for arrangements with vendors initiated on or after January 1, 2003 and in accordance with Emerging Issues Task Force ("EITF") Issue No. 02-16 "Accounting by a Customer (including a Reseller) for Certain Consideration Received from a Vendor" ("EITF 02-16"), consideration received from vendors that was previously classified as advertising revenue is applied as a decrease in the price paid for inventory and is recognized in cost of sales as the related inventory is sold. Advertising Expenses Amounts billed to members for advertising are included in revenue. Advertising costs are expensed in the period the advertising takes place. Such costs amounted to $31,999, $37,254 and $44,817 in 2005, 2004 and 2003, respectively, and are included in Cost of revenue. Amortization of Financing Fees Amounts paid for financing fees incurred in connection with True Value's financing arrangements are capitalized and amortized to interest expense over the remaining lives of the underlying financing agreements. During the third quarter of 2003, True Value expensed the financing fees related to the Senior Debt as a result of refinancing the Senior Debt with a new asset-based revolving credit facility ("Bank Facility"). True Value has purchased interest rate caps that limit its risk on $25,000 of variable-rate debt for the entire term of the Bank Facility to a maximum underlying LIBOR rate of 3.5% through August 2007 and 4.5% for the remaining F-12 TRUE VALUE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) term, which expires in August 2008. The three-month LIBOR at December 31, 2005, was approximately 4.5%. This interest rate cap instrument is considered speculative and is carried at current market value. Repairs and Maintenance Expense Expenditures which extend the useful lives of True Value'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 True Value's manufacturing operations are expensed as incurred. Such costs amounted to $987, $920 and $911 in 2005, 2004 and 2003, respectively, and are included in Logistics and manufacturing expenses. Shipping and Handling Costs Amounts billed to members for shipping and handling costs are included in Net revenue. Amounts incurred for shipping and handling are included in Cost of revenue. Income Taxes Deferred tax assets and liabilities are determined based on cumulative temporary differences between the amounts shown on the financial statements 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, 2005, True Value concluded that, based on the weight of available evidence, it is more likely than not that the deferred tax assets will not be realized, and that a full valuation allowance is required. Deferred tax assets will only be realized to the extent future earnings are taxable to True Value and not allocated to members as tax-deductible patronage dividends. Per Share Information There is no existing market for the True Value common stock and there is no expectation that any market will develop. True Value's Redeemable Class A voting common stock is owned by members and former members whose stock has not yet been redeemed. True Value'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. Fair Value of Financial Instruments The carrying amounts of True Value's financial instruments, which were comprised primarily of accounts and notes receivable, accounts payable, short-term borrowings, long-term debt and subordinated promissory and subordinated promissory installment notes, approximate fair value. The total carrying amount of debt and credit facilities approximates fair value due to their stated interest rates approximating market rates. 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 True Value's trade receivables. True Value extends credit to its members as part of its day-to-day operations. True Value 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, True Value's management believes that its allowance for doubtful accounts is adequate with F-13 TRUE VALUE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) respect to member credit risks. Also, the Certificate of Incorporation and By-Laws specifically provide that True Value 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 True Value. True Value, but not the member, may at its sole discretion exercise these set-off rights when any such funds become due to former members with outstanding accounts receivable to True Value and current members with past due accounts receivable to True Value. 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. Consideration Given by a Vendor On January 1, 2003, True Value adopted EITF 02-16, which addresses the accounting and income statement classification for consideration given by a vendor to a retailer in connection with the sale of the vendor's products or for the promotion of sales of the vendor's products. The EITF concluded that such consideration received from vendors should be reflected as a decrease in prices paid for inventory and recognized in cost of sales as the related inventory is sold, unless specific criteria are met qualifying the consideration for treatment as reimbursement of specific, identifiable incremental costs and is effective for arrangements with vendors initiated on or after January 1, 2003. Most of True Value's arrangements with vendors in 2003 were initiated before January 1, 2003. However, most arrangements with vendors for 2004 were initiated in the fourth quarter of 2003, and the application of EITF 02-16 has impacted the 2004 results of operations and financial position as Net margin was negatively impacted in 2004 compared to 2003 by $3,996. In 2004, the application of EITF 02-16 included an initial expense of $4,304 that did not reoccur in 2005. The application of EITF 02-16 impacted 2004 as vendor advertising funds are being earned based on merchandise purchases and the vendor advertising funds are recognized in income when the merchandise is sold. In 2003, the vendor advertising funds were matched and recognized in Net revenue when the advertising took place and the costs were incurred. Additionally, Net revenue was impacted by the application of EITF 02-16, as the advertising revenue that was recognized as the advertising occurred is now recorded as part of the cost of the product. Also impacting Net revenue was the recording of monies earned for holding markets that is a service provided to vendors and members. Monies earned from prior-year markets were recorded as an offset in Selling, general and administrative ("SG&A") expenses and are now recorded into Net revenue for 2004 and 2005. Also, expenses related to providing the markets were previously recorded in SG&A expenses and are now recorded in Cost of revenue for 2004 and 2005. F-14 TRUE VALUE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 2. INVENTORIES Inventories consisted of the following at December 31:
2005 2004 -------- -------- ($ IN THOUSANDS) Manufacturing inventories: Raw materials............................................. $ 2,253 $ 1,666 Work-in-process and finished goods........................ 25,452 22,492 Manufacturing inventory reserves.......................... (1,692) (1,112) -------- -------- 26,013 23,046 -------- -------- Merchandise inventories: Warehouse inventory....................................... 323,837 250,273 Merchandise inventory reserves............................ (15,832) (9,084) -------- -------- 308,005 241,189 -------- -------- $334,018 $264,235 ======== ========
The amount of warehouse, general and administrative costs included in ending inventory at December 31, 2005 and 2004, was $22,554 and $17,373, respectively. Warehouse, general and administrative costs incurred for 2005 and 2004, were $95,977 and $94,431, respectively. 3. PROPERTIES Properties consisted of the following at December 31:
2005 2004 --------- --------- ($ IN THOUSANDS) Buildings and improvements.................................. $ 62,988 $ 84,983 Machinery and warehouse equipment........................... 68,379 81,958 Office and computer equipment............................... 117,169 134,511 Transportation equipment.................................... 26,471 33,943 --------- --------- 275,007 335,395 Less: accumulated depreciation.............................. (214,140) (267,932) --------- --------- 60,867 67,463 Land........................................................ 2,340 2,985 --------- --------- $ 63,207 $ 70,448 ========= =========
Depreciation expense for 2005, 2004 and 2003 was $13,181, $15,440 and $22,000, respectively. F-15 TRUE VALUE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 4. DEBT ARRANGEMENTS Long-term debt consisted of the following at December 31:
2005 2004 -------- -------- ($ IN THOUSANDS) Bank Facility............................................... $ 93,900 $ 88,300 Real Estate Mortgage........................................ 21,600 -- Capital lease obligations................................... 5,493 1,855 -------- -------- Total third-party debt................................. 120,993 90,155 Subordinated promissory and subordinated promissory installment notes......................................... 73,071 80,146 -------- -------- 194,064 170,301 Less amounts due within one year............................ (39,244) (31,109) -------- -------- $154,820 $139,192 ======== ========
The weighted average of stated interest rates on total debt was 6.25% and 5.7% as of December 31, 2005 and 2004, respectively. At December 31, 2005, True Value had $93,900 in Bank Facility borrowings, of which $80,000 was included in Long-term debt including notes and capital lease obligations, less current maturities. At December 31, 2004, True Value had $88,300 in Bank Facility borrowings, which were included in Long-term debt including notes and capital lease obligations, less current maturities. Based on True Value's projection of seasonal working capital needs, the amount of the Bank Facility classified as Long-term debt including notes and capital lease obligations, less current maturities represents the expected lowest level of borrowings during the next 12 months for each year. BANK FACILITY On August 29, 2003, True Value entered into a four-year $275,000 Bank Facility. The Bank Facility was used to refinance the then existing third-party senior debt at a substantially lower interest rate. Availability under the Bank Facility is limited to the lesser of $275,000 or the collateral value of eligible assets (the "borrowing base"), less outstanding borrowings, letters of credit and reserves. The reserve amounts, if any, are set at the discretion of the lenders. True Value's availability as of December 31, 2005, was $150,006. True Value amended its Bank Facility on May 6, 2005, primarily to lower the interest rates charged on this debt, extend the term of the Bank Facility for one year to August of 2008, and ease certain restrictive language, which had the primary effect of increasing the spending limitations on capital expenditures, leases and various distributions to members. The interest rate charged for Bank Facility borrowings is variable at either LIBOR or prime, plus in either case, an additional amount of interest determined based on a performance-based pricing grid. True Value has the option to select LIBOR or prime as the base rate. The performance grid is based upon True Value's fixed charge coverage ratio, measured quarterly. Based on this performance pricing grid, True Value achieved 0.25% of improved variable pricing effective May 1, 2004. The performance-based pricing grid was amended in May 2005 to (1) lower the interest rate that is added to LIBOR or prime borrowings and (2) decrease the fixed charge ratio needed to achieve improved pricing. Based on this amended performance pricing grid, True Value achieved 0.75% of improved variable pricing effective May 11, 2005. As of December 31, 2005 and 2004, this interest rate was 6.1% and 4.7%, respectively, as the decrease to interest cost resulting from the amended performance grid was more than offset by an increase in the underlying LIBOR and prime rates. The unused F-16 TRUE VALUE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) commitment fee is 0.375%. Letters of credit issued under the Bank Facility have a fee based on the performance pricing grid and this fee was 1.625% and 1.875% at December 31, 2005 and 2004, respectively. The Bank Facility has no financial covenants unless daily average excess availability for the last 60 days of each quarter drops below $35,000. If the average is below $35,000, True Value is subject to a fixed charge coverage ratio of 1.1 to 1. As of December 31, 2005, True Value's average excess availability for the last 60 days was greater than $35,000 and True Value is therefore not subject to the fixed charge coverage ratio test. Additionally, True Value is required to maintain $15,000 of excess availability at all times. Management believes it is in compliance with this requirement and is in compliance with all terms and conditions of the Bank Facility. The Bank Facility is collateralized by substantially all of the assets of True Value and a pledge of 100% of the stock of True Value's subsidiaries. Borrowings under the Bank Facility are subject to borrowing base limitations that fluctuate in part with the seasonality of the business. In addition, the qualification of accounts receivable and inventory items as "eligible" for purposes of the borrowing base is subject to unilateral change in the discretion of the lenders. The borrowing base is calculated as the sum of: i. 85% of eligible accounts receivable, plus ii. the lesser of 65% of the value of eligible inventory, 85% of the net orderly liquidation value of inventory or $160,000 (increased to $175,000 in February 2006; see amendment discussion below), plus iii. a fixed asset sublimit, calculated as the lesser of $25,000 or 65% of the fair value of certain real estate, and 80% of orderly liquidation value of certain machinery and equipment. The sublimit is subject to a seven-year amortization for the portion predicated on machinery and equipment and a 10-year amortization for the portion predicated on real estate. The Bank Facility imposes certain limitations on and requires compliance with covenants from True Value that are usual and customary for similar asset-based revolving credit facilities. Unless such terms and conditions are waived by a majority of the lenders, these terms and conditions include, among other things: i. limitations on additional lease transactions (eliminated in February 2006; see amendment discussion below), additional third-party and subordinated debt, the granting of certain liens and guarantees, capital expenditures and cash dividend payments and distributions; ii. restrictions on mergers, investments, transactions with related parties, acquisitions and changes in corporate control; and iii. periodic financial and collateral reporting requirements. In December 2005, True Value amended the Bank Facility to allow True Value to enter into additional third-party debt secured by assets previously collateralizing the Bank Facility. See "Mortgage Transaction" below. In February 2006, True Value amended the Bank Facility to modify certain terms in the calculation of the borrowing base and the fixed charge coverage ratio, to remove the limitation on lease transactions and to ease restrictions on transactions with members. The borrowing base formula was modified to increase the maximum collateral value of inventory assets from $160,000 to $175,000. The modification to the fixed charge coverage calculation clarified terms, improved the reported ratio and had no impact on the performance pricing grid or compliance. Fees paid for obtaining the Bank Facility totaled $3,752 and these fees are being amortized by True Value over the term of the Bank Facility. Upon entering into the Bank Facility, True Value incurred a net expense of $19,221 upon refinancing the Senior Debt. The net expense consisted of $26,927 of interest expense relating to F-17 TRUE VALUE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) the write-off of old and new senior note prepayment obligations and prepaid bank fees offset by $7,706 of other income relating to debt forgiveness for a portion of the Senior Debt. MORTGAGE TRANSACTION On December 29, 2005, True Value entered into a $21,600 mortgage transaction on its Manchester, New Hampshire, distribution center (the "Manchester Mortgage"), which has a net book value of $10,143. The Manchester Mortgage is a 20-year fully amortizing loan at a fixed rate of 6.74% with a maturity date of January 1, 2026. Net proceeds were used to reduce borrowings under True Value's variable-rate Bank Facility. SUBORDINATED PROMISSORY AND SUBORDINATED PROMISSORY INSTALLMENT NOTES Subordinated promissory notes are issued from time to time for partial payment of the annual patronage dividend. Subordinated promissory notes are subordinated to indebtedness to banking institutions, trade creditors and other indebtedness of True Value as specified by its board of directors. Prior experience indicates that the maturities of a significant portion of the notes due within one year are often extended at the option of the member, for a three-year period, at interest rates established by True Value and substantially equivalent to competitive market rates of comparable instruments. In 2005 and 2004, approximately 77% and 70%, respectively, of notes scheduled to mature in those years were extended for an additional three years. True Value anticipates that this practice of extending notes, based on historical results, will continue. Subordinated promissory installment notes are issued in payment of the redemption of qualified Class B common stock upon termination of membership in the cooperative (see Note 1, "Description of Business and Accounting Policies -- Capital Stock Redemption"). Subordinated promissory and subordinated promissory installment notes consisted of the following as of December 31:
2005 2004 -------- -------- ($ IN THOUSANDS) Subordinated promissory notes: Due on December 31, 2005 -- 7.00% to 10.00%............... $ -- $ 23,336 Due on December 31, 2006 -- 6.00% to 9.00%................ 16,326 16,407 Due on December 31, 2007 -- 5.00% to 6.00%................ 15,170 15,207 Due on December 31, 2008 -- 6.00% to 7.00%................ 18,075 -- Due on December 31, 2010 -- 7.00%......................... 1,228 -- Subordinated promissory installment notes at interest rates of 4.36% with final maturities in 2008.................... 15,732 21,002 Subordinated promissory installment notes at interest rates of 4.64% with final maturities in 2009.................... 4,340 -- Accrued stock redemption liability.......................... 2,200 4,194 -------- -------- 73,071 80,146 Less amounts due within one year............................ (23,465) (30,304) -------- -------- $ 49,606 $ 49,842 ======== ========
The amount due within one year for both years was classified in Current maturities of long-term debt, notes and capital lease obligations. F-18 TRUE VALUE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Amounts shown below as scheduled repayments are the stated note amounts. True Value will seek members' consent in 2006 to extend the subordinated promissory note due dates at market competitive interest rates. Principal payment schedule for long-term debt:
2006 2007 2008 2009 2010 THEREAFTER ------- ------- -------- ------ ------ ---------- ($ IN THOUSANDS) Bank Facility(1).................... $ -- $ -- $ 93,900 $ -- $ -- $ -- Real Estate Mortgage................ 530 566 606 648 693 18,557 Subordinated promissory and subordinated promissory installment notes................. 23,465 21,847 24,751 2,661 347 -- Capital lease obligations........... 1,349 1,208 654 590 624 1,068 ------- ------- -------- ------ ------ ------- Total............................... $25,344 $23,621 $119,911 $3,899 $1,664 $19,625 ======= ======= ======== ====== ====== =======
- --------------- (1) Borrowings under the Bank Facility fluctuate as a result of the seasonal needs of the business. There are no required payments until the maturity of the Bank Facility in August 2008. 5. LEASE COMMITMENTS True Value is a lessee of distribution centers, office space, and computer, manufacturing and transportation equipment under operating and capital leases. The following is a schedule of future minimum lease payments under capital and long-term noncancelable operating leases (including sale leasebacks), together with the present value of the net minimum lease payments under capital leases, as of December 31, 2005:
CAPITAL OPERATING ------- --------- ($ IN THOUSANDS) 2006........................................................ $ 1,681 $ 32,568 2007........................................................ 1,441 29,816 2008........................................................ 825 27,256 2009........................................................ 722 26,369 2010........................................................ 720 26,018 Thereafter.................................................. 1,298 196,874 ------- -------- Net minimum lease payments.................................. 6,687 $338,901 ======== Less amount representing interest........................... (1,194) ------- Present value of net minimum lease payments................. 5,493 Less amount due within one year............................. (1,349) ------- $ 4,144 =======
Minimum annual operating lease payments as shown have been reduced by $2,897 from future sublease rentals due over the term of the subleases, and include estimated payments for operating costs and real estate taxes due to the lessor, where applicable. 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. F-19 TRUE VALUE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Rent expense under operating leases (reduced by sublease rentals) was $34,085, $35,643 and $36,366 for the years ended December 31, 2005, 2004 and 2003, respectively. Sale Leaseback Transaction On December 31, 2002, True Value sold seven of its distribution centers to unrelated third parties for an aggregate purchase price of $125,753. True Value concurrently agreed to lease the distribution centers for a period of 20 years. The transaction was recorded as a real property sale and as ongoing operating leases in True Value's financial statements. The resulting gain on sale of $55,564 was recorded as deferred gain in the Consolidated Balance Sheet and is being amortized to income on a straight-line basis over the initial 20-year lease term. True Value has the right to extend each lease for two additional periods of approximately 10 years each. True Value may elect to renew a lease or leases with respect to any one or more of the properties without renewing the lease or leases with respect to all of the properties. True Value has the right to assign the lease without the landlord's prior written consent, but subject to certain conditions described in the leases. Provided that True Value assigns the rent to the landlord, True Value may sublet all or any part of any property without the landlord's consent. 6. COMMITMENTS AND CONTINGENCIES True Value is involved in various claims and lawsuits incidental to its business. The following significant matters existed at December 31, 2005: ACTIVE LEGAL MATTERS: FLEGLES ACTION On February 12, 2003, a former True Value member, Flegles Inc. ("Flegles"), filed suit against True Value in the Circuit Court of Carlisle County, Kentucky. The complaint alleges that True Value is liable to Flegles for the role True Value played with respect to Flegles' construction of a new retail store facility in Bardwell, Kentucky, that has allegedly incurred financial losses. Flegles sought $2,400 in compensatory damages and also an award of punitive damages. On July 30, 2004, a jury found True Value liable to Flegles for certain losses incurred by Flegles and awarded Flegles $1,300 in compensatory damages. The jury did not award any punitive damages. As True Value believes that the verdict was rendered in error, it pursued post-trial motions before the Circuit Court, including a request that the verdict be set aside or that True Value be awarded a new trial. Such relief was denied by the Circuit Court and True Value is now pursuing its appeal for such relief in the Kentucky Appellate Court. True Value posted with the court a bond in an amount necessary to prevent Flegles from enforcing its judgment during the appeal. The parties have filed briefs with the Kentucky Appellate Court and are awaiting a date for oral arguments. True Value intends to continue to vigorously defend this case and does not believe that the ultimate resolution will have a material effect on results from operations or financial position. CLAIMS AGAINST ERNST & YOUNG LLP True Value pursued claims against its former outside auditors, Ernst & Young LLP ("E&Y"), for professional malpractice, breach of contract, deceptive business practices and fraud. True Value contended that E&Y failed to properly discharge its duties to True Value and failed to identify, in a timely manner, and indeed concealed, certain material weaknesses in True Value's internal financial and operational controls. As a result, True Value was forced to make an unanticipated accounting adjustment in the fourth quarter of 1999 in the total amount of $121,333 (the "Fourth Quarter Charge"). True Value accordingly reported a Net loss of $130,803 for the fiscal year ended December 31, 1999. True Value alleged that had E&Y properly discharged its duties, the scope and breadth of the Fourth Quarter Charge, as well as the accounting and operational control deficiencies that necessitated the charge, would have been substantially lessened. True Value began F-20 TRUE VALUE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) discussion of its claims with E&Y early in the fall of 2001. Pursuant to the dispute resolution procedures required by True Value's engagement letter with E&Y, True Value and E&Y attempted to mediate this dispute during the first six months of 2002. When those attempts proved unsuccessful and again pursuant to the dispute resolution procedures, True Value filed its claim with the American Arbitration Association on July 31, 2002. The arbitration is subject to certain confidentiality requirements. Another effort at non-binding mediation between the parties began in December 2004 and was unsuccessful. Hearings before the arbitration panel occurred in early 2005. On July 28, 2005, an arbitration panel denied True Value's claims against E&Y in their entirety. This decision of the arbitration panel also requires True Value to reimburse E&Y for reasonable attorneys' fees and expenses related to this matter. On August 17, 2005, True Value filed a motion asking the panel to reconsider its award of attorneys' fees and expenses. In its motion, True Value claimed that the panel exceeded its authority when it awarded attorneys' fees and expenses to E&Y. On October 19, 2005, the panel denied this motion. E&Y has requested attorneys' fees and expenses in this matter of approximately $18,200. True Value is challenging the reasonableness of this amount with the arbitration panel, but has recorded the requested amount as a reserve in the third quarter 2005 results. It is expected that the panel will make a final award of reasonable fees and expenses in the first half of 2006. Any adjustment to the reserve resulting from the final award will be reflected in the financial statements at that time. True Value will continue to explore all of its options to challenge both the reasonableness of E&Y's attorneys' fees and expenses and the authority of the panel to award attorneys' fees and expenses in any amount. On January 17, 2006, True Value filed a petition with the Circuit Court of Cook County to preserve its rights to further challenge the panel's authority to award any attorneys' fees and expenses and to vacate the final award when it is entered. 7. INCOME TAXES Income tax expense consisted of the following for the years ended December 31:
2005 2004 2003 ---- ---- ---- ($ IN THOUSANDS) Current: Federal................................................... $-- $ -- $ -- State..................................................... 51 177 333 Foreign................................................... -- -- -- --- ---- ---- Total current.......................................... 51 177 333 --- ---- ---- Deferred: Federal................................................... -- -- -- State..................................................... -- -- -- Foreign................................................... -- -- -- --- ---- ---- Total deferred......................................... -- -- -- --- ---- ---- $51 $177 $333 === ==== ====
True Value operates as a nonexempt cooperative and is allowed a deduction in determining its taxable income for amounts paid as qualified patronage dividends based on margins from business done with or on behalf of members and for the redemption of nonqualified notices of allocation. The reconciliation of income F-21 TRUE VALUE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) tax expense to income tax computed at the U.S. federal statutory tax rate of 35% was as follows for the years ended December 31:
2005 2004 2003 -------- -------- ------- ($ IN THOUSANDS) Tax at U.S. statutory rate............................ $ 16,690 $ 15,187 $ 7,544 Effects of: Patronage dividend.................................. (15,616) (14,743) (6,656) State income taxes, net of federal benefit.......... 33 115 216 Decrease in valuation allowance..................... (1,403) (691) (1,090) Other, net.......................................... 347 309 319 -------- -------- ------- $ 51 $ 177 $ 333 ======== ======== =======
Deferred income taxes reflect the net tax effects to True Value of its net operating loss carryforwards, which expire in years through 2024, alternative minimum tax credit carryforwards, which do not expire, nonqualified notices of allocations, which are deductible when redeemed and 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. The deferred tax effect of the net operating loss carryforward was reduced in 2005 by $10,147. This reduction is attributable to the net effect of a $3,333 decrease attributable to amounts to be charged against members' loss allocation accounts and by a $6,814 decrease primarily in other deferred tax assets and liabilities. Total deferred tax assets, net of deferred tax liabilities, have a full valuation allowance because True Value has concluded that, based on the weight of available evidence, it is more likely than not that the deferred tax assets will not be realized. Deferred tax assets will only be realized to the extent future earnings are taxable to True Value and not allocated to members as tax-deductible patronage dividends. F-22 TRUE VALUE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The significant components of True Value's deferred tax assets and liabilities were as follows for the years ended December 31:
2005 2004 -------- -------- ($ IN THOUSANDS) Deferred tax assets: Net operating loss carryforwards.......................... $ 10,415 $ 20,562 AMT credit carryforward................................... 784 784 Nonqualified notices of allocation........................ 8,605 9,502 Bad debt provision........................................ 568 1,534 Vacation pay.............................................. 3,060 3,014 Reserves and accruals..................................... 8,415 -- Deferred gain............................................. 18,892 20,003 Severance and restructuring costs......................... 1,752 2,015 Rent expense.............................................. 2,719 2,916 Inventory capitalization.................................. 743 840 Other..................................................... 4,662 6,077 -------- -------- Total deferred tax assets................................... 60,615 67,247 Valuation allowance for deferred tax assets................. (58,037) (62,973) -------- -------- Net deferred tax assets..................................... 2,578 4,274 -------- -------- Deferred tax liabilities: Tax depreciation in excess of book depreciation........... 384 2,280 Contributions to fund retirement plans.................... 2,194 1,994 -------- -------- Total deferred tax liabilities.............................. 2,578 4,274 -------- -------- Net deferred taxes.......................................... $ -- $ -- ======== ========
8. SUPPLEMENTAL CASH FLOW INFORMATION The annual patronage dividend is satisfied through cash payments and issuance of subordinated promissory notes and Redeemable Class B non-voting common stock; for members with loss allocation accounts, the Class B non-voting common stock is offset to satisfy members' remaining allocation of the 1999 loss. Non-cash operating and financing activities relating to the issuance of patronage dividends were as follows for the years ended December 31:
2005 2004 2003 ------- ------- ------- ($ IN THOUSANDS) Distribution of annual patronage dividend: Patronage dividend payable in cash........................ $13,257 $12,669 $ 8,983 Issuance of Subordinated promissory notes................. 1,228 1,493 -- Issuance of Redeemable Class B non-voting common stock.... 22,548 12,175 2,315 Reduction of Loss allocation accounts..................... 6,837 15,038 6,971 ------- ------- ------- Total.................................................. $43,870 $41,375 $18,269 ======= ======= =======
True Value may set off its obligation to make payments to members for redeemable stock, notes, interest or declared and unpaid dividends against any obligation owed by the member to True Value. True Value F-23 TRUE VALUE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) exercised its set-off rights in 2005, 2004 and 2003 when patronage dividends were declared for members with loss allocation accounts. In addition, True Value reduced the Patronage dividend payable in cash of $12,669 and $8,983 in 2004 and 2003, respectively, to $11,939 and $8,452 when they were paid in 2005 and 2004, respectively. The amounts not paid were used to set off past due accounts receivable of $730 and $531 in 2005 and 2004, respectively. True Value also had non-cash operating and financing activities related to the redemption of stock due to the lifting of the moratorium. In 2003, True Value reclassified amounts presented for redemption, but deferred due to the moratorium, into Liabilities. True Value reclassified $18,841 of Redeemable Class A voting common stock and $59,579 of Redeemable Class B non-voting common stock, offset by: $27,941 of Loss allocation, $9,933 of Accumulated deficit (related to the 2001 loss) and $6,821 of Accounts receivable to Deferred stock redemptions. In 2004, True Value began redeeming these shares and related offset amounts, and also began redeeming shares that were presented for redemption during 2004. The components of the stock redemptions and payments in 2005 and 2004 were as follows:
2005 2004 ------- -------- ($ IN THOUSANDS) Redemption of Shares: Redeemable Class A voting common stock.................... $ 4,131 $ 18,185 Redeemable qualified Class B non-voting common stock...... 10,714 47,728 Redeemable nonqualified Class B non-voting common stock... 2,215 10,679 Amounts offset: Loss allocation account amounts........................... (4,757) (25,041) Accumulated deficit amounts (related to the 2001 loss).... (2,796) (10,745) Accounts receivable....................................... (2,263) (6,676) ------- -------- Net amount redeemed......................................... 7,244 34,130 Amount redeemed in Cash..................................... 1,738 7,779 ------- -------- Amount issued in subordinated promissory installment notes..................................................... $ 5,506 $ 26,351 ======= ========
As of December 31, 2005 and 2004, True Value classified $2,200 and $4,886, respectively, in Liabilities for stock redemption requests that had not fully completed the redemption procedures. The components of the in-process stock redemption request as of December 31, 2005 and 2004, were as follows:
2005 2004 ------ ------- ($ IN THOUSANDS) Request for Redemption of Shares: Redeemable Class A voting common stock.................... $ 959 $ 2,729 Redeemable qualified Class B non-voting common stock...... 2,771 6,270 Redeemable nonqualified Class B non-voting common stock... 565 1,433 Amounts offset: Loss allocation account amounts........................... (913) (3,212) Accumulated deficit amounts (related to the 2001 loss).... (768) (1,575) Accounts receivable....................................... (414) (759) ------ ------- Net amount in Liabilities for requested stock redemptions... $2,200 $ 4,886 ====== =======
F-24 TRUE VALUE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) True Value exercised its set-off rights with member accounts receivable and loss allocation accounts when True Value member notes and interest came due in 2005, 2004 and 2003 as follows:
2005 2004 2003 ----- ----- ----- ($ IN THOUSANDS) Notes and interest amounts satisfied: Subordinated promissory notes............................. $ 318 $ 510 $ 846 Subordinated promissory installment notes................. 141 114 12 Interest.................................................. 120 160 170 Offset amounts: Loss allocation accounts.................................. -- (4) (565) Accounts receivable....................................... (579) (780) (463) ----- ----- ----- $ -- $ -- $ -- ===== ===== =====
In 2004, in accordance with the Stipulation of Settlement related to the Derivative Action, upon rescinding the moratorium, True Value reduced the loss allocation accounts of the parties to the Stipulation of Settlement by approximately $5,000 on a pro-rata basis by increasing the Accumulated deficit account. In 2005, 2004 and 2003, True Value extended subordinated promissory notes, at the option of the member for a three-year period in the amounts of $18,075, $13,714 and $16,479, respectively. True Value's non-cash financing and investing activities in 2005 included $4,760 primarily related to the acquisition of paint manufacturing and computer equipment by entering into capital leases. In 2004, True Value's non-cash financing and investing activities included $1,697 related to the acquisition of new computer equipment by entering into capital leases. No capital lease obligations were incurred in 2003. Cash paid for interest during 2005, 2004 and 2003 totaled $13,088, $11,938 and $27,496, respectively. Cash paid for income taxes during 2005, 2004 and 2003 totaled $39, $167 and $285, respectively. F-25 TRUE VALUE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 9. BENEFIT PLANS The change in the projected benefit obligation and in the plan assets for True Value administered pension plans were as follows for the years ended December 31:
2005 2004 -------- -------- ($ IN THOUSANDS) Change in projected benefit obligation: Projected benefit obligation at beginning of year......... $ 79,224 $ 72,664 Service cost.............................................. 5,929 5,660 Interest cost............................................. 4,124 4,197 Benefit payments.......................................... (397) (385) Actuarial losses.......................................... 4,393 5,400 Plan amendments........................................... -- (186) Settlements............................................... (7,782) (8,126) -------- -------- Projected benefit obligation at end of year............ 85,491 79,224 -------- -------- Change in plan assets: Fair value of plan assets at beginning of year............ 62,572 59,133 Actual return on assets................................... 3,628 6,486 Employer contributions.................................... 9,626 5,464 Benefit payments.......................................... (397) (385) Settlements............................................... (7,782) (8,126) -------- -------- Fair value of plan assets at end of year............... 67,647 62,572 -------- -------- Reconciliation of funded status: Funded status............................................. (17,844) (16,652) Unrecognized prior service cost........................... (3,795) (3,969) Unrecognized actuarial loss............................... 27,123 25,607 -------- -------- Prepaid expense............................................. $ 5,484 $ 4,986 ======== ========
The Accumulated Benefit Obligation ("ABO") for True Value administered pension plans was $71,031 and $62,393 at December 31, 2005 and 2004, respectively. One of True Value's pension plans is the supplemental retirement plan ("SRP"), which is an unfunded unqualified defined benefit plan. The SRP had an ABO of $4,670 and $4,430 as of December 31, 2005 and 2004, respectively. Since the SRP is an unfunded plan, there were no plan assets at December 31, 2005 and 2004. True Value recorded in Other long-term liabilities, for the SRP plan, an additional minimum pension liability of $3,966 and $4,479 as of December 31, 2005 and 2004, respectively, which represents the amount by which the accumulated benefit obligation exceeded the fair value of plan assets plus the previously recognized prepaid asset. The additional liability has been offset by an intangible asset, which is included in Other assets, to the extent of previously unrecognized prior service cost. The amount in excess of previously unrecognized prior service cost of $1,730 and $1,903 at December 31, 2005 and 2004, respectively, was recorded as a reduction of Members' equity in Accumulated other comprehensive loss. As of December 31, 2004, the pension plans had unrecognized actuarial losses of $25,607. The major source of actuarial losses under the plan are related to the decline in interest rates over the last several years and lower than expected asset returns during the same period. Deviations from expected returns on assets are rolled into unrecognized actuarial losses over a three-year period. Actuarial losses are amortized using the minimum amortization methodology as described in Statement of Financial Accounting Standards No. 87, "Employers' Accounting for Pensions." At December 31, 2005, unrecognized actuarial losses increased $1,516 F-26 TRUE VALUE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) to $27,123. Major sources of this change that occurred during 2005 include the change in discount rate, lower than expected asset returns, greater than expected turnover and retirement, and an increase in assumed rates of termination and retirement under the plan. True Value has a prepaid pension expense for both plans of $5,484 and $4,986 at December 31, 2005 and 2004, respectively. The prepaid pension expense at December 31, 2005 and 2004, was classified in "Prepaid expenses." The components of net periodic pension cost for True Value administered pension plans were as follows for the years ended December 31:
2005 2004 2003 ------- ------- ------- ($ IN THOUSANDS) Components of net periodic pension cost: Service cost.......................................... $ 5,929 $ 5,660 $ 5,204 Interest cost......................................... 4,124 4,197 3,998 Expected return on assets............................. (4,634) (4,470) (4,344) Amortization of transition assets..................... -- -- (105) Amortization of prior service cost/(benefit).......... (175) (163) 93 Amortization of actuarial loss........................ 1,411 1,445 902 Settlement loss....................................... 2,472 2,735 3,753 ------- ------- ------- Net pension cost........................................ $ 9,127 $ 9,404 $ 9,501 ======= ======= =======
PLAN ASSETS Plan assets consist primarily of publicly traded common stocks and corporate debt instruments and the split by asset category is as follows:
ASSET CATEGORY 2005 2004 - -------------- ----- ----- Domestic Equities........................................... 63.0% 65.2% Foreign Equities............................................ 10.2% 9.6% Fixed Income................................................ 22.6% 22.8% Real Estate................................................. 0.0% 0.0% Cash........................................................ 4.2% 2.4% Other....................................................... 0.0% 0.0% ----- ----- Total....................................................... 100.0% 100.0% ===== =====
The target asset allocation of the plan assets is:
TARGET ASSET CATEGORY - --------------------- Domestic Equities........................................... 65.0% Foreign Equities............................................ 10.0% Fixed Income................................................ 25.0% Real Estate................................................. 0.0% Cash........................................................ 0.0% Other....................................................... 0.0% ----- Total....................................................... 100.0% =====
F-27 TRUE VALUE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) CONTRIBUTIONS True Value expects to contribute $3,418 to its qualified pension plan and $772 to its SRP plan in 2006. True Value's policy is to fund its qualified pension plan to maintain assets equal to at least 90% of current liability in order to maintain its exemption from the Pension Benefit Guarantee Corporation variable premium. True Value also participates in union-sponsored defined contribution plans. Costs related to these plans were $75, $90 and $59 for 2005, 2004 and 2003, respectively. ESTIMATED FUTURE BENEFIT PAYMENTS The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid:
PENSION BENEFITS ---------------- ($ IN THOUSANDS) 2006........................................................ $ 8,624 2007........................................................ 8,575 2008........................................................ 9,865 2009........................................................ 9,455 2010........................................................ 9,439 2011-2015................................................... 46,737
The assumptions used to determine True Value's pension obligations for all plans were as follows for the years ended December 31:
2005 2004 ---- ---- Weighted average assumptions: Discount rate............................................. 5.25% 5.50% Expected return on assets................................. 8.00% 8.00% Rate of compensation increase............................. 3.50% 3.50%
The discount rate of 5.25% was primarily based upon spot-yields as of December 31, 2005, from the Citigroup Pension Discount Curve, in conjunction with interest rates trends from Moody's Aa bonds. The Citigroup Pension Discount Curve was developed using high quality corporate bonds. The basis used to determine the overall expected return on assets was an analysis of the historical real (net of inflation) returns from back to 1926 for a portfolio consisting of large-cap U.S. equities, corporate bonds, U.S. government bonds and cash (intended to approximate True Value's pension asset mix). Using the historical returns over 30-year periods, the average returns for this portfolio over 30-year periods were calculated - the calculated 25th and 75th percentile were 4.6% and 6.4%, respectively. With the inflation assumption (3.0%) and the adjustment for expected fees paid from the pension trust (1.0%), the 25th and 75th percentile nominal yields are 6.6% and 8.4%. The True Value Company Defined Benefit Pension Plan assumes a rate of return of 8.0%. The average expected future service under the plan during 2005 was approximately 15 years. True Value also contributes to the True Value Company Employee Savings and Compensation Deferral Plan (the "401k Plan") in accordance with IRS regulations. Under the 401k Plan, each participant may elect to contribute an amount up to 50% of the participant's annual compensation, not to exceed $14, $13 and $12 per year for 2005, 2004 and 2003, respectively. Also, plan participants who are 50 years of age or older may elect to make additional catch-up contributions not to exceed $4, $3 and $2 for 2005, 2004 and 2003, respectively. The total participants' deferred compensation including True Value's contributions to the F-28 TRUE VALUE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) participants' balances may not exceed $42, $41 and $40 in 2005, 2004 and 2003, respectively. The 401k Plan includes a guaranteed match of one-third of a participant's contribution up to a total of 2% of the participant's annual compensation. Based on True Value achieving certain financial goals, a match of greater than one-third of a participant's contribution can be earned. A match equaling two-thirds of a participant's contribution, up to a total of 4% of the participant's annual compensation, was earned for 2003 and funded in March 2004. For 2004, a match equaling one-third of a participant's contribution, up to a total of 2% of the participant's annual 401k eligible compensation, was earned and funded in March 2005. For 2005, a match equaling two-thirds of a participant's contribution, up to a total of 4% of the participant's annual 401k eligible compensation, was earned and will be funded by March 2006. True Value recognized costs of $3,056, $1,520 and $2,928 for 2005, 2004 and 2003, respectively, for the 401k Plan. 10. SEGMENT INFORMATION True Value is principally engaged as a wholesaler of hardware and related products and is a manufacturer of paint products. True Value identifies segments based on management responsibility and the nature of the business activities of each component of its business. True Value measures segment earnings as operating earnings including an allocation for interest expense and income taxes. Information regarding the identified segments and the related reconciliation to consolidated information are as follows:
AS OF AND FOR THE YEAR ENDED DECEMBER 31, 2005 ----------------------------------------------- PAINT MANUFACTURING CONSOLIDATED HARDWARE AND DISTRIBUTION TOTALS ----------- ----------------- ------------- ($ IN THOUSANDS) Net sales to external customers............... $1,936,563 $106,471 $2,043,034 Interest expense.............................. 11,756 2,457 14,213 Depreciation and amortization................. 11,268 1,913 13,181 Segment net margin............................ 39,047 8,508 47,555 Identifiable segment assets................... 695,235 56,294 751,529 Expenditures for long-lived assets............ 9,671 5,204 14,875
AS OF AND FOR THE YEAR ENDED DECEMBER 31, 2004 ----------------------------------------------- PAINT MANUFACTURING CONSOLIDATED HARDWARE AND DISTRIBUTION TOTALS ----------- ----------------- ------------- ($ IN THOUSANDS) Net sales to external customers............... $1,915,511 $108,376 $2,023,887 Interest expense.............................. 10,746 2,548 13,294 Depreciation and amortization................. 15,097 1,370 16,467 Segment net margin............................ 34,064 9,149 43,213 Identifiable segment assets................... 603,151 52,368 655,519 Expenditures for long-lived assets............ 10,920 954 11,874
F-29 TRUE VALUE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
AS OF AND FOR THE YEAR ENDED DECEMBER 31, 2003 ----------------------------------------------- PAINT MANUFACTURING CONSOLIDATED HARDWARE AND DISTRIBUTION TOTALS ----------- ----------------- ------------- ($ IN THOUSANDS) Net sales to external customers............... $1,921,448 $102,892 $2,024,340 Interest expense.............................. 48,339 9,184 57,523 Depreciation and amortization................. 24,640 1,420 26,060 Segment net margin............................ 13,025 8,196 21,221 Identifiable segment assets................... 632,543 48,917 681,460 Expenditures for long-lived assets............ 6,367 458 6,825
True Value does not have a significant concentration of members in any geographic region of the United States or in any foreign countries. Primary product revenue categories for the last three years are set forth in the following table:
FOR THE FISCAL YEARS ENDED DECEMBER 31, --------------------------------------- 2005 2004 2003 ----------- ----------- ----------- ($ IN THOUSANDS) HARDWARE SEGMENT Hardware goods................................... $ 510,241 $ 495,029 $ 485,374 Farm and garden.................................. 434,871 430,840 429,161 Electrical and plumbing.......................... 356,290 350,685 353,332 Painting and cleaning............................ 217,439 211,944 209,942 Appliances and housewares........................ 214,446 218,489 228,929 Sporting goods and toys.......................... 93,496 102,817 107,862 Other............................................ 109,780 105,707 106,848 ---------- ---------- ---------- Subtotal Hardware segment................... 1,936,563 1,915,511 1,921,448 PAINT MANUFACTURING AND DISTRIBUTION SEGMENT Painting......................................... 106,471 108,376 102,892 ---------- ---------- ---------- Total net sales to external customers............ $2,043,034 $2,023,887 $2,024,340 ========== ========== ==========
11. ASSET SALES On April 20, 2005, True Value sold its 640,000-square-foot East Butler, Pennsylvania, warehouse and office facility to a third party for a purchase price of $6,188. In the first quarter of 2005, True Value recorded an impairment charge of $942 to write-down this facility that was classified as held for sale to fair value. Pursuant to the Purchase and Sale Agreement, True Value leased back approximately 100,000 square feet of warehouse space through the end of 2005 and approximately 15,000 square feet of office space through the end of 2006 under an operating lease. The lease on the warehouse space has been extended to the end of the first quarter of 2006 for 25,000 square feet. On December 28, 2005, True Value sold its 105,000-square-foot Chicago, Illinois, oil-based paint manufacturing facility to a third party for a purchase price of $10,125. True Value recorded a net gain of $9,080 on the sale. F-30 TRUE VALUE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 12. QUARTERLY FINANCIAL SUMMARY (UNAUDITED) Selected quarterly financial information for each of the four quarters in 2005 and 2004 is as follows:
FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER FULL YEAR -------- -------- -------- -------- ---------- ($ IN THOUSANDS) 2005 Net revenue $503,581 $551,580 $486,815 $501,058 $2,043,034 Gross margin 51,972 64,064 62,185 54,631 232,852 Net margin before income taxes 2,623 19,468 2,970 22,545 47,606 Net margin 2,615 19,445 2,958 22,537 47,555 2004 Net revenue $499,362 $575,345 $474,516 $474,664 $2,023,887 Gross margin 49,843 61,658 55,956 54,620 222,077 Net margin before income taxes 2,175 16,974 13,421 10,820 43,390 Net margin 2,124 16,915 13,401 10,773 43,213
F-31 ITEM 15(a)(2). INDEX TO FINANCIAL STATEMENT SCHEDULE.
PAGE(S) ------- Schedule II -- Valuation and Qualifying Accounts............ F-33
F-32 TRUE VALUE COMPANY SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003 ALLOWANCE FOR DOUBTFUL ACCOUNTS
YEAR ENDED DECEMBER 31, ----------------------------- 2005 2004 2003 ------- ------- ------- ($ IN THOUSANDS) Allowance for Doubtful Accounts: Balance at beginning of year.............................. $ 3,835 $ 8,395 $ 8,553 Provision/(benefit) for losses on accounts and notes receivable............................................. (143) (2,498) 927 Write-offs of doubtful accounts (1)....................... (2,272) (2,062) (1,085) ------- ------- ------- Balance at end of year.................................... $ 1,420 $ 3,835 $ 8,395 ======= ======= =======
- --------------- (1) Notes and accounts written off as uncollectible, net of recoveries of accounts previously written off as uncollectible. INVENTORY RESERVES
YEAR ENDED DECEMBER 31, ---------------------------- 2005 2004 2003 ------- ------- -------- ($ IN THOUSANDS) Reserve for Inventory: Balance at beginning of year.............................. $10,196 $ 6,718 $ 10,434 Provision for inventory reserves.......................... 15,052 12,574 8,603 Write-off of inventory.................................... (7,724) (9,096) (12,319) ------- ------- -------- Balance at end of year.................................... $17,524 $10,196 $ 6,718 ======= ======= ========
VALUATION ALLOWANCE FOR DEFERRED TAX ASSETS
YEAR ENDED DECEMBER 31, ------------------------------ 2005 2004 2003 -------- -------- -------- ($ IN THOUSANDS) Valuation Allowance for Deferred Tax Assets: Balance at beginning of year.............................. $ 62,973 $ 72,116 $ 94,952 Increase in deferred tax assets........................... 13,696 9,866 23,514 Decrease in deferred tax assets........................... (18,632) (19,009) (46,350) -------- -------- -------- Balance at end of year.................................... $ 58,037 $ 62,973 $ 72,116 ======== ======== ========
F-33 ITEM 15(A)(3). INDEX TO EXHIBITS
EXHIBITS ENCLOSED DESCRIPTION -------- ----------- 3-B By-Laws of True Value Company, as Amended and Restated Effective December 8, 2005. 4-I Fourth Amendment to Loan and Security Agreement between True Value and various financial institutions as Amended and Restated Effective December 28, 2005. 4-J Fifth Amendment to Loan and Security Agreement between True Value and various financial institutions as Amended and Restated Effective February 13, 2006. 10-E True Value Company Defined Lump Sum Pension Plan as Amended and Restated as of January 1, 2006. 19-A Notice of True Value's 2006 Annual Stockholders' Meeting and Proxy Statement. 21 Subsidiaries 31-A Section 302 Certification (Chief Executive Officer) 31-B Section 302 Certification (Chief Financial Officer) 32-A Section 906 Certification (Chief Executive Officer and Chief Financial Officer)
EXHIBITS INCORPORATED BY REFERENCE ------------ 2-A Agreement and Plan of Merger dated as of December 9, 1996 between Cotter & Company and ServiStar Coast to Coast Corporation ("SCC"). Incorporated by reference -- Exhibit 2-A to Registration Statement on Form S-4 (No. 333-18397). 3-A Amended and Restated Certificate of Incorporation of True Value, effective December 31, 2004. Incorporated by reference -- Exhibit 3-A to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 2004. 4-A Specimen certificate of Class A common stock. Incorporated by reference -- Exhibit 4-C to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 2002. 4-B Specimen certificate of Class B common stock. Incorporated by reference -- Exhibit 4-D to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 2002. 4-C Subordinated promissory installment note form. Incorporated by reference -- Exhibit 4-A to the Registrant's Quarterly Report on Form 10-Q for the quarter ended October 1, 2005. 4-D Subordinated promissory note form. Incorporated by reference -- Exhibit 4-B to the Registrant's Quarterly Report on Form 10-Q for the quarter ended October 1, 2005. 4-E Loan and Security Agreement dated August 29, 2003 for $275,000,000 revolving credit facility between TruServ Corporation and various financial institutions. Incorporated by reference -- Exhibit 4-B to the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 27, 2003. 4-F First Amendment to Loan and Security Agreement between TruServ and various financial institutions as Amended and Restated Effective March 19, 2004. Incorporated by reference -- Exhibit 4-H to Post-Effective Amendment No. 17 on Form S-1 to Registration Statement on Form S-4 (No. 333-18397). 4-G Second Amendment to Loan and Security Agreement between TruServ and various financial institutions as Amended and Restated Effective October 31, 2004. Incorporated by reference -- Exhibit 4-A to the Registrant's Quarterly Report on Form 10-Q for the quarter ended October 2, 2004.
E-1
EXHIBITS INCORPORATED BY REFERENCE ------------ 4-H Third Amendment to Loan and Security Agreement between True Value and various financial institutions as Amended and Restated Effective May 6, 2005. Incorporated by reference -- Exhibit 4-A to the Registrant's Quarterly Report on Form 10-Q for the quarter ended April 2, 2005. 10-A Current Form of "Retail Member Agreement with True Value" between True Value and its members that offer primarily hardware and related items. Incorporated by reference -- Exhibit 10-A to Post-Effective Amendment No. 19 to Registration Statement on Form S-2 to Form S-4 (No. 333-18397). 10-B Current Form of "International Retail Member Agreement with True Value" between True Value and its members that offer primarily hardware and related items. Incorporated by reference -- Exhibit 10-B to the Registrant's Quarterly Report on Form 10-Q for the quarter ended April 3, 2004. 10-C Current Form of "Undesignated Retail Member Agreement with True Value" between True Value and its members that offer primarily hardware and related items. Incorporated by reference -- Exhibit 10-C to the Registrant's Quarterly Report on Form 10-Q for the quarter ended April 3, 2004. 10-D Current Form of "Subscription to Shares of True Value." Incorporated by reference -- Exhibit 10-B to Post-Effective Amendment No. 19 to Registration Statement on Form S-2 to Form S-4 (No. 333-18397). 10-F TruServ Corporation Savings and Compensation Deferral Plan as Amended and Restated Effective January 1, 1998; including amendments through December 2002. Incorporated by reference -- Exhibit 10-D to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 2002. 10-G First Amendment of TruServ Corporation Savings and Compensation Deferral Plan as Amended and Restated Effective January 1, 1998. Incorporated by reference -- Exhibit 10-M to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 2003. 10-H Second Amendment of TruServ Corporation Savings and Compensation Deferral Plan as Amended and Restated Effective January 1, 1998. Incorporated by reference -- Exhibit 10-N to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 2003. 10-I Third Amendment of TruServ Corporation Savings and Compensation Deferral Plan as Amended and Restated Effective January 1, 1998. Incorporated by reference -- Exhibit 10-O to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 2003. 10-J True Value Company Supplemental Retirement Plan As Amended and Restated Effective January 1, 2005. Incorporated by reference -- Exhibit 10-R to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 2004. 10-K True Value Company Transition Incentive Plan Effective March 1, 2005. Incorporated by reference -- Exhibit 10-S to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 2004. 10-L Retail Conversion Funds Agreement dated as of December 9, 1996 between TruServ and SCC. Incorporated by reference -- Exhibit 10-L to Registration Statement on Form S-4 (No. 333-18397).
E-2
EXHIBITS INCORPORATED BY REFERENCE ------------ 10-M Lease Agreement by and between Hammer (DE) Limited Partnership, a Delaware limited partnership, as Landlord and TruServ Corporation as Tenant, dated December 26, 2002. Incorporated by reference -- Exhibit 10-J to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 2002. 10-N Lease Agreement by and between Bolt (DE) Limited Partnership, a Delaware limited partnership, as Landlord and TruServ Corporation as Tenant, dated December 26, 2002. Incorporated by reference -- Exhibit 10-K to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 2002. 10-O Lease Agreement by and between Wrench (DE) Limited Partnership, a Delaware limited partnership, as Landlord and TruServ Corporation as Tenant, dated December 26, 2002. Incorporated by reference -- Exhibit 10-L to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 2002. 10-P Consulting Agreement between TruServ and Thomas S. Hanemann dated November 2, 2004. Incorporated by reference -- Exhibit 10-P to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 2004. 10-Q Employment Agreement between True Value and Lyle G. Heidemann dated May 25, 2005. Incorporated by reference -- Exhibit 10.1 to the Registrant's Report on Form 8-K filed on June 6, 2005. 14-A Code of Ethics. Incorporated by reference -- Exhibit 99.3 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 2002.
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, 2005 has been sent to security holders. Copies of such Annual Report will subsequently be furnished to the Securities and Exchange Commission. E-3 EX-3.B 2 c02989exv3wb.txt BY-LAWS, AS AMENDED AND RESTATED Exhibit 3-B BY-LAWS OF TRUE VALUE COMPANY AMENDED AND RESTATED AS OF DECEMBER 8, 2005 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 Corporation shall be organized and operated on a cooperative basis for the holders of its Class A Common Stock (who are its Members). The nature of the business, or objects or purposes to be transacted, promoted or carried on are: To manufacture, purchase or otherwise acquire, invest in, own, mortgage, pledge, sell, assign and transfer or otherwise dispose of and trade and deal with goods, wares and merchandise and personal property of every class description, including, but not limited to: (a) hardware, goods, tools and related products; (b) building materials and related products; (c) paints and paint sundries and related products; (d) lawn and garden products, supplies, and tools; (e) farming, home and garden maintenance supplies and related products; (f) automotive and related products; (g) variety, crafts, houseware goods, appliances, sporting goods, and related products; and (h) musical instruments and related products. To acquire, hold, use, sell, assign, lease, grant licenses in respect of, and otherwise deal in and dispose of letters patent of the United States or any other foreign country, patent rights, licenses and privileges, inventions, improvements and processes, copyrights, trademarks and trade names incident to or useful in connection with any business of this Corporation. To acquire the capital stock, bonds or other evidences of indebtedness, secured or unsecured, of any other corporation and to acquire the goodwill, rights, assets and property and to undertake and assume all or any part of the obligations or liabilities of any other corporation, firm, association or person. To acquire by purchase, subscription or otherwise, and to receive, hold, own, guarantee, sell, assign, exchange, transfer, mortgage, lease, pledge or otherwise dispose of or deal in and with any personal or real property, or any of the shares of the capital stock, or any voting trust certificates in respect of the shares of capital stock, scrips, warrants, rights, bonds, debentures, notes, trust receipts and other securities, obligations, choses in action and evidences of indebtedness or created by any corporations, joint stock companies, syndicates, associations, firms, trusts or persons, public or private, or by the government of the United States of America, or by any foreign government, or by any state, territory, province, municipality or other political subdivision or by any governmental agency, and as owner thereof to possess and exercise all the rights, powers and privileges of ownership, including the right to execute consents and vote thereon, and to do any and all acts and things necessary or advisable for the preservation, protection, improvement and enhancement in value thereof. To enter into, make and perform contracts of every kind and description with any person, firm, association, corporation, municipality, county, state, body politic or government or colony or dependence thereof. To borrow or raise moneys for any of the purposes of the Corporation and, from time to time without limit as to amount, to draw, make, accept, endorse, execute and issue promissory notes, drafts, bills of exchange warrants, bonds, debentures and other negotiable or non-negotiable instruments and evidences of indebtedness, and to secure the payment of any thereof and of the interest thereon by mortgage upon or pledge, conveyance or assignment in trust of the whole or any part of the property of the Corporation, whether at the time owned or thereafter acquired, and to sell, pledge or otherwise dispose of such bonds or other obligations of the Corporation for its corporate purposes. To purchase, hold, sell and transfer the shares of its own capital stock; provided it shall not use its funds or property for the purchase of its own shares of capital stock when such use would cause any impairment of its capital except as otherwise permitted by law and provided further that shares of its own capital stock belonging to it shall not be voted upon directly or indirectly. To engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of Delaware. 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 2 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. 3 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 chief executive officer 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 chief executive officer 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. 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. 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, chief executive officer, secretary, 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 board meetings may take place by any means through which all participating directors can hear each other, when properly called. 4 SECTION 9. QUORUM. At all meetings of the board a majority of the directors then in office and entitled to vote shall constitute a quorum for the transaction of business and the act of a majority of the directors present at any meeting at which there is a quorum shall be the act of the Board of Directors, except as may be otherwise specifically provided by statute or by the Certificate of Incorporation or by these By-Laws. If a quorum shall not be present at any meeting of directors, the directors present thereat may adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present. SECTION 10. AGENDAS AND MINUTES. Agendas for all regular meetings shall be delivered, either personally or by any electronic communication, or mailed at least five (5) days before the date of each such 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 the power at any time to fill vacancies in, to change the membership of, or to dissolve any committee. Each committee shall keep regular minutes of its meetings and report the same to the Board of Directors when required. ARTICLE V NOTICES SECTION 1. FORM; DELIVERY. Whenever applicable law or the Certificate of Incorporation or these By-Laws requires notice to any director or stockholder, it shall not be construed to mean personal notice, but such notice may be given in writing, by telephone, by any electronic communication, or by mail addressed to such director or stockholder at such address as appears on the books of the Corporation, and such notice shall be deemed to be given at the time when the same shall be thus delivered, conveyed by telephone call, entered into the electronic process or mailed. SECTION 2. WAIVER. Whenever any notice is required, a waiver thereof in writing signed by the person or persons entitled to said notice, whether before or after the time stated therein, shall be deemed equivalent thereto. ARTICLE VI OFFICERS SECTION 1. OFFICERS. The officers of the Corporation shall be chosen by the Board of Directors at its first meeting after each annual meeting of stockholders and shall be a chief executive officer, a president, a vice president, a secretary and a treasurer. The Board of Directors may also choose additional vice presidents and one (1) or more assistant secretaries and assistant treasurers. Two (2) or more offices may be held by the same person. 5 SECTION 2. OTHER OFFICERS AND AGENTS. The board may appoint such other officers as it shall deem necessary, who shall hold their offices for such terms and shall exercise such powers and perform such duties as shall be determined from time to time by the board. All officers shall have power to sign certificates for shares of the Corporation, deeds, mortgages, bonds, contracts, loans, and any other instruments which the Board of Directors has authorized to be executed. SECTION 3. SALARIES. The salaries of the chief executive officer and president of the Corporation shall be fixed by the Board of Directors. SECTION 4. TENURE AND REMOVAL. Any officer elected or appointed by the Board of Directors may be removed at any time by the affirmative vote of a two-thirds (2/3) majority of the entire Board of Directors, with or without cause, and without prejudice to any of such officer's contract rights. If the office of any officer becomes vacant, the vacancy may be filled by the Board of Directors. SECTION 5. PRESIDENT AND CHIEF EXECUTIVE OFFICER. The president shall be the chief executive officer, and shall perform all duties incident to the offices of president and chief executive officer and such other duties as shall from time to time be assigned by the Board of Directors, and shall report to the Board of Directors on the affairs, performance and direction of the Company. SECTION 6. VICE PRESIDENTS. The Vice Presidents 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 S-ecretary 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 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 shall, in the absence or disability of the treasurer, perform the duties and exercise the powers of the treasurer and shall perform such other duties as the treasurer and Board of Directors shall prescribe. 6 ARTICLE VII CERTIFICATES OF STOCK AND CERTAIN QUALIFICATIONS, LIMITATIONS AND RESTRICTIONS OF CAPITAL STOCK SECTION 1. STOCK CERTIFICATES. The certificates of stock of the Corporation shall be consecutively numbered and shall be entered on the books of the Corporation as they are issued. They shall exhibit the holder's name and number of shares and shall be signed by an officer. The designations, preferences and relative, participating, optional or other special rights of each class of stock and the qualifications, limitations or restrictions of such preferences and/or rights shall be set forth in full or summarized on the face or back of the certificates which the Corporation shall issue to represent such class of stock. If any stock certificate is signed (1) by a transfer agent or an assistant transfer agent or (2) by a transfer clerk acting on behalf of the Corporation and a registrar, the signature of any such officer may be by facsimile. SECTION 2. LOST CERTIFICATES. The Board of Directors may direct a new certificate or certificates to be issued in place of any certificate or certificates theretofore issued by the Corporation alleged to have been lost or destroyed, upon the making of an affidavit of that fact by the person claiming the certificate of stock to be lost or destroyed. When authorizing such issue of a new certificate or certificates, the Board of Directors may, in its discretion and as a condition precedent to the issuance thereof, require the owner of such lost or destroyed certificate or certificates, or the owner's legal representative, to advertise the same in such manner as it shall require and/or give the Corporation a bond in such sum as it may direct as indemnity against any claim that may be made against the Corporation with respect to the certificate alleged to have been lost or destroyed. SECTION 3. TRANSFER OF SHARES. Subject to the qualifications, limitations and restrictions set forth in the Certificate of Incorporation and these By-Laws, upon surrender to the Corporation, or the transfer agent of the Corporation, of a certificate for shares duly endorsed or accompanied by proper evidence of succession, assignment or authority to transfer, it shall be the duty of the Corporation to issue a new certificate to the person entitled thereto, cancel the old certificate and record the transaction upon its books. SECTION 4. CLOSING OF TRANSFER BOOKS. In order that the Corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholders, or to exercise any rights in respect of any change, conversion or exchange of stock or for the purpose of any other lawful action, the Board of Directors may, except as otherwise required by law, fix a record date, which record date shall not precede the date on which the resolution fixing the record date is adopted and which record date shall not be more than sixty (60) nor less than ten (10) days before the date of any meeting of stockholders, nor more than sixty (60) days prior to the time for such other action as hereinbefore described; provided, however, that if no record date is fixed by the Board of Directors, the record date for determining stockholders entitled to notice of or to vote at a meeting of stockholders shall be at the close of business on the day next preceding the day on which notice is given or, if notice is waived, at the close of business on the day next preceding the day on which the meeting is held, and, for determining stockholders entitled to exercise any rights of change, conversion or exchange of stock or for any other purpose, the record date shall be at the close of business on the day on which the Board of Directors adopts a resolution relating thereto. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the Board of Directors may fix a new record date for the adjourned meeting. 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. 7 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 have the right to purchase, in cash or through a note, all or any portion of outstanding shares of capital stock of the Corporation which are in excess of the number of shares required to be held by a stockholder or which are distributed as non-qualified written notices of allocation. Upon the effective date of the exercise of an option to purchase any stock redeemed pursuant to this section 6(b)(ii), the stock redeemed shall be deemed to be and shall be and become the property of this Corporation; from and after such date all rights and privileges incident to the ownership of the shares shall cease, except only the right to receive the purchase price, without interest, and subject to the Corporation's liens and right of setoff. (c) NOTICE OF REPURCHASE RIGHTS. The right or obligation of purchase or redemption hereby reserved to the Corporation may be stated in the subscription agreement under which the Corporation's stock is sold, in the Member Agreement and on any stock certificates. (d) REPURCHASE RIGHTS NOT EXCLUSIVE. The right or obligation of purchase or redemption provided for in this section 6 of Article VII of the By-Laws is in addition to, and not in derogation of, the rights reserved to the Corporation by the provisions of Article Four 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 shall cease, except only the right to receive the purchase price (as hereinafter provided) 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. 8 (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 and shall be subordinate to any indebtedness of the Company, whether existing, contingent or created after the date of issuance of the note. (c) AVAILABILITY OF FUNDS. Notwithstanding anything to the contrary expressed or implied herein, should the Board of Directors in its discretion determine that the funds of the Corporation available for such purpose are insufficient for immediate payment of all or any part of the redemption price in light of the Corporation's legal or business requirements, or that immediate payment of all or any part of the redemption price is otherwise not in the best interests of the Corporation, the Corporation may delay (without interest) the payment of all or any part of the redemption price (including the issuance of any promissory note) until such time as the Board of Directors determines that sufficient funds are available for such purpose and that it is otherwise in the Corporation's best interests to recommence payments for such purpose, at which time the Corporation shall pay to those entitled thereto, in the chronological order in which such payments were delayed starting with those whose payment has been longest delayed and continuing until sufficient funds are no longer available, or through another equitable manner determined by the Board of Directors, the unpaid redemption price in accordance with Section 7(b), except that any promissory note shall be dated the date of its issuance. (d) HARDSHIP. Notwithstanding the provisions of Paragraph 7(b) of this Article VII, the Board of Directors in its discretion and with due regard for the financial condition and requirements of the Corporation, may authorize and cause payment in cash for all or part of the redemption price which would otherwise be paid by a note if the Board of Directors determines that the prescribed method of payment imposes an undue hardship upon the Terminated Stockholder. The Board of Directors may implement this provision by delegating authority to an officer or officers. SECTION 8. LIEN ON STOCK AND NOTES. The Corporation shall have a lien on, and a right of setoff against, any stock or notes, including those issued as Patronage Dividend and against any cash portion of such Patronage Dividend which is in excess of twenty percent (20%) of the overall patronage dividend payable in any year for such indebtedness of the stockholder to the Corporation as may, for whatever cause, exist. In the event that the 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 attorneys' fees. 9 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 the 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), ownership or control; (d) A requirement that the Member purchase qualifying shares of the Corporation (as referred to in Article XII of these By-Laws) pursuant to a subscription agreement; (e) Automatic modification of the Member Agreement upon notice by the Corporation to the Member of any relevant changes in the Certificate of Incorporation, By-Laws, or by approval of the Board of Directors; and (f) Necessary conditions regarding use of the True Value and any other Company owned trademarks which must be complied with. SECTION 3. TERMINATION. Each Member Agreement may be terminated as provided therein. SECTION 4. CHANGE IN FORM OF BUSINESS. In the event a Member changes a sole proprietorship, partnership or joint venture to a corporate form, where the Corporation has agreed to accept the corporate successor-in-interest as a Member, then the Member shall sell, transfer or otherwise assign to such successor-in-interest all shares of stock of this Corporation owned by such Member. Such shares shall remain subject to the Corporation's liens and right of setoff and all other rights provided for in the Certificate of Incorporation, By-Laws or Member Agreement. 10 SECTION 5. MECHANICS OF SETOFF. Notes issued by the Corporation, whether issued incidental to the distribution of a 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 as reported in the Wall Street Journal on the day of setoff, 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. METHOD AND TIMING OF PAYMENT. The Patronage Dividend to which stockholder-Members become entitled for each fiscal year shall be distributed no later than the fifteenth day of the ninth month following such fiscal year. The Board of Directors may, in its discretion, determine to pay Patronage Dividends either all in a form that will be treated as a deductible qualified written notice of allocation within the meaning of section 1388(c) of the Internal Revenue Code of 1986, as amended (hereinafter referred to as the "IRC"), all in a form that will be treated as a nonqualified written notice of allocation within the meaning of section 1388(d) of the IRC, or part in qualified form and part in nonqualified form. At least twenty percent (20%) of any qualified payment of Patronage Dividends shall be paid in cash. Subject to this limitation with respect to qualified distributions, the Board of Directors may decide that the balance of any Patronage Dividend be paid, in whole or in part, in cash, property, Class B Common Stock, promissory notes or other evidences of indebtedness, or in any other form of written notice of allocation (within the meaning of section 1388(b) of the IRC). SECTION 3. 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 11 (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 4. 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: With respect to the Patronage Dividend payable for each fiscal year, the Corporation may pay each Member a portion of such Patronage Dividend 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 5. 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 are 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. Promissory Notes shall be subordinate to any indebtedness of the Company, whether existing, contingent or created after the date of issuance of the note. SECTION 6. HARDSHIP. If, upon application by a Member, the Board of Directors shall determine that payment of such Member's Patronage Dividend for any year by the method herein provided or prescribed by the Board of Directors imposed an undue hardship upon such Member, the Board of Directors, in its discretion and with due regard for the financial condition and requirements of the Corporation, may authorize and cause the payment of all or any additional part of such Patronage Dividends in cash. The Board of Directors may implement this provision by adopting hardship guidelines and delegating authority to an officer or officers. ARTICLE X GENERAL PROVISIONS SECTION 1. 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 2. 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 3. FISCAL YEAR. The fiscal year shall end on December 31 of each calendar year. 12 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 the 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 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 OFFICERS, DIRECTORS, EMPLOYEES AND AGENTS SECTION 1. RIGHT TO INDEMNIFICATION. Each person who was or is a party or is threatened to be made a party to or is involved (as a party, witness, or otherwise), in any threatened, pending, or completed action, suit, or proceeding, whether civil, criminal, administrative, or investigative (hereinafter a "Proceeding"), by reason of the fact that he or she, or a person of/for whom he or she is the legal representative, 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 the Corporation or of a partnership, joint venture, trust, or other enterprise, including service with respect to employee benefit plans, whether the basis of the Proceeding is alleged action in an official capacity as a director, officer, employee or agent in any other capacity while serving as a director, officer, employee or agent (hereafter an "Indemnitee"), shall be indemnified and held harmless by the Corporation to the fullest extent authorized by the Delaware General Corporation Law, as the same exists or may hereafter be amended or interpreted (but, in the case of any such amendment or interpretation, only to the extent that such amendment or interpretation permits the Corporation to provide broader indemnification rights than were permitted prior thereto) against all expenses, liability, and loss (including attorneys' fees, judgments, fines, ERISA excise taxes or penalties, and amounts paid or to be paid in settlement, and any interest, assessments, or other charges imposed thereon, and any federal, state, local, or foreign taxes imposed on any Indemnitee as a result of the actual or deemed receipt of any payments under this Article) reasonably incurred or suffered by such person in connection with investigating, defending, being a witness in, or participating in (including on appeal), or preparing for any of the foregoing in, any Proceeding (hereinafter "Expenses"); provided, however, that except as to actions to enforce indemnification rights pursuant to Section 3 of this Article, the Corporation shall indemnify any Indemnitee seeking indemnification in connection with a Proceeding (or part thereof) initiated by such person only if the Proceeding (or part thereof) was authorized by the Board of Directors of the Corporation. The right to indemnification conferred in this Article shall be a contract right for officers and directors. SECTION 2. AUTHORITY TO ADVANCE EXPENSES. Expenses incurred by an officer or director (acting in his or her capacity as such) in defending a Proceeding shall be paid by the Corporation in advance of the final disposition of such Proceeding, provided, however, that if required by law such Expenses shall be advanced only upon delivery to the Corporation of an undertaking by or on behalf of such director or officer to repay such amount if it shall ultimately be determined that he or she is not 13 entitled to be indemnified by the Corporation as authorized in this Article or otherwise. Expenses incurred by other Indemnitees of the Corporation (or by the directors or officers not acting in their capacity as such, including service with respect to employee benefit plans) may be advanced upon such terms and conditions as the Board of Directors deems appropriate. Any advancement is not intended to be a loan and any obligation to reimburse the Corporation for Expense advances shall be unsecured and no interest shall be charged thereon. SECTION 3. RIGHT OF CLAIMANT TO BRING SUIT. If a claim under Section 1 or 2 of this Article is not paid in full by the Corporation within a reasonable period of time after a written claim has been received by the Corporation, the claimant may at any time thereafter bring suit against the Corporation to recover the unpaid amount of the claim and, if successful in whole or in part, the claimant shall be entitled to be paid also the expense (including attorneys' fees) of prosecuting such claim. It shall be a defense to any such action (other than an action brought to enforce a claim for expenses incurred in defending a Proceeding in advance of its final disposition where the required undertaking has been tendered to the Corporation) that the claimant has not met the standards of conduct that make it permissible under the Delaware General Corporation Law for the Corporation to indemnify the claimant for the amount claimed. The burden of proving such a defense shall be on the Corporation. Neither the failure of the Corporation (including its Board of Directors or committees thereof, independent legal counsel, or its stockholders) to have made a determination prior to the commencement of such action that indemnification of the claimant is proper under the circumstances because he or she has met the applicable standard of conduct set forth in the Delaware General Corporation Law, nor an actual determination by the Corporation (including its Board of Directors or committees thereof, independent legal counsel, or its stockholders) that the claimant had not met such applicable standard of conduct, shall be a defense to the action or create a presumption that the claimant has not met the applicable standard of conduct. SECTION 4. PROVISIONS NONEXCLUSIVE. The rights conferred on any person by this Article shall not be exclusive of any other rights that such person may have or hereafter acquire under any statute, provision of the Certificate of Incorporation, agreement, vote of stockholders or disinterested directors, or otherwise, both as to action in an official capacity and as to action in another capacity while holding such office. To the extent that any provision of the Certificate of Incorporation, agreement, or vote of the stockholders or disinterested directors is inconsistent with these By-Laws, the provision, agreement, or vote shall take precedence. SECTION 5. AUTHORITY TO INSURE. The Corporation may purchase and maintain insurance to protect itself and any Indemnitee against any Expense, whether or not the Corporation would have the power to indemnify against such Expense under applicable law or the provisions of this Article. SECTION 6. FORM OF INDEMNIFICATION. The Corporation may fulfill its indemnification obligations by, at its election, paying Expenses and obligations directly, assuming the defense of any Proceeding, hiring counsel reasonably acceptable to the Indemnitee, reimbursing Indemnitee for amounts paid by Indemnitee or in any other manner determined by the Board of Directors. SECTION 7. SURVIVAL OF RIGHTS. The rights provided by this Article shall continue as to a person who has ceased to be an Indemnitee and shall inure to the benefit of the heirs, executors, and administrators of such a person. SECTION 8. SETTLEMENT OF CLAIMS. The Corporation shall not be liable to indemnify any Indemnitee under this Article (a) for any amounts paid in settlement of any action or claim effected without the Corporation's written consent, which consent shall not be unreasonably withheld; or (b) for any judicial award if the Corporation was not given a reasonable and timely opportunity, at its expense, to participate in the defense of such action. SECTION 9. EFFECT OF AMENDMENT. Any amendment, repeal, or modification of this Article shall not adversely affect any right or protection of any Indemnitee existing at the time of such amendment, repeal, or modification. 14 SECTION 10. SUBROGATION. In the event of payment under this Article, the Corporation shall be subrogated to the extent of such payment to all of the rights of recovery of the Indemnitee, who shall execute all papers required and shall do everything that may be necessary to secure such rights, including the execution of such documents necessary to enable the Corporation effectively to bring suit to enforce such rights. SECTION 11. NO DUPLICATION OF PAYMENTS. The Corporation shall not be liable under this Article to make any payment in connection with any claim made against the Indemnitee to the extent the Indemnitee has otherwise actually received payment (under any insurance policy, agreement, vote, or otherwise) of the amounts otherwise indemnifiable hereunder. 15 EX-4.I 3 c02989exv4wi.txt FOURTH AMENDMENT TO LOAN AND SECURITY AGREEMENT Exhibit 4-I EXECUTION COPY FOURTH AMENDMENT TO LOAN AND SECURITY AGREEMENT THIS FOURTH AMENDMENT TO LOAN AND SECURITY AGREEMENT ("Fourth Amendment") is made as of the 28th day of December, 2005 by and among True Value Company, a Delaware corporation (f/k/a TruServ Corporation and herein "True Value" or "TruServ"), TruServ Acceptance Company, an Illinois corporation ("TruServ Acceptance"), TruServ Logistics Company, an Illinois corporation ("TruServ Logistics"), General Paint & Manufacturing Company ("General Paint") and True Value.com Corporation, a Delaware corporation ("True Value.com"), Bank of America, N.A., a national banking association ("B of A"), as successor-in-interest to Fleet Capital Corporation ("FCC"), as agent for Lenders hereunder (B of A, in such capacity, being "Agent"), Wachovia Capital Financial Corporation (Central) (f/k/a Congress Financial Corporation), Merrill Lynch Capital, a Division of Merrill Lynch Business Financial Services, Inc., LaSalle Business Credit, LLC as Co-Documentation Agents ("Co-Documentation Agents") and the lenders who are signatories hereto ("Lenders"). True Value, TruServ Acceptance, TruServ Logistics, General Paint and True Value.com are sometimes hereinafter referred to individually as a "Borrower" and collectively as "Borrowers." WITNESSETH: WHEREAS, Borrowers, Bank of America, N.A., as Syndication Agent (Bank of America, N.A. has assigned all of its interests to FCC which, in turn, has assigned all of its interests, either directly or indirectly, through an Affiliate of B of A), Co-Documentation Agents, Agent and Lenders entered into a certain Loan and Security Agreement dated as of August 29, 2003, as amended by a certain First Amendment to Loan and Security Agreement by and among Borrowers, Bank of America, N.A., as Syndication Agent, Co-Documentation Agents, Agent and Lenders dated as of March 19, 2004, by a certain Second Amendment to Loan and Security Agreement by and among Borrowers, Syndication Agent, Co-Documentation Agents, Agents and Lenders dated as of October 26, 2004 and by a certain Third Amendment to Loan and Security Agreement by and among Borrowers, Co-Documentation Agents, Agent and Lenders dated as of May 6, 2005 (said Loan and Security Agreement, as so amended, is hereinafter referred to as the "Loan Agreement"); and WHEREAS, Borrowers desire to amend and modify certain provisions of the Loan Agreement and, subject to the terms hereof, Agent and Lenders are willing to agree to such amendments and modifications; NOW THEREFORE, in consideration of the premises, the mutual covenants and agreements herein contained, and any extension of credit heretofore, now or hereafter made by Agent and Lenders to Borrowers, the parties hereto hereby agree as follows: 1. Definitions. All capitalized terms used herein without definition shall have the meaning given to them in the Loan Agreement. 2. Added Definitions. Appendix A of the Loan Agreement is hereby amended to insert the following new definitions of "Fourth Amendment," "Fourth Amendment Effective Date," "Manchester Mortgage Documents" and "Manchester Mortgage Indebtedness" in their appropriate alphabetical order: Fourth Amendment - that certain Fourth Amendment to Loan and Security Agreement dated as of December 28, 2005 by and among Agent, Borrowers, Co-Documentation Agents and the Lenders party thereto. Fourth Amendment Effective Date - shall have the meaning contained in Section 6 of this Fourth Amendment. Manchester Mortgage Documents - [DESCRIPTION TO COME FROM BORROWERS.] Manchester Mortgage Indebtedness - Money Borrowed owed by Borrowers or any one of them pursuant to the Manchester Mortgage Documents. 3. Indebtedness. Subsection 8.2.3 of the Loan Agreement is hereby deleted and the following is inserts in its stead: "8.2.3 Total Indebtedness for Money Borrowed. Create, incur, assume, or suffer to exist, or permit any Restricted Subsidiary of any Borrower to create, incur or suffer to exist, any Indebtedness for Money Borrowed, except: (i) Obligations owing to Agent, any Lender or any Affiliate of any Lender or Agent under this Agreement or any of the other Loan Documents; (ii) Indebtedness for Money Borrowed, including, without limitation, Subordinated Debt, existing on the date of this Agreement and listed on Exhibit 8.2.3, any renewals, replacements, refinancings or extensions thereof; (iii) Permitted Purchase Money Indebtedness; (iv) contingent liabilities arising out of endorsements of checks and other negotiable instruments for deposit or collection in the ordinary course of business; (v) Guaranties of any Indebtedness for Money Borrowed permitted hereunder; (vi) Indebtedness for Money Borrowed permitted under subsections 8.2.2(v) and (vi); (vii) Indebtedness for Money Borrowed outstanding pursuant to the Redeemable Subordinated Notes; (viii) Indebtedness for Money Borrowed outstanding pursuant to the Member Notes; 2 (ix) reimbursement obligations owing with respect to the B of A LCs and with respect to documentary letters of credit; (x) Indebtedness for Money Borrowed arising out of performance or surety bonds in the ordinary course of business; (xi) Indebtedness for Money Borrowed arising out of Derivative Obligations; (xii) Indebtedness for Money Borrowed in respect of sale and leaseback transactions not prohibited by the terms hereof involving existing facilities; (xiii) Indebtedness for Money Borrowed in respect of deferred compensation, incentive plans and similar arrangements; (xiv) Member Guaranties in an aggregate amount outstanding at any time not to exceed $10,000,000 less the aggregate amount of Member Loans outstanding at such time; (xv) Manchester Mortgage Indebtedness; and (xvi) Indebtedness for Money Borrowed not included in paragraphs (i) through (xv) above which does not exceed at any time, in the aggregate, the sum of $1,000,000." [CHANGED ITEMS UNDERSCORED] 4. Liens. Subsection 8.2.5 of the Loan Agreement is hereby deleted and the following is inserted in its stead: "8.2.5 Limitation on Liens. Create or suffer to exist, or permit any Subsidiary of any Borrower to create or suffer to exist, any Lien upon any of its Property, income or profits, whether now owned or hereafter acquired, except: (i) Liens at any time granted in favor of Agent for the benefit of Lenders or Affiliates or upon any Property in possession of or control of any Lender; (ii) Liens for taxes, assessments or governmental charges (excluding any Lien imposed pursuant to any of the provisions of ERISA) not yet due, being contested in the manner described in subsection 7.1.14 hereto or other than taxes in immaterial amounts that inadvertently remain unpaid, but only if, in the case of contested taxes, such Lien would not reasonably be expected to adversely affect Agent's rights or the priority of Agent's lien on any Collateral (other than Collateral having de minimis value); 3 (iii) Liens arising in the ordinary course of the business of any Borrower or any of its Subsidiaries by operation of law or regulation, including, without limitation, Liens of landlords, mechanics, materialmen, repairmen and suppliers, but only if payment in respect of any such Lien is not at the time required (or are being contested in good faith and for which adequate reserves have been made) and such Liens do not, in the aggregate, materially detract from the value of the Property of such Borrower or any of its Restricted Subsidiaries or materially impair the use thereof in the operation of the business of such Borrower or any of its Restricted Subsidiaries; (iv) Purchase Money Liens securing Permitted Purchase Money Indebtedness; (v) such other Liens as appear on Exhibit 8.2.5 hereto and any renewals, refinancings, replacements or extensions thereof; (vi) Liens incurred or pledges of financial instruments (such as certificates of deposit) or deposits made in the ordinary course of business in connection with (1) worker's compensation, social security, unemployment insurance and other like laws, (2) sales contracts, bids, leases, statutory obligations, work in progress advances and other similar obligations not incurred in connection with the borrowing of money or the payment of the deferred purchase price of property or (3) surety or appeal bonds, insurance bonds, performance bonds and other obligations of a like nature incurred in the ordinary course of business; (vii) reservations, easements (including, without limitation, reciprocal easement agreements and utility easements) covenants, zoning and other land use regulations, imperfections of title, title exceptions, encroachments, or encumbrances affecting real Property owned or leased by a Borrower or one of its Restricted Subsidiaries; provided that such exceptions do not in the aggregate materially interfere with the use of such Property in the ordinary course of any Borrower's or such Restricted Subsidiary's business; (viii) local, county, state and federal laws, ordinances or governmental regulations now or hereafter in effect relating to the real Property owned or leased by Borrowers; (ix) with respect to the real Property owned by Borrowers on or prior to the Closing Date, all matters disclosed by the mortgagee title insurance policies delivered by Borrower to Agent pursuant to Section 5.5 hereof; (x) Liens related to dispositions of Properties permitted pursuant to subsection 8.2.7 hereof; 4 (xi) judgment Liens that do not give rise to an Event of Default under subsection 10.1.14; (xii) Liens consisting of cash or cash equivalents pledged to secure Borrowers' reimbursement obligations with respect to the B of A LCs or outstanding documentary letters of credit; (xiii) Liens arising in respect of Capitalized Lease Obligations permitted hereunder; (xiv) Licenses, leases or subleases granted to others not interfering in any material respect with the business of the Borrowers taken as a whole; (xv) Liens of a collection bank arising under, or described by, Section 4-201 of the Uniform Commercial Code; (xvi) normal and customary rights of setoff upon deposits of cash in favor of banks or other depositary institutions; (xvii) Liens of sellers of goods to a Borrower or any of its Restricted Subsidiaries arising under Article 2 of the Uniform Commercial Code or similar provisions of applicable law in the ordinary course of business, covering only the goods sold and securing the unpaid purchase price for such goods and related expenses; (xviii) Liens on property leased by a Borrower including the interest of lessor incurred under a lease entered into as part of a sale and leaseback transaction; (xix) any escrow, holdback or similar arrangement in connection with any sale, lease or transfer or other disposition of any asset not prohibited hereunder; (xx) such other Liens as Majority Lenders may hereafter approve in writing; (xxi) Liens on the real and other Property described in the Manchester Mortgage Documents (as such Manchester Mortgage Documents are in effect on the Fourth Amendment Effective Date) which Liens secure the repayment of the Manchester Mortgage Indebtedness; and (xxii) Liens not described in the foregoing clauses (i) through (xxi) and securing Indebtedness not to exceed $1,000,000." [ADDED LANGUAGE UNDERSCORED] 5 5. Payments and Amendments to Certain Debt. Subsection 8.2.6 of the Loan Agreement is hereby deleted and the following is inserted in its stead: "8.2.6 Payments and Amendments of Certain Debt. (i) make or permit any Subsidiary of any Borrower to make any payment of any part or all of any Subordinated Debt or take any other action or omit to take any other action in respect of any Subordinated Debt, which are prohibited by the subordination agreement relative thereto or the subordination provisions thereof, including, without limitation, Member Notes and Redeemable Subordinated Notes; (ii) prepay or permit any Subsidiary of any Borrower to prepay (either directly or indirectly through a repurchase) any principal or interest on any Subordinated Debt, except for principal and interest prepayments (either directly or indirectly through a repurchase) of amounts due under Member Notes or Redeemable Subordinated Notes in an aggregate sum not to exceed $250,000 within any fiscal year of Borrowers, so long as, in either case, after giving effect to any such prepayment, no Default or Event of Default would exist and be continuing; (iii) amend or modify, in any manner adverse to Borrowers, Agent or Lenders, any agreement, instrument or document evidencing or relating to any Subordinated Debt; (iv) make or permit any Subsidiary of any Borrower to make voluntary prepayment of the Manchester Mortgage Indebtedness; or (v) amend or modify, in any manner adverse to Borrowers, Agent or Lenders, the Manchester Mortgage Indebtedness." [ADDED LANGUAGE UNDERSCORED] 6. Proceeds of Manchester Mortgage Indebtedness. (a) Borrowers covenant to pay to Agent, pursuant to Section 3.3 of the Loan Agreement, the proceeds from the issuance of the Manchester Mortgage Indebtedness. Such proceeds shall be applied to outstanding Revolving Credit Loans as provided in subsection 3.3.1 of the Loan Agreement. Upon receipt of such proceeds and subject to the effectiveness of this Fourth Amendment, Agent shall release (and Majority Lenders so consent to any such release) its Lien on the real and other Property described in the Manchester Mortgage Documents (as in effect on the Fourth Amendment Effective Date). (b) Borrowers acknowledge that the Net Appraised Orderly Liquidation Value of Borrowers' Equipment and/or the Net Appraised Fair Market Value of Borrowers' real Property shall be reduced by the Net Appraised Orderly Liquidation Value of Borrowers' Equipment and Net Appraised Fair Market Value of Borrowers' real Property included within the real and other Property described in the Manchester Mortgage Documents as provided in subsection 3.3.1 of the Loan Agreement. Borrowers further acknowledge that Agent intends to 6 conduct new appraisals of Borrowers' real Property and Equipment as contemplated by Section 2.10 of the Agreement and that the Net Appraised Fair Market Value of Borrowers' real Property and/or the Net Appraised Orderly Liquidation Value of Borrowers' Equipment may be further reduced as a result of such appraisals. 7. Fourth Amendment Effective Date. This Fourth Amendment shall become effective when (i) Borrowers, Agent and Majority Lenders shall have executed and delivered to each other this Fourth Amendment, (ii) Borrowers shall have delivered to Agent and Lenders copies of the Manchester Mortgage Documents, certified as true, correct and complete by an officer of Borrower Representative and the terms and conditions of the Manchester Mortgage Documents shall be acceptable to Majority Lenders and (iii) the mortgagee under the Manchester Mortgage Documents shall have executed and delivered to Agent a Mortgagee Waiver in form and substance acceptable to Agent. The date on which such foregoing condition is satisfied shall be referred to as the "Fourth Amendment Effective Date." 8. Execution in Counterparts. This Fourth Amendment may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which shall be deemed an original but all of which together shall constitute one and the same instrument. 9. Continuing Effect. Except as otherwise specifically set out herein, the provisions of the Loan Agreement shall remain in full force and effect. 10. Successors and Assigns. This Fourth Amendment shall be binding upon and inure to the benefit of the successors and assigns of each Borrower, Agent and each Lender permitted under Section 11.9 of the Loan Agreement. 11. Governing Law. This Fourth Amendment shall be governed by and construed in accordance with the laws of the State of Illinois. 12. Successor Agent. Borrowers and Lenders acknowledge that FCC has assigned its entire rights, title and interest in the Loan Agreement and the Loan Documents to B of A (or an affiliate of B of A, which in turn has assigned such rights, title and interest to B of A). Borrowers and Lenders consent to such assignment(s), the resignation of FCC as Agent and the appointment of B of A as successor Agent to FCC. (SIGNATURE PAGE FOLLOWS) 7 (SIGNATURE PAGE TO FOURTH AMENDMENT TO LOAN AND SECURITY AGREEMENT) IN WITNESS WHEREOF, this Fourth Amendment has been duly executed as of the day and year specified at the beginning hereof. TRUE VALUE COMPANY, as a Borrower By: /s/ BARBARA L. WAGNER ------------------------------------ Name: Barbara L. Wagner Title: Vice President and Treasurer TRUSERV ACCEPTANCE COMPANY, as a Borrower By: /s/ BARBARA L. WAGNER ------------------------------------ Name: Barbara L. Wagner Title: Vice President and Treasurer TRUSERV LOGISTICS COMPANY, as a Borrower By: /s/ BARBARA L. WAGNER ------------------------------------ Name: Barbara L. Wagner Title: Vice President and Treasurer GENERAL PAINT & MANUFACTURING COMPANY, as a Borrower By: /s/ BARBARA L. WAGNER ------------------------------------ Name: Barbara L. Wagner Title: Vice President and Treasurer (SIGNATURE PAGE TO FOURTH AMENDMENT TO LOAN AND SECURITY AGREEMENT) TRUE VALUE.COM CORPORATION, as a Borrower By: /s/ BARBARA L. WAGNER ------------------------------------ Name: Barbara L. Wagner Title: Vice President and Treasurer (SIGNATURE PAGE TO FOURTH AMENDMENT TO LOAN AND SECURITY AGREEMENT) BANK OF AMERICA, N.A., as Agent and as a Lender By: /s/ DEBRA A. RATHBERGER ------------------------------------ Name: Debra A. Rathberger ---------------------------------- Title: Senior Vice President --------------------------------- (SIGNATURE PAGE TO FOURTH AMENDMENT TO LOAN AND SECURITY AGREEMENT) WACHOVIA CAPITAL FINANCE CORPORATION (CENTRAL) (FORMERLY KNOWN AS CONGRESS FINANCIAL CORPORATION (CENTRAL)), as Co-Documentation Agent and as a Lender By: /s/ BARRY FELKER ------------------------------------ Name: Barry Felker ---------------------------------- Title: Associate --------------------------------- (SIGNATURE PAGE TO THIRD AMENDMENT TO LOAN AND SECURITY AGREEMENT) MERRILL LYNCH CAPITAL, a Division of Merrill Lynch Business Financial Services, Inc., as Co-Documentation Agent and as a Lender By: /s/ EDWARD SHUSTER ------------------------------------ Name: Edward Shuster ---------------------------------- Title: Assistant Vice President --------------------------------- (SIGNATURE PAGE TO FOURTH AMENDMENT TO LOAN AND SECURITY AGREEMENT) LASALLE BUSINESS CREDIT, LLC, as Co-Documentation Agent and as a Lender By: /s/ STEVEN BUFORD ------------------------------------ Name: Steven Buford ---------------------------------- Title: Vice President --------------------------------- (SIGNATURE PAGE TO FOURTH AMENDMENT TO LOAN AND SECURITY AGREEMENT) THE CIT GROUP/BUSINESS CREDIT, INC., as a Lender By: /s/ EUSTACHIO BRUNO ------------------------------------ Name: Eustachio Bruno ---------------------------------- Title: Assistant Vice President --------------------------------- (SIGNATURE PAGE TO FOURTH AMENDMENT TO LOAN AND SECURITY AGREEMENT) M & I MARSHALL & ILSLEY BANK, as a Lender By: /s/ RONALD J. CAREY ------------------------------------ Name: Ronald J. Carey ---------------------------------- Title: Vice President --------------------------------- By: /s/ DAN DEFNET ------------------------------------ Name: Dan Defnet ---------------------------------- Title: Vice President --------------------------------- Schedule 1 Manchester Mortgage Documents 1. Mortgage Deed, Security Agreement, Assignment of Leases and Rents and Fixture Filing executed by True Value Company, as Borrower, in favor of GE Commercial Finance Business Property Corporation, as Mortgagee. 2. Promissory Note executed by True Value Company, as Borrower, in favor of GE Commercial Finance Business Property Corporation, as Mortgagee. 3. Security Agreement made by True Value Company, as Debtor, in favor of GE Commercial Finance Business Property Corporation, as Secured Party. 4. Environmental Indemnity Agreement Regarding Hazardous Substances made by True Value Company, as Indemnitor, in favor of GE Commercial Finance Business Property Corporation, as Lender. 5. Financing Statement made by True Value Company, as Debtor, in favor of GE Commercial Finance Business Property Corporation, as Secured Party for filing in the Recorder of Deeds office for Hillsborough County, New Hampshire. 6. Financing Statement made by True Value Company, as Debtor, in favor of GE Commercial Finance Business Property Corporation, as Secured Party for filing in the office of the Delaware Secretary of State. 7. Borrower's Certificate executed by Borrower. 8. General Corporate Authorization Documents including Corporate Resolutions and Incumbency Certificates executed by True Value Company. Schedule 1 Schedule 2 Loan No.: 6321415-001 EXHIBIT A (333 Harvey Road, Manchester, Hillsborough County, New Hampshire) LEGAL DESCRIPTION: A certain tract or parcel of land situate in the City of Manchester, County of Hillsborough, and State of New Hampshire, shown as Lot #721-6 on a Lot Line Adjustment Plan entitled "Tax Map 721 - Lots 6 & 18, Harvey Road, Manchester, N.H., Owners of Record: TRU-SERV (Lot 6), Manchester Airport Authority (Lot 18)" dated November 9, 1998 and recorded as Plan #30302 in the Hillsborough County Registry of Deeds. Reference to said plan is made for a more particular description. Together with an underground stormwater drainage easement as granted by the City of Manchester by Construction & Maintenance Agreement dated January 20, 2000 and recorded in Volume 6208, Page 1234 and described as follows: An Easement for the construction and maintenance of an underground stormwater drainage system over Lot 17, Tax Map 721, in Manchester, NH and further described as follows: Beginning at an IPIN to be set on the easterly property line of land formerly of B&M Railroad, now City of Manchester, at the most Southwesterly corner of "Parcel A" as shown on the plan entitled "Lot Line Adjustment plan, Tax Map 721, Lots 6 & 18, Harvey Road, Manchester, NH" Owners of Record, Tru-Serv (Lot 6) and Manchester Airport Authority (Lot 18) dated November 9, 1998 and recorded in the Hillsborough County Registry of Deeds as Plan 30302; Thence S 19(degrees)19(feet)54(inches) E along the westerly line of Tax Map 721 Lot 6, a distance of 278.08(feet) to a point; thence S 23(degrees)31(feet)56(inches) E, along the westerly line of Tax Map 721 Lot 6, a distance of 78.99(feet) to a point; thence S 10(degrees)25(feet)14(inches) W a distance of 264.84(feet) to a point; thence N 79(degrees)34(feet)46(inches) W a distance of 50(feet) to a point; thence N 10(degrees)25(feet)14(inches) E a distance of 264.84(feet) to a point; thence N 18(degrees)01(feet)24(inches) W a distance of 315.89(feet) to a point; thence N 42(degrees)16(feet)06(inches) E, northeasterly a distance of 34.74(feet) to the point of beginning. EXHIBIT B (333 Harvey Road, Manchester, Hillsborough County, New Hampshire) Secured Party: GE COMMERCIAL FINANCE BUSINESS PROPERTY CORPORATION, a Delaware corporation, its successors and assigns Debtor: TRUE VALUE COMPANY, a Delaware corporation Loan No.: 6321415-001 The collateral includes all of the right, title and interest of Debtor in, to and under: 1. All fixtures, landscaping, equipment used in the maintenance of the Improvements (defined below), and articles of property now or hereafter attached to, or used or adapted for use in the operation of buildings, structures, improvements, and parking areas located on the real estate (herein the "Premises") described in Exhibit A, including but without being limited to, all heating, air conditioning, lighting, and incinerating apparatus and equipment; all boilers, engines, motors, dynamos, generating equipment, piping and plumbing fixtures, water heaters, ranges, cooking apparatus and mechanical kitchen equipment, refrigerators, freezers, cooling, ventilating, sprinkling and vacuum cleaning systems, fire extinguishing apparatus, gas and electric fixtures, carpeting, floor coverings, underpadding, elevators, escalators, partitions, mantels, built-in mirrors, window shades, blinds, draperies, screens, storm sash, awnings, signs, and shrubbery and plants, and including also all interest of any owner of the Premises in any of such items hereafter at any time acquired under conditional sale contract, chattel mortgage or other title retaining or security instrument, all of which property mentioned in this paragraph 1 shall be referred to as the "Improvements" and shall be deemed part of the realty and not severable wholly or in part without material injury to the freehold of the Premises. 2. All compensation, awards, damages, rights of action and proceeds, including interest thereon and/or the proceeds of any policies of insurance therefor, arising out of or relating to a (a) taking or damaging of the Premises or Improvements thereon by reason of any public or private improvement, condemnation proceeding (including change of grade), sale or transfer in lieu of condemnation, or fire, earthquake or other casualty, or (b) any injury to or decrease in the value of the Premises or the Improvements for any reason whatsoever. 3. Return premiums or other payments upon any insurance any time provided for the benefit of or naming Secured Party with respect to the Premises, Improvements and other collateral described herein, and refunds or rebates of taxes or assessments on the Premises. 4. All written and oral leases and rental agreements (including extensions, renewals and subleases; all of the foregoing shall be referred to collectively herein as the "Leases") now or hereafter affecting the Premises including, without limitation, all rents, issues, profits and other revenues and income therefrom and from the renting, leasing or bailment of Improvements, all guaranties of tenants' performance under the Leases, and all rights and claims of any kind that Debtor may have against any tenant under the Leases or in connection with the termination or rejection of the Leases in a bankruptcy or insolvency proceeding. 5. Plans, specifications, contracts and agreements relating to the design or construction of the Improvements; Debtor's rights under any payment, performance, or other bond in connection with the design or construction of the Improvements; all landscaping and construction materials, supplies, and equipment used or to be used or consumed in connection with construction of the Improvements, whether stored on the Premises or at some other location; and contracts, agreements, and purchase orders with contractors, subcontractors, suppliers, and materialmen incidental to the design or construction of the Improvements. Secured Party: GE COMMERCIAL FINANCE BUSINESS PROPERTY CORPORATION, a Delaware corporation, its successors and assigns Debtor: TRUE VALUE COMPANY, a Delaware corporation Loan No.: 6321415-001 6. All contracts, rights, claims or causes of action pertaining to or affecting the Premises or the Improvements, including, without limitation, all options or contracts to acquire other property for use in connection with operation or development of the Premises or Improvements, service or supply contracts, permits, licenses, and certificates, and all commitments or agreements, now or hereafter in existence, intended by the obligor thereof to provide Debtor with proceeds to satisfy the loan evidenced hereby or improve the Premises or Improvements, and the right to receive all proceeds due under such commitments or agreements including refundable deposits and fees. 7. All books, records, surveys, reports and other documents related to the Premises, the Improvements, the Leases, or other items of collateral described herein. 8. All additions, accessions, replacements, substitutions, proceeds and products of the real and personal property, tangible and intangible, described herein, including but not limited to lease and real-estate proceeds and other amounts relating to the use, disposition, or sale of the collateral described herein which proceeds or other amounts are characterized as general intangibles. All of the foregoing described collateral is exclusive of any goods, inventory, equipment not related to the operation and maintenance of the improvements, furniture, furnishings, and trade fixtures owned and supplied by Debtor. FURTHER ENCUMBRANCE OF THE ABOVE COLLATERAL IS PROHIBITED. EX-4.J 4 c02989exv4wj.txt FIFTH AMENDMENT TO LOAN AND SECURITY AGREEMENT Exhibit 4-J EXECUTION COPY FIFTH AMENDMENT TO LOAN AND SECURITY AGREEMENT THIS FIFTH AMENDMENT TO LOAN AND SECURITY AGREEMENT ("Fifth Amendment") is made as of the 13th day of February, 2006 by and among True Value Company, a Delaware corporation (f/k/a TruServ Corporation and herein "True Value" or "TruServ"), TruServ Acceptance Company, an Illinois corporation ("TruServ Acceptance"), TruServ Logistics Company, an Illinois corporation ("TruServ Logistics"), General Paint & Manufacturing Company ("General Paint") and True Value.com Corporation, a Delaware corporation ("True Value.com"), Bank of America, N.A., a national banking association ("BofA"), as successor-in-interest to Fleet Capital Corporation ("FCC"), as agent for Lenders hereunder (BofA, in such capacity, being "Agent"), Wachovia Capital Financial Corporation (Central) (f/k/a Congress Financial Corporation), Merrill Lynch Capital, a Division of Merrill Lynch Business Financial Services, Inc., LaSalle Business Credit, LLC as Co-Documentation Agents ("Co-Documentation Agents") and the lenders who are signatories hereto ("Lenders"). True Value, TruServ Acceptance, TruServ Logistics, General Paint and True Value.com are sometimes hereinafter referred to individually as a "Borrower" and collectively as "Borrowers." WITNESSETH: WHEREAS, Borrowers, Bank of America, N.A., as Syndication Agent (Bank of America, N.A. has assigned all of its interests to FCC which, in turn, has assigned all of its interests, either directly or indirectly, through an Affiliate of BofA to BofA), Co-Documentation Agents, Agent and Lenders entered into a certain Loan and Security Agreement dated as of August 29, 2003, as amended by a certain First Amendment to Loan and Security Agreement by and among Borrowers, Bank of America, N.A., as Syndication Agent, Co-Documentation Agents, Agent and Lenders dated as of March 19, 2004, by a certain Second Amendment to Loan and Security Agreement by and among Borrowers, Bank of America, N.A., as Syndication Agent, Co-Documentation Agents, Agents and Lenders dated as of October 26, 2004, by a certain Third Amendment to Loan and Security Agreement by and among Borrowers, Co-Documentation Agents, Agent and Lenders dated as of May 6, 2005 and by a certain Fourth Amendment to Loan and Security Agreement by and among Borrowers, Co-Documentation Agents, Agent and Lenders dated as of December 28, 2005 (said Loan and Security Agreement, as so amended, is hereinafter referred to as the "Loan Agreement"); and WHEREAS, Borrowers desire to amend and modify certain provisions of the Loan Agreement and, subject to the terms hereof, Agent and Lenders are willing to agree to such amendments and modifications; NOW THEREFORE, in consideration of the premises, the mutual covenants and agreements herein contained, and any extension of credit heretofore, now or hereafter made by Agent and Lenders to Borrowers, the parties hereto hereby agree as follows: 1. Definitions. All capitalized terms used herein without definition shall have the meaning given to them in the Loan Agreement. 2. Added and Amended Definitions. Appendix A of the Loan Agreement is hereby amended to insert the following new definitions of "Fifth Amendment" and "Fifth Amendment Effective Date" in their appropriate alphabetical order; and the definition of "Borrowing Base" contained in Appendix A to the Loan Agreement and the definition of "Fixed Charge Coverage Ratio" contained in Exhibit 8.3 of the Loan Agreement are hereby deleted and the following are inserted in their stead: "Borrowing Base - as at any date of determination thereof, an amount equal to the lesser of: (i) the Revolving Credit Maximum Amount; or (ii) an amount equal to the sum of (a) 85% of the net amount of Eligible Accounts outstanding at such date; plus (b) the least of (1) $175,000,000, (2) 65% of the value of Eligible Inventory (other than that portion of Eligible Inventory consisting of Eligible On-Water Inventory) on such date plus the lesser of (x) the "Maximum On-Water Amount" (as defined below) or (y) 65% of the value of Eligible On-Water Inventory on such date; and (3) 85% (90% during the Seasonal Advance Months) of the Net Appraised Orderly Liquidation Value of Eligible Inventory at such date plus (c) an amount (the "Fixed Asset Sublimit") the lesser of (i) $25,000,000 reduced by $218,774.18 on October 1, 2003 and the first day of each month thereafter or (ii) the sum of (x) the product of the Equipment Percentage multiplied by 80% multiplied by the Net Appraisal Orderly Liquidation Value of Borrowers' Equipment plus (y) the product of the Real Property Percentage multiplied by 65% of the Net Appraised Fair Market Value of Borrowers' real Property. For purposes hereof, (1) the net amount of Eligible Accounts at any time shall be the face amount of such Eligible Accounts less any and all returns, rebates, discounts (which may, at Agent's option, be calculated on shortest terms), credits, allowances or excise taxes of any nature at any time issued, owing, claimed by Account Debtors, granted, outstanding or payable in connection with such Accounts at such time, (2) the amount of Eligible Inventory shall be determined on a first-in, first-out, lower of cost or market basis in accordance with GAAP and (3) the Maximum On-Water Amount shall be equal to $40,000,000. 2 Fifth Amendment - that certain Fifth Amendment to Loan and Security Agreement dated as of February 13, 2006 by and among Borrowers, Co-Documentation Agents, Agent and the Lenders party thereto. Fifth Amendment Effective Date - shall have the meaning contained in Section 7 of this Fifth Amendment. Fixed Charge Coverage Ratio - with respect to any period, the ratio of (i) EBITDA for such period plus, with respect to fiscal periods ending on or prior to December 31, 2006, to the extent recognized within the applicable period, the amount of gain ("Blackhawk Gain") realized from the sale of the Blackhawk Facility (in an amount not to exceed $9,100,000), minus the sum of (a) any provision for income taxes payable in cash and included in the determination of net earnings for such period plus (b) Capital Expenditures (excluding Blackhawk Capital Expenditures) during such period, to (ii) Fixed Charges for such period, all as determined for Borrowers and their Subsidiaries on a Consolidated basis and in accordance with GAAP. The foregoing notwithstanding, for purposes of the definition of Applicable Margin, Fixed Charge Coverage Ratio shall be determined without adding to EBITDA the Blackhawk Gain." 3. Loans. Subsection 8.2.2 of the Loan Agreement is hereby deleted and the following is inserted in its stead: "8.2.2 Loans. Make, or permit any Restricted Subsidiary of any Borrower to make, any loans or other advances of money to any Person, other than (i) for salary, travel, relocation and entertainment advances, advances against commissions and other similar advances to employees in the ordinary course of business, (ii) extensions of trade credit and advance payments on leases, licenses and other contracts, in each case, in the ordinary course of business, (iii) deposits with financial institutions and securities intermediaries permitted or required under this Agreement, (iv) prepaid expenses, including, without limitation, lease prepayments, (v) loans or advances from any Borrower to any other Borrower or to any Restricted Subsidiary, (vi) loans or advances from any Restricted Subsidiary to any Borrower or any other Restricted Subsidiary, (vii) loans existing on the date hereof and set forth on Exhibit 8.2.2, (viii) Member Loans in an aggregate amount outstanding at any time not to exceed (x) $10,000,000 with respect to fiscal year 2006, (y) $20,000,000 with respect to fiscal year 2007, or (z) $30,000,000 with respect to fiscal year 2008, less, for each fiscal year, the aggregate amount of Member Guaranties outstanding at such time, and (ix) any loan that consists of an Account from a former Member that is converted in the ordinary course of business into a loan and does not involve the advance of money." 4. Leases. Section 8.2.18 of the Loan Agreement is hereby deleted and the following is inserted in its stead: "8.2.18 Intentionally Omitted." 5. Fee. In order to induce Agent and Lenders to enter into this Fifth Amendment, Borrowers agree to pay to Agent, for the ratable benefit of Lenders, an amendment fee in the 3 amount of $16,500. Said amendment fee shall be due, payable, fully earned and non-refundable on the date of this Fifth Amendment. 6. Fifth Amendment Effective Date. This Fifth Amendment shall become effective when (x) Borrowers, Agent and all Lenders shall have executed and delivered to each other this Fifth Amendment and (y) Borrowers shall have paid to Agent, for the ratable benefit of Lenders, the amendment fee referred to in Section 5. The date on which such foregoing condition is satisfied shall be referred to as the "Fifth Amendment Effective Date." 7. Execution in Counterparts. This Fifth Amendment may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which shall be deemed an original but all of which together shall constitute one and the same instrument. 8. Continuing Effect. Except as otherwise specifically set out herein, the provisions of the Loan Agreement shall remain in full force and effect. 9. Successors and Assigns. This Fifth Amendment shall be binding upon and inure to the benefit of the successors and assigns of each Borrower, Agent and each Lender permitted under Section 11.9 of the Loan Agreement. 10. Governing Law. This Fifth Amendment shall be governed by and construed in accordance with the laws of the State of Illinois. (SIGNATURE PAGE FOLLOWS) 4 (SIGNATURE PAGE TO FIFTH AMENDMENT TO LOAN AND SECURITY AGREEMENT) IN WITNESS WHEREOF, this Fifth Amendment has been duly executed as of the day and year specified at the beginning hereof. TRUE VALUE COMPANY, as a Borrower By: /s/ BARBARA L. WAGNER ------------------------------------ Name: Barbara L. Wagner Title: Vice President and Treasurer TRUSERV ACCEPTANCE COMPANY, as a Borrower By: /s/ BARBARA L. WAGNER ------------------------------------ Name: Barbara L. Wagner Title: Vice President and Treasurer TRUSERV LOGISTICS COMPANY, as a Borrower By: /s/ BARBARA L. WAGNER ------------------------------------ Name: Barbara L. Wagner Title: Vice President and Treasurer GENERAL PAINT & MANUFACTURING COMPANY, as a Borrower By: /s/ BARBARA L. WAGNER ------------------------------------ Name: Barbara L. Wagner Title: Vice President and Treasurer TRUE VALUE.COM CORPORATION, as a Borrower By: /s/ BARBARA L. WAGNER ------------------------------------ Name: Barbara L. Wagner Title: Vice President and Treasurer (SIGNATURE PAGE TO FIFTH AMENDMENT TO LOAN AND SECURITY AGREEMENT) BANK OF AMERICA, N.A., as Agent and as a Lender By: /s/ DEBRA A. RATHBERGER ------------------------------------ Name: Debra A. Rathberger ---------------------------------- Title: Senior Vice President --------------------------------- (SIGNATURE PAGE TO FIFTH AMENDMENT TO LOAN AND SECURITY AGREEMENT) WACHOVIA CAPITAL FINANCE CORPORATION (CENTRAL) (FORMERLY KNOWN AS CONGRESS FINANCIAL CORPORATION (CENTRAL)), as Co-Documentation Agent and as a Lender By: /s/ BARRY FELKER ------------------------------------ Name: Barry Felker ---------------------------------- Title: Associate --------------------------------- (SIGNATURE PAGE TO FIFTH AMENDMENT TO LOAN AND SECURITY AGREEMENT) MERRILL LYNCH CAPITAL, a Division of Merrill Lynch Business Financial Services, Inc., as Co-Documentation Agent and as a Lender By: /s/ EDWARD SHUSTER ------------------------------------ Name: Edward Shuster ---------------------------------- Title: Assistant Vice President --------------------------------- (SIGNATURE PAGE TO FIFTH AMENDMENT TO LOAN AND SECURITY AGREEMENT) LASALLE BUSINESS CREDIT, LLC, as Co-Documentation Agent and as a Lender By: /s/ STEVEN BUFORD ------------------------------------ Name: Steven Buford Title: Vice President (SIGNATURE PAGE TO FIFTH AMENDMENT TO LOAN AND SECURITY AGREEMENT) THE CIT GROUP/BUSINESS CREDIT, INC., as a Lender By: /s/ EUSTACHIO BRUNO ------------------------------------ Name: Eustachio Bruno ---------------------------------- Title: Assistant Vice President --------------------------------- (SIGNATURE PAGE TO FIFTH AMENDMENT TO LOAN AND SECURITY AGREEMENT) M & I MARSHALL & ILSLEY BANK, as a Lender By: /s/ RONALD J. CAREY ------------------------------------ Name: Ronald J. Carey ---------------------------------- Title: Vice President --------------------------------- By: /s/ JAMES R. MILLER ------------------------------------ Name: James R. Miller ---------------------------------- Title: Vice President --------------------------------- EX-10.E 5 c02989exv10we.txt DEFINED LUMP SUM PENSION PLAN AS AMENDED AND RESTATED EXHIBIT 10-E TRUE VALUE COMPANY DEFINED LUMP SUM PENSION PLAN As Amended and Restated as of January 1, 2006 (except as otherwise provided) TABLE OF CONTENTS
PAGE SECTION 1 INTRODUCTION.............................................................................. 1 1.1 History of Plan............................................................................... 1 1.2 Preservation of Rights........................................................................ 1 1.3 Intent to Comply.............................................................................. 1 1.4 Application of Plan........................................................................... 2 SECTION 2 DEFINITIONS............................................................................... 3 2.1 Definitions................................................................................... 3 SECTION 3 PARTICIPATION............................................................................. 13 3.1 Date of Participation......................................................................... 13 3.2 Events Affecting Participation................................................................ 13 3.3 Participation upon Reemployment............................................................... 14 SECTION 4 NORMAL PENSION............................................................................ 15 4.1 Formula....................................................................................... 15 4.2 Eligibility and Commencement -- Normal Pension................................................ 15 4.3 Amount of Normal Pension...................................................................... 15 4.4 Uniformed Services Employment and Reemployment Rights......................................... 19 SECTION 5 IMMEDIATE, EARLY AND LATE PENSION......................................................... 20 5.1 Immediate Pension............................................................................. 20 5.2 Early Retirement Pension...................................................................... 20 5.3 SERVISTAR Plan................................................................................ 20 5.4 Late Retirement Pension....................................................................... 20 SECTION 6 NORMAL FORM OF PAYMENT.................................................................... 22 6.1 Normal Form of Payment -- Joint and Survivor.................................................. 22 6.2 Normal Form of Payment -- Single Life Annuity................................................. 22 6.3 Optional Forms of Payment..................................................................... 22 6.4 Election of Option............................................................................ 22 6.5 Notice to Participants........................................................................ 22 6.6 SERVISTAR Protected Payment Forms............................................................. 23 6.7 Payment of Pension to the Participant......................................................... 23 6.8 Payment Options............................................................................... 24 6.9 Minimum Distribution Requirements............................................................. 24 6.10 Restoration of Retired Participant or Other Former Associate to Service....................... 29 6.11 Direct Rollover of Certain Distributions...................................................... 29 SECTION 7 SURVIVING SPOUSE BENEFIT.................................................................. 31 7.1 Eligibility................................................................................... 31 7.2 Amount........................................................................................ 31 7.3 Payments...................................................................................... 31
i TABLE OF CONTENTS (CONTINUED)
PAGE 7.4 Death Benefits for Non-Spouse Beneficiaries................................................... 32 SECTION 8 TRUST FUND AND TRUSTEE.................................................................... 34 8.1 Trust Fund.................................................................................... 34 8.2 Trust Fund Applicable Only to Payment of Benefits and Expenses................................ 34 8.3 Trustee Capacity.............................................................................. 34 8.4 Resignation and Removal of Trustee............................................................ 34 8.5 Taxes, Expenses and Compensation of Trustee................................................... 34 8.6 Funding Policy and Investment Managers........................................................ 35 SECTION 9 FUNDING OF BENEFITS....................................................................... 36 9.1 Contributions to the Fund..................................................................... 36 9.2 Fund for Exclusive Benefit of Participants.................................................... 36 9.3 Disposition of Credits and Forfeitures........................................................ 36 SECTION 10 PLAN ADMINISTRATOR........................................................................ 37 10.1 Plan Administrator/Appointment of Committee................................................... 37 10.2 Duties and Authority.......................................................................... 37 10.3 Removal of Committee Members.................................................................. 38 10.4 Appointment of Successor Committee Member..................................................... 38 10.5 Plan Administration -- Miscellaneous.......................................................... 38 SECTION 11 AMENDMENT AND TERMINATION OF PLAN......................................................... 44 11.1 Amendment -- General.......................................................................... 44 11.2 Amendment -- Merger or Consolidation of Plan.................................................. 44 11.3 Termination of Plan........................................................................... 44 SECTION 12 RESTRICTION OF BENEFITS UPON EARLY TERMINATION OF THE PLAN................................ 45 12.1 Limitation Concerning Highly Compensated Employees or Highly Compensated Former Employees..... 45 SECTION 13 SPECIAL PENSION BENEFITS PROVISIONS....................................................... 46 13.1 Statutory Maximum Pension Benefits............................................................ 46 13.2 Top-Heavy Provisions.......................................................................... 51 SUPPLEMENT A.................................................................................................. A-1 SUPPLEMENT B.................................................................................................. B-1 SUPPLEMENT C.................................................................................................. E-1
ii SECTION 1 INTRODUCTION 1.1 History of Plan As of January 1, 1958, Cotter & Company established a program for providing retirement income and other benefits for certain of its Associates and their beneficiaries. This program was set forth in a document entitled the Cotter & Company Pension Plan. Since the Cotter & Company Pension Plan was initially established, it has been amended and restated and its name changed to the Cotter & Company Defined Lump Sum Pension Plan. On July 1, 1997, Cotter & Company and SERVISTAR COAST TO COAST Corporation merged to form TruServ Corporation. In conjunction with the merger, the Cotter & Company Defined Lump Sum Pension Plan changed its name to be known as the TruServ Corporation Defined Lump Sum Pension Plan effective as of January 1, 1998. On January 2, 1998, the TruServ Corporation Defined Lump Sum Pension Plan and the SERVISTAR COAST TO COAST Corporation Retirement Income Plan were combined. Between July 1, 1997 and January 1, 1998, all Associates of the TruServ Corporation who were participants in the SERVISTAR Plan on June 30, 1997 remained participants in the SERVISTAR Plan. All benefit accruals under the SERVISTAR COAST TO COAST Corporation Retirement Income Plan ceased as of December 31, 1997. On January 2, 1998, all participants under the SERVISTAR Plan became Participants under the TruServ Corporation Defined Lump Sum Pension Plan and are entitled to the retirement benefits described in this Plan, including current accruals beginning on January 1, 1998. Effective January 1, 2005 TruServ Corporation changed it name to True Value Company and the name of this Plan to the True Value Company Defined Lump Sum Pension Plan. The Plan has been further amended and restated effective January 1, 2006 to reflect the name change and to make certain other changes. 1.2 Preservation of Rights No provisions, other than those required to maintain this Plan as one qualified under Section 401(a) of the Code, of any previous amendment, this amendment and restatement of the Plan, or any future amendment shall operate to diminish or otherwise adversely affect the amount or terms of retirement income accrued in respect to a Participant's coverage under the Plan prior to the effective date of any such amendment or restatement. 1.3 Intent to Comply It is the intent of the Employer that the Plan shall be established and maintained (1) as a retirement program which is in full compliance with ERISA, and (2) as a qualified plan under the terms of Section 401(a) of the Internal Revenue Code of 1986 as amended from time to time. 1.4 Application of Plan This Plan superseded the Cotter & Company Defined Lump Sum Pension Plan and the SERVISTAR COAST TO COAST Corporation Retirement Income Plan, both as in effect on December 31, 1997. With respect to all persons who retired on or prior to December 31, 1997, retirement benefits will be made in accordance with such plan in effect on the date of retirement or separation from service. With respect to all persons who retire or otherwise separate from service on or after January 1, 1998, the retirement benefits will be made in accordance with the terms of the Plan. Notwithstanding the preceding effective dates, the provisions of this amended and restated Plan described in Supplement E shall have effective dates which are prior to January 1, 1998 and are applicable to the Prior Plan, and the SERVISTAR Plan as each plan existed at that time. 2 SECTION 2 DEFINITIONS 2.1 Definitions The terms, as capitalized and defined in this Section, shall for all purposes of this Plan have the meaning described in this Section unless the context clearly requires otherwise or as otherwise expressly provided. (A) Accrued Benefit -- The yearly Pension commencing on the Participant's Normal Retirement Date, or if later, the date of determination, determined in accordance with Section 4, as if the Participant's termination of employment occurred on the date of determination and he had a Vesting Percentage of 100%. (B) Actuarial Equivalent or Actuarially Equivalent -- The amount of equal value when computed on the basis of the actuarial assumptions set forth in Supplement A of the Plan. Application of such assumptions to the computation of benefits under the Plan shall be made uniformly and consistently with respect to all Participants in similar circumstances. (C) Adjustment Factor -- The appropriate adjustment factor(s) which may be applicable to a Participant's Pension in accordance with the further terms of the Plan. (D) Affiliated Employer -- Any company not participating in the Plan which is a member of a controlled group of corporations (as defined in Section 414(b) of the Code) which also includes as a member the Employer; any trade or business under common control (as defined in Section 414(c) of the Code) with the Employer; any organization (whether or not incorporated) which is a member of an affiliated service group (as defined in Section 414(m) of the Code) which includes the Employer; and any other entity required to be aggregated with the Employer pursuant to regulations under Section 414(o) of the Code. Notwithstanding the foregoing sentence, for purposes of Section 13.1, the definitions in Sections 414(b) and (c) of the Code shall be modified as provided in Section 415(h) of the Code. (E) Annuity Starting Date -- The first day of the first period for which an amount is payable as an annuity or in the case of a lump sum payment the first date on which all events have occurred which entitle a Participant to such benefit. (F) Associate -- Any person in the employ of the Employer, but excluding any person who is: (1) a Leased Employee; (2) in a unit of Associates covered by a collective bargaining agreement which does not provide for participation in the Plan; (3) a participant, or eligible to become a participant, in any other retirement or pension plan (except the True Value Company Savings and Compensation 3 Deferral Plan) intended to qualify under Section 401(a) of the Code and which is established by the Employer or to which the Employer makes any contribution; or (4) any person who is treated as being other than a common law employee on the payroll records of the Employer, including any person classified as an independent contractor or consultant by the Employer during the period such person is so classified by the Employer regardless of such person's reclassification for such period by the Internal Revenue Service or other controlling authority for tax withholding purposes. The term "Leased Employee" as used in the Plan means any person (other than a person in the employ of the Employer) who pursuant to an agreement between the recipient and any other person ("leasing organization") has performed services for the recipient (or for the recipient and related persons determined in accordance with Section 414(n)(2)(B) of the Code), on a substantially full time basis for a period of at least one year, and such services are performed under primary direction or control by the recipient. Contributions or benefits provided a leased employee by the leasing organization which are attributable to services performed for the recipient employer shall be treated as provided by the recipient employer. A Leased Employee shall not be considered an employee of the recipient if: (i) such employee is covered by a money purchase pension plan providing: (1) a nonintegrated employer contribution rate of at least 10 percent of compensation, as defined in Section 415(c) of the Code, but including amounts contributed pursuant to a salary reduction agreement which are excludable from the employee's gross income under Section 125, Section 402(e)(3), Section 402(h)(1)(B) or Section 403(b) of the Code; (2) immediate participation; and (3) full and immediate vesting; and (ii) leased employees do not constitute more than 20 percent of the recipient's non highly compensated work force. (G) Average Compensation -- Prior to January 1, 2002, the annual average of the Compensation of an Associate during the three consecutive calendar years within the ten calendar years up to and including the calendar year of such Associate's termination of employment which yield the highest average. Effective January 1, 2002, the annual average of the Compensation of an Associate during three calendar years within the ten calendar years up to and including the calendar year of such Associate's termination of employment which yield the highest average. Effective July 1, 2005, the annual average of the Compensation of an Associate during the three consecutive calendar years within the ten calendar years up to and including the calendar year of such Associate's termination of employment which yield the highest average. (H) Beneficiary -- The person or persons named by a Participant by written designation filed with the Employer to receive the Participant's contributions to the SERVISTAR Plan plus credited interest after the Participant's death as provided in Section 7.4. Effective January 1, 2003, the person named by an unmarried Participant by written designation filed with the Plan Administrator to receive the death benefit under Section 7.4 of the Plan. (I) Code -- The Internal Revenue Code of 1986, as amended from time to time. 4 (J) Committee -- The committee appointed by the Employer to act as Plan Administrator as described in Section 10.1. (K) Compensation -- For any calendar year is the total cash compensation (including commissions, bonuses [other than sign-on bonuses], overtime pay, sick pay, vacation pay and holiday pay) paid to him by the Employer during that calendar year for personal services rendered to an Employer as an Associate, plus elective deferrals under Sections 125 and 401(k) of the Code (and for Plan Years beginning after December 31, 1997, Section 132(f) of the Code) for that calendar year, but excluding severance pay, moving or relocation allowances or bonuses, tuition reimbursements, auto or travel expense allowances or bonuses, or any other extraordinary remuneration. During the period of any Leave of Absence, an Associate shall be deemed to receive Compensation at the annual rate of Compensation actually received by him during such period, or, if no compensation is paid, the annual rate of Compensation immediately prior to the commencement of such Leave of Absence. However, effective on and after the first day of the Plan Year beginning in 1989 and before the first day of the Plan Year beginning in 1994, Compensation taken into account for any purpose under the Plan, including the determination of Average Compensation, shall not exceed $200,000 per year. Except as provided below, as of January 1 of each calendar year on and after January 1, 1990 and before January 1, 1994, the applicable limitation as determined by the Commissioner of Internal Revenue for that calendar year shall become effective as the maximum Compensation to be taken into account for Plan purposes for 12-month compensation computation periods beginning within that calendar year only in lieu of the $200,000 limitation set forth above. Commencing with the Plan Year beginning in 1994, Compensation taken into account for any purpose under the Plan, including the determination of Average Compensation, shall not exceed $150,000 (as adjusted from time to time by the Secretary of the Treasury in accordance with Section 401(a)(17)(B) of the Code). Effective January 1, 1997, the compensation limit shall be applied without regard to the family aggregation provisions of the now repealed Section 414(q)(6) of the Code in determining benefit accruals for Plan Years beginning on and after January 1, 1997, and, to the extent permissible under the Internal Revenue Service rules or regulations, for any earlier Plan Year. Commencing with the Plan Year beginning in 2002, Compensation taken into account for any purpose under the Plan, including the determination of Average Compensation, shall not exceed $200,000 per year (as adjusted for cost-of-living increases in accordance with Section 401(a)(17)(B) of the Code). Prior to January 1, 2002, the cost-of-living adjustment in effect for a calendar year applies to Compensation for the Plan Year that begins with or within such calendar year. For purposes of determining Accrued Benefits in a Plan Year beginning after December 31, 2001, Compensation for prior Plan Years shall be limited to $160,000 for any Plan Year beginning in 1997, 1998, or 1999; and $170,000 for any Plan Year beginning in 2000 or 2001. Solely for purposes of this subsection 2.1(K), for those individuals who were employed by SERVISTAR Corporation or SERVISTAR COAST TO COAST Corporation and who were participants in the SERVISTAR Corporation Retirement Income Plan or the SERVISTAR COAST TO COAST Corporation Retirement Income Plan, Compensation for periods beginning before January 1, 1998 shall include "Earnings" as defined in the SERVISTAR Plan as restated in Supplement C hereto subject to the above statutory limits and for the purposes of this Plan recasted on a calendar year basis assuming level "Earnings." 5 Compensation shall not include any "Earnings" received by an individual while an Associate of Coast to Coast Stores, Inc. (L) Defined Lump Sum -- The amount determined under Section 4.3(B). (M) Disability Insurance Plan -- Any plan from time to time in force which provides for the payment of income benefits to Associates of an Employer by reason of disability resulting from accident or sickness. (N) Effective Date -- January 1, 2006, unless otherwise noted. (O) Employer -- On and after January 1, 2005, Employer shall mean True Value Company or any successor by merger, purchase or otherwise, with respect to its Associates. Before January 1, 2005, Employer shall mean TruServ Corporation. Before July 1, 1997, Employer shall mean Cotter & Company, a Delaware corporation, and any Affiliated Employer which adopted the Plan by resolution of its board of directors and with the consent of Cotter & Company. (P) Employment Continuity -- The period commencing with the date on which an Associate first performs an Hour of Service for an Employer or an Affiliated Employer and ending on the first day of the 12-month period in which the Associate incurs a One-Year Break in Service; provided, however, that if an Associate leaves the employ of the Employer or an Affiliated Employer other than pursuant to an authorized Leave of Absence and does not return until after a One-Year Break in Service, his Employment Continuity upon return to employment by the Employer or an Affiliated Employer shall be determined on the basis of the date on which the Associate first performs an Hour of Service subsequent to his return to the employ of the Employer or an Affiliated Employer. A former Associate who terminates employment and is reemployed by the Employer or an Affiliated Employer before incurring a One-Year Break in Service will not be deemed to have terminated employment with the Employer or an Affiliated Employer. Solely for purposes of determining Employment Continuity with respect to all persons who were active participants in the SERVISTAR Plan on December 31, 1997, for periods on or before June 30, 1997, Employer means SERVISTAR COAST TO COAST Corporation and its predecessors. (Q) ERISA -- The Employee Retirement Income Security Act of 1974, as it may be amended from time to time, and any regulations issued pursuant thereto. (R) Fund -- The fund or funds established by separate written agreement between the Employer and an insurance company and/or trustee or trustees for the purpose of accumulating contributions made in accordance with the Funding of Benefits Section and paying the benefits and expenses described in certain other Sections of this Plan. (S) Highly Compensated Employee -- With respect to a Plan Year commencing on or after January 1, 1997, any Associate of the Employer or an Affiliated Employer (whether or not eligible for the Plan) who (i) was a 5% owner of the Employer (as defined in Code Section 416(i)(1)) for such Plan Year or the prior Plan Year, or 6 (ii) for the preceding Plan Year received "statutory compensation" in excess of $80,000. The $80,000 amount is adjusted at the same time and in the same manner as under Section 415(d), except that the base period is the calendar quarter ending September 30, 1996. For purposes of the foregoing, the applicable year of the Plan for which a determination is being made is called a determination year and the preceding 12-month period is called a look-back year. A highly compensated former employee is based on the rules applicable to determining highly compensated employee status as in effect for that determination year, in accordance with Section 1.414(q)-1T, A-4 of the Temporary Treasury Regulations and Internal Revenue Service Notice 97-45. Notwithstanding the foregoing, Associates who are nonresident aliens and who receive no earned income from the Employer or an Affiliated Employer which constitutes income from sources within the United States shall be disregarded for all purposes of this Section. The provisions of this definition shall be further subject to such additional requirements as shall be described in Section 414(q) of the Code and its applicable regulations, which shall override any aspects of this Section inconsistent therewith. (T) Hour of Service -- With respect to the applicable computation period: (1) each hour for which the Associate is either directly or indirectly paid by the Employer or Affiliated Employer or entitled to payment for the performance of duties for the Employer or an Affiliated Employer; and (2) up to a maximum of 501 hours for reasons other than the performance of duties (such as but not limited to paid sick leave, paid vacation time), irrespective of whether the employment relationship has terminated, which hours shall be credited to the Associate during the computation period in which payment is made or amounts payable to the Associate become due, and (3) each hour for which back pay is either awarded or agreed to by the Employer or an Affiliated Employer, irrespective of mitigation of damages, which hour shall be credited to the Associate for the computation period to which the award, agreement or payment pertains, rather than the period in which the award, agreement or payment was made. The same hours of service shall not be credited under more than one paragraph of this definition. In no event will Hours of Service be allowed and computed in a manner less liberal than the manner described in the Department of labor Regulation 2530.200b-2. Solely for purposes of this subsection 2.1(T), the term Associate shall be deemed to include any person who is in the common law employ of the Employer or an Affiliated Employer so that Associates may be credited under the Plan with Hours of Service for 7 participation purposes for period of employment during which they are not Associates as such term is defined in subsection 2.1(F). (U) Leave of Absence -- A temporary absence from active service with the Employer or an Affiliated Employer that, in the discretion of the Employer or an Affiliated Employer, may be granted to an Associate because of temporary incapacity or other good cause. If an Associate on a Leave of Absence does not return to employment with the Employer or an Affiliated Employer within the period authorized by the Employer or an Affiliated Employer, the Associate's employment shall be deemed to have terminated as of the first day following the period of the Leave of Absence. A Participant shall automatically be entitled to a Leave of Absence during any period of time for which he is eligible to receive a benefit under a Disability Insurance Plan. (I.E.) Manchester Employee - Any person: (1) who is or was covered by the collective bargaining agreement between the Employer and Chauffeurs, Teamsters and Helpers Local Union #633 of New Hampshire ratified on March 1, 2003; (2) who was an Associate on March 1, 2003; and (3) who was a Participant with a Vesting Percentage of 100% as of January 1, 2002. (V) Named Fiduciary -- For purposes of ERISA, is the Committee appointed in Section 10. (W) Normal Retirement Date - For benefit eligibility and vesting purposes, the day on which the Participant attains his 65th birthday. For all other purposes, the first day of the month coinciding with or next following the Participant's 65th birthday. (X) One-Year Break in Service -- For an Associate, a 12-month period commencing on the date of an Associate's termination of employment and on each anniversary thereof during which such Associate is not employed (i.e., does not complete an Hour of Service) with an Employer or an Affiliated Employer. In the case of a maternity or paternity Leave of Absence, the 12-month period beginning on the first day of such absence shall not constitute a One-Year Break in Service. For purposes of this subsection 2.1(X), maternity or paternity Leave of Absence means an absence from work by reason of the Associate's pregnancy, birth of the Associate's child, or placement of a child with the Associate in connection with the adoption of such child, or an absence for the purpose of caring for such child for a period immediately following such birth or placement. (Y) Participant -- Any Associate who becomes covered under this Plan. A former Associate who is entitled to a vested Pension under the Plan shall continue to be a Participant until he has received his vested Pension. (Z) Pension -- Yearly payments (and lump sum payment, if elected) under the Plan in the amount provided in Section 4.1 and the forms provided in Section 7 payable to the 8 Participant or his Beneficiary under the Plan as a consequence of the termination of employment of the Participant. (AA) Plan -- The True Value Company Defined Lump Sum Pension Plan as set forth in this document, as amended from time to time thereafter. (BB) Plan Administrator -- The committee designated by the Employer to administer and supervise the Plan as provided in Section 10. (CC) Plan Year -- The 12-month period commencing on a January 1 and ending on the following December 31. (DD) Prior Plan -- The Cotter & Company Pension Plan in effect on December 31, 1995. (EE) Protected Benefits -- As of any date of determination, the Accrued Benefit of a Participant and (1) any right of the Participant under the terms of the Plan as of such date to have such Accrued Benefit, and the Prior Plan benefit, commence on a date other than the Normal Retirement Date; (2) any right of the Participant under the terms of the Plan as of such date to have such Accrued Benefit, and the Prior Plan benefit, payable in an optional form of payment; and (3) the methodology under the terms of the Plan as of such date for determining the amount of benefit payable as a result of the exercise of any right of the Participant expressed in paragraph (1) or (2) above. For the sole purposes of paragraph (3) above, any provision of the Plan that requires payment of a Participant's Pension in a form other than that described in Section 6.2 shall be considered to be the exercise of a right by the Participant therefor. See Sections 2.1(OO), 4.1(B), 5.3, 6.6 and 7.4 for any Protected Benefits rights with respect to the SERVISTAR Plan. (FF) Qualified Joint and Survivor Annuity -- (1) in the case of a 50% Qualified Joint and Survivor Annuity, an annuity for the life of the Participant with a survivor annuity for the life of his Spouse which is one-half of the amount of the annuity payable during the joint lives of the Participant and his Spouse, and which is the Actuarial Equivalent of a single annuity for the life of the Participant in the amount specified by the relevant provision of Section 4; and (2) in the case of a 100% Qualified Joint and Survivor Annuity, an annuity for the life of the Participant with an survivor annuity for the life of his Spouse 9 which is equal to the amount of the annuity payable during the joint lives of the Participant and his Spouse, and which is the Actuarial Equivalent of a single annuity for the life of the Participant in the amount specified by the relevant provision of Section 4. (3) in the case of an unmarried Participant, a Qualified Joint and Survivor Annuity is a single life annuity. (GG) Retirement Date -- The date on which the payment of a Participant's Pension is to commence as a result of his termination of employment, as determined in accordance with the further terms of the Plan. (HH) SERVISTAR -- Is SERVISTAR COAST TO COAST Corporation, which merged with Cotter & Company to form the TruServ Corporation on July 1, 1997. (II) SERVISTAR Plan -- Is the SERVISTAR COAST TO COAST Corporation Retirement Income Plan in effect on December 31, 1997. Certain provisions of the SERVISTAR Plan are contained in Supplement C to this Plan to assist the Committee's administration of this Plan's provisions where they relate to the SERVISTAR Plan provisions. (JJ) Spousal Consent -- The Spouse's consent to the Participant's election of a form of payment other than Qualified Joint and Survivor Annuity must be in writing, must acknowledge the effect of the election, and the Spouse's signature must be witnessed by a Plan representative or notary public. Additionally, the Spouse's consent must specifically acknowledge any nonspouse Beneficiary designated by the Participant in conjunction with his election of an optional form of payment. The Participant may not subsequently designate another nonspouse Beneficiary without the further written consent of the Spouse. Notwithstanding this consent requirement, if the Participant establishes to the satisfaction of a Plan representative that such written consent cannot be obtained because there is no Spouse; the Spouse cannot be located; of other circumstances as the Secretary of the Treasury may by regulations prescribe, the Participant's election to waive coverage will be considered valid. Any consent necessary under this provision will be valid only with respect to the Spouse who signs the consent. A Participant is allowed to revoke his election without the consent of his Spouse. The number of his revocations is not limited. (KK) Spouse -- The lawful wife of a male Participant, or the lawful husband of a female Participant, on the Participant's Retirement Date, date of death, or other event date as the context requires, if earlier. (LL) Trust -- The trust established with the Trustee to hold the assets which fund the benefits payable by the Plan. (MM) Trustee - The Trustee of the Fund appointed by the Employer, which may be a bank, trust company or other corporation possessing trust powers under applicable state and Federal law, or one or more individuals or any combination thereof. (NN) Vesting Percentage -- The percentage which may be applied to a Participant's Accrued Benefit in accordance with the further terms of the Plan as determined below: 10
VESTING PERCENTAGE ---------- If he has 5 Years of Service 100% On his Normal Retirement Date 100% In all other cases 0%
Notwithstanding the above, a Participant shall have a 100% Vesting Percentage in his Accrued Benefit if he: (i) attained age 50, regardless of his Years of Service, and (ii) became a participant in the SERVISTAR Plan before July 1, 1996. (OO) Wage Base - The amount of wages from which Social Security taxes are required to be withheld in accordance with the Federal Insurance Contributions Act, or any successor act, which is in effect at the beginning of the Plan Year. (PP) Year of Service -- Shall be credited to each Participant based on the number of days during a Participant's period of Employment Continuity divided by 365.25 rounded to the nearest 1/10 of a year, subject to the following: (1) a Prior Plan participant shall be credited with his Years of Service earned through December 31, 1995 in accordance with provisions of the Prior Plan; (2) a Participant in the SERVISTAR Plan as of December 31, 1997 shall be credited with a minimum number of Years of Service which shall be equal to his Years of Service as of June 30, 1997 under the SERVISTAR Plan; (3) in addition, if an individual was a participant in the SERVISTAR Plan on July 1, 1997 and earned at least 500 hours of service (as defined in the SERVISTAR Plan and included in Supplement C hereto in which the Employer and Affiliated Employer referred to therein has the same meaning as defined in this Plan) during the period July 1, 1997 through December 31, 1997, he shall be credited with an additional one-half Year of Service under this Plan and thereafter shall be credited with a Year of Service (and fractions thereof) as generally provided in this subsection (OO); (4) if a former Participant with no Vesting Percentage in the Plan again becomes a Participant in this Plan, his Years of Service prior to any One-Year Break in Service shall be taken into account only if the number of consecutive One-Year Breaks in Service is less than five; (5) no more than one Year of Service shall be granted to any individual for any 12-month period; and (6) notwithstanding any Plan provision to the contrary, for purposes of Section 4.3, no Year of Service shall be credited to any Participant for any of the 11 following periods: (a) periods of employment with Coast to Coast Stores, Inc. occurring prior to July 1, 1996, (b) periods of employment with Advocate Services, Inc. occurring prior to January 1, 1998, (c) periods of employment while such person is in an employment classification, including but not limited to a unit of Associates covered by a collective bargaining agreement which does not provide for participation in this Plan, (d) periods of employment during which an employee was a participant (or eligible to be a participant) in any retirement plan which is intended to be qualified under the Code (except the True Value Company Savings and Compensation Deferral Plan and the SERVISTAR Plan) sponsored by the Employer or an Affiliated Employer, (e) periods of employment as a Leased Employee as defined in Section 414(n) of the Code, (f) periods of employment for which an employee has received or is receiving benefits under this Plan. 12 SECTION 3 PARTICIPATION 3.1 Date of Participation (A) Each Associate who: (1) was a Participant in the Cotter & Company Defined Lump Sum Pension Plan on January 1, 1998; or (2) was a Participant in the SERVISTAR Plan on January 1, 1998 automatically became a Participant in the Plan on January 2, 1998 provided that his Employment Continuity did not end on January 1, 1998. (B) Each other Associate who is not a Participant as of January 1, 2005 will become a Participant under the Plan on the date the Associate has completed "one year of employment." (C) Notwithstanding any Plan provision to the contrary, each individual, who on January 1, 1998 was employed by Advocate Services, Inc. and who became an Associate of the Employer on January 2, 1998, commenced participation in the Plan on January 2, 1998. (D) For the purposes of this Section, an Associate shall be credited with "one year of employment" when he completes a 12-month period of employment during his period of Employment Continuity. (E) Notwithstanding any Plan provision to the contrary, for purposes of this Section, each individual who is hired as a temporary employee shall be credited with "one year of employment" for the 12-month computation period beginning on the date he first completes an Hour of Service if he completes at least 1,000 Hours of Service by the end of that period, and he shall become a Participant as provided in (B) above. If a temporary employee terminates employment prior to becoming a Participant, but after having worked 1,000 Hours of Service in the 12-month period during which he was employed, and is subsequently rehired, he shall become a Participant as of the first January 1 or July 1 which coincides with or immediately follows his reemployment. If he terminates employment, is subsequently rehired as a temporary employee, and had not worked 1,000 Hours of Service in the 12-month period commencing with his initial date of hire, his prior service shall be disregarded and he shall begin a new computation period and his Hours of Service shall be counted from his date of rehire. 3.2 Events Affecting Participation A person's participation in the Plan shall end when he is no longer employed by the Employer, if he is not entitled to either an immediate or a deferred Pension under the Plan. Participation shall continue while on a Leave of Absence or during a period while he is not an Associate but is in the employ of the Employer or an Affiliated Employer, but no Years of Service for the purpose of determining the Accrued Benefit shall be counted for that period, 13 except as specifically provided otherwise in this Plan, and such person's Accrued Benefit shall be determined in accordance with the provisions of the Plan in effect on the date he ceased to be an Associate. 3.3 Participation upon Reemployment (A) If an Associate's participation in the Plan ends and he again becomes an Associate, he shall again become a Participant as of his date of restoration to service as an Associate if his Vesting Percentage was 100% or he had not incurred five One-Year Breaks in Service. In any other case, he will participate in the Plan when he again meets the requirements of Section 3.1. (B) However, if an Associate's employment is terminated before he participates in the Plan and: (i) he is later reemployed before he incurred a One-Year Break in Service, his employment after reemployment shall be aggregated with his previous period of employment and the period between his date of termination and his date of reemployment shall be included in his requirement of one year of employment; or (ii) he incurred at least a One-Year Break in Service and the length of his break in service exceeded his Service prior to his Break, his employment before reemployment shall not be aggregated with his period of employment after his absence, in which case he will participate in the Plan when he meets the requirements of Section 3.1. 14 SECTION 4 NORMAL PENSION 4.1 Formula With respect to a Participant who retires or terminates on or after January 2, 1998, the Pension payable under the Plan is the greatest of (A), (B) or (C): (A) The Vesting Percentage of the Participant's Accrued Benefit determined in Section 4.3; or (B) The Vesting Percentage of the Participant's accrued benefit payable under the SERVISTAR Plan as of January 1, 1998, as modified by Section 2.1(OO); or (C) The Vesting Percentage of the Participant's accrued benefit under the Prior Plan as of December 31, 1995. 4.2 Eligibility and Commencement -- Normal Pension Each Participant who retires from the employ of the Employer on his Normal Retirement Date will receive a normal Pension commencing as of such date. 4.3 Amount of Normal Pension The yearly Pension payable to such Participant will be equal to the amount described in subsections (A), (B), (C) and (D) below (subject, however, to Section 13.1 of this Plan, if applicable, and the election of the Participant to take the Accrued Benefit in a lump sum or other optional form under Section 6.9): (A) The Participant's Accrued Benefit shall equal his Defined Lump Sum converted into an Actuarially Equivalent single life annuity payable at the Participant's Normal Retirement Date or, if the Participant retires after his Normal Retirement Date, the age he retires after his Normal Retirement Date. (B) The Participant's Defined Lump Sum Benefit shall be determined as follows: (1) With respect to Participants other than Participants who are Manchester Employees, the amount determined by multiplying the Participant's Average Compensation by the sum of (a) plus (b) below and adding the result to the amount calculated in (c) below: (a) The sum of (I) plus (II) below: (I) The sum of the annual pension credit percentages in the table below that were earned by the Participant under the Plan as of December 31, 2001: 15
YEARS OF SERVICE ANNUAL PENSION AGE DURING ANNUAL PENSION WHILE AGE CREDIT PERCENTAGE YEARS OF SERVICE CREDIT PERCENTAGE - ---------------- ----------------- ---------------- ----------------- Less than 26 2.0% 46 7.0% 26-28 2.5% 47 7.5% 29-31 3.0% 48 8.0% 32-33 3.5% 49 8.5% 34-35 4.0% 50 9.0% 36-37 4.5% 51 9.5% 38-39 5.0% 52 10.0% 40-41 5.5% 53 10.5% 42-43 6.0% 54 11.0% 44-45 6.5% 55-60 11.5% 61 or more 12.0%
(II) For a Participant in the Plan who: i. was a participant in the ServiStar Plan, had attained age 50 and completed 15 years of service as of January 1, 1998; or ii. was a participant in the Prior Plan, had attained age 50 and completed 15 years of service as of January 1, 1996; an additional 25% credit will be added to the Participant's total annual pension credit percentages. (b) the sum of the annual pension credit percentages in the table below that are earned by the Participant for each Year of Service (and fraction thereof) beginning January 1, 2002;
YEARS OF SERVICE ANNUAL PENSION YEARS OF SERVICE ANNUAL PENSION WHILE AGE CREDIT PERCENTAGE WHILE AGE CREDIT PERCENTAGE - ---------------- ----------------- ---------------- ----------------- Less than 26 1.0% 50 6.0% 26-28 1.5% 51 6.5% 29-31 2.0% 52 7.0% 32-34 2.5% 53 7.5% 35-37 3.0% 54 8.0% 38-40 3.5% 55 8.5% 41-43 4.0% 56 or More 9.0% 44-45 4.5% 46-47 5.0% 48-49 5.5%
16 (c) For a Participant whose Average Compensation is greater than 2/3 of the Wage Base, an additional amount equal to the excess of the Participant's Average Compensation over 2/3 of the Wage Base multiplied by 1/2 of the Participant's annual pension credit percentages as of December 31, 2001 as defined in section 4.3(B)(1)(a) above. (2) With respect to Participants who are Manchester Employees, the amount determined by multiplying the Participant's Average Compensation by the sum of (a) plus (b) below and adding the result to the amount calculated in (c) below: (a) The sum of the annual pension credit percentages in the table in Section 4.3(B)(i)(a) earned by the Participant under the Plan as of October 31, 2002, based on the provisions of the Plan in effect on December 31, 2001 and assuming such provisions had continued in effect until October 31, 2002. (b) The sum of the annual pension credit percentages in the table set forth in Section 4.3(B)(1)(b) above that are earned by the Participant for each Year of Service (and fraction thereof) beginning November 1, 2002. (c) For a Participant whose Average Compensation is greater than 2/3 of the Wage Base, an additional amount equal to the excess of the Participant's Average Compensation over 2/3 of the Wage Base multiplied by 1/2 of the Participant's annual pension credit percentages as of October 31, 2002 as defined in section 4.3(B)(2)(a) above. (3) In no event will the Participant's Defined Lump Sum Benefit by less than 10% of the Participant's Average Compensation. (C) (1) With respect to any Participant who is an officer of the Employer, such Participant's Defined Lump Sum shall not be less than an amount which is equal to the sum of (a) the benefits determined under (B) above, considering only Years of Service prior to becoming an officer, plus (b) 33% of the Participant's Average Compensation for each Year of Service, considering only the Years of Service beginning with the date the Participant became an officer, subject to Section 4.3(C)(2) below. In no event will a Participant's total accumulated pension credit percentages under this paragraph exceed 660%. In no event will the benefit described in this subsection be greater than the maximum benefit payable under Code section 415(b). (2) Effective July 1, 2005, the benefit under this section 4.3(C) will be calculated as the greater of (a) and (b), as described below: (a) the sum of: i. the benefit described in section 4.3(C)(1) based on the Participant's Average Compensation and Years of Service as of December 31, 2004, and 17 ii. 20% of the Participant's Average Compensation for each Year of Service prior to age 50 and 25% of the Participant's Average Compensation for each Year of Service after age 50, considering only Years of Service beginning with the date the Participant became an Officer on or after January 1, 2005. (b) The benefit described in section 4.3(C)(1), based on the Participant's Average Compensation and Years of Service as of June 30, 2005. (D) Minimum Benefit Protection (1) With respect to a Participant in the Prior Plan, the lump sum benefit payable under this Plan shall be no less than the Actuarial Equivalent of the Participant's Accrued Benefit under the Prior Plan. Further, for a Participant eligible for an immediate benefit under the Prior Plan, the lump sum shall be no less than the Actuarial Equivalent of the immediate Prior Plan benefit payable to the Participant. (2) With respect to a Participant in the Prior Plan who attains age 62 or completes 30 Years of Service while an active Associate, the lump sum shall be no less than the lump sum calculated in (1) above, assuming the Participant commenced receipt of the lump sum at the later of (a) January 1, 1996, and (b) the first day of the month coincident with or next following the earlier of (i) the date the Associate attains age 62, and (ii) the date the Associate completes 30 Years of Service. (3) With respect to a Participant in the SERVISTAR Plan, the lump sum benefit payable under this Plan will not be less than the Actuarial Equivalent of the Participant's Accrued Benefit under the SERVISTAR Plan. (4) With respect to a Participant in the SERVISTAR Plan who attains age 60 while an active Associate, the lump sum shall be no less than the lump sum calculated in (3) above, assuming the Participant commenced receipt of the lump sum at the later of (a) January 1, 1998, and (b) the first day of the month coincident with or next following the date the Associate attains age 60. 4.4 Uniformed Services Employment and Reemployment Rights Notwithstanding any Plan provision to the contrary, for re-employments initiated on or after December 12, 1994, benefits and service credit with respect to qualified military service will be provided in accordance with Section 414(u) of the Code. 18 SECTION 5 IMMEDIATE, EARLY AND LATE PENSION 5.1 Immediate Pension A Participant, whose employment with the Employer and all Affiliated Employers terminates with a 100% Vesting Percentage, may upon such termination of employment prior to his Normal Retirement Date be entitled to receive an immediate Pension. An immediate Pension is the Participant's Accrued Benefit converted into an Actuarially Equivalent single life annuity. With the consent of the Participant and Spousal Consent, if applicable, such immediate Pension shall commence on the first day of the month coinciding with or immediately following the Participant's termination of employment and shall be payable in any form of benefit as described in Section 6. Such Immediate Pension election must be made within 60 days from the date the Pension information and forms are provided to the Participant which will be as soon as administratively practical after the earlier of the submission of the Participant's written notice of termination or the Participant's actual termination from employment. 5.2 Early Retirement Pension A Participant who does not timely elect an immediate Pension under Section 5.1 upon his termination of employment may next elect to receive his Pension as an early retirement Pension under the Plan on the first day of any month thereafter, provided that the Participant gives the Committee at least 15 days advance notice, but not later than his Normal Retirement Date. The early retirement Pension shall equal his Accrued Benefit reduced by 2/3 of 1% for each of the first 60 months and by 1/3 of 1% for each of the next 60 months by which payment of his early retirement Pension precedes his Normal Retirement Date (see SERVISTAR Plan application in Section 5.3 below). If the Participant is younger than age 55, the early retirement Pension shall be Actuarially Equivalent to the Participant's Accrued Benefit. In no event, however, shall a Participant's early retirement Pension be less than his immediate Pension. With the consent of the Participant and Spousal Consent, if applicable, the early retirement Pension shall be payable in any form of benefit described in Section 6. 5.3 SERVISTAR Plan For any Participant whose Pension is determined under Section 4.1(B), the calculation of any immediate or early retirement reduction factors will be based upon an age 60 Normal Retirement Date in accordance with the terms of the SERVISTAR Plan in effect at the earlier of his termination, retirement or January 1, 1998, as restated in Supplement C hereto. 5.4 Late Retirement Pension (A) If a Participant's employment with the Employer or any Affiliated Employer continues after his Normal Retirement Date, such Participant will receive a late retirement Pension commencing on the first day of the month immediately following the calendar month in which his employment ceases by reason other than death. The Participant's late retirement Pension is the Participant's Accrued Benefit. 19 In the event a Participant's Pension is required to begin under Section 6.8 while the Participant is in active service, such required beginning date shall be the Participant's Annuity Starting Date for purposes of Section 6 and the Participant shall receive a late retirement Pension commencing on or before such required beginning date in an amount determined as if he had retired on the last day of the preceding Plan Year. Subsequently, as of the end of each prior Plan Year before the Participant's actual late retirement date (and as of his actual late retirement date), the Participant's Pension shall be recomputed to reflect additional accruals. The Participant's recomputed Pension shall then be paid as of the following January 1. (1) If the Participant's Pension is being paid on an annuity form, the Participant's recomputed Pension shall then be reduced by the Actuarial Equivalent of the total payments of his late retirement Pension which were paid prior to each such recomputation to arrive at the Participant's late retirement Pension; provided that no such reduction shall reduce the Participant's late retirement Pension below the amount of late retirement Pension payable to the Participant prior to the recomputation of such Pension. (2) If the Participant's Pension was paid in a lump sum payment, the additional accrual for a subsequent Plan Year will be based on that Year of Service only and not be reduced by any prior payments. Such additional Accrued Benefit shall be paid in a lump sum as soon as practicable following the end of the Plan Year. (B) If a Participant terminates employment with the Employer and all Affiliated Employers prior to age 65, but does not elect to commence his or her Pension until after age 65, the amount of such Pension shall be adjusted to the Actuarial Equivalent of the Pension payable at age 65. 20 SECTION 6 NORMAL FORM OF PAYMENT 6.1 Normal Form of Payment -- Joint and Survivor If the Participant has a Spouse, to whom he was married at least one year prior to his Annuity Starting Date, the normal form of payment is the 50% Qualified Joint and Survivor Annuity form. A Participant who was married within one year of his Annuity Starting Date shall be deemed to have been married for at least one year if he and his spouse remain married for at least one year. As an alternative to the 50% Qualified Joint and Survivor Annuity described above, a Participant may elect that his benefit be payable to him in the 100% Qualified Joint and Survivor Annuity form. Such election will not require Spousal Consent as provided in Section 6.4. 6.2 Normal Form of Payment -- Single Life Annuity If the Participant does not have a Spouse on his Annuity Starting Date, the normal form of payment is the single life annuity form. This form provides that payments will be made to the Participant during his lifetime with no payments made after death. 6.3 Optional Forms of Payment In lieu of receiving his Pension in the normal form applicable to his coverage, a Participant may elect to receive an Actuarially Equivalent benefit based on one of the optional forms of payment provided in accordance with the further terms of the Plan, including Sections 6.6 and 6.8. 6.4 Election of Option The Participant may elect or revoke an option during the 90-day period before his Annuity Starting Date by filing a written election, including the Spousal Consent, with the Employer. However, a Participant may not elect more than one option to be effective at the same time. No such election or revocation can be made after the Participant's Retirement Date. In addition a Participant may elect or revoke an optional form of payment, to become effective upon his death, at any time on or after his Normal Retirement Date and before his late Retirement Date. To elect an option the Participant must waive surviving Spouse benefit coverage and elect an optional form of payment. His election must include the Spousal Consent to both the waiver and election. 6.5 Notice to Participants The Committee shall furnish to each Participant, no less than 30 days and no more than 90 days, before his Annuity Starting Date a written explanation in nontechnical language of the terms and conditions of the Pension payable to the Participant in the normal and optional forms described in Sections 6.1, 6.2, 6.3, 6.6 and 6.8. Such explanation shall include a general 21 description of the eligibility conditions for, and the material features and relative values of, the optional forms of payment under the Plan, any rights the Participant may have to defer commencement of his Pension, the requirement for Spousal Consent, and the right of the Participant to make, and to revoke, elections under Section 6.4. A Participant's Annuity Starting Date may not occur less than 30 days after receipt of the notice. An election under Section 6.4 shall be made on a form provided by the Plan Administrator and may be made during the 90-day period ending on the Participant's Annuity Starting Date, but not prior to the date the Participant receives the written explanation described in this Section. Notwithstanding any provision to the contrary, the Participant may, after having received the notice, affirmatively elect (with any applicable Spousal Consent) to waive any requirement that the written explanation be provided at least 30 days before his Annuity Starting Date if: (A) the Committee clearly informs the Participant that he has a period of at least 30 days after receiving the notice to decide when to have his benefits begin and, if applicable, to choose a particular optional form of payment; (B) the Participant affirmatively elects a date for his benefit to begin and, if applicable, an optional form of payment, after receiving the notice; (C) the Participant is permitted to revoke his election until the later of his Annuity Starting Date or seven days following the day he received the notice; and (D) the distribution of his Pension commences more than 7 days after such explanation is provided to the Participant. 6.6 SERVISTAR Protected Payment Forms Each Participant who was a participant in the SERVISTAR Plan on January 1, 1998 shall have, in addition to the optional forms of payment available under this Plan, all of the normal and optional forms of payment available under the SERVISTAR Plan, except for the 66 2/3 Joint and Survivor Annuity form, with respect to the payment of his Pension under this Plan. The Participant's Pension payable under said SERVISTAR Plan optional payment forms shall be the Actuarial Equivalent of the single life annuity form of payment for the life of the Participant and all calculations of these forms are based on the provisions contained in the SERVISTAR Plan on December 31, 1997 and restated in Supplement C hereto. 6.7 Payment of Pension to the Participant A Participant's Pension will be payable monthly with each payment equivalent to 1/12 of the yearly amount. The first of such monthly payments will be made at the Participant's Normal Retirement Date, late retirement date or early retirement date, if appropriate, with subsequent monthly payments being made at the first of each month thereafter until the Participant's death occurs, or in the case of a survivor annuity, until the surviving Beneficiary's death occurs. Except as otherwise provided in Sections 4, 5 or 7, unless the Participant elects otherwise, the payment of a Pension shall commence not later than the 60th day after the latest of the close of the Plan Year in which: 22 (A) the Participant attains the earlier of age 65 or his Normal Retirement Date, or (B) the fifth anniversary of the year in which the Participant commenced participation in the Plan occurs, or (C) the Participant terminates his Service with the Employer. Notwithstanding the preceding paragraph, in the case of a Participant in active service of the Employer or an Affiliated Employer, the Participant's Pension shall begin not later than the April 1 following the calendar year in which he attains age 70 1/2. In this situation, the provisions of Section 5.4 shall apply to him. However, a Participant who attained age 70 1/2 prior to January 1, 1988 and who is not a 5% owner (as defined in Section 416(i) of the Code) of the Employer as described above shall not receive payment while in active service under the provisions of this Section 6.7. 6.8 Payment Options If not made in a lump-sum under the small benefits provisions of Section 10.5(G), payment may be made in one of the following forms upon the Participant's election and with Spousal Consent, if applicable: (A) A monthly pension payable in equal installments for the life of the Participant; provided however, that in the event the Participant dies within the 10-year period following his Annuity Starting Date, monthly payments equal to those payable during the life of the Participant shall be made to the Beneficiary or Spouse of the deceased Participant designated to receive such payments for the remainder of said 10-year period. (B) A lump sum payment equal to the Participant's Defined Lump Sum, as determined under Section 4.3(B) but in no event less than the lump sum amount determined under Section 4.3(D), which payment shall be made as of the first day of the month following the date an election to receive such lump sum payment is made pursuant to this Section. (C) A monthly pension payable in equal installments for the life of a Participant. The Participant must elect the optional forms of payment described in this Section 6.9, subject to the provisions of Section 5.1 and as provided in Section 6.4. Each of the optional forms of payment in this Section 6.9 (except as modified by Section 6.9(D)) shall be the Actuarial Equivalent of the single life annuity form of payment for the life of the Participant. 6.9 Minimum Distribution Requirements (A) General Rules (1) Effective Date. The provisions of this Section 6.10 will apply for purposes of determining required minimum distributions for calendar years beginning with the 2003 calendar year. 23 (2) Precedence. The requirements of this Section will take precedence over any inconsistent provisions of the Plan. (3) Requirements of Treasury Regulations Incorporated. All distributions required under this Section will be determined and made in accordance with the Treasury regulations under Section 401(a)(9) of the Internal Revenue Code. (B) Time and Manner of Distribution (1) Required Beginning Date. The Participant's entire interest will be distributed, or begin to be distributed, to the Participant no later than the Participant's Required Beginning Date, as defined in subsection (F)(4) below. (2) Death of Participant Before Distributions Begin. If the Participant dies before distributions begin, the Participant's entire interest will be distributed, or begin to be distributed, no later than as follows: (a) If the Participant's surviving spouse is the Participant's sole designated beneficiary, then, except as provided in subsection (G), distributions to the surviving spouse will begin by December 31 of the calendar year immediately following the calendar year in which the Participant died, or by December 31 of the calendar year in which the Participant would have attained age 70 1/2, if later. (b) If the Participant's surviving spouse is not the Participant's sole designated beneficiary, then, except as provided in subsection (G), distributions to the designated beneficiary will begin by December 31 of the calendar year immediately following the calendar year in which the Participant died. (c) If there is no designated beneficiary as of September 30 of the year following the year of the Participant's death, the Participant's entire interest will be distributed by December 31 of the calendar year containing the fifth anniversary of the Participant's death. (d) If the Participant's surviving spouse is the Participant's sole designated beneficiary and the surviving spouse dies after the Participant but before distributions to the surviving spouse begin, this subsection (B)(2), other than subsection (B)(2)(a), will apply as if the surviving spouse were the Participant. For purposes of this subsection (B)(2) and subsection (E), distributions are considered to begin on the Participant's Required Beginning Date (or, if subsection (B)(2)(d) applies, the date distributions are required to begin to the surviving spouse under subsection (B)(2)(a)). If annuity payments irrevocably commence to the Participant before the Participant's Required Beginning Date (or to the Participant's surviving spouse before the date distributions are required to begin to the surviving spouse under subsection (B)(2)(a)), the date distributions are considered to begin is the date distributions actually commence. 24 (3) Form of Distribution. Unless the Participant's interest is distributed in the form of an annuity purchased from an insurance company or in a single sum on or before the Required Beginning Date, as of the first distribution calendar year distributions will be made in accordance with subsections (C), (D) and (E) of this Section 6.10. If the Participant's interest is distributed in the form of an annuity purchased from an insurance company, distributions thereunder will be made in accordance with the requirements of Section 401(a)(9) of the Code and the Treasury regulations. Any part of the Participant's interest which is in the form of an individual account described in Section 414(k) of the Code will be distributed in a manner satisfying the requirements of Section 401(a)(9) of the Code and the Treasury regulations that apply to individual accounts. (C) Determination of Amount to be Distributed Each Year (1) General Annuity Requirements. If the Participant's interest is paid in the form of annuity distributions under the Plan, payments under the annuity will satisfy the following requirements: (a) the annuity distributions will be paid in periodic payments made at intervals not longer than one year; (b) the distribution period will be over a life (or lives) or over a period certain not longer than the period described in subsection (D) or (E); (c) once payments have begun over a period certain, the period certain will not be changed even if the period certain is shorter than the maximum permitted; (d) payments will either be non-increasing or increase only as follows: i. by an annual percentage increase that does not exceed the annual percentage increase in a cost-of-living index that is based on prices of all items and issued by the Bureau of Labor Statistics; ii. to the extent of the reduction in the amount of the Participant's payments to provide for a survivor benefit upon death, but only if the beneficiary whose life was being used to determine the distribution period described in subsection (D) dies or is no longer the Participant's beneficiary pursuant to a qualified domestic relations order within the meaning of Section 414(p) of the Code; iii. to provide cash refunds of employee contributions upon the Participant's death; or 25 iv. to pay increased benefits that result from a Plan amendment. (2) Amount Required to be Distributed by Required Beginning Date. The amount that must be distributed on or before the Participant's Required Beginning Date (or, if the Participant dies before distributions begin, the date distributions are required to begin under subsection (B)(2)(a) or (b)) is the payment that is required for one payment interval. The second payment need not be made until the end of the next payment interval even if that payment interval ends in the next calendar year. Payment intervals are the periods for which payments are received, e.g., bi-monthly, monthly, semi-annually, or annually. All of the Participant's benefit accruals as of the last day of the first distribution calendar year will be included in the calculation of the amount of the annuity payments for payment intervals ending on or after the Participant's Required Beginning Date. (3) Additional Accruals After First Distribution Calendar Year. Any additional benefits accruing to the Participant in a calendar year after the first distribution calendar year will be distributed beginning with the first payment interval ending in the calendar year immediately following the calendar year in which such amount accrues. (D) Requirements For Annuity Distributions that Commence During Participant's Lifetime (1) Joint Life Annuities Where the Beneficiary Is Not the Participant's Spouse. If the Participant's interest is being distributed in the form of a joint and survivor annuity for the joint lives of the Participant and a non-spouse beneficiary, annuity payments to be made on or after the Participant's Required Beginning Date to the designated beneficiary after the Participant's death must not at any time exceed the applicable percentage of the annuity payment for such period that would have been payable to the Participant using the table set forth in Q&A-2 of Section 1.401(a)(9)-6T of the Treasury regulations. If the form of distribution combines a joint and survivor annuity for the joint lives of the Participant and a non-spouse beneficiary and a period certain annuity, the requirement in the preceding sentence will apply to annuity payments to be made to the designated beneficiary after the expiration of the period certain. (2) Period Certain Annuities. Unless the Participant's spouse is the sole designated beneficiary and the form of distribution is a period certain and no life annuity, the period certain for an annuity distribution commencing during the Participant's lifetime may not exceed the applicable distribution period for the Participant under the Uniform Lifetime Table set forth in Section 1.401(a)(9)-9 of the Treasury regulations for the calendar year that contains the annuity starting date. If the annuity starting date precedes the year in which the Participant reaches age 70, the applicable distribution period for the Participant is the distribution period for age 70 under the Uniform Lifetime Table set forth in Section 1.401(a)(9)-9 of the Treasury regulations plus the excess of 70 over the age of the Participant as of the Participant's birthday in the year that contains the annuity starting date. If the Participant's spouse is the Participant's sole designated beneficiary and the form of distribution is a period certain and no life 26 annuity, the period certain may not exceed the longer of the Participant's applicable distribution period, as determined under this subsection (D)(2), or the joint life and last survivor expectancy of the Participant and the Participant's spouse as determined under the Joint and Last Survivor Table set forth in Section 1.401(a)(9)-9 of the Treasury regulations, using the Participant's and spouse's attained ages as of the Participant's and spouse's birthdays in the calendar year that contains the annuity starting date. (E) Requirements for Minimum Distributions Where Participant Dies Before Date Distributions Begin (1) Participant Survived by Designated Beneficiary. Except as provided in subsection (G) below, if the Participant dies before the date distribution of his or her interest begins and there is a designated beneficiary, the Participant's entire interest will be distributed, beginning no later than the time described in subsection (B)(2)(a) or (b), over the life of the designated beneficiary or over a period certain not exceeding: (a) unless the annuity starting date is before the first distribution calendar year, the life expectancy of the designated beneficiary determined using the beneficiary's age as of the beneficiary's birthday in the calendar year immediately following the calendar year of the Participant's death; or (b) if the annuity starting date is before the first distribution calendar year, the life expectancy of the designated beneficiary determined using the beneficiary's age as of the beneficiary's birthday in the calendar year that contains the annuity starting date. (2) No Designated Beneficiary. If the Participant dies before the date distributions begin and there is no designated beneficiary as of September 30 of the year following the year of the Participant's death, distribution of the Participant's entire interest will be completed by December 31 of the calendar year containing the fifth anniversary of the Participant's death. (3) Death of Surviving Spouse Before Distributions to Surviving Spouse Begin. If the Participant dies before the date distribution of his or her interest begins, the Participant's surviving spouse is the Participant's sole designated beneficiary, and the surviving spouse dies before distributions to the surviving spouse begin, this subsection (E) will apply as if the surviving spouse were the Participant, except that the time by which distributions must begin will be determined without regard to subsection (B)(2)(a). (F) Definitions (1) Designated Beneficiary. The individual who is designated as the beneficiary under the terms of this Supplement and is the designated beneficiary under Section 401(a)(9) of the Internal Revenue Code and Section 1.401(a)(9)-1, Q&A-4, of the Treasury regulations. 27 (2) Distribution Calendar Year. A calendar year for which a minimum distribution is required. For distributions beginning before the Participant's death, the first distribution calendar year is the calendar year immediately preceding the calendar year which contains the Participant's Required Beginning Date. For distributions beginning after the Participant's death, the first distribution calendar year is the calendar year in which distributions are required to begin pursuant to subsection (B)(2). (3) Life Expectancy. Life expectancy as computed by use of the Single Life Table in Section 1.401(a)(9)-9 of the Treasury regulations. (4) Required Beginning Date. The April 1 following the calendar year in which the Participant attains age 70 1/2. (G) Election to Apply 5-Year Rule to Distributions to Designated Beneficiaries. If the Participant dies before distributions begin and there is a designated beneficiary, distribution to the designated beneficiary is not required to begin by the date specified in subsection (B)(2), but the Participant's entire interest will be distributed to the designated beneficiary by December 31 of the calendar year containing the fifth anniversary of the Participant's death. If the Participant's surviving spouse is the Participant's sole designated beneficiary and the surviving spouse dies after the Participant but before distributions to either the Participant or the surviving spouse begin, this election will apply as if the surviving spouse were the Participant. 6.10 Restoration of Retired Participant or Other Former Associate to Service If a Participant having received his Pension or in receipt of a Pension is restored to service with the Employer or an Affiliated Employer, the following shall apply: (A) Upon his restoration to service he shall not be required or allowed to repay any benefit he has received and, if his Pension is payable in an annuity form, his Pension shall not be suspended and any optional form of payment shall remain in effect; if the Participant had commenced payment prior to his Normal Retirement Date, however, any additional Pension he accrues after his restoration to service shall be paid to his surviving Spouse in accordance with the provisions of Section 7 if he should die in active service. (B) Any Years of Service to which he was entitled when he retired or terminated service shall be restored to him, subject to the provisions of Section 2.1(PP) ("Years of Service"). 6.11 Direct Rollover of Certain Distributions (A) Notwithstanding any provision of the Plan to the contrary that would otherwise limit a distributee's election under this Section, a distributee may elect, at the time and in the manner prescribed by the Plan Administrator, to have any portion of an eligible rollover distribution paid directly to an eligible retirement plan specified by the distributee in a direct rollover. (B) The following definitions apply to the terms used in this Section: 28 (1) An "eligible rollover distribution" is any distribution of all or any portion of the balance to the credit of the distributee, except that an eligible rollover distribution does not include: any distribution that is one of a series of substantially equal periodic payments (not less frequently than annually) made for the life (or life expectancy) of the distributee or the joint lives (or joint life expectancies) of the distributee and the distributee's designated beneficiary, or for a specified period of ten years or more; any distribution to the extent such distribution is required under Section 401(a)(9) of the Code; and the portion of any distribution that is not includible in gross income; (2) An "eligible retirement plan" is an individual retirement account described in Section 408(a) of the Code, an individual retirement annuity described in Section 408(b) of the Code, an annuity plan described in Section 403(a) of the Code, or a qualified trust described in Section 401(a) of the Code, that accepts the distributee's eligible rollover distribution. An "eligible retirement plan" shall also mean an annuity contract described in Section 403(b) of the Code and an eligible deferred compensation plan under Section 457(b) of the Code which is maintained by a state, political subdivision of a state, or any agency or instrumentality of a state or political subdivision of a state and which agrees to separately account for amounts transferred into such plan from the Plan. The definition of eligible retirement plan shall also apply in the case of a distribution to a surviving Spouse, or to a Spouse or former Spouse who is the alternate payee under a qualified domestic relations order, as defined in Section 414(p) of the Code. (3) A "distributee" includes an Associate or former Associate. In addition, the Associate's or former Associate's surviving Spouse and the Associate's or former Associate's Spouse or former Spouse who is the alternate payee under a qualified domestic relations order, as defined in Section 414(p) of the Code, are distributees with regard to the interest of the Spouse or former Spouse; and (4) A "direct rollover" is a payment by the Plan to the eligible retirement plan specified by the distributee. (C) In the event that the provisions of this Section 6.11 or any part thereof cease to be required by law as a result of subsequent legislation or otherwise, this Section or any applicable part thereof shall be ineffective without the necessity of further amendments to the Plan. 29 SECTION 7 SURVIVING SPOUSE BENEFIT 7.1 Eligibility Upon the death of a Participant before his Retirement Date, his Spouse will receive a surviving Spouse benefit as described below in either 7.2(A) or (B) as applicable, but in no event less than the amount determined under Section 7.2(C), if the following requirements were met when the Participant died: (A) The Participant had a Spouse to whom the Participant had been married at least one full year prior to his death; and (B) The Participant's Vesting Percentage is 100%. 7.2 Amount (A) If the Participant dies while actively employed by the Employer, the surviving Spouse benefit shall be equal to 55% of the Participant's Defined Lump Sum, but in no event less than 55% of the lump sum amount determined under Section 4.3(D). (B) If the Participant dies after his employment with the Employer is terminated, but prior to commencement of payments under the Plan, the Surviving Spouse benefit shall be equal to 55% of the benefit the Participant would have received if the Participant had survived to age 55 (or the age at his date of death, if older) and elected a 50% Qualified Joint and Survivor Annuity, and died. (C) Regardless of the amount determined under (A) or (B), (1) if a married Participant dies before his Annuity Starting Date, and also before reaching his earliest retirement age, as defined in Section 5.2, then the benefit may not be less than the benefit that would be payable to the Spouse if the Participant had separated from service at the earlier of the actual separation or death, survived until the earliest retirement age, retired at that time with an immediate Qualified Joint and Survivor Annuity, and died on the day thereafter; or (2) if a married Participant dies before his Annuity Starting Date, but after reaching his earliest retirement age, as defined in Sections 5.2, then the benefit may not be less than the benefit that would be payable to the Spouse if the Participant had retired with an immediate Qualified Joint and Survivor Annuity on the day before the Participant's death. 7.3 Payments (A) Subject to the surviving Spouse's right to have the benefit paid at what would have been the Participant's Normal Retirement Date, the surviving Spouse benefit under Section 7.2(A) shall be paid commencing as of the first day of the month coinciding with or 30 immediately following the Participant's death. In lieu of immediate monthly payments for life, the surviving Spouse may elect to receive the benefit immediately as a lump sum. Alternatively, the surviving Spouse may elect to defer commencement of the surviving Spouse benefit until the first day of any month coinciding with or immediately following the date the Participant would have attained age 55 (or age at death, if older), but not later than the first day of the month coinciding with or next following the date that would have been the Participant's Normal Retirement Date (or age at death, if older). If a surviving Spouse elects to defer commencement of the surviving Spouse benefit, the benefit shall be converted to an Actuarially Equivalent monthly annuity for the life of the surviving Spouse commencing on the date that would have been the Participant's Normal Retirement Date. This benefit will be reduced by 2/3 of 1% for each of the first 60 months and 1/3 of 1% for each of the next 60 months by which the benefit commencement date precedes the date that would have been the Participant's Normal Retirement Date. In no event, however, shall this benefit be less than the benefit the surviving Spouse could have received as a monthly annuity for life commencing on the first of the month coinciding with or immediately following the Participant's death. (B) Subject to the surviving Spouse's right to have the benefit paid at what would have been the Participant's Normal Retirement Date, the surviving Spouse benefit under Section 7.2(B) shall be paid commencing as of the first day of the month coinciding with or immediately following the Participant's death. In lieu of such immediate payment, the surviving Spouse may elect to defer receipt of the surviving Spouse benefit to any date which is not later than the Participant's Normal Retirement Date. If such an election is made, the surviving Spouse benefit shall be equal to 55% of the benefit the Participant would have received if the Participant had survived to the date at which the surviving Spouse elects to commence the surviving Spouse benefit and had elected a 50% Qualified Joint and Survivor Annuity. (C) An election by the Spouse to commence receiving payments prior to what would have been the Participant's Normal Retirement Date shall be made on a form provided by the Plan Administrator and may be made during the 90-day period ending on the date the payments to the Spouse commence. 7.4 Death Benefits for Non-Spouse Beneficiaries If a Participant dies prior to his or her Annuity Starting Date and does not have a Spouse eligible for the surviving Spouse benefit, then the following provisions shall apply: (A) If the Participant's Vesting Percentage at the time of death was 100%, then Participant's Beneficiary shall be entitled to a death benefit equal to 55% of the Participant's Defined Lump Sum. (B) If the Participant was a former participant in the SERVISTAR Plan, then the amount payable to a Beneficiary under paragraph (A) above shall at least be equal to the Participant's available contributions together with credited interest computed thereon to the date of the Participant's death. Credited interest on a Participant's contributions means interest for the number of full months from the January 1 following the date each such contribution was paid 31 to the Plan to the date specified herein. Prior to January 1, 1960, the rate of credited interest was 2-1/2% per annum, compounded annually. From January 1, 1960 to January 1, 1976, the rate of credited interest was 3% per annum, compounded annually. From January 1, 1976 to July 1, 1983, the rate of credited interest is 5% per annum. On and after July 1, 1983, the rate of credited interest is 7% per annum, compounded on each July 1. Any change in the rate of credited interest will apply to interest allowed for months occurring after the effective date of change. (C) All death benefits payable under this Section 7.4 shall be paid to the Beneficiary in a single, lump sum payment, as soon as practicable following the Participant's death. The foregoing provisions of this Section 7.4 shall apply to Participants who terminate employment with the Employer on or after December 15, 2002. The death benefits payable to the Beneficiary of a Participant who terminated employment with the Employer prior to such date, if any, shall be determined in accordance with the terms of the Plan as in effect on such termination date. 32 SECTION 8 TRUST FUND AND TRUSTEE 8.1 Trust Fund The Employer has heretofore established the Fund which comprises all of the assets of the Plan and into which future contributions to finance this Plan shall be made. The Trust shall hold the Fund, which shall be used to pay benefits or expenses as provided in this Plan pursuant to authorization by the Committee; and such benefits shall be payable only from the Fund. 8.2 Trust Fund Applicable Only to Payment of Benefits and Expenses The fund will be used and applied only in accordance with the provisions of the Plan and the Trust Agreement entered into by the Employer and the Trustee to provide the benefits thereof, and no part of the corpus or income of the Trust fund will be used for, or diverted to, purposes other than for the exclusive benefit of Participants under the Plan and other persons thereunder entitled to benefits except to the extent provided in Sections 9.2 and 11.3 or to pay any reasonable expenses in the administration of the Plan. 8.3 Trustee Capacity When there are two or more Trustees, they are authorized to allocate specific responsibilities, obligations or duties among themselves by their written agreement. An executed copy of such written agreement is to be delivered to and retained by the Committee. In the event of more than one Trustee, any action shall be taken at the direction of a majority of such Trustees. 8.4 Resignation and Removal of Trustee Any Trustee may resign at any time by delivering to the Board of Directors of the Employer (the "Board of Directors") a written notice of resignation, which notice may be waived by the Board of Directors, to take effect at a date specified therein, which shall not be less than 30 days after the delivery thereof. The Trustee may be removed by the Board of Directors with or without cause, by tendering to the Trustee a written notice of removal to take effect at a date specified therein. Upon such removal or resignation of a Trustee, the Board of Directors shall either appoint a successor Trustee who shall have the same powers and duties as those conferred upon the resigning or discharged Trustee, or, if more than one Trustee is acting, determine that a successor shall not be appointed and the number of Trustees shall be reduced by one. 8.5 Taxes, Expenses and Compensation of Trustee The Trustee shall deduct from and charge against the Trust any taxes paid by it which may be imposed upon the Trust, or the income thereof, or which the Trustee is required to pay with respect to the interest of any Participant or Beneficiary therein. The Employer may pay the Trustee's reasonable expenses in administering the Plan and a reasonable compensation for its services as Trustee hereunder, either directly or through the Fund, at a rate to be agreed upon 33 from time to time; provided, however, that no full-time Associate shall receive any compensation for acting as Trustee hereunder. 8.6 Funding Policy and Investment Managers The Employer or its delegate shall be responsible for establishing and carrying out a funding policy and method consistent with the objectives of this Plan and the requirements of ERISA and shall determine the investment policy for the Plan. However, the Employer or its delegate may appoint one or more investment managers to manage the assets of the Plan (including the power to acquire and dispose of all or part of such assets) as the Employer shall designate. In that event, the authority over and responsibility for the management of the assets so designated shall be the sole responsibility of that investment manager. For purposes of this Article, the term "investment manager" means an individual who: (A) Has the power to manage, acquire or dispose of any asset of the Plan; (B) Is (i) registered as an investment advisor under the Investment Advisors Act of 1940, (ii) is a bank, as defined in that Act, or (iii) is an insurance company qualified to perform services described in paragraph (A) above; and (C) Has acknowledged in writing that he is a fiduciary with respect to the Plan. 34 SECTION 9 FUNDING OF BENEFITS 9.1 Contributions to the Fund From time to time, the Employer shall make such contributions to the Fund as the Employer determines are required to maintain the Plan on a sound actuarial basis. In determining the amounts and incidence of such contributions, the Employer will take into account such actuarial recommendations as may be provided by an enrolled actuary as defined by ERISA. Contributions by Participants are neither required nor permitted. 9.2 Fund for Exclusive Benefit of Participants The Fund is for the exclusive benefit of Participants and other persons who may become entitled to benefits hereunder, and may also be used to pay any reasonable expenses arising from the administration of the Plan not assumed and then paid directly by the Employer. Prior to the satisfaction of all liabilities for benefits provided hereunder, no contribution made to the Fund will be refunded to the Employer except in the following circumstances: (A) The Employer's contributions to the Plan are conditioned upon their deductibility under Section 404 of the Code. If all or part of the Employer's deductions for contributions to the Plan are disallowed by the Internal Revenue Service, the portion of the contributions to which that disallowance applies shall be returned to the Employer without interest, but reduced by any investment loss attributable to those contributions. The return shall be made within one year after the date of the disallowance of deduction. (B) The Employer may recover without interest the amount of its contributions to the Plan made on account of a mistake in fact, reduced by any investment loss attributable to those contributions, if recovery is made within one year after the date of those contributions. 9.3 Disposition of Credits and Forfeitures No credit or forfeitures arising from the operation of the Plan may be used to increase the benefit of any Participant or group of Participants but will instead be taken into account in determining contributions to be made by the Employer. 35 SECTION 10 PLAN ADMINISTRATOR 10.1 Plan Administrator/Appointment of Committee To the extent provided in this Section, the general administration of the Plan and the responsibility for carrying out the provisions of the Plan shall be placed in a committee of not less than 3 persons appointed from time-to-time by the Board of Directors (the "Committee") to serve at the pleasure of the Board of Directors. Any person who is appointed a member of the Committee shall signify his acceptance by filing written acceptance with the Board of Directors and the Secretary of the Committee. Any member of the Committee may resign by delivering his written resignation to the Board of Directors and the Secretary of the Committee. If the Employer does not appoint a Committee, the Employer shall perform the duties of the Committee. 10.2 Duties and Authority The Plan Administrator shall administer the Plan on behalf of the Employer in a nondiscriminatory manner for the exclusive benefit of Participants and their Beneficiaries. The Plan Administrator shall have the exclusive discretionary power to, and perform all such duties as are necessary to, operate, administer and manage the Plan in accordance with the terms thereof, including but not limited to the following: (A) To determine, in its sole discretion, all questions relating to a Participant's coverage under the Plan, (B) To maintain all necessary records for the administration of the Plan, (C) To compute and authorize the payment of a Pension and other benefit payments to eligible Participants and Beneficiaries, (D) To adopt and amend rules for the administration of the Plan and the transaction of its business subject to the limitations of the Plan. The Plan Administrator shall have the sole and unilateral discretionary authority to interpret the Plan and to make factual determinations (including but not limited to, determination of an individual's eligibility for Plan participation, the right, amount and form of any benefit payable under the Plan and the date on which any individual ceases to be a Participant and to remedy ambiguities, inconsistencies and/or omissions). The determinations, acts and decisions of the Plan Administrator shall be final, conclusive and binding on all parties and, subject to the claim procedures in Section 10.7(B), shall not be overturned unless determined to be arbitrary and capricious by a court of competent jurisdiction. (E) To advise or assist Participants regarding any rights, benefits or elections available under the Plan. 36 The Plan Administrator shall take such actions as are necessary to establish and maintain the Plan as a retirement program which is at all times in full and timely compliance with any law or regulation having pertinence to this Plan. The Plan Administrator shall have all reasonable discretionary powers necessary or appropriate to accomplish its duties as Plan Administrator. The Plan Administrator shall use that degree of care, skill, prudence and diligence that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of a similar situation. 10.3 Removal of Committee Members Any member of the Committee may be removed with or without cause by the Board of Directors through delivery to him of written notice of removal, to take effect at a date specified therein. 10.4 Appointment of Successor Committee Member In the event the Committee has fewer than three members, the Board of Directors shall promptly designate one or more successor Committee members who must signify acceptance of this position in writing. In the event no Committee is appointed, the Employer shall function as the Plan Administrator until a new Plan Administrator has been appointed and has accepted such appointment. 10.5 Plan Administration -- Miscellaneous (A) Filing a claim for Benefits. A Participant or Beneficiary shall notify the Plan Administrator of a claim for benefits under the Plan. Such request may be in any form adequate to give reasonable notice to the Plan Administrator and shall set forth the basis of such claim. The claim shall also authorize the Plan Administrator to conduct such examinations as may be necessary to determine the validity of the claim and to take such steps as may be necessary to facilitate the payment of any benefits to which the Participant or Beneficiary may be entitled under the Plan. (B) Claims Procedures. (1) The Plan Administrator will endeavor to administer the Plan fairly and consistently and to pay all benefits to which Participants or Beneficiaries are properly entitled. However, failure to execute any forms required or to furnish information requested by the Plan Administrator within a reasonable period of time may result in delayed benefit payments. All claims for unpaid benefits should be made in writing to the Plan Administrator. The Plan Administrator may request additional information necessary to consider the claim further. If a claim is wholly or partially denied, the Plan Administrator will notify the claimant of the adverse decision within a reasonable period of time, but not later than 90 days after receiving the claim, unless the Plan Administrator determines that special circumstances require an extension. In such case, a written extension notice shall be furnished before the end of the initial 90-day period. The extension cannot exceed 90 days. The extension notice shall indicate the special circumstances requiring an extension of time and the date by which the Plan 37 Administrator expects to render the decision. The claim determination time frames begin when a claim is filed, without regard to whether all the information necessary to make a claim determination accompanies the filing. Any notice of denial shall include: (i) The specific reason or reasons for denial with reference to those specific Plan provisions on which the denial is based; (ii) A description of any additional material or information necessary to perfect the claim and an explanation of why that material or information is necessary; and (iii) A description of the Plan's appeal procedures and time frames, including a statement of the claimant's right to bring a civil action under ERISA following an adverse decision on appeal. (2) A claimant, or a claimant's authorized representative, may appeal a denied claim within 60 days after receiving the Plan Administrator's notice of denial. A claimant has the right to: (i) Submit to the Plan Administrator, for review, written comments, documents, records and other information relating to the claim; (ii) Request, free of charge, reasonable access to, and copies of, all documents, records and other information relevant to the claimant's claim; and (iii) A review on appeal that takes into account all comments, documents, records, and other information submitted by the claimant, without regard to whether such information was submitted or considered in the initial claim decision. (3) The Plan Administrator will make a full and fair review of the appeal and may require additional documents as it deems necessary in making such a review. A final decision on review shall be made within a reasonable period of time, but not later than 60 days following receipt of the written request for review, unless the Plan Administrator determines that special circumstances require an extension. In such case, a written extension notice will be sent to the claimant before the end of the initial 60-day period. The extension notice shall indicate that the special circumstances and the date by which the Plan Administrator expects to render the appeal decision. The extension cannot exceed a period of 60 days. The appeal time frames begin when an appeal is filed, without regard to whether all the information necessary to make an appeal decision accompanies the filing. If an extension necessary because the claimant failed to submit necessary information, the days from the date the Plan Administrator sends the extension notice until the claimant responds to the request for additional information are not counted as part of the appeal determination period. The Plan Administrator's notice of denial on appeal shall include: (i) The specific reason or reasons for denial with reference to those Plan provisions on which the denial is based; and 38 (ii) A statement that the claimant is entitled to receive, upon request and free of charge, reasonable access to, and copies of all documents, records, and other information relevant to the claimant's claim. (C) Governing Law. To the extent not preempted by ERISA, the Plan shall be construed, regulated and administered under the laws of the State of Illinois. (D) Masculine and Feminine, Singular and Plural. In construing the text of this Plan, the masculine shall include the feminine and the singular shall include the plural, and the plural the singular wherever the context shall plainly so require. (E) Reference to Laws. Any reference herein to any section of the federal Internal Revenue Code, ERISA or any other statute or law shall be deemed to include any successor statute or law of similar import. (F) Non-Assignment. Except as required by any applicable law, no benefit under the Plan shall in any manner be anticipated, assigned, alienated, subject to garnishment, levy, execution or other legal or equitable process, or otherwise subject to the claims of creditors, and any attempt to do so shall be void. However, payment shall be made in accordance with the provisions of any judgment, decree, or order which: (1) creates for, or assigns to, a spouse, former spouse, child or other dependent of a Participant the right to receive all or a portion of the Participant's benefits under the Plan for the purpose of providing child support, alimony payments or marital property rights to that spouse, child or dependent, (2) is made pursuant to a State domestic relations law, (3) does not require the Plan to provide any type of benefit, or any option, not otherwise provided under the Plan, and (4) otherwise meets the requirements of Section 206(d) of ERISA, as amended, as a "qualified domestic relations order," as determined by the Plan Administrator. The amount payable to an alternate payee under a qualified domestic relations order shall be paid to the alternate payee in a single lump sum as soon as practicable after the order has been determined to be qualified by the Plan Administrator unless the qualified domestic relations order specifically provides otherwise. (G) Small Benefits. If the Actuarial Equivalent of the Vesting Percentage of the Participant's Pension under the Plan is $1,000 or less, such Pension shall be distributed without the Participant's consent (or his Spouse's/Beneficiary's consent, if applicable) in the form of a lump sum cash distribution. For purposes of determining such Actuarial Equivalent amount, it shall be assumed that the benefit commencement date is the Participant's Normal Retirement Date. 39 The lump sum payment shall be made as soon as administratively practicable following the Participant's termination of employment or death, but in any event prior to the date his Pension payments would have otherwise commenced. In the event a Participant is not entitled to any Pension upon his termination of employment, he shall be deemed cashed-out under the provisions of this paragraph (G) as of the date he terminated service. However, if a Participant described in the preceding sentence is subsequently restored to service, the provisions of Section 6.10 shall apply to him without regard to such sentence. (H) Conditions of Employment Not Affected by Plan. The establishment of the Plan shall not confer any legal rights upon any Associate or other person for a continuation of employment, nor shall it interfere with the rights of the Employer or an Affiliated Employer to discharge any Associate and to treat him without regard to the effect which that treatment might have upon him as a Participant or potential Participant of the Plan. Participation in the Plan shall not grant any Participant the right to be retained in the service of the Employer or an Affiliated Employer or any other rights other than those to which he is entitled under relevant law or regulations. (I) Clerical Error. If any fact pertaining to eligibility for or amount of benefits payable under the Plan to a Participant or other payee has been misstated, or in the event of clerical error, the benefits will be adjusted by the Plan Administrator on the basis of the correct facts in a manner precluding individual selection. (J) Divestment of Benefits for Cause Precluded. In no event may a Participant be divested for cause of Pension or other benefits which he is eligible to receive. (K) Advisors and Counsel. The Employer, or the Committee acting through the Employer, may employ one or more persons to render advice with respect to any duty or responsibility it may have including, but not limited to, consultants, actuaries, financial advisors, accountants and attorneys. (L) Incompetency. If the Committee receives evidence satisfactory to it that a Participant or his Beneficiary to whom an amount is distributable under this Plan is legally incompetent to receive such amount and give valid receipt therefore, the Committee may cause payment of such amount to be made to the guardian or other legal representative of such Participant or his Beneficiary, or in the absence of a legal guardian or other legal representative, to such other person or institution who is then maintaining and has custody of such Participant or his Beneficiary. Any payments made shall be a complete discharge of liabilities of the Plan for that benefit. (M) Erroneous Payments. In the event that a Participant (or his Beneficiary) receives a distribution under this Plan in excess of the amount, if any, to which he is entitled, by reason of a calculation error or otherwise, the Plan Administrator, in its sole and absolute discretion, may adjust future benefit payments to the Participant (or his Beneficiary) to the extent necessary to recoup the amount which the Participant (or his Beneficiary) received which was in excess of the amount to which he was entitled under the term of the Plan. If the Plan Administrator determines, in its sole and absolute discretion, that it is not feasible or desirable to adjust future benefit payments to the Participant, the Plan Administrator may require the 40 Participant (or his Beneficiary) to repay to the Plan the amount which is in excess of the amount to which the Participant (or his Beneficiary) is entitled under the terms of the Plan. All amounts received by the Participant (or his Beneficiary) under the Plan shall be deemed to be paid subject to these conditions. The determination of the Plan Administrator made pursuant to this Section 10.7(M) shall be final, conclusive and binding on all parties, subject to the claims procedures under Section 10.7(B), and shall not be overturned unless such determinations are arbitrary and capricious. (N) Headings. The headings of the Plan have been inserted for convenience of reference only and are to be ignored in the construction of the Plan. (O) Information. Before any benefit shall be payable by the Plan, each Participant, Spouse, Beneficiary or other person entitled to a benefit shall file with the Committee all the information that the Committee shall require to establish such persons rights and benefits under the Plan. (P) Written Elections. Any elections, notifications or designations made by a Participant or any other individual pursuant to the provisions of the Plan shall be made in writing and filed with the Committee in a time and manner determined by the Committee under rules uniformly applicable to all persons similarly situated. The Committee reserves the right to change from time to time the time and manner for making notifications, elections or designations by such persons under the Plan if it determines after due deliberation that such action is justified in that it improves the administration of the Plan. In the event of a conflict between the provisions for making an election, notification or designation set forth in the Plan and such new administrative procedures, those new administrative procedures shall prevail. (Q) Vested Rights. No person shall have any vested rights under the Plan and Trust except to the extent that such rights may accrue to him as provided under the Plan. Furthermore, any person with vested rights under the Plan and Trust shall look solely to the Plan and Trust and the assets thereunder for satisfaction of such vested rights. (R) Plan Provisions Controlling. In the event of any conflict between the provisions of the Plan and the provisions of a summary or other description of the Plan or the terms of any agreement or instrument related to the Plan, the provisions of the Plan shall control. (S) Interpretation of the Plan. It is the intent of the Employer that the Plan and Trust qualify under Sections 401(a) and 501(a) of the Code, respectively, and meet all applicable requirements of ERISA. Accordingly, the Plan and Trust shall be construed and interpreted in such manner as to give effect to this intent. (T) Limitation of Liability. The Employer, the Board of Directors of the Employer or any Affiliated Employer, the members of the Committee, and any of their officers, Associates, representatives, consultants, counsel, or agents shall not incur any liability individually or on behalf of any other individuals or on behalf of the Employer for any act or failure to act, made in good faith in relation to the Plan or the Funds of the Plan. However, this limitation shall not act to relieve any such individual or the Employer from a responsibility or liability for any fiduciary responsibility, obligation or duty under Part 4, Title I of ERISA. 41 (U) Indemnification. The Employer, members of the Committee, the Board of Directors of the Employer or any Affiliated Employer, and their officers, Associates, representatives, consultants, counsel, and agents shall be indemnified against any and all liabilities arising by reason of any act, or failure to act, in relation to the Plan or the Fund of the Plan, including, without limitation, expenses reasonably incurred in the defense of any claim relating to the Plan or the Fund of the Plan, and amounts paid in any compromise or settlement relating to the Plan or the Fund of the Plan, except for such liability, losses or costs which result from: (1) their actions or failures to act made in bad faith; (2) their own gross negligence or willful conduct; (3) any settlement, without the Employer's prior approval, of an action, suit, or proceeding; or (4) suits or actions at law or in equity advanced by the Employer against such party. (V) Authority to Act. The Employer and the Committee may authorize one or more of its members, Associates, representatives, consultants, counsel, or agents to execute on its behalf instructions or directions to any interested party, and any such interested party may rely thereupon and the information contained therein. 42 SECTION 11 AMENDMENT AND TERMINATION OF PLAN 11.1 Amendment -- General The Employer, by action of its Board of Directors, or the Committee, in either case, at a meeting held either in person or by telephone or other electronic means, or by unanimous written consent in lieu of a meeting, reserves the right at any time and from time to time, and retroactively if deemed necessary or appropriate, to amend in whole or in part any or all of the provisions of the Plan. However, no amendment shall make it possible for any part of the Fund of the Plan to be used for, or diverted to, purposes other than for the exclusive benefit of persons entitled to benefits under the Plan, before the satisfaction of all liabilities with respect to them. No amendment shall be made which has the effect of decreasing the Protected Benefit of any Participant or of reducing the nonforfeitable percentage of the Accrued Benefit of a Participant below the nonforfeitable percentage computed under the Plan as in effect on the date on which the amendment is adopted or, if later, the date on which the amendment becomes effective. 11.2 Amendment -- Merger or Consolidation of Plan This Plan may be amended to provide for the merger or consolidation of the Plan with another retirement plan, or for the transfer of assets and liabilities hereunder to another retirement plan. Such an event, however, may not occur unless each Participant would receive a retirement benefit under such other retirement plan after the merger, consolidation, or transfer (assuming that plan had then terminated) which is at least as great as the benefit he would have received under this Plan immediately prior to the merger, consolidation, or transfer (assuming this Plan had then terminated). 11.3 Termination of Plan The Employer, by action of its Board of Directors, taken at a meeting held either in person or by telephone or other electronic means, or by unanimous written consent in lieu of a meeting, may terminate the Plan for any reason at any time. In case of termination of the Plan, the rights of Participants to their Protected Benefits as of the date of the termination, to the extent then funded or protected by law, if greater, shall be nonforfeitable. The Funds of the Plan shall be used for the exclusive benefit of persons entitled to benefits under the Plan as of the date of termination, except as provided in Section 9.2. However, any funds not required to satisfy all liabilities of the Plan for benefits because of erroneous actuarial computation shall be returned to the Employer. The Plan Administrator shall determine on the basis of actuarial valuation the share of the Fund of the Plan allocable to each person entitled to benefits under the Plan in accordance with Section 4044 of ERISA, or corresponding provision of any applicable law in effect at the time. In the event of a partial termination of the Plan, the provisions of this Section shall be applicable to the Participants affected by that partial termination. 43 SECTION 12 RESTRICTION OF BENEFITS UPON EARLY TERMINATION OF THE PLAN 12.1 Limitation Concerning Highly Compensated Employees or Highly Compensated Former Employees (A) The provisions of this Section shall apply (i) in the event the Plan is terminated, to any Participant who is a Highly Compensated Employee or Former Highly Compensated Employee of the Employer or an Affiliated Employer and (ii) in any other event, to any Participant who is one of the 25 Highly Compensated Employees of former Highly Compensated Employees of the Employer or Affiliated Employer with the greatest compensation in any Plan Year. The amount of the annual payments to any one of the Participants to whom this Section applies shall not be greater than an amount equal to the annual payments that would be made on behalf of the Participant during the year under a single life annuity that is Actuarially Equivalent to the sum of the Participant's Accrued Benefit and the Participant's other benefits under the Plan. (B) If, (i) after payment of Pension or other benefits to any one of the Participants to whom this Section applies, the value of Plan assets equals or exceeds 110% of the value of current liabilities (as that term is defined in Section 412(l)(7) of the Code) of the Plan, (ii) the value of the Accrued Benefit and other benefits of any one of the Participants to whom this Section applies is less than 1% of the value of current liabilities of the Plan, or (iii) the value of the benefits payable to a Participant to whom this Section applies does not exceed the amount described in Section 411(a)(11)(A) of the Code, the provisions of paragraph (A) above will not be applicable to the payment of benefits to such Participant. (C) If any Participant to whom this Section applies elects to receive a lump sum payment in lieu of his Pension and the provisions of paragraph (B) above are not met with respect to such Participant, the Participant shall be entitled to receive his benefit in full provided he shall agree to repay to the Plan any portion of the lump sum payment which would be restricted by operation of the provisions of paragraph (A), and shall provide adequate security to guarantee that repayment. (D) Notwithstanding paragraph (A) of this Section, in the event the Plan is terminated, the restriction of this Section shall not be applicable if the benefit payable to any Highly Compensated Employee and any former Highly Compensated Employee is limited to a benefit that is nondiscriminatory under Section 401(a)(4) of the Code. (E) If it should subsequently be determined by statute, court decision acquiesced in by the Commissioner of Internal Revenue, or ruling by the Commissioner of Internal Revenue, that the provisions of this Section are no longer necessary to qualify the Plan under the Code, this Section shall be ineffective without the necessity of further amendment to the Plan. 44 SECTION 13 SPECIAL PENSION BENEFITS PROVISIONS 13.1 Statutory Maximum Pension Benefits The statutory maximum amount of yearly Pension payable during any Plan Year, which shall be the limitation year for the purpose attributable to the Employer Accrued Benefit shall be determined in accordance with the further provisions of this Section 13.1. (A) Basic Limitation Regardless of any other provisions of this Plan, other than paragraphs (B)(4), (C) and (D) below, the amount of yearly Pension payable hereunder for any Limitation Year shall not exceed the lesser of (1) the Defined Benefit Dollar Limitation or (2) 100% of the Participant's average annual remuneration determined with reference to the three consecutive limitation years of Service which he received the highest aggregate remuneration from the Employer and all Affiliated Employers (referred to hereinafter in this Section 13.1 as "highest average compensation"). The "Defined Benefit Dollar Limitation" is $160,000, as adjusted, effective January 1 of each year, under Section 415(d) of the Code in such manner as the Secretary of the Treasury shall prescribe, and payable in the form of a straight life annuity. A limitation as adjusted under Section 415(d) of the Code will apply to limitation years ending with or within the calendar year for which the adjustment applies. (B) Secondary Limitations The basic limitation in paragraph (A) shall be reduced or increased, as applicable, for the following situations if they are applicable: (1) Form of Pension other than a life annuity. If the Pension is payable in a form other than a single life annuity, or a Qualified Joint and Survivor Annuity, the basic limitation in paragraph (A) shall be adjusted to its actuarial equivalent based upon the age at which such Pension commences and an interest rate assumption of the greater of the rate of interest specified in Supplement A - Section A.1.(a) or 5%. (2) Less Than 10 Years of Service If the Participant has less than 10 full years of Service, the basic limitations in paragraph (A)(2) shall be reduced by multiplying such limitation by a fraction, the numerator of which is the Participant's years of Service (computed to the nearest full month) and the denominator of which is 10. In addition, if the Participant has not been a Participant of the Plan for at least 10 years, the maximum annual Pension in paragraph (A)(1) above shall be multiplied by the ratio which the number of years of his participation in the Plan bears to 10. In both cases, these limits under this 45 Section 13.1(B)(2) shall not be reduced to an amount less than 1/10 of the applicable limitation in Section 13.1(A). (3) Commencement of Pension If the Pension of a Participant begins prior to age 62, the Defined Benefit Dollar Limitation applicable to the Participant at such earlier age is an annual benefit payable in the form of a straight life annuity beginning at the earlier age that is the actuarial equivalent of the Defined Benefit Dollar Limitation applicable to the Participant at age 62 (adjusted under Section 13.1(B)(2), if required). The Defined Benefit Dollar Limitation applicable at an age prior to age 62 is determined as the lesser of (i) the actuarial equivalent (at such age) of the Defined Benefit Dollar Limitation computed using the interest rate and Group Annuity Mortality Table specified in Supplement A - Section A.1. and (ii) the actuarial equivalent (at such age) of the Defined Benefit Dollar Limitation computed using a 5 percent interest rate and the Group Annuity Mortality Table as specified in Supplement A - Section A.1.(b). (4) Commencement of Pension After Social Security Retirement Age If the Pension benefit of a Participant begins after the Participant attains age 65, the Defined Benefit Dollar Limitation applicable to the Participant at the later age is the annual benefit payable in the form of a straight life annuity beginning at the later age that is actuarially equivalent to the Defined Benefit Dollar Limitation applicable to the Participant at age 65 (adjusted under Section 13.1(B)(2), if required). The actuarial equivalent of the Defined Benefit Dollar Limitation applicable at an age after age 65 is determined as (i) the lesser of the actuarial equivalent (at such age) of the Defined Benefit Dollar Limitation computed using the interest rate and Group Annuity Mortality Table specified in Supplement A - Section A.1. and (ii) the actuarial equivalent (at such age) of the Defined Benefit Dollar Limitation computed using a 5 percent interest rate assumption and the applicable Group Annuity Mortality Table specified in Supplement A - Section A.1.(b). (5) Special Provisions Effective under the Small Business Job Protection Act of 1996. (I) This Section 13.1(B)(5) is effective on January 1, 2000. As provided in the Small Business Job Protection Act of 1996, for purposes of this Section 13.1, a Participant's annual benefit provided under this Plan, and compliance with the benefit limitations under Section 415 of the Code, shall be determined in accordance with Revenue Ruling 98-1, 1998-1 C.B. 249, and specifically Q&A-7 and Q&A-8 thereof. The annual benefit for a Participant who is married shall include the benefit payable as a Qualified Joint and Survivor Annuity under Section 6.1. (II) For purposes of applying Section 415(b) of the Code to an optional form of benefit under Sections 6.3, 6.7, and 6.9 of the Plan that is not subject to Section 417(e)(3) of the Code, the determination as to whether such a 46 benefit satisfies the limitations under Section 415(b) of the Code is made by comparing the equivalent annual benefit determined in Step 1 below with the lesser of the age-adjusted dollar limit determined in Step 2 below and the limitations under Section 415(b) of the Code described in Step 3 below: Step 1: Under Section 415(b)(2)(B) of the Code, determine the annual benefit in the form of a straight life annuity commencing at the same age that is actuarially equivalent to the retirement benefit. In general, Sections 415(b)(2)(E)(i) and (v) of the Code require that the equivalent annual benefit be the greater of the equivalent annual benefit computed using the interest rate and mortality table, specified in Supplement A - Section A.1 of the Plan for actuarial equivalence for the particular form of benefit payable (Plan rate and Plan mortality table, or Plan tabular factor, respectively) and the equivalent annual benefit computed using a 5 percent interest rate assumption and the applicable mortality table. This step does not apply to a benefit that is not required to be converted to a straight life annuity pursuant to Section 415(b)(2)(B) of the Code (for example, a qualified joint and survivor annuity). Step 2: Under Section 415(b)(2)(C) or (D) of the Code, determine the dollar limitation under Section 415(b) of the Code that applies at the age the benefit is payable (age-adjusted dollar limit). The age-adjusted dollar limit is the annual benefit that is actuarially equivalent to an annual benefit equal to dollar limitation under Section 415(b) of the Code payable at the Participant's social security retirement age (as such term is defined in Section 13.1(B)(3)). If the age at which the benefit is payable is 62 or greater, and less than the Participant's social security retirement age, the age-adjusted dollar limit is determined by reducing the dollar limitation under Section 415(b) of the Code at the Participant's social security retirement age using adjustment factors that are consistent with the factors used to reduce old-age insurance benefits under the Social Security Act. Pursuant to Q&A-5 of Notice 87-21, 1987-1 C.B. 458, the dollar limitation under Section 415(b) of the Code at the Participant's Social Security Retirement Age is reduced by 5/9 of 1 percent for each of the first 36 months by which benefits commence before the month in which the Participant's social security retirement age is attained and by 5/12 of 1 percent for each additional month. If the age at which the benefit is payable is less than 62, the age-adjusted dollar limit is determined by reducing the age-adjusted dollar limit at age 62 on an actuarially equivalent basis. In general, Sections 415(b)(2)(E)(i) and (v) of the Code require that the reduced age-adjusted dollar limit be the lesser of the equivalent amount computed using the plan rate and plan mortality table (or plan tabular factor) used for actuarial equivalence for early retirement benefits under Supplement A - Section A.1 and the amount computed using 5 percent interest and the applicable mortality table under Revenue Ruling 95-6, 1995-1, C.B. 80, (used to the extent described in Q&A-6 of Revenue Ruling 98-1, 1998-1 C.B. 249, which provides that for purposes of adjusting any limitation under 47 Sections 415(b)(2)(C) or (D) of the Code that, to the extent a forfeiture does not occur upon death, the mortality decrement may be ignored prior to age 62 and must be ignored after social security retirement age). If the age at which the benefit is payable is greater than the Participant's social security retirement age, the age-adjusted dollar limit is determined by increasing the dollar limitation under Section 415(b) of the Code at the Participant's social security retirement age on an actuarially equivalent basis. In general, Sections 415(b)(2)(E)(i) and (v) of the Code require that the increased age-adjusted dollar limit be the lesser of the equivalent amount computed using the Plan rate and the Plan mortality table (or Plan tabular factor) used for actuarial equivalence for late retirement benefits under Supplement A - Section A.1 and the equivalent amount computed using 5 percent interest and the applicable mortality table (used to the extent described in Q&A-6 of Revenue Ruling 98-1, 1998-1 C.B. 249, as described in the prior paragraph). Step 3: Determine the Participant's compensation limitation under Section 415(b) of the Code. This limitation is equal to the Participant's compensation averaged over the consecutive three-year period producing the highest average, as provided in Section 415(b)(3) of the Code. The Plan does not satisfy the limitations under Section 415(b) of the Code unless the equivalent annual benefit determined in Step 1 above is not greater than the lesser of the age-adjusted dollar limit determined in Step 2 above and the compensation limitation under Section 415(b) of the Code determined in Step 3 above. (III) For purposes of applying Section 415(b)(2)(B) of the Code to a benefit that is payable in a form subject to Section 417(e)(3) of the Code, the determination of the equivalent annual benefit is the same as in Step 1 of subsection (2) above, except that, under Section 415(b)(2)(E)(ii) of the Code, the applicable interest rate under Q&A-4 of Revenue Ruling 98-1, 1998-1 C.B. 249, (i.e., "GATT interest rates") is substituted for the 5 percent interest rate under Section 415(b)(2)(E)(i) of the Code. Thus, the equivalent annual benefit must be the greater of the equivalent annual benefit computed using the Plan rate and Plan mortality table (or Plan tabular factor) under Supplement A - Section A.1 and the equivalent annual benefit computed using the applicable interest rate and the applicable mortality table"). (IV) Notwithstanding any other Plan provisions to the contrary, any reference to the mortality table under Revenue Ruling 95-6, 1995-1 C.B. 80, shall be construed as a reference to the mortality table prescribed in Revenue Ruling 2001-62, 2001-2 C.B. 632, for all purposes under the Plan. For any distribution with an Annuity Starting Date on or after the effective date of this subsection and before the adoption date of this subsection, if application of this subsection as of the Annuity Starting Date would have caused a reduction in the amount of any distribution, such reduction is not reflected in any payment made 48 before the adoption date of this subsection. However, the amount of any such reduction that is required under Code Section 415(b)(2)(B) must be reflected actuarially over any remaining payments to the Participant. (6) Notwithstanding the above, for limitation years beginning before January 1, 2002, the maximum permissible benefit will not exceed the Defined Benefit Dollar Limitation. In the case of a Participant who has fewer than 10 years of Service with the Employer, the Defined Benefit Dollar Limitation shall be multiplied by a fraction, (i) the numerator of which is the number of years (or part thereof) of Service and (ii) the denominator of which is 10. (C) Minimum Pension If the Participant's yearly Pension is not more than $10,000, as adjusted in accordance with paragraph (B)(2) above, the Participant may receive such $10,000 without regard to the other secondary limitations, provided the Participant did not at any time participate in a defined contribution plan maintained by the Employer. (D) Cost-of-Living Limitation Adjustment Each January 1, the $90,000 limitation of paragraph (A) above will be automatically adjusted to the new dollar limitation determined by the Commissioner of Internal Revenue for that calendar year. The new limitation will apply to limitation years in which the dollar limitation is changed. (E) Participation in More Than One Defined Benefit Plan If the Participant participated in more than one defined benefit plan maintained by the Employer or an Affiliated Employer regardless of whether any such plans are terminated, the statutory maximum retirement benefit shall be determined as if there were just one defined benefit plan, but the retirement income so determined will apply on a pro rata basis between, or among, such plans. (F) Remuneration For purposes of this Section 13.1 and the following Section 13.2, a Participant's remuneration means his earned income, wages, salaries, and fees for professional services, and other amounts received for personal services actually rendered in the course of employment with the employer maintaining the plan determined for purposes of Section 13.1, including, but not limited to, commissions paid to salesmen, compensation for services on the basis of a percentage of profits, commissions paid on insurance premiums, tips and bonuses (except as excluded below) and also including, in accordance with Section 415(c)(3) of the Code, any elective deferrals (as defined in Section 402(g)(3) of the Code) and any amount which is contributed by the employer at the election of the employee and which is not includible in the gross income of the employee by reason of Sections 125, 132(f)(4), or 457 of the Code. However, remuneration shall exclude the following: 49 (1) Employer contributions under a simplified Associate pension plan to the extent such contributions are deductible by the Associate, or any distributions from a plan of deferred compensation; (2) Amounts realized from the exercise of a nonqualified stock option, or when restricted stock (or property) held by the Associate either becomes freely transferable or is no longer subject to a substantial risk of forfeiture; (3) Amounts realized from the sale, exchange, or other disposition of stock acquired under a qualified stock option; (4) Or other contributions made by the employer (whether or not under a salary reduction agreement) towards the purchase of an annuity described in Section 403(b) of the Code (whether or not the amounts are actually excludable from the gross income of the Associate). Remuneration for any limitation year is the remuneration actually paid or includible in gross income during such year. (G) Discrepancy With Code The limitations set forth in this Section 13.1 are intended to comply with the provisions of Section 415 of the Code and any regulations issued pursuant thereto, so that the maximum Pension shall be exactly equal to the maximum amount allowed under said Section 415, and any regulations issued pursuant thereto. Should there be any discrepancy between the provisions of this Section 13.1 and those of said Section 415 and any regulations issued pursuant thereto, such discrepancy shall be resolved by giving full effect to the provisions of said Section 415 and any regulations issued pursuant thereto. 13.2 Top-Heavy Provisions (A) Top-heavy Plan Status. This Plan will be a Top-Heavy Plan as of a Determination Date if: (1) this Plan is not a Plan that is required to be aggregated and the ratio of the Present Value of Accrued Benefits of Participants who are Key Employees to the Present Value of the Accrued Benefits of all Participants in the Plan exceeds 6/10; or (2) this Plan is part of a Required Aggregation Group and the ratio of the Present Value of Accrued Benefits of Participants who are Key Employees to the Present Value of Accrued Benefits of all Participants in the Required Aggregation Group exceeds 6/10. Notwithstanding anything in (A)(2) to the contrary, the determination of whether this Plan is a Top-Heavy Plan of a Determination Date shall be made after aggregating all Plans in the Required Aggregation Group, and after aggregating any other Plans which are in the Permissive Aggregation Group, if such permissive aggregation thereby eliminates the Top- 50 Heavy status of the Required Aggregation Group. Regardless of the results of any aggregation, a Plan that was not part of the Required Aggregation Group will not be top-heavy. (B) Key Employee. The term Key Employee means any Associate or former Associate in this Plan who, at any time during the Plan Year ending on the Determination Date, was: (1) An officer of the Employer having annual remuneration greater than $130,000 (as adjusted under Section 416(i)(1) of the Code for Plan Years beginning after December 31, 2002), (2) A "5-percent owner" (as defined in Section 416(i) of the Code) of the Employer, or (3) A "1-percent owner" of the Employer having an annual remuneration of more than $150,000. The term shall also include beneficiaries of Key Employees. For purposes of this definition, ownership percentages shall be determined without regard to aggregation of entities under common control within the meaning of Sections 414(b), (c) and (m) of the Code. However, in determining an individual's remuneration, remuneration from the Employer and each Affiliated Employer shall be taken into account. The determination of who is a Key Employee will be made in accordance with Section 416(i)(1) of the Code and the applicable regulations and other guidance of general applicability issued thereunder. (C) Non-Key Employee. A Non-Key Employee means any Associate who is not a Key Employee. Any Associate who previously was a Key Employee and is now a Non-Key Employee will be excluded entirely from the calculation done to determine Top-heavy Status. (D) Employer. For purposes of Section 13.2 the Employer is the Employer who adopts this Plan, and any Affiliated Employer. (E) Accrued Benefit. The Accrued Benefit is the yearly Pension commencing on the Participant's Normal Retirement Date determined in accordance with Section 4 as if the Participant's Termination of Employment had occurred as of the most recent valuation date prior to the Determination Date. For purposes of Section 13.2 the Accrued Benefit will not include the accrued benefit attributable to any Associate who has not performed an Hour of Service during the five-year period ending on the Determination Date, but will include any distribution made to a Key Employee or Non-Key Employee during the five-year period ending on the Determination Date. (F) Present Value. Present Value shall be based on the actuarial assumptions specified in Supplement A - Section A.1. If this Plan is part of a Required or Permissive Aggregation Group, the mortality and interest assumptions shall be the same for all plans within the Group. In determining Present Value, proportional subsidies shall not be taken into account, but nonproportional subsidies shall be taken into account. The Present Value will be determined 51 as of the valuation date occurring during the twelve-month period ending on the Determination Date. The valuation date is the date used in computing Plan costs for minimum funding. (G) Required Aggregation Group. The term Required Aggregation Group means all of the plans of the Employer which cover a Key Employee during the five-year period ending on the relevant Determination Date, or those plans which during said five-year period were aggregated, so that a plan which covers a Key Employee would satisfy the requirements of Sections 401(a)(4) or 410 of the Code. (H) Permissive Aggregation Group. The term Permissive Aggregation Group means all of the plans of the Employer which are included in the Required Aggregation Group plus any plans of the Employer which provide comparable benefits to the benefits provided by plans in the Required Aggregation Group and are not included in the Required Aggregation Group, but which satisfy the requirements of Sections 401(a)(4) and 410 of the Code when considered together with the Required Aggregation Group. (I) Determination Date. The term Determination Date means, with respect to a Plan Year, the last day of the preceding Plan Year, or, in the case of the first Plan Year of a plan, the last day of the first Plan Year. (J) Minimum Pension Benefit. The yearly amount of Pension as described in Section 4.1 for a Participant who is a Non-Key Employee, shall not be less than the Participant's average yearly remuneration, during the Participant's five highest-paid consecutive calendar years, multiplied by the lesser of (1) 2%, multiplied by the number of the Participant's years of Service after December 31, 1983 in which this Plan is a Top-Heavy Plan, or (2) 20%. This minimum amount is assumed to be payable on a single life annuity basis, commencing on his Normal Retirement Date. If a Participant who is a Non-Key Employee is covered under this Plan and a defined contribution plan maintained by the Employer, the yearly amount of Pension, for such Participant, determined in the preceding paragraph shall not be applicable to such Participant if the minimum contribution under such defined contribution plan is equal to 5% of the Participant's remuneration. If the minimum Pension payable on a basis other than a single life annuity or on a date other than Normal Retirement Date, it shall be adjusted to be the actuarial equivalent of the single life annuity form payable at Normal Retirement Date. In determining Years of Service with the Employer for purposes of determining a Participant's minimum Pension benefit under this Section 13.2(J), any Service with the Employer shall be disregarded to the extent that such Service occurs during a Plan Year when the Plan benefits (within the meaning of Section 410(b) of the Code) no Key Employee. (K) Minimum Vesting Percentage. Notwithstanding any other Vesting Percentage provision of this Plan to the contrary unless it would produce a greater Vesting Percentage, the Vesting Percentage that is applied to the Participant's Accrued Benefit, on and after this Plan becomes a Top-Heavy Plan, shall, in accordance with the further terms of this Plan, be as determined below: 52
YEARS OF SERVICE PERCENTAGE - --------------------------- ---------- If he has less than 2 years 0% If he has 2 years 20% If he has 3 years 40% If he has 4 years 60% If he has 5 years 100%
(L) Determination of Present Values and Amounts. Notwithstanding any other provisions of the Plan to the contrary, this Section 13.2(L) shall apply for purposes of determining the Present Values of Accrued Benefits and the amounts of account balances of Participants as of the Determination Date. (1) The Present Values of Accrued Benefits and the amounts of account balances of a Participant as of the Determination Date shall be increased by the distributions made with respect to the Participant under the Plan and any plan aggregated with the Plan under Section 416(g)(2) of the Code during the 1-year period ending on the Determination Date. The preceding sentence shall also apply to distributions under a terminated plan which, had it not been terminated, would have been aggregated with the Plan under Section 416(g)(2)(A)(i) of the Code. In the case of a distribution made for a reason other than separation from service, death, or disability, this provision shall be applied by substituting "5-year period" for "1-year period." (2) The Accrued Benefits and accounts of any individual who has not performed Service for the Employer during the 1-year period ending on the Determination Date shall not be taken into account. The Employer herewith causes this amended and restated Plan to be executed by its duly authorized officers on this __________ day of ______________, 2005. TRUE VALUE COMPANY _______________________________ 53 SUPPLEMENT A ACTUARIAL ASSUMPTIONS A.1 Lump Sum Distributions For purposes of determining "Actuarially Equivalent" or "Actuarial Equivalent" lump sum distributions under the Plan, and for purposes of converting a Participant's Defined Lump Sum into a single life annuity pursuant to Section 4.3(A), the following actuarial assumptions are used: (a) Rate of Interest: The rate in use during a Plan Year shall be the annual rate of interest on 30-year Treasury securities for the month of November immediately preceding such Plan Year as specified by the Commissioner for such month in the Internal Revenue Bulletin but not greater than 8.0%. (b) Mortality: The mortality table prescribed by the Secretary of the Treasury in revenue rulings, notices, or other guidance pursuant to Section 807(d)(5)(A) of the Code that has been published in the Internal Revenue Bulletin as of the date such lump sum distribution is being determined. Notwithstanding any other Plan provisions to the contrary (with exception of Section 13.1(B)(5)(iv)), the applicable mortality table used for purposes of adjusting any benefit or limitation under Section 415(b)(2)(B), (C), or (D) of the Code and satisfying the requirements of Section 417(e) of the Code is the table prescribed in Revenue Ruling 2001-62, 2001-2 C.B. 632. For any distribution with an Annuity Starting Date on or after the effective date of this subsection and before the adoption date of this subsection, if application of this paragraph as of the Annuity Starting Date would have caused a reduction in the amount of any distribution, such reduction is not reflected in any payment made before the adoption date of this subsection. However, the amount of any such reduction that is required under Code Section 415(b)(2)(B) must be reflected actuarially over any remaining payments to the Participant. A.2 Type of Annuity For purposes of determining "Actuarially Equivalent" or "Actuarial Equivalent" benefits under the Plan, the following factors shall be used in determining benefits that are actuarially equivalent to the normal single annuity for the life of the Participant form of benefit provided under the Plan (in no event will a factor exceed one): (a) 50% Qualified Joint and Survivor Annuity: 90%, plus (or minus) 0.4 of 1% for each full year that the Participant is younger (or older) than the Participant's spouse; except that, if the Participant's age at the Annuity Starting Date is less than 55 years, "94%" shall be substituted for "90%." In no event will this factor exceed 100%. (b) 100% Qualified Joint and Survivor Annuity: 81%, plus (or minus) 0.7 of 1% for each full year that the Participant is younger (or older) than the Participant's A-1 spouse; except that, if the Participant's age at the Annuity Starting Date is less than 55 years, "89%" shall be substituted for "81%." In no event will this factor exceed 100%. (c) Life and 10-Year Certain Annuity: 94%; except that, if the Participant's age at the Annuity Starting Date is less than 55 years, "98%" shall be substituted for "94%." A-2 SUPPLEMENT B MERGER OF NORTHERN WHOLESALE HARDWARE CO. RETIREMENT PLAN WITH AND INTO PRIOR PLAN B.1 Merger Effective as of January 1, 1990, the Northern Wholesale Hardware Co. Retirement Plan ("Northern Plan") was amended, continued and merged with the Cotter & Company Pension Plan ("Prior Plan"). B.2 Participation On January 1, 1990, each former participant in the Northern Plan ("Northern Participant") became a Participant in the Prior Plan and will have benefits determined and paid in accordance with this Plan. B.3 Preservation of Accrued Benefit Notwithstanding any provisions of the Plan to the contrary, in no event shall a Northern Participant's accrued benefit under the Prior Plan as in effect on January 1, 1990 be less than the accrued earned by such Northern Participant under the Northern Plan as at December 31, 1989. B.4 Years of Service Each Northern Participant will be credited with the Years of Service before January 1, 1990 that such Northern Participant had earned under the Northern Plan as in effect on December 31, 1989 for participation, vesting and accrued benefit purposes. B.5 Records The Committee shall maintain such records as it deems necessary and desirable to demonstrate the amount of each Northern Participant's benefits and Years of Service under Paragraphs B.3 and B.4 above pursuant to applicable Internal Revenue Service regulations. B.6 Effective Date The effective date of this Supplement B is January 1, 1990. B-1 SUPPLEMENT C SERVISTAR COAST TO COAST CORPORATION RETIREMENT INCOME PLAN PROVISIONS The following provisions from the SERVISTAR Plan are included herein (with slight modification if appropriate) to assist the administration of this Plan as it requires inclusion of the SERVISTAR Plan provisions or the calculation of the Participant's Accrued Benefit under the SERVISTAR Plan: Certain defined terms from the SERVISTAR Plan are referred to in this Supplement C, but are not reproduced in the interest of conciseness. The terms - Accrued Benefit, Code, Contingent Pensioner, Credited Interest, Employee, Employer, Excess Benefit Plan, Long-Term Disability, Normal Retirement Date, Participant Pension, Retirement Date, Termination of Employment - should not need further defining and are intended to continue their meaning from the SERVISTAR Plan. The term "Plan" was used in the SERVISTAR Plan to refer to itself, but will be used herein to refer to this Plan. Any reference to "Plan" from the SERVISTAR Plan document is changed herein to "SERVISTAR Plan" where appropriate. Any use of the term "Plan Year" in Supplement C will refer to the SERVISTAR Plan Year (July 1 to June 30) unless otherwise indicated. The method used to recast SERVISTAR Plan "Earnings" for this Plan is described in Plan Section 2.1(K). Vesting Percentage as used herein is now defined in Section 2.1(NN) of the Plan. SERVISTAR PLAN SECTION REFERENCES HAVE BEEN CHANGED TO SUPPLEMENT C SECTIONS IF INCLUDED IN THIS SUPPLEMENT C, OTHERWISE SERVISTAR PLAN REFERENCES HAVE BEEN MAINTAINED. All SERVISTAR Plan service, credited service, earnings and cash balance credits shall cease on January 2, 1998. In the event of a conflict in the terms of the SERVISTAR Plan as included in Supplement C and the SERVISTAR Plan itself, the terms of the SERVISTAR Plan shall control. C.1 Earnings Includes basic salary or wages paid to an Employee for services rendered to the Employer, determined prior to any pre-tax contributions under a "qualified cash or deferred arrangement" (as defined under Section 401(k) of the Code and its applicable regulations) under a "cafeteria plan" (as defined under Section 125 of the Code and its applicable regulations), or that are a "qualified transportation" fringe benefit (as defined under Section 132(f) of the Code), including executive bonuses, pay for which no duties are performed due to vacation pay, holiday pay, sick pay, and any other authorized policy pay, safe driver awards and perfect attendance awards (effective July 1, 1994), gain sharing (effective July 1, 1995) and overtime payments received from the Employer during each Plan Year, excluding Employer contributions to Social Security, contributions to this or through any other profit sharing or retirement plan or program, capital income compensation or the value of any other fringe benefits (including any E-1 long-term disability payments) provided at the expense of the Employer which are not specifically included herein. If, in a Plan Year, a Participant has lower Earnings than he had the preceding Plan Year because he was paid either Worker's Compensation or Long-Term Disability, or both, Earnings will be considered to be his Earnings received in the preceding Plan Year. These higher Earnings calculations will continue for the period of time that benefits are paid under either Worker's Compensation or Long-Term Disability, or both. Notwithstanding the immediately preceding two sentences, for Plan Years beginning on or after July 1, 1996, if a Participant is disabled in any Plan Year, only the Participant's Earnings in such Plan Year shall be taken into account for any purpose under the SERVISTAR Plan. Notwithstanding any SERVISTAR Plan provision to the contrary, Earnings for any Participant, who transferred employment from Coast to Coast Corporation to SERVISTAR Corporation prior to July 1, 1996, shall only include such remuneration paid by SERVISTAR Corporation. C.2 Hour of Service (1) each hour for which the Employee is either directly or indirectly paid by the Employer or Affiliated Employer or entitled to payment, (a) for duties performed during the applicable computation period, and (b) for reasons other than the performance of duties (such as but not limited to paid sick leave, paid vacation time), irrespective of whether the employment relationship has terminated, and (2) any additional hours as normally would have been credited to the Employee had he worked on a no overtime basis during the following periods for the Employer or an Affiliated Employer: (a) temporary layoff, (b) leave of absence of up to two years, as authorized by the Employer pursuant to the Employer's established leave policy, and (c) military leave while the Employee's reemployment rights are protected by law, provided that any such periods qualify as Service in accordance with the terms of the Service definition, and (3) each hour for which back pay is either awarded or agreed to by the Employer or an Affiliated Employer, irrespective of mitigation of damages. Hours of Service shall be credited to the Employee for the computation period(s): (1) in which the duties are performed or payments are due, (2) in which payments would have been due during a covered unpaid leave of absence or layoff, or (3) to which the back pay E-2 award or agreement pertains. The same Hours of Service shall not be credited under more than one paragraph of this definition. In no event will Hours of Service be allowed and computed in a manner less liberal than the manner described in the Department of Labor Regulation 2530.200b-2. C.3 SERVISTAR Plan Prior Formula With respect to each Participant who retires or terminates on or after July 1, 1996, the yearly amount of basic Pension payable under the Plan is equal to the greater of (A) or (B) plus (C): (A) Is (i) less (ii) where: (i) is 2% of a Participant's Final Earnings multiplied by the years and fraction of Credited Service, up to a maximum of 25, 1/2 of 1% of a Participant's Final Earnings multiplied by the years and fraction of Credited Service over 25 years, and (ii) is 3/4 of 1% of the Participant's Offset Earnings multiplied by the years and fraction of Credited Service, up to a maximum of 25, plus 1/4 of 1% of (a) the Participant's Offset Earnings, or (b) effective July 1, 1994 the Participant's Final Earnings (if smaller), multiplied by the years and fractions of Credited Service over 25 years, provided that this offset will not be applied until the first of the month following or coincident with the Participant's attainment of Social Security Retirement Age. Notwithstanding any Plan provision to the contrary, for purposes of calculating the benefit under Supplement C Section C.3(A)(i) and (ii), Credited Service shall not include any period after June 30, 1996. (B) Is the amount the Participant would have received under the terms of Section 4.1(B) of the SERVISTAR Plan (referring to the SERVISTAR Plan as in effect on June 30, 1983) assuming level Earnings from that time forward, using Credited Service through June 30, 1994 only. (C) With respect to each Participant who contributed to the SERVISTAR Plan in accordance with its terms prior to July 1, 1974, the Employee Accrued Benefit, unless: (1) if a cash refund of the Participant's Contributions with Credited Interest is elected on or after July 1, 1994, the Employee Accrued Benefit is not payable under this paragraph (C); (2) if a refund of the Participant's contributions with Credited Interest is elected prior to January 1, 1994, the benefit calculated under this paragraph (C) is equal to the excess, if any, of the amount determined in paragraph (a) over paragraph (b), where: E-3 (a) is a yearly amount beginning on the Participant's Normal Retirement Date determined on an equivalent Value (using the monthly interest rate in effect when the refund is paid instead of the yearly rate) to the cash refund of the Participant's contributions; and (b) is the Employee Accrued Benefit; provided, however, that the yearly benefit under Supplement C Section C.3 of a Participant who is affected by the imposition of the $150,000 limitation on Earnings shall be equal to the greater of (a) the Participant's benefit calculated under the provisions of Supplement C Section C.3 as determined with regard to such imposition, or (b) the benefit equal to the Participant's Accrued Benefit determined as of the last day of the Plan Year beginning in 1993, plus the Participant's Accrued Benefit based solely on Credited Service after such date under the provisions of Supplement C Section C.3 as determined with regard to such imposition. For purposes of the SERVISTAR Plan, the Accrued Benefit determined as of the last day of the Plan Year beginning in 1993 shall be equal to the greater of (c) the Participant's Accrued Benefit determined as of the last day of the Plan Year beginning in 1993 as determined with regard to the $200,000 limitation on Earnings, or (d) the Participant's Accrued Benefit determined as of the last day of the Plan Year beginning in 1988, plus the Participant's Accrued Benefit based solely on Credited Service after such date under the provisions of the SERVISTAR Plan as determined with regard to such limitation. In no event will the Pension determined for a Participant on his Retirement Date to be less than the highest amount of Pension the Participant would have received in the same form of payment had his Credited Service ceased at any time prior to his Retirement Date when he was eligible to receive an immediate Pension. In no event will any amendment to the SERVISTAR Plan reduce the Accrued Benefit to the effective date of such amendment including, but not limited to, any Pension payable as a result of the delayed application of the offset in Supplement C Section C.3.(A)(ii). In addition, effective July 1, 1988, in no event will the annuities purchased for Participants in the Employer's Excess Benefit Plan plus retirement income payable under the Plan (as limited by the maximums outlined in Section 13.1 of the Plan) exceed the total retirement income as calculated in this Supplement C Section C.3 and the Cash Balance Formula under Section 4.4 of the SERVISTAR Plan (assuming the maximums in Section 13.1 of the Plan had not been in effect). Any excess will be subtracted from the yearly amount of retirement income payable under the Plan after reduction to comply with the maximums as outlined in Section 13.1 of the Plan. This provision will not reduce the amount of retirement income accrued under the SERVISTAR Plan as of July 1, 1988. E-4 C.4 Final Earnings The highest average Earnings received in any five consecutive Plan Years ending on or before June 30, 1996, excluding any Plan Year in which the Credited Service is not granted under Supplement C Section C.5. Notwithstanding the foregoing, for the purposes of determining a Participant's Final Earnings, all Earnings received during the Plan Year starting January 1, 1976 and ending July 1, 1976 shall be annualized and counted as a full Plan Year's Earnings. C.5 Credited Service That portion of a Participant's Service which is included for purposes of determining the amount of his accrued Pension attributable to the Prior Formula. With respect to any employment period, a Participant's Credited Service shall include employment with the Employer corresponding with Service allowed except: (1) Any Plan Year in which the Participant has less than 1,000 Hours of Service, except for the Plan Year commencing on January 1, 1976, as determined in Supplement C Section C.6. (2) Service prior to a break-in-service if the Participant received a lump sum payment equal to the equivalent Value of his vested accrued Pension at the time of his latest termination. A Participant's Credited Service shall be counted in whole years and full months. In no event will a Participant receive Credited Service for a period that is considered a "break-in-service," as determined in the Service definition. Notwithstanding any Plan provision to the contrary, Credited Service shall not include any Service for periods after June 30, 1996. C.6 Service Shall be the aggregate number of years of employment with the Employer excluding any period or portion of any period as determined in accordance with the following rules. Service is used to determine an Employee's participation and vesting status, and effective for Plan Years beginning on or after July 1, 1996, Service also is used to determine the Participant's Plan Year Cash Balance Formula benefit credit under Section 4.4 of the SERVISTAR Plan. (1) With respect to any employment periods prior to January 1, 1976, an Employee's last period of continuous employment immediately prior to such date will be counted as Service. (2) With respect to any employment periods on and after January 1, 1976 and before January 2, 1998: E-5 (a) If in any Plan Year an Employee has at least 1000 hours of Service, he will be credited with one year of Service. (b) If in any Plan Year an Employee has less than 1000 Hours of Service, no Service will be credited for such Plan Year but a break-in service" will not be deemed to have occurred. (c) If in any Plan Year an Employee has 500 or less Hours of Service, no Service will be credited for such Plan Year, and a "break-in-service" will be deemed to have occurred. Solely for purposes of determining whether a one year break-in-service has occurred in a Plan Year, an Employee who is absent from work for maternity or paternity reasons shall receive credit for up to 501 Hours of Service which would otherwise have been credited to such Employer but for such absence, or in any case in which such hours cannot be determined 8 Hours of Service per day of such absence. For purposes of this paragraph, an absence from work for maternity or paternity reasons means an absence: (a) by reason of the pregnancy of the Employee, (b) by reason of a birth of a child of the Employee, (c) by reason of the placement of a child with the Employee in connection with the adoption of such child by such Employee, or (d) for purposes of caring for such child for a period beginning immediately following such birth or placement. The Hours of Service credited under this paragraph shall be credited (a) in the Plan Year in which the absence begins if the crediting is necessary to prevent a break-in-service in that period, or (b) in all other cases, in the following Plan Year. (3) Service prior to a break-in-service which occurs before July 1, 1985 will be determined in accordance with the terms of the SERVISTAR Plan as of the date the break-in-service occurred. (4) If an Employee who has a break-in-service which occurs after July 1, 1985 is later reemployed by the Employer, the following special rule shall apply: Service prior to his most recent break-in-service shall be counted along with any Service earned on or after the Employee's reemployment date if: (a) he was entitled to any vested Pension attributable to Employer contributions in accordance with Section 6 of the SERVISTAR Plan prior to his most recent break-in-service, or E-6 (b) he was not entitled to any vested Pension attributable to Employer contributions and the length of his latest break-in-service did not equal or exceed the greater of: (i) the Employee's aggregate number of years of prebreak Service; or (ii) 5 years. If a reemployed Employee fails to meet any of the tests described in (a) or (b) above, any Service earned prior to his most recent break-in-service shall be disregarded. (5) Absence from employment shall be counted as Service if the following circumstances apply: (a) temporary layoff, (b) subject to Section 2.1(L) of the SERVISTAR Plan, a leave of absence of up to two years, as authorized by the Employer pursuant to the Employer's established leave policy, (c) military leave while the Employee's re-employment rights are protected by law, provided that the Employee returns to active employment with the Employer when recalled (if temporary layoff), within 2 years (if leave of absence), or within 90 days after he becomes eligible for release from active duty (if military leave). Except as required by law for military leaves, if the Employee does not return to active employment with the Employer, his Service will be deemed to have ceased on the date his absence commenced, and he will receive credit for 501 Hours of Service for each year of continuous absence. The Employer's leave policy shall be applied in a uniform and nondiscriminatory manner to all Employees under similar circumstances. (6) Employment with a predecessor company shall be counted as Service to the extent required by ERISA. (7) Transfers and Service with an Affiliated Employer or as a Leased Employee (a) If an Employee (i) becomes employed by the Employer in any capacity other than as an Employee, or (ii) becomes employed by an Affiliated Employer, or (iii) becomes a Leased Employee, he shall retain any Credited Service he has under the SERVISTAR Plan. Upon his later retirement or termination of employment with the Employer or Affiliated Employer (or upon benefit commencement in the case of a Leased Employee), any benefits to which the Employee is entitled under the SERVISTAR Plan shall be determined under the SERVISTAR Plan E-7 provisions in effect on the date he ceases to be an Employee, and only on the basis of his Credited Service accrued while he was an Employee. (b) Subject to the break-in-service provisions of this Supplement C Section C.6, in the case of a person who (i) was originally employed by the Employer in any capacity other than as an Employee, or (ii) was originally employed by an Affiliated Employer, or (iii) was originally providing services to the Employer as a Leased Employee, and thereafter becomes an Employee, upon his later retirement or termination of employment, the benefits payable under the SERVISTAR Plan shall be computed under the SERVISTAR Plan provisions in effect at that time, and only on the basis of the Credited Service accrued while he is an Employee. (c) Any Participant who was formerly employed with Coast to Coast Stores, Inc. (as it was formerly known) shall receive credit for service with Coast to Coast Stores, Inc. prior to May 29, 1990 (as defined at that time by Coast to Coast Stores, Inc.) for purposes of calculating his Service for the Vested Percentage. (d) For any Participant who is an Employee of the Employer on July 1, 1996, Service, with respect to Plan Years beginning on or after July 1, 1996, shall include all service recognized under the Coast Profit Sharing and Savings Plan for purposes of vesting thereunder and credited to the Participant as of June 30, 1996. C.7 Offset Earnings The average of the Employee's Earnings for the three consecutive Plan Years preceding the Plan Year in which the Employee's employment ceases or June 30, 1996, if earlier. In determining the Offset Earnings, any Earnings for a Plan Year in excess of the taxable wage base in effect under Section 230 of the Social Security Act shall be disregarded. Prior to June 30, 1994, Offset Earnings shall not include any Plan Year excluded from Credited Service under Supplement C Section C.5 and shall be the average of the Employee's Earnings for the three highest consecutive Plan Years ending with the Plan Year that the Employee's employment ceases. Notwithstanding the foregoing, Offset Earnings shall not exceed Covered Compensation for the Plan Year in which the Employee's employment ceases. C.8 Covered Compensation For any Participant, the average of the taxable wage bases in effect under Section 230 of the Social Security Act for each year in the 35-year period ending with the year in which the Participant attains his Social Security Retirement Age rounded to the nearest $600 or such other similar amount designated by the Internal Revenue Service. In determining a Participant's Covered Compensation for any Plan Year, the taxable wage base for the current Plan Year and any subsequent Plan Year shall be assumed to be the same as the E-8 taxable wage base in effect as of the beginning of the Plan Year for which the determination is made. C.9 Social Security Retirement Age Age 65 with respect to a Participant who was born before January 1, 1938; age 66 with respect to a Participant who was born after December 31, 1937 and before January 1, 1955; and age 67 with respect to a Participant who was born after December 31, 1954. For employees who terminate prior to July 1, 1994, Social Security Retirement Age means the age (in years and months) at which he or she qualifies for unreduced old age Social Security benefits. C.10 Normal Retirement Date For benefit eligibility and vesting purposes, the day on which the Participant attains his 60th birthday. For all other purposes, the first day of the month coinciding with or next following the Participant's 60th birthday. C.11 Value With respect to the refund of a Participant's contribution under Supplement C Section C.20 or the calculation of the monthly benefit derived from the Participant's contributions under Supplement C Section C.3(C)(2)(a), Value means the present value of a Participant's Pension based upon the Pension Benefit Guaranty Corporation's male annuity rates, factors, tables, assumptions and procedures for lump sum payments in effect for the month in which the refund is distributed. For all other Pensions based on the provisions of the SERVISTAR Plan: (i) for terminations occurring on or after July 1, 1996, Value shall mean the equivalent actuarial value of the Ten-Year Certain and Life form of payment as described in Supplement C Section C.17 computed on the basis of the Participant's age at distribution (or the Beneficiary's age, if the benefit is payable due to the Participant's death prior to commencement of benefits), the 1983 Group Annuity Mortality Table as set forth in Revenue Ruling 95-28 or such other mortality table as may be required by the Internal Revenue Service in any ruling superseding Revenue Ruling 95-28, with interest at the annual rate of interest on 30-Year Treasury securities. The rate of interest shall be fixed for each Plan Year and shall be determined by the rate of interest on 30-year Treasury securities set in April and published by the Board of Governors of the Federal Reserve System in May of the preceding Plan Year; and (ii) for terminations occurring before July 1, 1996, Value shall mean the equivalent actuarial value calculated as above but based on the Pension Benefit Guaranty Corporation's male annuity rates, factors, tables, assumptions and procedures for lump sum payments in effect at the beginning of the Plan Year in which the distribution is made. C.12 Adjustment Factor The appropriate adjustment factor(s) which may be applicable to a Participant's Pension under the SERVISTAR Plan in accordance with the further terms of the SERVISTAR Plan. E-9 With respect to each Participant whose Retirement Date occurs after August 1, 1983, the appropriate Adjustment Factors are the applicable gender-neutral Adjustment Factors based on the 1971 GAM, 6% interest and the gender mix as shown in the Tables attached hereto and, with respect to Participants who are retiring after the Normal Retirement Date, the late retirement Adjustment Factors. Table A shall apply to Accrued Benefit as of June 30, 1994 in accordance with the procedures in Section 5.4 of the SERVISTAR Plan. C.13 Cash Balance Account Is the bookkeeping account established for eligible Participants who accrue Service under the SERVISTAR Plan after June 30, 1996 and who are entitled to a Cash Balance Benefit. C.14 Cash Balance Benefit The benefit described in Cash Balance Formula under Section 4.4 of the SERVISTAR Plan derived from a Participant's Cash Balance Account which, if not distributed in a lump sum, will be the annual benefit which has a Value equal to the Participant's Cash Balance Account, adjusted as necessary to reflect the form of payment elected by the Participant by applying the Adjustment Factor. C.15 Amount of Early Pension Reduction During the period commencing July 1, 1994 and ending June 30, 1996, the yearly amount of early Pension payable to the Participant will be equal to the amount determined in Supplement C Section C.3, based on Credited Service to the date the Participant's employment ceases or June 30, 1996, if earlier, and then reduced by 1/4 of 1%, for each month (3% per year) by which the early retirement date precedes the Normal Retirement Date up to 60 months early (5 years) and then 2/5 of 1% for each month (4.8% per year) thereafter. C.16 Normal Form of Payment - Joint and Survivor If the Participant has a Spouse on his Retirement Date, the normal form of payment is the Joint and Survivor form. This form provides that, upon the Participant's death on or after his Retirement Date, 50% of the Pension payable to the Participant, will be paid to such Spouse, if surviving the Participant, for the balance of the Spouse's life. However, if the Participant dies within the ten-year period commencing on his Retirement Date, a Pension in the same amount as the Participant would have received will be paid until the end of such ten-year period. As an alternative to the 50% continuation described above, a Participant may elect that 66 2/3% or 100% of the benefit payable to him, be continued to his Spouse upon his death. Such election will not require Spousal Consent as provided in the Plan. E-10 C.17 Normal Form of Payment - Ten-Years Certain If the Participant does not have a Spouse on his Retirement Date or if his Termination of Employment occurred prior to January 1, 1976, the normal form of payment is the Ten Years Certain form. This form provides that payments will be made to the Participant in an amount determined in accordance with Supplement C Section C.3 and the Cash Balance Formula under Section 4.4 of the SERVISTAR Plan during his lifetime and that, if his death occurs within the 10-year period commencing upon his Retirement Date, a Pension in the same amount as the Participant would have received will be paid to the Beneficiary designated by the Participant for the balance of the 10-year period. C.18 Contingent Pension Option Subject to the right to elect the lump sum payment of the Cash Balance Benefit, the Participant who elects this option will receive a reduced Pension amount during his lifetime so that, after his death, a Pension in the same amount or 66 2/3% or 50% thereof (as specified in the election) will be paid for the life of the Contingent Pensioner designated by the Participant if surviving the Participant. However, if the Participant dies within the ten-year period commencing on his Retirement Date, payments will not be reduced to the elected percentage until the tenth anniversary of his Retirement Date. If the option is in effect on the Participant's Retirement Date, the amount of Pension payable to the Participant will be determined using the same procedures specified in Section 4.3(A) of the Plan except that the Contingent Pensioner Adjustment Factor will be applied instead of the Joint and Survivor Adjustment Factor. This option will be inoperative if the Contingent Pensioner dies before the Participant's Retirement Date or the Participant dies before his Retirement Date and the terms of the next paragraph are not applicable. If a Participant who has elected this option dies on or after his Normal Retirement Date, but before his Pension is due to commence, his Contingent Pensioner will receive Pension payments beginning on the first day of the month next following the Participant's death and continuing for the balance of his life. Prior to the tenth anniversary of such first day of the month, these Pension payments will be equal to the amount of Pension which would have been payable to the Participant had he retired hereunder on such first day of the month with the option in effect; any such payments payable thereafter will be adjusted by the continuation percentage (100%, 66 2/3%, or 50%) elected by the Participant. C.19 Cash Balance Benefit Payment Option Notwithstanding any Plan provision to the contrary, the entire Vesting Percentage of the Cash Balance Benefit portion of the Participant's Pension may be distributed in a cash lump sum form of payment if elected by the Participant, or his Beneficiary if applicable. Such distribution may commence as soon as practicable after the earliest to occur of the following: the Participant's death, disability, or retirement, or termination of service and E-11 in no event later than the dates described in Section 8.9 of the Plan. The spousal consent rules described in Section 8.4 of the Plan shall apply to such distribution. C.20 Refund of Participant's Contributions to Participant If a Participant's Service ceases by reason other than death prior to his Normal Retirement Date, he may elect prior to or on his Retirement Date to receive a refund of his Participant's contributions made prior to July 1, 1974, together with Credited Interest computed thereon to the date the election is made. Effective July 1, 1994, the cash refund of the Participant's contributions shall be no less than the equivalent Value of the yearly amount of Pension that can be provided by the Participant's contributions with Credited Interest computed to the date such amount is applied to purchase this Pension in accordance with the rates in Table C. Such benefit shall be on a Full Cash Refund - Ten-Year Certain Form of payment. Credited Interest on a Participant's Contributions means interest for the number of full months from the January 1 following the date each such contribution was paid to the Fund to the date specified herein. Prior to January 1, 1960, the rate of Credited Interest was 2 1/2% per annum, compounded annually. From January 1, 1960 to January 1, 1976, the rate of Credited Interest was 3% per annum, compounded annually. From January 1, 1976 to July 1, 1983, the rate of Credited Interest is 5% per annum. On and after July 1, 1983, the rate of Credited Interest is 7% per annum, compounded on each July 1. Any change in the rate of Credited Interest will apply to interest allowed for months occurring after the effective date of change. E-12 TABLE A LATE RETIREMENT ADJUSTMENT FACTOR
NUMBER OF YEARS AND MONTHS FROM NORMAL RETIREMENT DATE TO LATE RETIREMENT DATE - ------------------------------------------------------------------------------------------------------ MONTHS: YEARS: 0 1 2 3 4 5 6 7 8 9 10 - ------- ------ ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- 0 107.2% 114.4% 122.8% 131.2% 140.8% 150.4% 161.2% 172.0% 182.8% 193.6% 1 100.6% 107.8 115.1 123.5 132.0 141.6 151.3 162.1 172.9 183.7 2 101.2 108.4 115.8 124.2 132.8 142.4 152.2 163.0 173.8 184.6 3 101.8 109.0 116.5 124.9 133.6 143.2 153.1 163.9 174.7 185.5 4 102.4 109.6 117.2 125.6 134.4 144.0 154.0 164.8 175.6 186.4 5 103.0 110.2 117.9 126.3 135.2 144.8 154.9 165.7 176.5 187.3 6 103.6 110.8 118.6 127.0 136.0 145.6 155.8 166.6 177.4 188.2 7 104.2 111.4 119.3 127.7 136.8 146.4 156.7 167.5 178.3 189.1 8 104.8 112.0 120.0 128.4 137.6 147.2 157.6 168.4 179.2 190.0 9 105.4 112.6 120.7 129.1 138.4 148.0 158.5 169.3 180.1 190.9 10 106.0 113.2 121.4 129.8 139.2 148.8 159.4 170.2 181.0 191.8 11 106.6 113.8 122.1 130.5 140.0 149.6 160.3 171.1 181.9 192.7
Factors for other years and months will be determined in a manner consistent with the manner used in determining these factors. E-13 TABLE B CONTINGENT PENSIONER ADJUSTMENT FACTORS JOINT AND SURVIVOR ADJUSTMENT FACTORS 50% CONTINUATION
PARTICIPANT - ------------------------------------------------------------------------------------------------------- AGE* 55 56 57 58 59 60 61 ---- ---- ---- ---- ---- ---- ---- ---- C 41 89.1 88.4 87.7 86.9 86.2 85.4 84.6 O 42 89.3 88.7 88.0 87.2 86.4 85.7 84.9 N 43 89.6 89.0 88.2 87.5 86.7 86.0 85.2 T 44 89.9 89.3 88.5 87.8 87.0 86.3 85.5 I 45 90.1 89.5 88.8 88.1 87.3 86.6 85.8 N 46 90.4 89.8 89.1 88.4 87.7 86.9 86.2 G 47 90.7 90.2 89.4 88.7 88.0 87.3 86.6 E 48 91.0 90.5 89.8 89.0 88.3 87.6 86.9 N 49 91.3 90.8 90.1 89.4 88.7 88.0 87.3 T 50 91.6 91.1 90.4 89.7 89.0 89.3 87.6 51 91.9 91.4 90.7 90.1 89.4 88.7 88.0 52 92.3 91.7 91.1 90.4 89.8 89.1 88.4 53 92.6 92.1 91.4 90.8 90.1 89.5 88.8 54 92.9 92.4 91.8 91.1 90.5 89.9 89.2 55 93.2 92.7 92.1 91.5 90.9 90.3 89.6 P 56 93.5 93.1 92.5 91.9 91.3 90.7 90.1 E 57 93.8 93.4 92.8 92.2 91.7 91.1 90.5 N 58 94.2 93.7 93.2 92.6 92.1 91.5 90.9 S 59 94.5 94.1 93.5 93.0 92.4 91.9 91.4 I 60 94.8 94.4 93.9 93.4 92.8 92.3 91.8 O 61 95.1 94.7 94.2 93.7 93.2 92.7 92.2 N 62 95.4 95.0 94.6 94.1 93.6 93.1 92.6 E 63 95.7 95.4 94.9 94.4 94.0 93.5 93.1 R 64 96.0 95.7 95.2 94.8 94.4 93.9 93.5 65 96.3 96.0 95.6 95.2 94.8 94.3 93.9 66 96.5 96.3 95.9 95.5 95.1 94.7 94.7 67 96.8 96.5 96.2 95.8 95.5 95.1 94.7 68 97.1 96.8 96.5 96.1 95.8 95.5 95.1 69 97.3 97.1 96.8 96.5 96.1 95.8 95.5 70 97.6 97.4 97.1 96.8 96.5 96.2 95.9 71 97.8 97.6 97.3 97.0 96.8 96.5 96.2 72 98.0 97.8 97.5 97.3 97.0 96.8 96.5 73 98.2 98.0 97.8 97.6 97.3 97.1 96.9 74 98.4 98.2 98.0 97.8 97.6 97.4 97.2 75 98.6 98.4 98.3 98.1 97.9 97.7 97.5
* Age nearest birthday on Retirement Date, or on date Contingent Pensioner option becomes effective, if later. Factors for other age combinations will be determined in a manner consistent with the manner used in determining these factors. E-14 TABLE B (CONTINUED) CONTINGENT PENSIONER ADJUSTMENT FACTORS 66 2/3% CONTINUATION
PARTICIPANT - ------------------------------------------------------------------------------------------------------- AGE* 55 56 57 58 59 60 61 ---- ---- ---- ---- ---- ---- ---- ---- C 41 85.9 85.2 84.2 83.3 82.4 81.4 80.5 O 42 86.3 85.5 84.6 83.6 82.7 81.8 80.9 N 43 86.6 85.8 84.9 84.0 83.1 82.2 81.2 T 44 86.9 86.2 85.3 84.3 83.4 82.5 81.6 I 45 87.3 86.5 85.6 84.7 83.8 82.9 82.0 N 46 87.6 86.9 86.0 85.1 84.2 83.3 82.4 G 47 88.0 87.3 86.4 85.5 84.6 83.7 82.9 E 48 88.4 87.7 86.8 85.9 85.0 84.2 83.3 N 49 88.8 88.1 87.2 86.3 85.5 84.6 83.7 T 50 89.1 88.4 87.6 86.7 85.9 85.0 84.2 51 89.5 88.9 88.0 87.2 86.3 85.5 84.7 52 89.9 89.3 88.5 87.6 86.8 86.0 85.2 53 90.3 89.7 88.9 88.1 87.3 86.5 85.7 54 90.7 90.1 89.3 88.5 87.7 87.0 86.2 55 91.1 90.5 89.8 89.0 88.2 87.4 86.7 P 56 91.5 91.0 90.2 89.5 88.7 87.9 87.2 E 57 91.9 91.4 90.7 89.9 89.2 88.5 87.7 N 58 92.4 91.8 91.1 90.4 89.7 89.0 88.3 S 59 92.8 92.2 91.6 90.9 90.2 89.5 88.8 I 60 93.2 92.7 92.0 91.3 90.7 90.0 89.3 O 61 93.6 93.1 92.4 91.8 91.2 90.5 89.9 N 62 93.9 93.5 92.9 92.3 91.7 91.0 90.4 E 63 94.3 93.9 93.3 92.7 92.2 91.6 91.0 R 64 94.7 94.3 93.8 93.2 92.6 92.1 91.5 65 95.1 94.7 94.2 93.7 93.1 92.6 92.1 66 95.4 95.1 94.6 94.1 93.6 93.1 92.6 67 95.8 95.4 95.0 94.5 94.0 93.6 93.1 68 96.1 95.8 95.4 94.9 94.5 94.0 93.6 69 96.4 96.2 95.8 95.3 94.9 94.5 94.1 70 96.8 96.5 96.1 95.8 95.4 95.0 94.6 71 97.0 96.8 96.5 96.1 95.7 95.4 95.1 72 97.3 97.1 96.8 96.4 96.1 95.8 95.5 73 97.6 97.4 97.1 96.8 96.5 96.2 95.9 74 97.8 97.7 97.4 97.1 96.8 96.6 96.3 75 98.1 97.9 97.7 97.4 97.2 97.0 96.7
* Age nearest birthday on Retirement Date, or on date Contingent Pensioner option becomes effective, if later. Factors for other age combinations will be determined in a manner consistent with the manner used in determining these factors. E-15 TABLE B (CONTINUED) CONTINGENT PENSIONER ADJUSTMENT FACTORS 66 2/3% CONTINUATION
PARTICIPANT - ------------------------------------------------------------------------------------------------------ AGE* 62 63 64 65 66 67 68 ---- ---- ---- ---- ---- ---- ---- ---- C 41 79.5 78.5 77.5 76.5 75.5 74.5 73.5 O 42 79.9 78.9 77.9 76.9 75.9 74.9 73.9 N 43 80.2 79.2 78.2 77.2 76.2 75.3 74.3 T 44 80.6 79.6 78.6 77.6 76.6 75.7 74.7 I 45 81.0 80.0 79.0 78.0 77.0 76.1 75.1 N 46 81.4 80.4 79.5 78.5 77.5 76.5 75.6 G 47 81.9 80.9 79.9 78.9 78.0 77.0 76.1 E 48 82.3 81.4 80.4 79.4 78.4 77.5 76.5 N 49 82.8 81.8 80.8 79.9 78.9 78.0 77.0 T 50 83.2 82.3 81.3 80.3 79.4 78.4 77.5 51 83.7 82.8 81.8 80.9 79.9 79.0 78.1 52 84.2 83.3 82.4 81.4 80.5 79.6 78.6 53 84.7 83.8 82.9 82.0 81.1 80.1 79.2 54 85.3 84.3 83.4 82.5 81.6 80.7 79.8 55 85.8 84.9 84.0 83.1 82.2 81.3 80.4 P 56 86.3 85.4 84.6 83.7 82.8 81.9 81.0 E 57 86.9 86.0 85.2 84.3 83.4 82.6 81.7 N 58 87.4 86.6 85.8 84.9 84.1 83.2 82.3 S 59 88.0 87.2 86.3 85.5 84.7 83.8 83.0 I 60 88.5 87.7 86.9 86.1 85.3 84.5 83.7 O 61 89.1 88.3 87.6 86.8 86.0 85.2 84.4 N 62 89.7 88.9 88.2 87.4 86.7 85.9 85.1 E 63 90.3 89.5 88.8 88.1 87.4 86.6 85.8 R 64 90.8 90.1 89.4 88.8 88.1 87.3 86.6 65 91.4 90.7 90.1 89.4 88.7 88.0 87.3 66 91.9 91.3 90.7 90.0 89.4 88.7 88.0 67 92.5 91.9 91.3 90.7 90.1 89.4 88.7 68 93.0 92.5 91.9 91.3 90.7 90.1 89.5 69 93.6 93.0 92.5 92.0 91.4 90.8 90.2 70 94.1 93.6 93.1 92.6 92.1 91.5 90.9 71 94.6 94.1 93.6 93.1 92.7 92.1 91.6 72 95.0 94.6 94.1 93.7 93.3 92.7 92.2 73 95.5 95.1 94.7 94.2 93.8 93.4 92.9 74 95.9 95.5 95.2 94.8 94.4 94.0 93.5 75 96.4 96.0 95.7 95.4 95.0 94.6 94.2
* Age nearest birthday on Retirement Date, or on date Contingent Pensioner option becomes effective, if later. Factors for other age combinations will be determined in a manner consistent with the manner used in determining these factors. E-16 TABLE B (CONTINUED) CONTINGENT PENSIONER ADJUSTMENT FACTORS 100% CONTINUATION
PARTICIPANT - ------------------------------------------------------------------------------------------------------ AGE* 55 56 57 58 59 60 61 ---- ---- ---- ---- ---- ---- ---- ---- C 41 80.3 79.3 78.1 76.9 75.7 74.5 73.4 O 42 80.8 79.7 78.5 77.4 76.2 75.0 73.8 N 43 81.2 80.2 79.0 77.8 76.6 75.5 74.3 T 44 81.6 80.6 79.4 78.3 77.1 75.9 74.7 I 45 82.1 81.0 79.9 78.7 77.5 76.4 75.2 N 46 82.6 81.6 80.4 79.2 78.1 76.9 75.8 G 47 83.1 82.1 80.9 79.8 78.6 77.5 76.3 E 48 83.6 82.6 81.4 80.3 79.2 78.0 76.9 N 49 84.1 83.1 82.0 80.8 79.7 78.6 77.4 T 50 84.6 83.6 82.5 81.4 80.2 79.1 78.0 51 85.1 84.2 83.1 82.0 80.9 79.8 78.6 52 85.6 84.7 83.7 82.6 81.5 80.4 79.3 53 86.2 85.3 84.2 83.2 82.1 81.0 79.9 54 86.7 85.9 84.8 83.8 82.7 81.7 80.6 55 87.3 86.4 85.4 84.4 83.3 82.3 81.2 P 56 87.8 87.0 86.0 85.0 84.0 83.0 82.0 E 57 88.4 87.6 86.6 85.6 84.7 83.7 82.7 N 58 89.0 88.2 87.3 86.3 85.3 84.4 83.4 S 59 89.5 88.8 87.9 86.9 86.0 85.0 84.1 I 60 90.1 89.4 88.5 87.6 86.7 85.7 84.8 O 61 90.6 90.0 89.1 88.2 87.3 86.5 85.6 N 62 91.2 90.6 89.7 88.9 88.0 87.2 86.3 E 63 91.7 91.1 90.3 89.5 88.7 87.9 87.1 R 64 92.3 91.7 90.9 90.2 89.4 88.6 87.8 65 92.8 92.3 91.5 90.8 90.1 89.3 88.6 66 93.3 92.8 92.1 91.4 90.7 90.0 89.7 67 93.8 93.3 92.7 92.0 91.3 90.7 90.0 68 94.3 93.8 93.2 92.6 92.0 91.3 90.7 69 94.8 94.4 93.8 93.2 92.6 92.0 91.4 70 95.3 94.9 94.3 93.8 93.2 92.7 92.1 71 95.6 95.3 94.8 94.3 93.8 93.2 92.7 72 96.0 95.7 95.2 94.8 94.3 93.8 93.3 73 96.4 96.1 95.7 95.2 94.8 94.4 93.9 74 96.8 96.5 96.1 95.7 95.3 94.9 94.5 75 97.2 96.9 96.6 96.2 95.9 95.5 95.1
* Age nearest birthday on Retirement Date, or on date Contingent Pensioner option becomes effective, if later. Factors for other age combinations will be determined in a manner consistent with the manner used in determining these factors. E-17 TABLE B (CONTINUED) CONTINGENT PENSIONER ADJUSTMENT FACTORS 100% CONTINUATION
PARTICIPANT - ------------------------------------------------------------------------------------------------------ AGE* 62 63 64 65 66 67 68 ---- ---- ---- ---- ---- ---- ---- ---- C 41 72.1 70.9 69.7 68.5 67.2 66.1 65.0 O 42 72.6 71.4 70.1 68.9 67.7 66.6 65.4 N 43 73.1 71.8 70.6 69.4 68.2 67.0 65.9 T 44 73.5 72.3 71.1 69.8 68.6 67.5 66.3 I 45 74.0 72.8 71.5 70.3 69.1 67.9 66.8 N 46 74.5 73.3 72.1 70.9 69.7 68.5 67.4 G 47 75.1 73.9 72.7 71.5 70.2 69.1 68.0 E 48 75.7 74.5 73.2 72.0 70.8 69.7 68.5 N 49 76.2 75.0 73.8 72.6 71.4 70.3 69.1 T 50 76.8 75.6 74.4 73.2 72.0 70.8 69.7 51 77.5 76.3 75.1 73.9 72.7 71.5 70.4 52 78.1 76.9 75.7 74.6 73.4 72.2 71.1 53 78.8 77.6 76.4 75.2 74.1 72.9 71.8 54 79.4 78.3 77.1 75.9 74.8 73.6 72.5 55 80.1 78.9 77.8 76.6 75.5 74.3 73.2 P 56 80.8 79.7 78.5 77.4 76.3 75.2 74.0 E 57 81.6 80.4 79.3 78.2 77.1 76.0 74.9 N 58 82.3 81.2 80.1 79.0 77.9 76.8 75.7 S 59 83.0 81.9 80.9 79.8 78.7 77.6 76.5 I 60 83.8 82.7 81.6 80.6 79.5 78.4 77.4 O 61 84.5 83.5 82.5 81.4 80.4 79.4 78.3 N 62 85.3 84.3 83.3 82.3 81.3 80.3 79.2 E 63 86.1 85.1 84.2 83.2 82.2 81.2 80.2 R 64 86.9 85.9 85.0 84.0 83.1 82.1 81.1 65 87.7 86.7 85.8 84.9 84.0 83.0 82.1 66 88.4 87.5 86.7 85.8 84.9 84.0 83.1 67 89.2 88.3 87.5 86.7 85.8 84.9 84.0 68 89.9 89.1 88.3 87.5 86.8 85.9 85.0 69 90.7 89.9 89.2 88.4 87.7 86.8 86.0 70 91.4 90.7 90.0 89.3 88.6 87.8 87.0 71 92.1 91.4 90.7 90.1 89.4 88.7 87.9 72 92.7 92.1 91.5 90.9 90.2 89.5 88.8 73 93.4 92.8 92.2 91.6 91.1 90.4 89.7 74 94.0 93.5 92.9 92.4 91.9 91.3 90.6 75 94.7 94.2 93.7 93.2 92.7 92.1 91.5
* Age nearest birthday on Retirement Date, or on date Contingent Pensioner option becomes effective, if later. Factors for other age combinations will be determined in a manner consistent with the manner used in determining these factors. E-18 TABLE C IMMEDIATE ANNUITY 10-YEAR CERTAIN ANNUITY MONTHLY INCOME PER 1000
AGE* MONTHLY INCOME - ---- -------------- 45 7.72 46 7.81 47 7.89 48 7.98 49 8.07 50 8.16 51 8.26 52 8.36 53 8.46 54 8.57 55 8.68 56 8.80 57 8.93 58 9.05 59 9.19 60 9.33 61 9.47 62 9.62 63 9.77 64 9.93 65 10.10 66 10.26
* Age, nearest birthday, or annuity commencement date. Purchase of retirement annuity with employee contributions plus Credited Interest. E-19 E-20 EX-19.A 6 c02989exv19wa.txt NOTE OF 2006 ANNUAL STOCKHOLDERS' MEETING AND PROXY STATEMENT EXHIBIT 19-A [TRUE VALUE COMPANY LOGO] Notice of TRUE VALUE COMPANY'S 2006 ANNUAL STOCKHOLDERS' MEETING AND PROXY STATEMENT [TRUE VALUE COMPANY LOGO] 8600 W. Bryn Mawr Avenue Chicago, IL 60631 January 23, 2006 Dear True Value Stockholder: You are cordially invited to attend True Value Company's Annual Meeting of Stockholders on Saturday, March 18, 2006, at 8:30 a.m. Central Standard Time. The meeting will be held at the George R. Brown Convention Center in Houston, Texas. At the Annual Meeting, a vote is required to elect the nine named directors to serve until our 2007 Annual Meeting. If you will not be attending this year's Annual Meeting, please complete and return the enclosed proxy as soon as possible, authorizing directors Bryan R. Ableidinger, Michael S. Glode and Charles W. Welch to cast your votes. Your vote is very important. You may cast your proxy vote in any of the following three ways: 1) by completing and signing the accompanying proxy card, and returning it in the envelope provided; 2) by telephone, using the instructions on your proxy card; or 3) by Internet, using the instructions on your proxy card. To help ensure the presence of quorum and to avoid any additional costs, we encourage you to forward your proxy vote in any of these three ways prior to Saturday, February 25, 2006. For further information concerning individuals nominated for director, please read the proxy statement on the following pages. We look forward to seeing you on Saturday, March 18, 2006. Thank you for your support of True Value. Sincerely, /s/ Cathy C. Anderson Cathy C. Anderson Corporate Secretary 1 Notice of ANNUAL MEETING OF STOCKHOLDERS To Be Held Saturday, March 18, 2006 To the Stockholders of True Value Company: The Annual Meeting of Stockholders of True Value Company, a Delaware Corporation, will be held at the George R. Brown Convention Center in Houston, Texas. The Annual Meeting is held for the following purposes: 1. To elect nine (9) directors to serve for a term of one (1) year, and until their successors are elected and qualified; and 2. To transact such other business as may properly come before the meeting or any adjournment thereof. Election of Directors - The Board of Directors has nominated for election the nine (9) nominees listed below: - Bryan R. Ableidinger - Richard E. George, Jr. - Michael S. Glode - Thomas S. Hanemann - Lyle G. Heidemann - Kenneth A. Niefeld - David Y. Schwartz - Brian A. Webb - Charles W. Welch The shares represented by the proxies solicited by the Board of Directors will be voted in favor of the election of the above-named nominees unless otherwise indicated. The Board of Directors knows of no reason why any nominee for director will be unable to serve if elected. If any nominee shall become unavailable for election, it is intended that such shares shall be voted for the election of a substitute nominee selected by the persons named as proxies on the enclosed proxy ballot. Only stockholders of record of the Class A Common Stock of the Company at the close of business on Wednesday, January 18, 2006, are entitled to notice of, and to vote at, the Annual Meeting. 2 For further information concerning individuals nominated to serve as directors, you are respectfully urged to read the following pages. Even if you plan to attend the Annual Meeting, please return your proxy by Saturday, February 25, 2006. Sign, date and return the enclosed proxy to the company in the enclosed stamped envelope and mail it addressed to: True Value Company, c/o ComputerShare Investor Services, P.O. Box A3800, Chicago, IL 60690-9608. Alternatively, stockholders may cast their proxy vote, via telephone or electronically, by following the instructions on their proxy card. Your vote is very important. You are urged to sign, date and return your proxy without delay to ensure its arrival in time for the Annual Meeting. This will help ensure the presence of a quorum at the meeting. By Order of the Board of Directors, /s/ Cathy C. Anderson - --------------------- Cathy C. Anderson Corporate Secretary Chicago, Ill. Date of Mailing: January 23, 2006 3 TRUE VALUE Directors [PHOTO OF BRYAN R. ABLEIDINGER] Bryan R. Ableidinger Mr. Bryan Ableidinger, 57, was elected as a board member in 2000 and was named chairman of the board in 2003. He also serves as chairman of the executive and legal committees. He is co-owner of Parkrose Hardware, Inc., with one True Value store located in Portland, Ore., and the other in Vancouver, Wash. Mr. Ableidinger joined Cotter & Company, now True Value Company, in 1975. Mr. Ableidinger also served as a pilot in the U.S. Navy for seven years. He then flew for 12 years for Flying Tigers, a company that was acquired by Federal Express. Additional work experience includes land and building development. Mr. Ableidinger has participated for six years at the master's level in The Strategic Coach Program, an organization that assists entrepreneurs in developing their businesses and becoming visionary in their leadership. He completed Visionary Leadership training, as well as additional courses on leadership and business development. Mr. Ableidinger holds a bachelor's degree in aeronautics and astronautics from the University of Washington. [PHOTO OF RICHARD E. GEORGE, JR.] Richard E. George, Jr. Mr. Richard George, 66, was appointed to the board in 2005. Mr. George began his career with Jewel Companies, Inc. in 1962 and rose to the position of executive vice president in charge of accounting, treasury and informational systems. From 1979 to 1988, he served as president and CEO of Osco Drug, Inc., a subsidiary which operated 680 stores in 1988 and had sales in excess of $3 billion. In 1989, he founded Ulta 3 Cosmetics & Salon, Inc. and served as chairman and CEO until 1994. Most recently, Mr. George has been an active member of Alpha Capital's CEO Advisor Group. He also serves as chairman of the board for Factory Card & Party Outlet Corp., and Factory Connection, as well as president and CEO for RG Trends, Inc. Mr. George holds both a bachelor's and master's degree in accounting from the University of Illinois, and is a registered Certified Public Accountant. 4 TRUE VALUE Directors [PHOTO OF MICHAEL S. GLODE] Michael S. Glode Mr. Michael Glode, 56, was elected as a board member in 2003 and currently is chairman of the corporate governance and nominating committees. He operates True Value stores in both Saratoga and Rawlins, Wyo. He joined Cotter & Company, now True Value Company, in 1970. His board experience includes service as chairman of the Wyoming State Board of Education and member of the National Assessment Governing Board, a body created by Congress to set policy for the National Assessment of Education Progress. Mr. Glode holds a bachelor's degree in business administration from Creighton University and a master's degree in finance from the University of Illinois. [PHOTO OF THOMAS S. HANEMANN] Thomas S. Hanemann Mr. Thomas Hanemann, 66, was elected as a board member in 2002 and currently serves on the audit and nominating committees. He retired from AutoZone, the Fortune 500 national chain of auto parts stores, where he served as president and as a member of its board of directors. Mr. Hanemann worked as a pharmacist until 1974, and then began a career in retailing and wholesaling with Super D Drugs, the drug store division of Malone & Hyde, a large New York Stock Exchange grocery wholesaler. During his tenure, he expanded the company to more than 100 stores and increased its sales to $150 million. In 1983, while serving as Super D's president, he founded Ike's Deep Discount Drug Stores, a high-volume-discount retail drug chain selling health and beauty aids at deeply discounted prices. Mr. Hanemann holds a bachelor's degree in pharmacy from the University of Tennessee. 5 TRUE VALUE Directors [PHOTO OF LYLE G. HEIDEMANN] Lyle G. Heidemann Mr. Lyle Heidemann, 61, is president and chief executive officer of True Value Company. He joined the company in June, 2005. He began his career in 1967 with Sears, where he gained extensive experience in retail, merchandising, brand management, operations and logistics. Mr. Heidemann served as executive vice president and general manager of home and off-mall stores until 2003. In that role, he directed some of Sears' most profitable and successful operating units, including 249 Sears Hardware and Orchard Supply Hardware stores, 1,053 Sears Auto Center and National Tire & Battery stores, and 767 dealer stores. He was responsible for over $20 billion in revenue-generating business, including home appliances and electronics, tools and paint, lawn and garden, tires and batteries, and licensed businesses, among others. Mr. Heidemann holds a bachelor's degree in marketing from Northern Illinois University. [PHOTO OF KENNETH A. NIEFELD] Kenneth A. Niefeld Mr. Kenneth Niefeld, 63, was elected as a board member in 2004 and currently serves on the compensation committee. He operates K&B True Value in Annapolis, Md. Mr. Niefeld joined Cotter & Company, now True Value Company, in 1974. Before opening his hardware business, he worked for the Internal Revenue Service as an accountant and assistant director of the Interagency Auditor Training Center. Mr. Niefeld has completed courses for corporate directors at the National Association of Corporate Directors and courses in compensation at Harvard Business School. Mr. Niefeld holds a bachelor's degree in accounting and a master's degree in business administration from the University of Maryland. 6 TRUE VALUE Directors [PHOTO OF DAVID Y. SCHWARTZ] David Y. Schwartz Mr. David Schwartz, 65, was elected as a board member in 2002. He currently serves as chairman of the audit committee and is a member of the legal and nominating committees. Mr. Schwartz retired as a senior partner from Arthur Andersen in 1997. He now serves as a business advisor and consultant, principally in the retail, distribution and services industries. Mr. Schwartz was with Arthur Andersen for 35 years where he had various responsibilities, including managing partner of the Chicago office attest and business consulting practice, and in the worldwide leadership of the firm's retail industry activities. He is also a member of the boards of directors for Walgreen Co. and Foot Locker, Inc. and serves on the boards of several privately held companies. Mr. Schwartz holds a bachelor's degree in business administration from Roosevelt University and is a Certified Public Accountant. [PHOTO OF BRIAN A. WEBB] Brian A. Webb Mr. Brian Webb, 49, was elected as a board member in 2004 and vice chairman of the board during 2005. He currently serves on the corporate governance and executive committees. He operates two family-owned businesses in Wisconsin: Krueger's True Value, located in Neenah, and Grand Rental Station, located in Appleton. Mr. Webb's family joined Cotter & Company, now True Value Company, in 1951. Mr. Webb has been in the retail hardware business for more than 30 years. He is currently a member of the board of directors for Future Neenah, Inc. and is a founding member and current president of the Neenah West Alliance. He served two terms as president of the Midwest Hardware Association and served on its audit committee. He also participated in True Value's Lumber and Building Materials Marketing Ad Council. Mr. Webb attended the University of Wisconsin, Madison. 7 TRUE VALUE Directors [PHOTO OF CHARLES W. WELCH] Charles W. Welch Mr. Charles Welch, 55, was elected as a board member in 2003 and currently serves on the compensation, nominating and legal committees. He operates two True Value hardware stores in Vermont, one in South Royalton and the other in Woodstock. He joined Cotter & Company, now True Value Company, in 1974. His board experience includes serving as chairman of the board of Gifford Memorial Hospital and director of several financial institutions. Among his other qualifications, Mr. Welch is a master plumber. His other business experience includes building and rental management and other small business endeavors. Mr. Welch holds an associate's degree in aeronautical and space engineering from Wentworth Institute of Technology in Boston, Mass. 8 [TRUE VALUE COMPANY LOGO] 8600 W. Bryn Mawr Avenue Chicago, IL 60631 (c)2006 True Value Company EX-21 7 c02989exv21.txt SUBSIDIARIES EXHIBIT 21 SUBSIDIARIES OF REGISTRANT The registrant owns 100% of the issued and outstanding capital stock of TruServ Acceptance Company, TruServ Logistic Company and General Paint and Manufacturing Co., all Illinois corporations, Servistar Paint Company and Advocate Services Incorporated, both Pennsylvania Corporations, TruValue.com, a Delaware Corporation, True Value Company HK Limited, a Hong Kong company, and is the sole member of TruServ Specialty Company, LLC, a Delaware limited liability company. The accounts of these subsidiaries have been consolidated with the registrant's in December 31, 2005 and 2004. EX-31.A 8 c02989exv31wa.txt SECTION 302 CERTIFICATION (CHIEF EXECUTIVE OFFICER) EXHIBIT 31-A CERTIFICATION I, Lyle G. Heidemann, certify that: 1. I have reviewed this annual report on Form 10-K of True Value Company; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of True Value as of, and for, the periods presented in this annual report; 4. True Value's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for True Value and have: a. designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to True Value, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b. evaluated the effectiveness of True Value's disclosure controls and procedures and presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this annual report based on such evaluation; and c. disclosed in this annual report any change in True Value's internal control over financial reporting that occurred during True Value's most recent fiscal quarter (True Value's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, True Value's internal control over financial reporting; 5. True Value's other certifying officer and I have disclosed, based on our most recent evaluation, to True Value's auditors and the audit committee of True Value's board of directors: a. all significant deficiencies and material weaknesses in the design or operation of internal controls which are reasonably likely to adversely affect True Value's ability to record, process, summarize and report financial information; and b. any fraud, whether or not material, that involves management or other employees who have a significant role in True Value's internal control over financial reporting. TRUE VALUE COMPANY By: /s/ LYLE G. HEIDEMANN ------------------------- Lyle G. Heidemann President and Chief Executive Officer Date: March 8, 2006 EX-31.B 9 c02989exv31wb.txt SECTION 302 CERTIFICATION (CHIEF FINANCIAL OFFICER) EXHIBIT 31-B CERTIFICATION I, David A. Shadduck, certify that: 1. I have reviewed this annual report on Form 10-K of True Value Company; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of True Value as of, and for, the periods presented in this annual report; 4. True Value's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for True Value and have: a. designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to True Value, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b. evaluated the effectiveness of True Value's disclosure controls and procedures and presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this annual report based on such evaluation; and c. disclosed in this annual report any change in True Value's internal control over financial reporting that occurred during True Value's most recent fiscal quarter (True Value's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, True Value's internal control over financial reporting; 5. True Value's other certifying officer and I have disclosed, based on our most recent evaluation, to True Value's auditors and the audit committee of True Value's board of directors: a. all significant deficiencies and material weaknesses in the design or operation of internal controls which are reasonably likely to adversely affect True Value's ability to record, process, summarize and report financial information; and b. any fraud, whether or not material, that involves management or other employees who have a significant role in True Value's internal control over financial reporting. TRUE VALUE COMPANY By: /s/ DAVID A. SHADDUCK ------------------------- David A. Shadduck Senior Vice President and Chief Financial Officer Date: March 8, 2006 EX-32.A 10 c02989exv32wa.txt SECTION 302 CERTIFICATION (CEO AND CFO) EXHIBIT 32-A CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of True Value Company (the "Company") on Form 10-K for the year ended December 31, 2005, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), each of the undersigned officers of the Company certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to such officer's knowledge: (1) The Report fully complies with the requirements of Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of the dates and for the periods expressed in the Report. Date: March 8, 2006 /s/ LYLE G. HEIDEMANN - --------------------- Lyle G. Heidemann President and Chief Executive Officer /s/ DAVID A. SHADDUCK - --------------------- David A. Shadduck Senior Vice President and Chief Financial Officer A signed original of this written statement required by Section 906 has been provided to True Value Company and will be retained by True Value Company and furnished to the Securities and Exchange Commission or its staff upon request. -----END PRIVACY-ENHANCED MESSAGE-----