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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED April 3, 2004 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
TRUSERV CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 36-2099896
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
8600 West Bryn Mawr Avenue
Chicago, Illinois 60631-3505
----------------- ----------
(Address of principal executive offices) (Zip Code)
(773) 695-5000
--------------
(Registrant's telephone number, including area code)
Not applicable
--------------
(Former name, former address and former fiscal year,
if changed since last report)
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 whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
The number of shares outstanding of each of the issuer's classes of common
stock, as of May 1, 2004.
Class A Common Stock, $100 Par Value........................ 479,940 Shares
Class B Common Stock, $100 Par Value........................ 1,779,613 Shares
ITEM 1. FINANCIAL STATEMENTS
($ in thousands - except per share information)
TRUSERV CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET
(Unaudited)
ASSETS
April 3, December 31,
2004 2003
------------- -------------
Current assets:
Cash and cash equivalents $ 6,161 $ 9,234
Accounts and notes receivable, net of allowance for doubtful
accounts of $7,997 and $8,395 272,256 203,010
Inventories 334,969 276,725
Other current assets 18,007 18,225
------------- -------------
Total current assets 631,393 507,194
Properties, net of accumulated depreciation of $286,404 and $283,233 71,445 73,055
Goodwill, net 91,474 91,474
Other assets 9,225 9,737
------------- -------------
Total assets $ 803,537 $ 681,460
============= =============
See Notes to Condensed Consolidated Financial Statements
2
LIABILITIES AND MEMBERS' CAPITALIZATION
April 3, December 31,
2004 2003
------------- -------------
Current liabilities:
Accounts payable $ 332,196 $ 238,180
Drafts payable 31,388 44,540
Accrued expenses 68,566 72,931
Current maturities of long-term debt, notes, borrowings and capital
lease obligations 117,271 91,958
Deferred stock redemptions 13,355 -
Patronage dividend payable in cash 736 8,983
------------- -------------
Total current liabilities 563,512 456,592
------------- -------------
Long-term liabilities and deferred credits:
Long-term debt, including capital lease obligations, less current
maturities 126,048 100,324
Deferred gain on sale leaseback 49,293 50,135
Other long-term liabilities 16,052 13,656
Deferred stock redemptions 22,366 33,725
Redeemable nonqualified Class B non-voting common stock, $100 par value;
224,016 and 231,392 shares issued and fully paid 22,402 23,139
------------- -------------
Total long-term liabilities and deferred credits 236,161 220,979
------------- -------------
Total liabilities and deferred credits 799,673 677,571
------------- -------------
Commitments and contingencies - -
Members' equity:
Redeemable Class A voting common stock, $100 par value; 750,000 shares
authorized; 298,380 and 304,560 shares issued and fully paid; 6,300 and
9,840 shares issued (net of subscriptions receivable of $110, and $112) 30,358 31,440
Redeemable qualified Class B non-voting common stock and paid-in capital,
$100 par value; 4,000,000 shares authorized; 924,559 and 952,436 shares
issued and fully paid 93,755 96,542
Loss allocation (37,809) (40,502)
Deferred patronage (24,858) (25,045)
Accumulated deficit (55,603) (56,567)
Accumulated other comprehensive loss (1,979) (1,979)
------------- -------------
Total members' equity 3,864 3,889
------------- -------------
Total liabilities and members' equity $ 803,537 $ 681,460
============= =============
See Notes to Condensed Consolidated Financial Statements
3
TRUSERV CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
For the thirteen weeks ended
April 3, March 29,
2004 2003
--------- ---------
Net revenues $ 499,362 $ 452,127
Cost of revenues 449,180 408,242
--------- ---------
Gross Margin 50,182 43,885
Operating expenses:
Logistics and manufacturing expenses 16,081 16,010
Selling, general and administrative expenses 29,001 23,080
Other income, net (498) (581)
--------- ---------
Operating Income 5,598 5,376
Interest expense to members 1,401 1,385
Third party interest expense 2,022 7,824
--------- ---------
Net margin/(loss) before income taxes 2,175 (3,833)
Income tax expense 51 84
--------- ---------
Net margin/(loss) $ 2,124 $ (3,917)
========= =========
See Notes to Condensed Consolidated Financial Statements
4
TRUSERV CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
April 3, March 29,
2004 2003
-------- ---------
Operating activities:
Net margin / (loss) $ 2,124 $ (3,917)
Adjustments to reconcile net margin / (loss) to cash
and cash equivalents provided by / (used for) operating
activities:
Depreciation and amortization 4,595 7,147
Provision for allowance for doubtful accounts 352 (137)
Provision for inventory reserves 2,873 1,495
Amortization of deferred gain on sale leaseback (699) (638)
Net change in working capital components (39,214) 23,301
-------- ---------
Net cash and cash equivalents provided by / (used for)
operating activities (29,969) 27,251
-------- ---------
Investing activities:
Additions to properties (1,704) (745)
Proceeds from sale of properties 90 43
Changes in restricted cash - 503
Changes in other assets 17 836
-------- ---------
Net cash and cash equivalents provided by / (used for)
investing activities (1,597) 637
-------- ---------
Financing activities:
Payment of patronage dividend (8,401) (5,721)
Payment of notes, long-term debt and lease obligations (157) (7,512)
Increase/ (decrease) in drafts payable (13,152) 3,085
Increase / (decrease) in revolving credit facilities, net 50,200 (19,065)
Proceeds from Class A common stock subscription
receivable 3 14
-------- ---------
Net cash and cash equivalents provided by / (used for)
financing activities 28,493 (29,199)
-------- ---------
Net decrease in cash and cash equivalents (3,073) (1,311)
Cash and cash equivalents at beginning of period 9,234 9,001
-------- ---------
Cash and cash equivalents at end of period $ 6,161 $ 7,690
======== =========
See Notes to Condensed Consolidated Financial Statements.
5
TRUSERV CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
($ in thousands)
NOTE 1 - GENERAL
The condensed consolidated balance sheet at April 3, 2004, the condensed
consolidated statement of operations for the thirteen weeks ended April 3, 2004
and March 29, 2003, and the condensed consolidated statement of cash flows for
the thirteen weeks ended April 3, 2004 and March 29, 2003 are unaudited and, in
the opinion of the management of TruServ, include all adjustments, consisting
only of normal recurring adjustments, necessary for a fair presentation of
financial position at the balance sheet dates and results of operations and cash
flows for the respective interim periods. The accompanying unaudited condensed
consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of America for
interim financial information and with the instructions to Form 10-Q and Article
10 of Regulation S-X. Accordingly, they do not include all of the information
and footnotes required by accounting principles generally accepted in the United
States of America for complete financial statements. These financial statements
should be read in conjunction with the consolidated financial statements for the
year ended December 31, 2003 included in TruServ's 2003 Annual Report on Form
10-K.
NOTE 2 - RECLASSIFICATIONS
Certain reclassifications have been made to the prior year's condensed
consolidated financial statements 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.
NOTE 3 - ESTIMATED PATRONAGE DIVIDENDS
If financial and operating conditions permit, patronage dividends are declared
and paid by TruServ after the close of each fiscal year. The estimated cash
portion of the patronage dividend for the three-month period ended April 3, 2004
was $603, which was 30% of the quarter's estimated patronage income. Due to the
net loss in the same period last year there was no estimated cash portion of the
patronage dividend. TruServ's By-Laws and Internal Revenue Service regulations
require the payment of at least 20% of patronage dividends in cash. In the past,
TruServ paid the remainder primarily through the issuance of Class B common
stock (in both qualified and nonqualified written notices of allocation, as
those terms are used in the Internal Revenue Code); and in certain cases,
TruServ paid a small portion of the dividend by means of Promissory
(subordinated) notes. For 2004, to the extent TruServ declares a patronage
dividend, it intends to issue, in 2005, the non-cash portion of the dividend in
the form of Qualified Class B common stock, and, in the case of those members
who have loss allocation accounts, to apply the value of the Qualified Class B
common stock to reduce such account balances (see Note 4). To the extent TruServ
declares a patronage dividend, it is allowed a deduction in that amount to
determine taxable income. Based on the estimated patronage dividend, the U.S.
federal effective income tax rate is 0%.
NOTE 4 - LOSS ALLOCATION TO MEMBERS
During the third quarter of 2000, TruServ 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.
6
TruServ has allocated and 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 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 equity investment relative to the total equity
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 TruServ, 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 TruServ.
The board of directors determined that TruServ 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. TruServ has determined for each member that was
a stockholder in 2001, its share of the 2001 loss that has been retained in the
Accumulated deficit account. The 2001 loss was allocated based upon both the
member's proportionate stock investment, net of any 1999 loss allocation
account, and also based on the member's purchases from the co-op in 2001. No
member was allocated a loss amount greater than its net equity investments held
as of year end 2001. In the event a member terminates its status as a
stockholder of TruServ, any remaining 2001 loss in the Accumulated deficit
account that is allocable to the terminating member will be distributed to the
terminating member and satisfied by reducing the redemption amount paid for the
member's stock investment in TruServ.
A member's proportionate share of the 1999 and/or 2001 losses has been limited
to the extent of its equity investment in TruServ. Any portion of a loss
allocation that exceeds a member's equity investment is retained by TruServ in
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.
7
NOTE 5 - INVENTORIES
April 3, December 31,
2004 2003
------------- -------------
Manufacturing inventories:
Raw materials $ 2,670 $ 1,979
Work-in-process and finished goods 27,991 19,020
Manufacturing inventory reserves (220) (258)
------------- -------------
30,441 20,741
============= =============
Merchandise inventories:
Warehouse inventory 312,600 262,444
Merchandise inventory reserves (8,072) (6,460)
------------- -------------
304,528 255,984
------------- -------------
Total $ 334,969 $ 276,725
============= =============
Inventories are stated at the lower of cost, determined on the first-in,
first-out basis, or market. The cost of inventory also includes indirect costs
incurred to bring inventory to its existing location for resale. The amount of
indirect costs included in ending inventory at April 3, 2004 and December 31,
2003 was $21,775 and $18,386, respectively.
NOTE 6 - DEBT
On August 29, 2003, TruServ entered into a new four-year $275,000 asset based
revolving credit facility (the "Bank Facility"). The Bank Facility was used to
refinance the existing third party senior debt. The interest rate for the
initial term through April 30, 2004 was a variable rate (at TruServ's option) of
London Interbank Offering Rate ("LIBOR") plus 2.25% or the prime rate plus
0.25%. The unused commitment fee is 0.375%. As of April 3, 2004, the weighted
average interest rate was 3.42%. Letters of credit issued under the Bank
Facility have a fee of 2.25%. Fees paid for closing the Bank Facility totaled
$3,752 and these fees are being amortized by TruServ over the four-year term.
Under the terms of the Bank Facility agreement, pricing is determined by a
performance grid based upon a fixed charge coverage ratio, measured quarterly
beginning in March 2004. Based on this performance pricing grid, TruServ
achieved improved variable pricing for the quarter and therefore effective May
1, 2004 TruServ's variable interest rate will be LIBOR plus 2.0% or the prime
rate and letters of credit will carry fees of 2.0%.
The Bank Facility has no financial covenants, unless average daily excess
availability for the last 60 days of each quarter drops below $35,000. As of
April 3, 2004, TruServ's average excess availability for the last 60 days was
greater than $35,000 and TruServ is therefore not subject to a maximum fixed
charge coverage ratio of 1.1 to 1.0. Additionally, TruServ is required to
maintain $15,000 of excess availability at all times. Availability is defined as
the lesser of $275,000 or the calculated collateral value of eligible assets
less the outstanding borrowings, letters of credit and reserves against
availability that may be imposed at the reasonable discretion of the lenders.
Availability at April 3, 2004 less the aggregate of outstanding borrowings of
$181,800 together with letters of credit and reserves of $14,167 was $79,033. As
of April 3, 2004 TruServ is in compliance with all terms and conditions of the
Bank Facility.
At April 3, 2004, TruServ had Current maturities of long-term debt, notes,
borrowings and capital lease obligations of $117,271, which only $20,471 of
8
this amount has required payments during the next twelve months. The required
payments consist of $19,778 of member subordinated and installments notes and
$693 of capital leases and other. Historically, a minimum of 50% of the member
subordinated notes have been renewed, extending the maturity for an additional
three years. In 2003, this renewal rate was approximately 85%. The remaining
$96,800 in current maturities of long-term debt, notes, borrowings and capital
lease obligations is the current portion of the Bank Facility and as explained
below reflects the seasonality of TruServ's business. The current and long-term
portions of the Bank Facility do not have any required payments until 2007. At
April 3, 2004, TruServ had $181,800 in revolving credit loans of which $96,800
is included in Current maturities of long-term debt, notes and capital lease
obligations and $85,000 is included in Long-term debt, notes and capital lease
obligations, less current maturities. Based on management's projection of
seasonal working capital needs, the amount classified as Long-term debt, notes
and capital lease obligations, less current maturities represents the lowest
level of borrowings during the next twelve months.
In March 2004, TruServ amended the Bank Facility primarily to clarify language
in the loan agreement to better reflect the intent of the parties and to adjust
the method of reporting financial calculations in light of new accounting
pronouncements affecting TruServ since the Bank Facility was negotiated in
August 2003.
NOTE 7 - SEGMENT INFORMATION
TruServ is principally engaged as a wholesaler of hardware and related products
and is a manufacturer of paint products. TruServ identifies segments based on
management responsibility and the nature of the business activities of each of
its components. TruServ 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:
Thirteen weeks ended April 3, 2004
----------------------------------------------
Consolidated
Hardware Paint Totals
------------- ------------- -------------
Net sales to external customers $ 476,595 $ 22,767 $ 499,362
Interest expense 2,885 538 3,423
Depreciation and amortization 4,251 344 4,595
Segment net margin / (loss) (1,708) 3,832 2,124
Thirteen weeks ended March 29, 2003
----------------------------------------------
Consolidated
Hardware Paint Totals
------------- ------------- -------------
Net sales to external customers $ 431,729 $ 20,398 $ 452,127
Interest expense 7,738 1,471 9,209
Depreciation and amortization 6,784 363 7,147
Segment net margin / (loss) (5,807) 1,890 (3,917)
NOTE 8 - COMMITMENTS AND CONTINGENCIES
In May 2000, TruServ filed a complaint in the Circuit Court of McHenry County,
Illinois against Bess Hardware and Sports, Inc., ("Bess") to recover an accounts
receivable balance in excess of $400. Bess filed a counterclaim, seeking a
setoff against its accounts receivable balance for the par redemption value of
Bess's shares of TruServ Stock. Bess contested the validity of a March 17, 2000
corporate resolution declaring a moratorium on the redemption of all
9
TruServ capital stock, as well as an allocation of Bess' proportionate share of
the loss, which TruServ declared for its fiscal year 1999. On August 6, 2003,
the Circuit Court entered judgment in favor of TruServ on its accounts
receivable claim in the amount of $392, and entered judgment in favor of Bess on
its counterclaim. Bess did not appeal the judgment on the accounts receivable
claim. TruServ appealed the judgment on Bess's counterclaim. On January 21,
2004, the Second District of the Illinois Appellate Court issued a decision
reversing the portion of the Circuit Court's ruling that had refused to enforce
the Moratorium. In validating the Moratorium, the Second District found that
TruServ's capital was impaired, and held that TruServ "was prohibited from
immediately remitting the redemption price for [Bess's] TruServ stock." The
Second District also held that as of April 10, 2000 -- the effective date of the
termination of Bess's membership -- Bess ceased to be a TruServ stockholder and
thus was not subject to the loss allocation plan passed by resolution of the
TruServ board of directors on August 29, 2000. On February 9, 2004, Bess filed a
Petition For Rehearing in the Second District of the Illinois Appellate Court.
On March 3, 2004 the Petition For Rehearing was denied.
TruServ provides guarantees for certain member loans, but is not required to
provide a compensating balance for the guarantees. TruServ is required to pay
off a portion of the full amount of these loans under these guarantees, ranging
from 0-50% of the member's outstanding balance, in the event that a member
defaults on their loan, after which the member will be liable to TruServ for the
guaranteed amount. The amount of the guaranteed portion of these member loans,
which are not recorded in TruServ's balance sheet, was approximately $601 and
$1,854 as of April 3, 2004 and March 29, 2003, respectively. The balance of $601
as of April 3, 2004 includes approximately $169 that will mature in fiscal 2004.
The remaining guarantees will expire periodically through 2013. TruServ carries
a reserve of $60 relating to these guarantees.
Additionally, TruServ sold certain member note receivables to a third party in
2002, payment of which TruServ has fully guaranteed. TruServ is required to pay
off 100% of the outstanding balance of these member notes under these guarantees
in the event that a member defaults on its notes, after which the member will be
liable to TruServ for the guaranteed amount. The balance of these notes at April
3, 2004 and March 29, 2003 was $401 and $785, respectively. TruServ has recorded
a liability and related receivable for $401 relating to these member notes, and
carries a $40 reserve relating to these guarantees. The balance of $401 as of
April 3, 2004 includes approximately $218 that will mature in fiscal 2004. The
remaining guarantees will expire periodically through 2007.
TruServ has a lifetime warranty or a customer satisfaction guarantee on the
majority of its True Value paint products, which covers only replacement
material. TruServ has historically experienced minimal returns on these
warranties and guarantees and has determined any related liability to be
immaterial.
NOTE 9 - BENEFITS
Pensions Plans
The components of net periodic pension cost for TruServ administered pension
plans were as follows for the quarter ended April 3, 2004 and March 29, 2003:
10
2004 2003
------- -------
($ in thousands)
Components of net periodic pension cost:
Service cost $ 1,400 $ 1,300
Interest cost 1,100 1,000
Expected return on assets (1,100) (1,100)
Amortization of prior service cost 100 100
Amortization of actuarial loss/(gain) 300 200
Settlement loss/(gain) 500 900
------- -------
Net pension cost $ 2,300 $ 2,400
======= =======
Contributions
TruServ expects to contribute $6,500 to its qualified pension plan and $1,550 to
its supplemental retirement plan in 2004.
Retirement Medical Plan
The components of net periodic post-retirement benefit cost, was as follows for
the quarter ended April 3, 2004 and March 29, 2003:
2004 2003
------- -------
($ in thousands)
Component of net periodic post-retirement benefit cost:
Interest cost $ 100 $ 100
------- -------
Net periodic benefit cost $ 100 $ 100
======= =======
Contributions
TruServ expects to contribute $547 to its retirement medical plan to cover the
cost of premiums and subsidies during 2004.
NOTE 10 - NEW ACCOUNTING PRONOUNCEMENTS
On January 1, 2003, TruServ adopted 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"), 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. In
January 2003, the EITF clarified that this issue is effective for arrangements
with vendors initiated on or after January 1, 2003. Most of TruServ's
arrangements with vendors in 2003 were initiated before January 1, 2003 and did
not have a material impact on first quarter of 2003. However, most arrangements
with vendors in 2004 were initiated in the fourth quarter of 2003, and the
application of EITF 02-16 has impacted the first quarter 2004 results of
operations and financial position as net margin was
11
negatively impacted in the first quarter of 2004 compared to the same period
last year by $2,540. The first quarter of 2004 was impacted by the application
of EITF 02-16 as vendor advertising funds are being earned in 2004 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 will be impacted by the application of EITF
02-16, as the advertising revenue that was recognized as the advertising
occurred will now be classified as part of the cost of the product. Also
impacting net revenue is the classification of monies earned for holding markets
that are now considered a service to vendors and members. Monies earned from
prior year markets were recorded as an offset in SG&A expenses and are now
recorded into net revenue for 2004. Also, the expenses related to providing the
markets were previously classified in SG&A expenses and are now classified in
cost of revenue for 2004.
NOTE 11 - Deferred Stock Redemptions
Deferred stock redemptions are comprised of the aggregate net equity investments
for each shareholder that has presented its stock for redemption and had such
redemption deferred due to TruServ's declaration in March of 2000 of a
moratorium on stock redemptions. These net equity investments are the aggregate
par value of Class A common stock, Qualified Class B common stock and
Nonqualified Class B common stock reduced by the aggregate amount that TruServ
may legally offset to the Loss allocation, Accumulated deficit and Accounts
receivable accounts. At the TruServ annual meeting on March 28, 2004, the board
of directors of TruServ announced that it had voted to rescind the moratorium on
stock redemptions effective July 6, 2004, provided that there does not occur a
material adverse change in the financial position of the business or the
operations of the business between March 28 and July 6, 2004.
As of April 3, 2004, the deferred stock redemption liability on TruServ's
financial statements totals $35,721. As TruServ offsets amounts due by its
members against amounts that it pays to the members on redemption of their
stock, the deferred 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. In accordance with TruServ's By-Laws, TruServ intends to pay
approximately $7,764 of the stock redemption liability in cash as soon as
practical after it lifts the moratorium. TruServ intends to pay the balance of
the redemption obligation in subordinated installment notes that would be
payable in five equal annual installments and that would bear interest at the
rate of 4.36%. The first installment payment of principal and interest of the
subordinated installment notes would be due in December 2004, if TruServ lifts
the moratorium. Therefore, TruServ would be required to pay in 2004, if it lifts
the moratorium, approximately $13,355 that is classified under current
liabilities in the balance sheet.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
($ in thousands)
THIRTEEN WEEKS ENDED APRIL 3, 2004 COMPARED TO THIRTEEN WEEKS ENDED
MARCH 29, 2003
12
RESULTS OF OPERATIONS:
Overview
The first quarter of 2004 was yet another positive chapter in the TruServ turn
around. This was the first quarter since 1999 that TruServ experienced a quarter
over prior year quarter increase in revenue. TruServ also realized a $6,041
improvement year over year in the bottom line.
Revenue was up 10.4% versus first quarter last year. Revenue this year in the
first quarter was $499,362 compared to $452,127 in the first quarter last year.
The revenue increase was mainly generated from an increase in same store sales.
Approximately one half of the same store sales increase relates to an additional
four shipping days in the first quarter this year versus last year and the
balance of the increase relates to an increase in existing member purchasing
volume. The revenue impact of net participating member loss of $7,785 related to
nonrecurrence of sales to members who left TruServ after the first quarter of
2003 net of new member sales. 103 members terminated their membership in the
first quarter of 2004, which is the lowest level since the merger. Approximately
73.0% of these first quarter terminations were members who on average had
warehouse and relay purchases less than $40 from TruServ in the full year 2003.
When netted with new members in the quarter, TruServ's store count only dropped
by 46 locations from 6,178 at year-end to 6,132. Management is seeing an
increase in TruServ's success rate in converting new stores from the
competition. The negative revenue impact from the net participating member loss
was substantially offset by the classification of vendor dollars for supporting
the Spring 2004 market as revenue, consistent with EITF 02-16.
TruServ had a profit in the first quarter this year of $2,124 compared to a net
loss of $3,917 last year. The primary driver in the improved earnings is the
effect of last year's refinancing. TruServ's interest expense for the quarter of
$3,423 was down $5,786 from $9,209 a year ago. The favorable earnings from the
higher revenue and the fact the spring market was held in the first quarter this
year compared to the second quarter last year, was partially offset by higher
employee medical expense and legal costs, plus the $2,540 negative impact of a
new accounting rule regarding how certain monies from vendors are to be
recorded. Included in the results were incremental wholesale price reductions to
the members of $3,146, which were essentially funded by negotiated lower
purchase prices.
TruServ's new revolving credit facility has performance pricing. This means
TruServ can cause favorable and unfavorable adjustments to its credit facility
interest rate based on the financial performance of TruServ. TruServ's financial
performance for the fourth quarter of 2003 and the first quarter of 2004 has
been such that TruServ has been able to lower its interest rate by 0.25% (from
LIBOR + 2.25% to LIBOR + 2.0%). The rate was adjusted downward effective May 1,
2004. Going forward, this pricing adjustment will be determined each quarter.
As Spring is the busiest season for TruServ's members, it is the busiest season
for TruServ and requires the highest use of working capital. Since year-end, and
consistent with prior years' first quarter trends, TruServ's accounts receivable
and inventory have risen as well as accounts payable and bank borrowings.
TruServ's debt increased to $243,319 from $192,282 at year-end, to support a
rise in inventory, and is up 6.0% compared to $229,620 at the end of the first
quarter last year. The higher investment in inventory has generated a fill rate
in the first quarter of 95.8%, which is the highest fill rate for a first
quarter since the merger in 1997. Management continues to work to optimize
TruServ's inventory investment and concurrently its fill rate to its members.
13
Revenue and Gross Margin
A reconciliation of net revenue and gross margin for the 13 weeks ending April
3, 2004 and March 29, 2003 follows:
Gross
Net % of Net Gross Margin %
Revenue Revenue Margin of Revenue
------------ -------- ------------ ---------
($ in thousands)
Thirteen weeks ended March 29, 2003 results $ 452,127 100.0% $ 43,885 9.7%
Same store sales:
Warehouse and relay revenue 26,197 5.8 4,499
Vendor direct revenue 16,615 3.7 93
Paint Revenue 2,834 0.6 389
------------ ------- ------------
Net same store sales 45,646 10.1 4,981
------------ ------- ------------
Change in participating members:
Terminated members:
Warehouse and relay revenue (8,947) (2.0) (1,372)
Vendor direct revenue (4,535) (1.0) (54)
Paint Revenue (680) (0.2) (324)
------------ ------- ------------
Net terminated members (14,162) (3.2) (1,750)
------------ ------- ------------
New members:
Warehouse and relay revenue 3,692 0.8 448
Vendor direct revenue 2,471 0.5 12
Paint Revenue 214 0.1 78
------------ ------- ------------
Net new members 6,377 1.4 538
------------ ------- ------------
Net change in participating members (7,785) (1.8) (1,212)
------------ ------- ------------
Advertising, transportation and other revenue 9,374 2.1 3,417
Indirect cost of revenue - - (889)
------------ ------- ------------
Total change 47,235 10.4 6,297
------------ ------- ------------
Thirteen weeks ended April 3, 2004 results $ 499,362 110.4% $ 50,182 10.0%
============ ======= ============
Net revenue for the 13 weeks ended April 3, 2004 totaled $499,362, an increase
of $47,235, or 10.4%, as compared to the same period last year. The increase in
net revenue was in the same store sales and advertising, transportation, and
other revenue categories and was partially offset by a decline in the change in
participating member sales category. TruServ's same store sales increased
$45,646, or 10.1%, due to four additional shipping days in the first quarter of
2004, which represented approximately 50% of the increase, together with the
impact of an improved economy, renewed member confidence in their business and
in the co-op, as well as various co-op programs and initiatives to drive
merchandise sales. Advertising, transportation and other revenue increased
$9,374, or 2.1%, mainly due to the timing of TruServ's spring market held in the
first quarter of 2004, as compared to the second quarter of 2003, and partially
offset by the EITF 02-16 impact on vendor advertising fund recognition as
disclosed in Note 10, "New Accounting Pronouncements." Offsetting the favorable
net revenue variance was a net decline in TruServ's number of participating
member retail outlets of 4.6%,as compared to the same period last year, which
resulted in revenue reduction of $7,785, or 1.8%. Although there is a net
decline in revenue from the change in participating members in the first quarter
of 2004, this represents an improvement relative to the net decline of $25,606
experienced in the first quarter of 2003. Also, another factor reducing net
revenue in the same store sales and change in participating member categories is
a product price reduction that lowered revenue by an incremental $3,146, as
compared to the first quarter of 2003.
14
Gross margin for the 13 weeks ended April 3, 2004 increased by $6,297, or 14.3%,
as compared to the first quarter of 2003. Same store sales gross margin
contributed $4,981 to the favorable variance due to the volume increase in same
store sales, and was partially offset by lower paint margins due to costs
incurred to implement the new "Color Made Simple" program. Advertising,
transportation, and other gross margin was also favorably impacted mainly due to
the timing of TruServ's spring market held in the first quarter of 2004, as
compared to the second quarter of 2003, and was partially offset by the impact
of EITF 02-16 which reduced margin $2,540, (See note 10, "New Accounting
Pronouncements"). Another contributing factor reducing gross margin was the net
decline in participating member outlets that lowered gross margin by $1,212.
Although, the net decline in participating members caused a gross margin
reduction, the trend shows improvements, as the first quarter of 2003 had a
gross margin loss of $2,903 from a net decline in participating members. Also,
indirect cost of revenue, which is comprised of freight-in, vendor rebates, cash
discounts and other cost incurred to prepare goods for resale, offset the
favorable gross margin by $889. This negative impact was mainly due to an
increase in freight-in cost associated with the increase in global sourcing of
products. The product price reduction did not impact gross margin as lower
product acquisition cost from both domestic and global suppliers offset the
product price reduction.
2004 2003 $ Expense Increase
---- ---- ------------------
Logistics and manufacturing expenses $16,081 $16,010 $71
Logistics and manufacturing expenses increased by $71, or 0.4%, as compared to
the same period last year. As the result of continuing cost reduction
initiatives, TruServ was able to reduce its handling cost as a percent of
warehouse sales and maintained expenses consistent with the same period last
year despite a 7.9% increase in net warehouse and relay sales volume.
2004 2003 $ Expense Increase
---- ---- ------------------
Selling, general and administrative expenses $29,001 $23,080 $5,921
Selling, general and administrative ("SG&A") expenses increased $5,921, or
25.7%, as compared to the first quarter of 2003. The increase in SG&A expenses
was partially due to higher health care costs, which reflects the upward trends
in health care self-insurance costs in the first quarter compared to the same
period last year. Also severance charges and professional fees that relate to
higher litigation costs as well as professional work related to Sarbanes-Oxley
preparation were higher in the first quarter compared to the same period last
year.
2004 2003 $ Expense (Decrease)
---- ---- --------------------
Third party interest expense $2,022 $7,824 $(5,802)
Third party interest expense decreased $5,802, or 74.2%, as compared to the same
period last year. Lower interest expense was achieved as TruServ completed the
refinancing of its third party senior debt on August 29, 2003. The significant
items that generated lower interest expense were the lower average interest rate
savings of $3,709, the elimination of make-whole prepayment penalties of $1,452
and the lower bank fee amortization of $409.
2004 2003 $ Net margin Increase
---- ---- ---------------------
Net margin/(loss) $2,124 ($3,917) $6,041
15
The quarter resulted in a net margin of $2,124, up from a net loss of $3,917 for
the same period a year ago. The favorable increase in net margin of $6,041 is
mainly due to the lower interest expense related to the August 29, 2003
refinancing of TruServ's third party debt. Other significant impacts to net
margin / (loss) were the timing of TruServ's market and increased sales volume
partially offset by the effects of EITF 02-16, as well as increased health
insurance, professional fees and severance charges.
LIQUIDITY AND CAPITAL RESOURCES:
The information provided below, which should be read in conjunction with the
information in TruServ's Annual Report on Form 10-K for the year ended December
31, 2003, describes TruServ's debt, credit facilities, guarantees and future
commitments, in order to facilitate a review of TruServ's liquidity.
TruServ used cash from operating activities for the 13 weeks ended April 3, 2004
of $29,969, as compared to generating cash of $27,251 for the 13 weeks ended
March 29, 2003. TruServ'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 the co-op 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 increase in accounts receivable
and inventory from fiscal year end is partially matched by the increase in
accounts payable. The cash needed to meet the future payments for accounts
payable will be provided by the cash generated from collections on accounts
receivable and from the future sale of inventory. The unfavorable change in cash
related to operating activities was mainly due to increased accounts receivable
from higher sales volume and a higher days sales outstanding due to offering
members an extension on terms through various programs compared to the same
period last year.
Inventory as of April 3, 2004 is $334,969, up $58,244 since the beginning of the
year. This increase in the first quarter of 2004 is comparable to the first
quarter of 2003. Inventory as compared to the same period last year is up
$42,142, as TruServ maintained the increased level of inventory that existed at
the end of 2003. The increased inventory levels over the same period last year
was primarily due to the expansion of the merchandise assortment available
through the TruServ distribution centers. TruServ increased its stockkeeping
unit ("SKU") count 9.4%, to approximately 71,000 SKUs. An additional factor is
the timing of TruServ's spring market, as the spring market was held in the
first quarter of 2004 and was held in the second quarter of 2003. Also,
TruServ's first quarter 2004 inventory levels reflect the impact of additional
lead times related to increased importing of product. Accounts payable did not
increase at the same level in the first quarter of 2004, as compared to the
first quarter of 2003, as increased global sourcing of products requires TruServ
to pay earlier for merchandise. Also, first quarter 2004 payments related to
increased inventory that TruServ had acquired late in the fourth quarter of 2003
lowered TruServ's accounts payable balance.
TruServ used cash from investing activities of $1,597 for the 13 weeks
ended April 3, 2004, as compared to $637 of cash generated for the same period
last year. This is mainly due to additions to properties owned using cash of
$1,704, which is up from $745 compared to the same period last year. These
capital expenditures are comprised of various building improvements and
purchases of additional equipment and technology at TruServ's distribution
centers and at its corporate headquarters.
16
TruServ used cash generated from its financing activities of $28,493 to fund its
seasonal need for operating activities and its financing activities. The cash
was generated from increased borrowings of $50,200 from the Bank Facility. The
interest rate for the initial term of the Bank Facility through April 30, 2004
was a variable rate (at TruServ's option) of LIBOR plus 2.25% or the prime rate
plus 0.25%. The unused commitment fee is 0.375%. As of April 3, 2004, the
weighted average interest rate was 3.42%. Letters of credit issued under the
Bank Facility have a fee of 2.25%. Under the terms of the Bank Facility
agreement, pricing is determined by a performance grid based upon a fixed charge
coverage ratio, measured quarterly beginning in March 2004. Based on this
performance pricing grid, TruServ achieved improved variable pricing for the
quarter and therefore, effective May 1, 2004, TruServ's variable interest rate
will be LIBOR plus 2.0% or the prime rate and letters of credit will carry fees
of 2.0%.
The Bank Facility has no financial covenants, unless average daily excess
availability for the last 60 days of each quarter drops below $35,000. As of
April 3, 2004, TruServ's average excess availability for the last 60 days was
greater than $35,000 and TruServ is therefore not subject to a maximum fixed
charge coverage ratio of 1.1 to 1.0. Additionally, TruServ is required to
maintain $15,000 of excess availability at all times. Availability is defined as
the lesser of $275,000 or the calculated collateral value of eligible assets
less the outstanding borrowings, letters of credit and reserves against
availability that may be imposed at the reasonable discretion of the lenders.
Availability at April 3, 2004 less the aggregate of outstanding borrowings of
$181,800, together with letters of credit and reserves of $14,167, was $79,033.
As of April 3, 2004 TruServ is in compliance with all terms and conditions of
the Bank Facility.
In the 13 weeks ended April 3, 2004, TruServ had a net decrease in cash and cash
equivalents of $3,073. At April 3, 2004, TruServ's working capital was $67,881,
as compared to $50,602 at December 31, 2003. The current ratio was 1.12 at April
3, 2004, as compared to 1.11 at December 31, 2003.
TruServ believes that its cash from operations and existing credit facility will
provide sufficient liquidity to meet its working capital needs, planned capital
expenditures and debt obligations that are due to be repaid in fiscal year 2004.
At April 3, 2004, TruServ has $20,471 of required payments during the next
twelve months. The required payments consist of $19,778 of member subordinated
and installments notes and $693 of capital leases and other. Historically, a
minimum of 50% of the member subordinated notes have been renewed, extending the
maturity for an additional three years. In 2003, this renewal rate was
approximately 85%. The remaining $96,800 in current maturities of long-term
debt, notes, borrowings and capital lease obligations is the current portion of
the Bank Facility that reflects the seasonality of TruServ's business (See Note
6 "Debt"). The current and long-term portions of the Bank Facility do not have
any required payments until 2007.
CASH REQUIREMENTS:
Below is the current schedule of the expected cash outflows necessary to meet
financial commitments existing as of April 3, 2004 and thereafter:
17
2005 & 2007 &
2004 2006 2008 Thereafter Total
------------ ------------ ------------ ------------ ------------
($ in thousands)
Bank Facility(1) $ 96,800 $ - $ 85,000 $ - $ 181,800
Promissory (subordinated) and installment notes(2) 19,778 39,922 - - 59,700
Capital lease obligations 764 927 300 - 1,991
Operating lease obligations 24,546 53,470 46,506 238,793 363,315
Purchase obligations(3) 72,653 - - - 72,653
Redeemable non-qualified Class B non-voting
common stock - - - 22,402 22,402
Deferred stock redemption(4) 13,355 11,183 11,183 - 35,721
------------ ------------ ------------ ------------ ------------
Total $ 227,896 $ 105,502 $ 142,989 $ 261,195 $ 737,582
============ ============ ============ ============ ============
(1) The amount shown due in 2004 represents management's estimate of the
amount necessary to reduce the outstanding balance to the expected lowest
level of borrowings during the next twelve months. There are no required
payments until the maturity of the Bank Facility in August 2007.
(2) The amounts shown are scheduled payments; however, historically a minimum
of 50% of the promissory (subordinated) notes have been renewed, extending
the maturity for an additional three years. In 2003, this renewal rate was
approximately 85%.
(3) Purchase obligations are typically short-term and fluctuate with the
seasonality of TruServ's business. Also purchase obligations are
continuously replaced throughout the year with new purchase obligations as
existing purchase obligations are received into inventory.
(4) At the TruServ annual meeting on March 28, 2004, the board of directors of
TruServ announced that it had voted to rescind the moratorium on stock
redemptions effective July 6, 2004, provided that there does not occur a
material adverse change in the financial condition or the operations of
the business between March 28 and July 6, 2004. TruServ intends to pay
approximately $7,764 of the stock redemption liability in cash as soon as
practical after it lifts the moratorium. TruServ intends to pay the
balance of the redemption obligation in subordinated installment notes
that would be payable in five equal annual installments and that would
bear interest at the rate of 4.36%. The first installment payment of
principal and interest of the subordinated installment notes would be due
in December 2004, if it lifts the moratorium. Therefore, TruServ would be
required to pay in 2004, if it lifts the moratorium, approximately
$13,355.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
($ in thousands)
TruServ's operations are subject to certain market risks, primarily interest
rate risk and credit risk. Interest rate risk pertains to TruServ's variable
rate debt, which had approximately $181,800 outstanding at April 3, 2004. A 50
basis point movement in interest rates would result in an approximate $909
annualized increase or decrease in interest expense and cash flows based on the
outstanding balance at April 3, 2004.
For the most part, TruServ manages interest rate risk through a combination of
variable and fixed-rate debt instruments with varying maturities. As required
18
by the Bank Facility, TruServ has purchased interest rate caps that limit its
risk on $25,000 of variable rate debt for the entire term of the Bank Facility
to a maximum underlying LIBOR rate of 3.5%, approximately 2.25% increase over
current LIBOR. Credit risk pertains primarily to TruServ's trade receivables.
TruServ extends credit to its members as part of its day-to-day operations.
TruServ's management believes that as no specific receivable or group of
receivables comprises a significant percentage of total trade accounts, its risk
in respect to trade receivables is limited. Additionally, TruServ's management
believes that its allowance for doubtful accounts is adequate with respect to
member credit risks. TruServ performs no speculative hedging activities. TruServ
does not have any interest in variable interest entities ("VIE's") and all
related party transactions (i.e., transactions with members) are at arm's
length.
ITEM 4. CONTROLS AND PROCEDURES
TruServ's Chief Executive Officer and Chief Financial Officer have concluded
that as of April 3, 2004 TruServ's disclosure controls and procedures are
effective. There has been no change in TruServ's internal control over financial
reporting identified in connection with reaching the conclusion described above
that occurred during TruServ's last fiscal quarter that has materially affected,
or is reasonably likely to materially affect, TruServ's internal control over
financial reporting.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
($ in thousands)
BESS ACTION
In May 2000, TruServ filed a complaint in the Circuit Court of McHenry
County, Illinois against Bess Hardware and Sports, Inc., ("Bess") to recover an
accounts receivable balance in excess of $400. Bess filed a counterclaim,
seeking a setoff against its accounts receivable balance for the par redemption
value of Bess's shares of TruServ Stock. Bess contested the validity of a March
17, 2000 corporate resolution declaring a moratorium on the redemption of all
TruServ capital stock, as well as an allocation of Bess' proportionate share of
the loss, which TruServ declared for its fiscal year 1999. On August 6, 2003,
the Circuit Court entered judgment in favor of TruServ on its accounts
receivable claim in the amount of $392, and entered judgment in favor of Bess on
its counterclaim. Bess did not appeal the judgment on the accounts receivable
claim. TruServ appealed the judgment on Bess's counterclaim. On January 21,
2004, the Second District of the Illinois Appellate Court issued a decision
reversing the portion of the Circuit Court's ruling that had refused to enforce
the Moratorium. In validating the Moratorium, the Second District found that
TruServ's capital was impaired, and held that TruServ "was prohibited from
immediately remitting the redemption price for [Bess's] TruServ stock". The
Second District also held that as of April 10, 2000 -- the effective date of the
termination of Bess's membership -- Bess ceased to be a TruServ stockholder and
thus was not subject to the loss allocation plan passed by resolution of the
TruServ board of directors on August 29, 2000. On February 9, 2004, Bess filed a
Petition For Rehearing in the Second District of the Illinois Appellate Court.
On March 3, 2004 the Petition For Rehearing was denied.
CLAIMS AGAINST ERNST & YOUNG LLP
TruServ is pursuing claims against its former outside auditors, Ernst &
Young LLP ("E&Y"), for professional malpractice, breach of contract, deceptive
19
business practices and fraud. TruServ contends that E&Y failed to properly
discharge its duties to TruServ and failed to identify, in a timely manner, and
indeed concealed, certain material weaknesses in TruServ's internal financial
and operational controls. As a result, TruServ 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"). As a result, TruServ reported
a net loss of $130,803 for the fiscal year ended December 31, 1999. It is
TruServ's belief that had E&Y properly discharged its duties, the scope and
breadth of the Fourth Quarter Charge, as well as the accounting and operational
control deficiencies that necessitated the charge, would have been substantially
lessened. As a result of E&Y's failures, TruServ has suffered significant
financial damages. The factual allegations that form the basis for TruServ's
claim against E&Y include, in part, the issues identified in the Securities and
Exchange Commission (the "Commission") cease and desist order described below.
TruServ began discussion of its claims with E&Y early in the fall of 2001.
Pursuant to the dispute resolution procedures required by TruServ's engagement
letter with E&Y, TruServ and E&Y attempted to mediate this dispute during the
first six months of 2002. When those attempts proved unsuccessful, and again
pursuant to the dispute resolution procedures, TruServ filed its claim with the
American Arbitration Association on July 31, 2002. The arbitration, which is
subject to certain confidentiality requirements, is currently pending. Hearings
are currently scheduled to begin in the fall of 2004. Recoveries under this
matter, if any, may be subrogated to the rights of TruServ's insurer to the
extent that it has made payments to or on behalf of TruServ associated with the
1999 loss.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
($ in thousands)
In March 2000, the board of directors of TruServ declared a moratorium on
redemptions of the capital stock. In reaching its decision to declare the
moratorium, the board of directors of TruServ reviewed the financial condition
of TruServ and considered its fiduciary obligations and corporate law principles
under Delaware law. The board of directors concluded that it should not redeem
any of the capital stock (which TruServ's By-laws required to be redeemed at par
value) while its net asset value was substantially less than par value, as that
would likely violate legal prohibitions against "impairment of capital." In
addition, the board of directors concluded that it would be a violation of its
fiduciary duties to all members and that it would constitute a fundamental
unfairness to members if some members were allowed to have their shares redeemed
before the 1999 loss was allocated to them and members who did not request
redemption were saddled with the losses of those members who requested
redemption. Moreover, the board of directors considered TruServ's debt
agreements in existence at that time and, in particular, the financial covenants
thereunder, which prohibit redemptions when TruServ, among other things, did not
attain certain profit margins.
At the time the board of directors declared the moratorium on redemptions,
TruServ's By-Laws did not impose limitations on the board's discretion to
initiate or to continue a moratorium on redemption. The By-Laws merely provided
that upon termination of a member's agreement, TruServ was to redeem the
member's shares at par value. Nevertheless, the board of directors concluded
that its fiduciary obligations to TruServ and its members would not permit it to
effect redemptions under the circumstances described above. After the board of
directors declared the moratorium, the board of directors amended the By-Laws to
provide that if TruServ's funds available for redemption are insufficient to pay
all or part of the redemption price of shares of capital stock presented for
redemption, the board of directors may, in its sole discretion, delay the
payment of all or part of the redemption price.
20
At the TruServ annual meeting on March 28, 2004, the board of directors of
TruServ announced that it had voted to rescind the moratorium on stock
redemptions effective July 6, 2004, provided that there does not occur a
material adverse change in the financial condition or the operations of the
business between March 28 and July 6, 2004.
As of April 3, 2004, the deferred stock redemption liability on TruServ's
financial statements totals $35,721. As TruServ offsets amounts due by its
members against amounts that it pays to the members on redemption of their
stock, the deferred 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. Details are as follows:
Fair Value of Stock Presented for Redemption but Deferred due to the Moratorium
Class A common stock $ 19,812
Non-qualified Class B common stock 11,467
--------
Amounts historically paid out at time of redemption 31,279
Qualified Class B common stock (historically paid out by means of a five-year
subordinated installment note) 51,637
---------
Gross par value of stock presented for redemption but deferred
due to the moratorium 82,916
Reductions due to legal right of offsets:
1999 loss allocations (29,223)
2001 loss allocable to terminated members (10,971)
Accounts receivable owed by terminated members (7,001)
--------
Reductions due to legal right of offsets (47,195)
---------
Fair value of stock presented for redemption but deferred
due to the moratorium $ 35,721
=========
In accordance with TruServ's By-Laws, TruServ intends to pay approximately
$7,764 of the stock redemption liability in cash as soon as practical after it
lifts the moratorium. TruServ intends to pay the balance of the redemption
obligation in subordinated installment notes that would be payable in five equal
annual installments and that would bear interest at the rate of 4.36%. The first
installment payment of principal and interest of the subordinated installment
notes would be due in December 2004, if TruServ lifts the moratorium. Therefore,
TruServ would be required to pay in 2004, if it lifts the moratorium,
approximately $13,355.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
21
At the company's Annual Meeting of Stockholders held on March 28, 2004,
the election results were as follows:
1. Election of directors for a term of one year:
Votes for Votes Withheld
Bryan R. Ableidinger 168,780 6,540
Laurence L. Anderson 167,820 7,500
Michael S. Glode 168,960 6,360
Thomas S. Hanemann 168,000 7,320
Judith S. Harrison 168,060 7,260
Pamela Forbes Lieberman 168,120 7,200
Kenneth A. Niefeld 168,840 6,480
David Y. Schwartz 167,580 7,740
Gilbert L. Wachsman 167,940 7,380
Brian A. Webb 168,780 6,540
Charles W. Welch 168,840 6,480
2. Appointment of PricewaterhouseCoopers LLP as the company's
independent accountant for fiscal 2004.
For Against Abstain
--- ------- -------
168,180 3,660 3,480
3. Approval of proxy authorization to vote on other business:
For Against Abstain
--- ------- -------
158,400 8,280 8,640
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 10-A Retail Member Agreement with TruServ Corporation
Exhibit 10-B International Retail Member Agreement with
TruServ Corporation
Exhibit 10-C Undesignated Retail Member Agreement with TruServ
Corporation
Exhibit 31.1 Section 302 Certification (Chief Executive
Officer)
Exhibit 31.2 Section 302 Certification (Chief Financial
Officer)
Exhibit 32.1 Section 906 Certification (Chief Executive
Officer and Chief Financial Officer)
(b) Reports on Form 8-K
A Current Report on Form 8-K was filed on February 27, 2003
regarding TruServ's fiscal year 2003 earnings.
22
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
TRUSERV CORPORATION
Date: May 13, 2004 By /s/ DAVID A. SHADDUCK
-----------------------------------
David A. Shadduck
Senior Vice President and
Chief Financial Officer
23