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 June 28,September 27, 2003 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 July 26,October 25, 2003.
Class A Common Stock, $100 Par Value........................ 476,400476,460 Shares
Class B Common Stock, $100 Par Value........................ 1,756,457 Shares
ITEM 1. FINANCIAL STATEMENTS
($ in thousands)thousands - except per share information)
TRUSERV CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET
ASSETS
June 28,September 27,
2003 December 31,
(Unaudited) 2002
-------------------- --------------------------------- ------------
Current assets:
Cash and cash equivalents $ 15,9907,882 $ 9,001
Restricted cash 15,33712,153 15,755
Accounts and notes receivable, net of allowance for doubtful
accounts of $7,228$6,624 and $8,553 274,861223,559 207,709
Inventories (Note 5) 266,555280,062 234,448
Other current assets 19,63318,627 23,440
-------------------- ------------------------------- -----------
Total current assets 592,376542,283 490,353
Properties, net of accumulated depreciation of $281,143$282,935 and $274,519 80,77978,820 91,116
Goodwill, net 91,474 91,474
Other assets 22,62713,104 30,428
-------------------- ------------------------------- -----------
Total assets $ 787,256725,681 $ 703,371
==================== =============================== ===========
See Notes to Condensed Consolidated Financial Statements
LIABILITIES AND MEMBERS' CAPITALIZATION
September 27,
2003 December 31,
(Unaudited) 2002
------------- ------------
Current liabilities:
Accounts payable $ 294,214249,227 $ 199,566
Outstanding checks 50,05836,825 28,884
Accrued expenses 81,77579,952 84,082
Short-term borrowings --- 27,852
Current maturities of long-term debt, notes and
capital lease obligations 53,349120,150 59,797
Patronage dividend payable in cash (Note 3) 6,2338,538 6,121
------------------- ---------------------------- -----------
Total current liabilities 485,629494,692 406,302
------------------- -----------------
Long-term debt, includingnotes and capital lease obligations,
less current maturities 122,971115,615 125,021
Deferred gain on sale leaseback 51,48650,825 52,786
Deferred credits 13,68313,476 20,282
------------------- -----------------Deferred stock redemptions 32,092 --
Redeemable nonqualified Class B non-voting common stock,
$100 par value; 234,495 shares issued and fully paid 23,450 --
----------- -----------
Total long-term liabilities and deferred credits 188,140235,458 198,089
------------------- -----------------
Total liabilities and deferred credits 673,769730,150 604,391
------------------- -----------------
Commitments and contingencies (Note 8) - --- --
Members' capitalization:
Promissory (subordinated) and installment notes, net
of current portion 43,433-- 43,531
Members' equity:
Redeemable Class A voting common stock, $100 par value;
750,000 shares authorized; 475,980304,980 and 474,360 shares
issued and fully paid; 34,08015,117 and 35,700 shares issued
(net of subscriptions receivable of $866,000$134,000
and $886,000) 50,14031,876 50,120
Redeemable qualified Class B non-voting common stock
and paid-in capital, $100 par value; 4,000,000
shares authorized; 1,756,457942,904 and 1,756,457 shares
issued and fully paid 176,94595,590 176,945
Loss allocation (Note 4) (61,529)(45,937) (75,966)
Deferred patronage (25,419)(25,232) (25,793)
Accumulated deficit (68,930)(59,613) (68,704)
Accumulated other comprehensive loss (1,153) (1,153)
------------------- ---------------------------- -----------
Total members' equity 70,054equity/(deficit) (4,469) 55,449
------------------- ---------------------------- -----------
Total members' capitalization 113,487capitalization/(deficit) (4,469) 98,980
------------------- ---------------------------- -----------
Total liabilities and members' capitalization $ 787,256725,681 $ 703,371
=================== ============================ ===========
See Notes to Condensed Consolidated Financial Statements
TRUSERV CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
For the thirteen weeks ended For the twenty-sixthirty-nine weeks ended
June------------------------------ ---------------------------------
September 27, September 28, June 29, JuneSeptember 27, September 28, June 29,
2003 2002 2003 2002
--------------- -------------- --------------------------- ------------- ------------- --------------
Net revenuesrevenue $ 566,532478,811 $ 588,033499,817 $ 1,016,0061,504,100 $ 1,136,4621,650,901
Costs and expenses:
Cost of revenues 498,666 513,632 904,255 1,007,875revenue 422,887 437,676 1,336,425 1,460,173
Logistics and manufacturing expenses 18,483 21,535 34,493 37,06515,031 18,824 49,524 55,889
Selling, general and adminstrativeadministrative expenses 21,019 26,411 44,082 45,85327,538 22,238 71,620 68,091
Restructuring charges and other related expenses (Note 6) 491 241 508 241(23) 895 485 1,136
Interest expense to members 1,430 1,690 2,815 3,356
Other1,462 1,618 4,277 4,974
Third party interest expense 8,959 15,183 16,783 29,06932,964 13,312 49,747 42,381
(Gain)/loss on sale of assets 249 (164) 209 (225)(166) (67) 43 (292)
Other income, net (Note 10) (7,524) (988) (8,065) (2,003)
--------------- -------------- -------------- --------------(11,254) (709) (19,319) (2,712)
------------ ----------- ----------- ------------
Net marginmargin/(loss) before income taxes 24,759 10,493 20,926 15,231(9,628) 6,030 11,298 21,261
Income tax expense 62 60 146 150
--------------- -------------- -------------- --------------142 97 288 247
------------ ----------- ----------- ------------
Net marginmargin/(loss) $ 24,697(9,770) $ 10,4335,933 $ 20,78011,010 $ 15,081
=============== ============== ============== ==============21,014
============ =========== =========== ============
See Notes to Condensed Consolidated Financial Statements
TRUSERV CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
For the twenty-six weeks ended
JuneSeptember 27, September 28, June 29,
2003 2002
--------------- ------------------------------ -------------
Operating activities:
Net margin $ 20,78011,010 $ 15,08121,014
Adjustments to reconcile net margin to cash
and cash equivalents provided by/(used for)by operating
activities:
Depreciation and amortization 14,198 18,52220,333 27,112
Provision for allowance for doubtful accounts (1,072)(1,379) 453
Provision for inventory reserves 6,580 6,538
Restructuring charges and other related expenses 508 241485 1,136
(Gain)/loss on sale of assets 209 (225)43 (292)
Gain from debt forgiveness (7,706) --
Net change in working capital components (6,479) 8,398
--------------- -----------------(20,857) 38,245
---------- ----------
Net cash and cash equivalents provided by
operating activities 28,144 42,470
--------------- -----------------8,509 94,206
---------- ----------
Investing activities:
Additions to properties (2,207) (6,578)(4,676) (8,254)
Proceeds from sale of properties 172 230300 6,559
Changes in restricted cash 418 8,9733,602 14,528
Changes in other assets 1,379 1,872
--------------- -----------------1,861 16,778
---------- ----------
Net cash and cash equivalents provided by/(used for)by
investing activities (238) 4,497
--------------- -----------------1,087 29,611
---------- ----------
Financing activities:
Payment of patronage dividend (5,761) -(5,790) --
Payment of notes, long-term debt and lease obligations (8,498) (15,049)(155,657) (45,673)
Increase/(decrease) in outstanding checks 21,174 (40,093)
Payments of short-term borrowings,7,941 (45,878)
Decrease in senior revolving credit facility, net (27,852) (67,352)(24,194) (109,874)
Increase in asset based revolving credit facility, net 166,961 --
Proceeds from Class A common stock subscription
receivable 20 146
--------------- -----------------24 199
---------- ----------
Net cash and cash equivalents used for financing
activities (20,917) (122,348)
--------------- -----------------(10,715) (201,226)
---------- ----------
Net increase/(decrease)decrease in cash and cash equivalents 6,989 (75,381)(1,119) (77,409)
Cash and cash equivalents at beginning of period 9,001 88,816
--------------- --------------------------- ----------
Cash and cash equivalents at end of period $ 15,9907,882 $ 13,435
=============== =================11,407
========== ==========
See Notes to Condensed Consolidated Financial Statements.
TRUSERV CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
($ in thousands)
NOTE 1 - GENERAL
The condensed consolidated balance sheet at June 28,September 27, 2003, the condensed
consolidated statement of operations for the thirteen weeks and twenty-sixthirty-nine
weeks ended June 28,September 27, 2003 and June 29,September 28, 2002, and the condensed
consolidated statement of cash flows for the twenty-sixthirty-nine weeks ended June 28,September
27, 2003 and June 29,September 28, 2002 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, 2002 included in TruServ's 2002 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
(see Note 9).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 six-monthnine-month period ended June 28,September 27,
2003 was $6,190$8,538, which was 30% of the estimated patronage income;income before the net
effect of the refinancing of the existing senior revolving credit facility and
senior notes. The estimated cash portion of the patronage dividend for the
corresponding period for 2002 was $2,948$4,109, which was 20% of the estimated
patronage income. 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;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 fiscal 2003, if TruServ declares a patronage dividend,
it intends to issue 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).
NOTE 4 - LOSS ALLOCATION TO MEMBERS
During the third quarter of fiscal 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. TruServ has allocated 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 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 account 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
the company,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 fiscal 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 fiscal 2001 loss that has been retained
in the Accumulated deficit account. This allocation was based upon a combination
of the member's proportionate Class A common stock and Class B common stock
investment, along with the member's purchases from the co-op in 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 satisfied by reducing the redemption amount paid for
the member's stock investment in TruServ.
NOTE 5 - INVENTORIES
Inventories consisted of the following:
June 28,September 27, December 31,
2003 2002
------------------ -------------------------------- ------------
Manufacturing inventories:
Raw materials $ 2,4262,008 $ 1,473
Work-in-process and finished goods 21,78118,170 19,655
Manufacturing inventory reserves (1,726)(1,658) (1,297)
------------------ -------------------
22,481--------- ---------
18,520 19,831
Merchandise inventories:
Warehouse inventory 250,600267,120 223,754
Merchandise inventory reserves (6,526)(5,578) (9,137)
------------------ -------------------
244,074--------- ---------
261,542 214,617
--------- ---------
Total $ 266,555280,062 $ 234,448
================== ============================ =========
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 June 28,September 27, 2003 and December
31, 2002 was $16,855$18,215 and $15,753, respectively.
NOTE 6 - RESTRUCTURING CHARGES AND OTHER RELATED EXPENSES
Net restructuring and other related charges of $491$(23) and $508$485 were incurred in
the thirteen and twenty-sixthirty-nine weeks ended June 28,September 27, 2003, respectively, of
which $491$(23) and $572$549 related to restructuring costs.costs, as detailed in the chart
below. The year to date amount was offset by a favorable adjustment of $64
in the first quarter resulting from changes in estimates to previously accrued post-employment
severance charges. Restructuring charges for the Cary,
Illinois facility. For the second quarter of 2003, the net restructuring charge
of $491primarily consisted of restructuring charges of $945 offset by restructuring
reversals of $454. The $945 restructuring charge consisted of a $900 charge for
losses on a buyout of operating leases at the Hagerstown, Maryland distribution
center, and $45 relating to changes in
estimatesamounts accrued for severance and exit costs at the Hagerstown, Maryland
distribution center and severance costs at TruServ's corporate headquarters. The second quarter 2003 restructuring reversal of $454
was primarily due to changes in estimates for the loss related to the remaining
obligation on the Hagerstown, Maryland distribution center lease and related
grant payback. Year to date restructuring expenses also included additional
charges of $81 related to changes in estimates for severance and exit costs at
the Hagerstown, Maryland distribution center and at TruServ's corporate
headquarters recorded in the first quarter.
In the first six months of 2002,Net
restructuring expenses of $241$895 and $1,136 were incurred in the thirteen and
thirty-nine weeks ended September 28, 2002, respectively, which primarily
related toconsisted of additional outplacementseverance and exits costs for Hagerstown, Maryland and
Brookings, South Dakota distribution centers, and additional severance costs at
TruServ's corporate headquarters of $185, plus additional facility exit costs at TruServ's
Hagerstown, Maryland distribution center of $150, offset by the reversal of
excess outplacement costs at TruServ's Hagerstown, Maryland and Brooking, South
Dakota distribution centers of $94.headquarters. TruServ did not incur any post-employment
charges induring the first thirty-nine weeks of 2002.
During the first sixnine months of 2003 and 2002, TruServ used previously
established restructuring reserves of $4,294 ($2,422 in the first quarter$14,309 and $1,872 in the second quarter of 2003) and $4,447 ($2,852 in the first quarter
and $1,595 in the second quarter of 2002),$5,168, respectively, related
to distribution center closures and workforce reductions at TruServ's corporate
headquarters. In the third quarter 2003, the largest component of the use of
reserves/cash disbursement was $9,254 related to the remaining lease obligation
to a third party, which was converted into a senior term loan and was
subsequently paid off as part of the refinancing arrangement on August 29, 2003
(see Note 7), related buyouts of several operating leases and a payback of a
portion of an existing grant. Additionally, during the first sixnine months of
2003, TruServ used previously established post-employment reserves of $685 ($317 in the first quarter and $368
in the second quarter of 2003),$937,
primarily related to severance payments for former associates at TruServ's
corporate headquarters and the Cary, Illinois facility.
Restructuring reserve summary:Reserve Summary:
For the twenty sixthirty-nine weeks ended
------------------------------
June--------------------------------------------------------------------------------------------
September 27, 2003 September 28, 2003 June 29, 2002
------------------------------------------ --------------------------------------------------------------------------------------- ---------------------------------------------
Severance & Total Severance & Total
Outplacement Facility Restructuring Outplacement Facility Restructuring
Costs Exit Costs Reserve Costs Exit Costs Reserve
------------------------------------------ --------------------------------------------------------------------------------------- ---------------------------------------------
Restructuring reserves,
beginning of year $ 4,241 $ 11,030 $ 15,271 $ 8,270 $ 17,979 $ 26,249
First quarter activity:
Restructuring charge 49 32 81 - - --- -- --
Use of reservesreserves/Cash disbursements (1,110) (1,312) (2,422) (1,864) (988) (2,852)
------------------------------------------ ---------------------------------------------------- -------- -------- -------- -------- --------
Restructuring reserves,
end of 1st quarter 3,180 9,750 12,930 6,406 16,991 23,397
Second quarter activity:
Restructuring charge 45 900 945 185 150 335
Restructuring reversals --- (454) (454) (94) --- (94)
Use of reservesreserves/Cash disbursements (930) (942) (1,872) (1,498) (97) (1,595)
------------------------------------------ ---------------------------------------------------- -------- -------- -------- -------- --------
Restructuring reserves,
end of 2nd quarter 2,295 9,254 11,549 4,999 17,044 22,043
Third quarter activity:
Restructuring charge -- -- -- 1,822 -- 1,822
Restructuring reversals (23) -- (23) -- (927) (927)
Use of reserves/Cash disbursements (761) (9,254) (10,015) (1,648) 927 (721)
-------- -------- -------- -------- -------- --------
Restructuring reserves,
end of 3rd quarter $ 2,2951,511 $ 9,254-- $ 11,5491,511 $ 4,9995,173 $ 17,044 $ 22,043
========================================== ============================================22,217
======== ======== ======== ======== ======== ========
NOTE 7 - DEBT
On August 29, 2003, TruServ closed a new four-year $275,000 asset based
revolving credit facility (the "Bank Facility"). The Bank Facility was used to
refinance the existing senior revolving credit facility and senior notes. Under
the terms of the Bank Facility agreement, the interest rate is variable at
TruServ's option of LIBOR plus 2.25% or prime plus 0.25%. The unused commitment
fee is 0.375%. The Bank Facility pricing includes a performance grid based upon
a fixed charge coverage ratio, measured quarterly beginning in March 2004.
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, TruServ is subject to a fixed charge coverage ratio of
1.1 to 1. Additionally, TruServ is required to maintain $15,000 of excess
availability at all times. Availability is 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. TruServ had availability, under the Bank
Facility, of approximately $44,582 on September 27, 2003.
Substantially all of the assets of TruServ and a pledge of 100% of the stock of
TruServ's subsidiaries secure the Bank Facility. Borrowings under the Bank
Facility are subject to borrowing base limitations that fluctuate in part with
the seasonality of the business. Additionally, the qualification of accounts
receivable and inventory items as "eligible" for purposes of the borrowing
base is subject to unilateral change at the discretion of the lenders. The
borrowing base is calculated as follows:
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, 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 ten-year amortization for the
portion predicated on real estate.
The Bank Facility imposes certain limitations on and requires compliance with
covenants from TruServ 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, 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.
Fees paid for closing the Bank Facility totaled $3,752 and TruServ will amortize
these fees over the four-year term.
Upon closing the Bank Facility, TruServ incurred a net expense of $19,221 to
exit the replaced credit agreements. The net expense consisted of $26,927 of
interest expense relating to the write-off of old and new senior note make whole
obligations and prepaid bank fees offset by $7,706 of other income relating to
debt forgiveness for a portion of the existing refinanced debt.
At September 27, 2003, the Company had $166,961 in revolving credit loans of
which $106,961 is included in Current maturities of long-term debt, notes and
capital lease obligations and $60,000 is included in Long-term debt, notes and
capital lease obligations, less current maturities. Based on the Company'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.
NOTE 8 - 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 June 28,September 27, 2003
--------------------------------------------------------------------------------------------------
Consolidated
Hardware Paint Totals
-------------------------------------------------------- ----- ------------
Net sales to external customers $ 534,384449,860 $ 32,14828,951 $ 566,532478,811
Interest expense 8,742 1,647 10,38926,409(1) 8,017(1) 34,426(1)
Depreciation and amortization 6,686 365 7,0515,789 346 6,135
Segment net margin 19,822 4,875 24,697margin/(loss) (8,426)(2) (1,344)(2) (9,770)(2)
Expenditures for long-lived assets 1,424 38 1,4622,437 32 2,469
Thirteen weeks ended June 29,September 28, 2002
--------------------------------------------------------------------------------------------------
Consolidated
Hardware Paint Totals
-------------------------------------------------------- ----- ------------
Net sales to external customers $ 555,458467,426 $ 32,57532,391 $ 588,033499,817
Interest expense 15,492 1,381 16,87314,263 667 14,930
Depreciation and amortization 8,806 365 9,1718,242 348 8,590
Segment net margin 7,106 3,327 10,4331,236 4,697 5,933
Expenditures for long-lived assets 4,539 171 4,7101,540 136 1,676
Twenty-sixThirty-nine weeks ended June 28,September 27, 2003
--------------------------------------------------------------------------------------------------
Consolidated
Hardware Paint Totals
-------------------------------------------------------- ----- ------------
Net sales to external customers $1,422,603 $ 963,460 $ 52,546 $ 1,016,00681,497 $1,504,100
Interest expense 16,584 3,014 19,59842,993(1) 11,031(1) 54,024(1)
Depreciation and amortization 13,470 728 14,19819,259 1,074 20,333
Segment net margin 13,327 7,453 20,7804,901(2) 6,109(2) 11,010(2)
Identifiable segment assets 733,320 53,936 787,256677,855 47,826 725,681
Expenditures for long-lived assets 2,030 177 2,2074,467 209 4,676
Twenty-sixThirty-nine weeks ended June 29,September 28, 2002
--------------------------------------------------------------------------------------------------
Consolidated
Hardware Paint Totals
-------------------------------------------------------- ----- ------------
Net sales to external customers $1,558,750 $ 1,076,702 $ 59,760 $ 1,136,46292,151 $1,650,901
Interest expense 29,896 2,529 32,42544,200 3,155 47,355
Depreciation and amortization 17,795 727 18,52226,037 1,075 27,112
Segment net margin 8,626 6,455 15,0817,322 13,692 21,014
Identifiable segment assets 877,461 60,552 938,013763,090 50,502 813,592
Expenditures for long-lived assets 6,329 249 6,5787,869 385 8,254
(1) Interest expense includes $20,693 and $6,234 allocated to Hardware and
Paint, relating to the $26,927 write-off of old and new senior note make
whole obligations and prepaid bank fees.
(2) Segment net margin/(loss) includes $13,411 and $5,810 relating to the
$19,221 of net expense to refinance the existing senior revolving credit
facility and senior notes.
NOTE 89 - COMMITMENTS AND CONTINGENCIES
In August 2000, an action (the "Derivative Action") was brought in Delaware
Chancery Court (New Castle County) by a former TruServ member ("Hudson City
Properties") against certain present and former directors and certain former
officers of TruServ and against TruServ. The complaint was brought derivatively
on behalf of TruServ and alleged that the individual defendants breached
fiduciary duties in connection with the accounting adjustments made by TruServ
in the fourth quarter of 1999. Hudson City Properties also sought to proceed on
a class-action basis against TruServ on behalf of all those affected by the
moratorium on stock redemption and the creation of the loss allocation accounts.
Hudson City Properties alleged that TruServ breached, and the named directors
caused TruServ to breach, agreements with members by suspending payment of the
members' 1999 annual patronage dividend, by declaring the moratorium on the
redemption of members' TruServ stock and by imposing annual minimum purchase
requirements upon members. On May 12, 2003, the parties to this action signed a
Stipulation of Settlement resolving the lawsuit, subject to court approval. On
May 15, 2003, the Delaware Chancery Court entered an Order preliminarily
approving the Settlement. The Court conducted a Settlement Hearing on July 8,
2003, and approved the Stipulation of Settlement as fair, reasonable, adequate
and in the best interests of TruServ and the class. On July 14, 2003, the Court
entered a Final Order and Judgment dismissing the lawsuit with prejudice. The
Stipulation of Settlement became final and binding 30 days after the date the
Final Order and Judgment was entered. Under the terms of the Stipulation of
Settlement, at such time as TruServ's board of directors determines that it is
in the best interest of TruServ to lift the moratorium on stock redemptions, the
loss allocation accounts for all current and former members who are parties to
the Stipulation of Settlement will be reduced by approximately $5 million on a
pro rata basis as more fully described in the Stipulation of Settlement
agreement. The majority of the settlement was provided by TruServ's insurance
carrier. Additionally, all of the current and former members who participated in
the Stipulation of Settlement released TruServ and its current and former
officers and directors from any liability with respect to the moratorium on
stock redemptions and the creation of the 1999 loss allocation accounts.
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, which
range from 15-50% of the member's outstanding balance. In the event that a
member defaults on its loan, 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 $1,215$998 and
$2,172 as of June 28,September 27, 2003 and December 31, 2002, respectively. The balance
of $1,215$998 as of June 28,September 27, 2003 includes approximately $306$293 that will mature
over the next twelve months. The remaining guarantees will expire periodically
through 2013. TruServ carries a reserve of $126$114 relating to these guarantees.
Additionally, TruServ sold certain member note receivables to a third party in
2002 which it has fully guaranteed. TruServ is required to pay 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 member notes at
June 28,September 27, 2003 and December 31, 2002 was $633$574 and $871, respectively, and is
recorded as a liability and related receivable in TruServ's consolidated balance
sheet. TruServ carries a $63$57 reserve relating to the guarantees on these notes.
The balance of $633$574 as of June 28,September 27, 2003 includes approximately $238$241 that
will mature over the next twelve months. The remaining guarantees will expire
periodically through 2007.
TruServ has a lifetime warranty or a customer satisfaction guarantee on the
majority of its TruTestTrue 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 910 - NEW ACCOUNTING PRONOUNCEMENTS
In January 2003, TruServ adopted Statement of Financial Accounting Standards
("SFAS") No. 143, "Accounting for Asset Retirement Obligations." SFAS No. 143
addresses financial accounting and reporting for obligations associated with the
retirement of tangible long-lived assets and the associated asset retirement
costs. The adoption of this standard did not have a material impact on TruServ's
financial position or results of operations.
In January 2003, TruServ adopted SFAS No. 145, "Rescission of FAS 4, 44 and 64,
Amendment of FAS 13 and Technical Corrections as of April 2002." SFAS No. 145
rescinds SFAS No. 4, "Reporting Gains and Losses from Extinguishment of Debt"
(eliminating the extraordinary treatment of gains or losses on debt modification
other than for certain exceptions) and its related amendment, SFAS No. 64,
"Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements." SFAS No.
145 also rescinds SFAS No. 44, "Accounting for Intangible Assets of Motor
Carriers" and amends SFAS No. 13, "Accounting for Leases" (to eliminate an
inconsistency between the required accounting for sale leaseback transactions
and the required accounting for certain lease modifications that have economic
effects that are similar to sale leaseback transactions). SFAS No. 145 also
amends other existing authoritative pronouncements (to make various technical
corrections, clarify meanings or describe their applicability under changed
conditions). The adoption of SFAS No. 145 by TruServ did not have a material
impact on TruServ's financial position or results of operations.
In January 2003, TruServ adopted SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal." SFAS No. 146 addresses financial accounting and
reporting for costs associated with exit or disposal activities and nullifies
Emerging Issues Task Force ("EITF") Issue No. 94-3, "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)." The principal difference
between SFAS No. 146 and EITF Issue No. 94-3 relates to the requirement for
recognition of a liability for a cost associated with an exit or disposal
activity. SFAS No. 146 requires that a liability for a cost associated with an
exit or disposal activity be recognized only when the liability is incurred;
under EITF Issue No. 94-3, a liability for an exit cost, as defined in EITF
Issue No. 94-3, was recognized at the date of an entity's commitment to an exit
plan. SFAS No. 146 also requires that a liability for a cost associated with an
exit or disposal activity be recognized and measured initially at fair value and
only when the liability is incurred. This standard will be applied to any exit
or disposal activities undertaken after December 31, 2002.
In Maythe third quarter of 2003, the Financial Accounting Standards Board ("FASB") issuedTruServ adopted 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. SFAS No. 150 is effective June 29, 2003 for
TruServ. TruServ is currently evaluating the impactAdoption of this standard impacted the classification in the
Condensed Consolidated Balance Sheet of Promissory (subordinated) and
installment notes, net of current portion; Redeemable nonqualified Class B
non-voting common stock; and stock presented for redemption but deferred due to
the moratorium. Promissory (subordinated) and installment notes, net of current
portion, which are notes with three year durations with current owners of
TruServ's Class A common stock, are now included in Long-term debt. Promissory
(subordinated) and installment notes, net of current portion previously was
recorded under the caption of Members' capitalization. Redeemable nonqualified
Class B non-voting common stock is now included in long-term liabilities as
these shares of stock have a planned redemption schedule. Redeemable
nonqualified Class B non-voting common stock previously was recorded under the
caption of Members' equity. Redeemable nonqualified Class B non-voting common
stock has a planned redemption schedule of at least 10% of the shares by
December 31, 2011; at least 40% of the shares by December 31, 2019 and all of
the shares by December 31, 2029. Shares of stock presented for redemption but
deferred due to the moratorium are now included in long-term liabilities in
Deferred stock redemptions. Deferred stock redemptions contain the par value of
Class A, Qualified Class B and Nonqualified Class B common stock reduced by the
legal right of offsets from the Loss allocation, Accumulated deficit and
Accounts receivable accounts for each shareholder who has presented their stock
for redemption but has been deferred due to the moratorium. These amounts were
recorded in each of the respective categories. As of September 27, 2003, the
aggregate value of the terminated members' equity investments presented for
redemption but deferred due to the moratorium was approximately $32,092, after
the offset of the loss allocations resulting from the 1999 loss, the 2001 loss
and accounts receivable owed by the former members. Historically, TruServ has
offset amounts due by its members against amounts that it pays to the members on
redemption of their stock.
The effects of SFAS 150 on Member Capitalization are as follows:
Stock
Balance at redemptions
9/27/2003 deferred due to Non-qualified
before Promissory and the moratorium Class B common Balance at
the effect of installment notes reclassified to stock reclassified 9/27/2003 after
adoption of reclassified to Long-term to Long-term adoption of
SFAS 150 Long-term debt liabilities liabilities SFAS 150
----------- ----------------- --------------- --------------- ----------------
Promissory and installment notes $ 55,042 $ (55,042) $ -- $ -- $ --
Redeemable Class A common stock 50,144 -- (18,268) -- 31,876
Redeemable Class B common stock 176,945 -- (57,905) (23,450) 95,590
Loss allocation (73,684) -- 27,747 -- (45,937)
Deferred patronage (25,232) -- -- -- (25,232)
Accumulated deficit (69,069) -- 9,456 -- (59,613)
Accumulated other comprehensive loss (1,153) -- -- -- (1,153)
--------- --------- --------- --------- ---------
Total members' capitalization $ 112,993 $ (55,042) $ (38,970) $ (23,450) $ (4,469)
========= ========= ========= ========= =========
Stock redemptions deferred due to the moratorium of $38,970 are reduced by the
legal right of offset of accounts receivable of $6,878 for the net deferred
stock redemption of $32,092. The Class A common stock and the Non-Qualified
Class B common stock have historically been paid out at the time of redemption.
Qualified Class B common stock has historically been paid out by means of a
five-year subordinated installment note, which has the first installment due at
the end of the calendar year of the time of redemption. On a member by member
basis, the net amount of $32,092 owed to terminated members would be payable
approximately $7,002 at the time of redemption, and $25,090 in five-year
installment notes. Additionally, adoption of this standard did not anticipated to have an effecta
material impact on its financial position,TruServ's results of operations or cash flow.
In November 2002, the FASBFinancial Accounting Standards Board ("FASB") issued
Interpretation No. 45 ("FIN 45"), "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others." FIN 45 requires the disclosure of certain guarantees existing at
December 31, 2002. In addition, FIN 45 requires the recognition of a liability
for the fair value of the obligation of qualifying guarantee activities that are
initiated or modified after December 31, 2002. Accordingly, TruServ has
disclosed certain guarantees that existed at December 31, 2002 in Note 89 and
updated the status of the guarantees at June 28,September 27, 2003. In January 2003,
TruServ adopted the recognition provisions of FIN 45 for guarantee activities
initiated after December 31, 2002. TruServ did not have any new guarantees in
the first half39 weeks of 2003.
In January 2003, the FASB issued Interpretation No. 46 ("FIN 46"),
"Consolidation of Variable Interest Entities, an Interpretation of Accounting
Research Bulletin No. 51." FIN 46 provides guidance on the identification of,
and reporting for, entities over which control is achieved through means other
than voting rights; such entities are known as Variable Interest Entities
("VIE's"). See Note 11, "Subsequent Events," forThe adoption of this standard did not have a further discussionmaterial impact on
TruServ's financial position, results of VIE's.operations or cash flow.
In January 2003, TruServ adoptedNovember 2002, the EITF reached a consensus on EITF Issue No. 02-16
"Accounting by a Customer (Including(including a Reseller) for Certain Consideration
Received from a Vendor." Vendor" ("EITF Issue No. 02-16 requires02-16") 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 vendor allowancessuch consideration received
from vendors should be treatedreflected as a reductiondecrease in prices paid for inventory and
recognized in cost of Costsales as the related inventory is sold, unless specific
criteria are met qualifying the consideration for treatment as reimbursement of
revenues. TruServ previously had recorded advertising
allowances fromspecific, identifiable incremental costs. In January 2003, the EITF clarified
that this issue is effective for arrangements with vendors as revenue relatedinitiated on or after
January 1, 2003. In March 2003, the EITF addressed the issue again with respect
to the advertising servicereclassification of prior period amounts and determined that
reclassification is only permitted provided that previously reported net income
would not change as a result of applying the consensus. TruServ providesadopted the
provisions of EITF 02-16 effective January 1, 2003; however, TruServ applied the
provisions to its members. TruServ hasagreements modified prior to January 1, 2003 effective for 2003
and reclassified from Net revenues to Costprior period amounts of revenues $7,615revenue and $11,270costs of revenue
accordingly for presentation purposes. The classification provisions should have
been applied on a prospective basis for all agreements entered into or modified
after January 1, 2003. The following table presents revenue and costs of revenue
for the thirteenfirst two quarters of 2002 and twenty-six weeks ended June 28,
2003, respectively, and $9,823 and $14,622 for the thirteen and twenty-six weekssix months ended June 29, 2002 respectively, withas if
the previous reclassifications for EITF 02-16 had not been applied.
For the Quarter Ending
---------------------------------- Year-to-Date
March 30, 2002 June 29, 2002 June 29, 2002
-------------- ------------- ---------------
Revenue per previously filed $ 548,429 $ 588,033 $1,136,462
2003 Forms 10-Q
Reversal of reclassification 4,799 9,823 14,622
---------- ---------- ----------
Revenue $ 553,228 $ 597,856 $1,151,084
========== ========== ==========
Cost of revenue per $ 494,243 $ 513,632 $1,007,875
previously filed 2003 Forms
10-Q
Reversal of reclassification 4,799 9,823 14,622
---------- ---------- ----------
Cost of revenue $ 499,042 $ 523,455 $1,022,497
========== ========== ==========
The adoption of EITF Issue No. 02-16.
These reclassifications did02-16 has not have anyhad a material impact on Net margin.the Company's 2003
results of operations, financial position or cash flows.
NOTE 1011 -- OTHER INCOME
Effective April 21, 2003, TruServ terminated its non-compete, cooperation, and
trademark and license agreements entered into with Builder Marts of America,
Inc. ("BMA") in connection with the sale of the lumber and building materials
business on December 29, 2000. TruServ has agreed to give up its equity option
and its position on the board of directors of BMA in consideration for the
termination of these agreements. These agreements had deferred credits related
to them that were being amortized to income over the lives of the underlying
agreements, which were generally 5-10 years. The termination of these agreements
resulted in the recognition of the unamortized credits, which constituted
approximately $7,100$7,133 of income in the second quarter of 2003.
NOTE 11 -- SUBSEQUENT EVENTSOn August 29, 2003, TruServ recognized $7,706 of other income relating to debt
forgiveness for a portion of the existing refinanced debt (Note 7). Additional
other income was recognized from a gain on settlement of litigation (Note 9).
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
($ in thousands)
THIRTEEN WEEKS ENDED SEPTEMBER 27, 2003 COMPARED TO THIRTEEN WEEKS ENDED
SEPTEMBER 28, 2002
RESULTS OF OPERATIONS:
Revenue and Gross Margin
A reconciliation of net revenue and gross margin for the 13 weeks ending
September 27, 2003 and September 28, 2002 follows:
Gross
Net % of Net Gross Margin %
Revenue Revenue Margin of Revenue
------- --------- ------ ----------
Thirteen weeks ended September 28, 2002 results $ 499,817 100.0% $ 62,141 12.4%
Same store sales:
Warehouse and relay revenue 2,328 0.5 37
Vendor direct revenue (688) (0.1) (99)
Paint Revenue (2,340) (0.5) (1,399)
--------- ----- ---------
Net same store sales (700) (0.1) (1,461)
--------- ----- ---------
Terminated members:
Warehouse and relay revenue (16,364) (3.3) (2,680)
Vendor direct revenue (5,252) (1.1) (45)
Paint Revenue (1,448) (0.3) (901)
--------- ----- ---------
Net terminated members (23,064) (4.6) (3,626)
--------- ----- ---------
New members:
Warehouse and relay revenue 3,870 0.8 629
Vendor direct revenue 1,762 0.4 10
Paint Revenue 348 0.1 199
--------- ----- ---------
Net new members 5,980 1.2 838
--------- ----- ---------
Net change in participating members (17,084) (3.4) (2,788)
--------- ----- ---------
Advertising, transportation and other revenue (3,222) (0.6) 2,395
Indirect cost of revenue -- -- (4,363)
--------- ----- ---------
Total change (21,006) (4.2) (6,217)
--------- ----- ---------
Thirteen weeks ended September 27, 2003 results $ 478,811 95.8% $ 55,924 11.7%
========= ===== =========
Net revenue for the 13 weeks ended September 27, 2003 totaled $478,811, a
decrease of $21,006, or 4.3%, as compared to the same period last year. The
overall decline in net revenue was predominately due to a decline in the number
of participating member retail outlets. TruServ had a net decline in the number
of participating member retail outlets of 5.6% compared to the third quarter of
2002 and resulted in a net revenue reduction of $17,084, or 3.4%. Same store
sales declined slightly, $700, or 0.1% as compared to the third quarter of 2002.
A contributing factor in the decline of revenue in same store sales and
participating member retail outlets was a product price reduction that lowered
revenue by approximately $883, as compared to the same period last year.
Advertising, transportation and other revenue declined $3,222, or 0.6% primarily
due to the timing of advertising and lower freight revenue due to the
merchandise volume decrease.
Gross margin for the 13 weeks ended September 27, 2003 decreased by $6,217, or
10.0%, as compared to the third quarter of 2002. The net decline in
participating member outlets contributed $2,788, or 4.5% of the gross margin
reduction. Same store gross margin was impaired by $1,461, or 2.4% principally
due to a change in sales mix as the higher margin TruServ manufactured paint
products' revenue declined and warehouse and relay revenue increased. An
additional contributing factor in the decline of gross margin in same store
sales and participating member retail outlets was a product price reduction that
lowered gross margin by approximately $883, as compared to the same period last
year. The product price reduction was partially offset by lower
product acquisition costs from both domestic and global suppliers. Advertising,
transportation and other gross margin increase $2,395, or 3.9% as a result of
costs being reduced. Indirect costs of revenue, which is comprised of
freight-in, vendor rebates, cash discounts and other costs incurred to prepare
goods for resale, negatively impacted gross margin by $4,363, or 7.0%, as
compared to the same period last year. This negative impact was due to an
increase in freight costs and lower discounts and rebates associated with the
global sourcing of product and lower purchasing volume.
2003 2002 $ Expense (Decrease)
---- ---- --------------------
Logistics and manufacturing expenses $15,031 $18,824 ($3,793)
Logistics and manufacturing expenses decreased by $3,793, or 20.1%, as compared
to the same period last year. TruServ's decrease in expense was due to lower
operating costs resulting from the closure of a distribution center in the
fourth quarter of 2002 together with increased labor productivity resulting from
process changes. These savings were partially offset by increased rent expense,
net of reduced depreciation expense and gain amortization, as a result of a sale
leaseback transaction, which occurred on December 31, 2002. See "Interest
expense" below for a discussion of the related impact from the sale leaseback
transaction.
2003 2002 $ Expense Increase
---- ---- ------------------
Selling, general and administrative expenses $27,538 $22,238 $5,300
Selling, general and administrative ("SG&A") expenses increased $5,300, or
23.8%, as compared to the third quarter of 2002. The increase in SG&A expenses
was due mainly to higher health care costs, which reflects the upward trends in
health care self insurance costs in the quarter compared to the same period last
year, and professional fees, which relate to higher litigation costs as well as
professional work related to Sarbanes-Oxley preparation.
$ Expense
2003 2002 Increase/(Decrease)
---- ---- -------------------
Interest expense:
Member $1,462 $1,618 ($156)
Third Parties 32,964 13,312 19,652
Interest expense to members decreased by $156, or 9.6%, as compared to the same
period last year, due to a lower average principal balance of debt outstanding,
partially offset by a higher average interest rate. The interest rate that
TruServ offered to members to renew their maturing subordinated debt for an
additional three years was higher than the coupon rate of their maturing debt.
Third party interest expense increased $19,652, or 147.6%, as compared to the
same period last year. On August 29, 2003, TruServ completed the refinancing of
the existing senior revolving credit facility and senior notes resulting in the
write-off of the remaining unamortized balance of prepaid bank fees and old and
new senior note make whole interest cost totaling $26,927. See "Other income,
net" for related debt forgiveness. These write-offs were partially offset by
lower interest costs as a result of lower average principal balance of senior
debt outstanding as compared to the same period last year and lower interest
rates of the new Bank Facility. TruServ achieved the lower average principal
balance by paying down debt through cash generated from both operations and
asset sales, which includes the sale leaseback of seven facilities at December
31, 2002.
2003 2002 $ Income Increase
---- ---- -----------------
Other income, net $(11,254) $(709) $10,545
Other income, net increased by $10,545, as compared to the same period last
year. This increase in income was due to $7,706 of debt forgiveness related to
the refinancing of the existing senior revolving credit facility and senior
notes together with a gain recognition from a litigation settlement.
2003 2002 $ Net margin (Decrease)
---- ---- -----------------------
Net margin/(loss) ($9,770) $5,933 ($15,703)
The quarter resulted in a net loss of $9,770, down from a net margin of $5,933
for the same period a year ago. The net cost of $19,221 ($26,927 interest
expense net of $7,706 debt forgiveness) related to the refinancing of the
existing senior revolving credit facility and senior notes, partially offset by
the settlement of the Derivative Action had the most significant impact to net
margin/(loss).
THIRTY-NINE WEEKS ENDED SEPTEMBER 27, 2003 COMPARED TO THIRTY-NINE WEEKS ENDED
SEPTEMBER 28, 2002
RESULTS OF OPERATIONS:
Revenue and Gross Margin
A reconciliation of net revenue and gross margin for the 39 weeks ending
September 27, 2003 and September 28, 2002 follows:
Gross
Net % of Net Gross Margin %
Revenue Revenue Margin of Revenue
------- -------- ------ ----------
Thirty-nine weeks ended September 28, 2002 results $ 1,650,901 100.0% $ 190,728 11.6%
Same store sales:
Warehouse and relay revenue (27,259) (1.7) (1,623)
Vendor direct revenue (24,772) (1.5) (1,071)
Paint revenue (6,608) (0.4) (4,116)
----------- ----- -----------
Net same store sales (58,639) (3.6) (6,810)
----------- ----- -----------
Terminated members:
Warehouse and relay revenue (62,059) (3.8) (9,943)
Vendor direct revenue (27,156) (1.6) (274)
Paint revenue (4,977) (0.3) (3,295)
----------- ----- -----------
Net terminated members (94,192) (5.7) (13,512)
----------- ----- -----------
New members:
Warehouse and relay revenue 10,567 0.7 1,639
Vendor direct revenue 6,646 0.4 50
Paint revenue 930 0.1 574
----------- ----- -----------
Net new members 18,143 1.1 2,263
----------- ----- -----------
Net change in participating members (76,049) (4.6) (11,249)
----------- ----- -----------
Advertising, transportation and other revenue (12,113) (0.7) 2,091
Indirect cost of revenue -- -- (7,085)
----------- ----- -----------
Total change (146,801) (8.9) (23,053)
----------- ----- -----------
Thirty-nine weeks ended September 27, 2003 results $ 1,504,100 91.1% $ 167,675 11.1%
=========== ===== ===========
Net revenue for the 39 weeks ended September 27, 2003 totaled $1,504,100, a
decrease of $146,801, or 8.9%, as compared to the same period last year. The
overall decline in revenue was predominately due to a decline in the number of
participating member retail outlets. TruServ had a net decline in the number of
participating member retail outlets of 5.6% compared to the thirty-nine weeks of
2002 and resulted in a revenue reduction of $76,049, or 4.5%. Same store sales
declined, $58,639, or 3.6%, as compared to the thirty-nine weeks of 2002, due to
TruServ members shifting some of their merchandise purchases to other sources
and the effect of a slow economy. A contributing factor in the decline of
revenue in same store sales and participating member retail outlets was a
product price reduction that lowered revenue by approximately $4,028, as
compared to the same period last year. Advertising, transportation and other
revenue declined $12,113, or 0.7%, primarily due to the timing of advertising
and lower freight revenue due to the merchandise volume decrease.
Gross margin for the 39 weeks ended September 27, 2003 decreased by $23,053, or
12.1%, over the prior year. The net decline in participating member outlets
contributed $11,249, or 5.9% of the gross margin reduction. Same store gross
margin was impaired by $6,810, or 3.6%. A contributing factor in the decline of
gross margin in same store sales and participating member retail outlets was a
product price reduction that lowered gross margin by approximately $4,028, as
compared to the same period last year. The product price reduction was partially
offset by lower product acquisition costs from both domestic and global
suppliers. Advertising, transportation and other gross margin increased
$2,091, or 1.1%, as a result of costs being reduced. Indirect costs of revenue,
which is comprised of freight-in, vendor rebates, cash discounts and other costs
incurred to prepare goods for resale, negatively impacted gross margin by
$7,085, or 3.7%, as compared to the same period last year. This negative impact
was due to an increase in freight costs and lower discounts and rebates
associated with the global sourcing of product and lower purchasing volume.
2003 2002 $ Expense (Decrease)
---- ---- --------------------
Logistics and manufacturing expenses $49,524 $55,889 ($6,365)
Logistics and manufacturing expenses decreased by $6,365, or 11.4%, as compared
to the same period last year. TruServ's decrease in expense was due to lower
operating costs resulting from the closure of two distribution centers during
2002 together with increased labor productivity resulting from process changes.
In 2001, TruServ had implemented a distribution center closure plan in response
to a reduction in the member base. These savings were partially offset by
increased rent expense, net of reduced depreciation expense and gain
amortization, as a result of a sale leaseback transaction, which occurred on
December 31, 2002. See "Interest expense" below for a discussion of the related
impact from the sale leaseback transaction.
2003 2002 $ Expense Increase
---- ---- ------------------
Selling, general and administrative expenses $71,620 $68,091 $3,529
SG&A expenses increased $3,529, or 5.2%, as compared to the same period last
year. SG&A expenses increased due to higher health care costs and lower service
charge income. These increases in SG&A were partially offset by reduced
depreciation and amortization expense and lower bad debt expense. The increases
in health insurance costs reflect the upward trends in health care
self-insurance costs for the year compared to the same period last year. The
reduction in depreciation and amortization expense was due to capital
expenditures and conversion funds incurred from the 1997 merger; such costs
started to become fully depreciated by the end of fiscal 2002. The lower bad
debt expense and the reduction in service charge income were the result of a
lower accounts receivable balance as a result of lower sales and favorable
account aging.
$ Expense
2003 2002 Increase/(Decrease)
---- ---- -------------------
Interest expense:
Member $4,277 $4,974 ($697)
Third Parties 49,747 42,381 7,366
Interest expense to members decreased by $697, or 14.0%, as compared to the same
period last year, due to a lower average principal balance of debt outstanding,
partially offset by a higher average interest rate. The interest rate that
TruServ offered to members to renew their maturing subordinated debt for an
additional three years was higher than the coupon rate of their maturing debt.
Third party interest expense increased $7,366, or 17.4%, as compared to the same
period last year. On August 29, 2003, TruServ completed the refinancing of the
existing senior revolving credit facility and senior notes resulting in the
write-off of the remaining unamortized balance of prepaid bank fees and old and
new senior note make whole interest cost totaling $26,927. See "Other income,
net" for related debt forgiveness. An additional factor that increased interest
expense compared to the same period last year was an increase in the
amortization of make whole costs incurred by the early paydown of debt from the
asset sales that occurred in the second half of 2002. These write-offs and
increased amortization were partially offset by lower interest costs of
approximately $20,000 as a result of lower average principal balance of senior
debt outstanding as compared to the same period last year and lower interest
rates on the new Bank Facility. TruServ achieved the lower average principal
balance by generating cash from operations and asset sales, which includes the
sale leaseback of seven facilities at December 31, 2002.
2003 2002 $ Income Increase
---- ---- -----------------
Other income, net $(19,319) $(2,712) $16,607
Other income, net increased by $16,607, as compared to the same period last
year. This increase in other income was due to the termination of the agreements
with BMA of $7,133(see Note 11), the forgiveness of debt related to the
refinancing of the existing senior revolving credit facility and senior notes of
$7,706 and gain recognition from a litigation settlement.
2003 2002 $ Net margin (Decrease)
---- ---- -----------------------
Net margin $11,010 $21,014 ($10,004)
The first nine months resulted in net margin of $11,010, down from a net margin
of $21,014 for the same period a year ago. The lower gross margin and the net
cost of refinancing the existing senior revolving credit facility and senior
notes of $19,221 ($26,927 interest expense net of $7,706 debt forgiveness) was
partially offset by lower interest expense of approximately $20,000 related to
the lower average principal balance of senior debt outstanding as compared to
the same period last year and the terminating of the BMA agreements of $7,133.
LIQUIDITY AND CAPITAL RESOURCES:
In 2001, the Securities and Exchange Commission ("SEC") issued Financial
Reporting Release ("FRR") No. 61, which sets forth the views of the SEC
regarding certain disclosures relating to 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, 2002, describes TruServ's debt, credit facilities, guarantees and future
commitments, in order to facilitate a review of TruServ's liquidity.
TruServ generated cash from operating activities for the 39 weeks ended
September 27, 2003 of $8,509, as compared to $94,206 for the 39 weeks ended
September 28, 2002. The change in cash related to operating activities was due
principally to the non-recurrence of significant cash generation from the
liquidation of excess inventory in 2002. While excess inventory was disposed of
in 2003, such disposal was not at the same level in 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.
TruServ generated cash from investing activities of $1,087 for the 39 weeks
ended September 27, 2003, as compared to $29,611 of cash generated for the same
period last year. This reduction was primarily due to a decrease in other assets
and restricted cash in 2002. In 2002, the cash generated from other assets were
provided by the early payment of the note receivable from BMA. The restricted
cash generated cash in 2002 as asset sale proceeds that were recorded in
restricted cash were distributed during 2002 to the senior lenders in accordance
with the intercreditor agreement. However, this was partially offset by the
decrease in additions to properties, which was lower by $3,578, as compared to
the same period last year. The additions to capital expenditures consist of
various building improvements and purchases of additional equipment and
technology at TruServ's distribution centers and at its corporate headquarters.
In the 39 weeks ended September 27, 2003, TruServ had a net decrease in cash and
cash equivalents of $1,119. TruServ used the cash generated from operating
activities and in its financing activities to help reduce its debt by $10,715
during 2003. In the 39 weeks ended September 28, 2002, TruServ had a net
decrease in cash and cash equivalents of $77,409. This reduction in cash and
cash equivalents was the result of TruServ using excess cash available at
December 31, 2001 to cover outstanding checks and to pay off short-term
borrowings.
At September 27, 2003, TruServ's working capital was $47,591, as compared to
$84,051 at December 31, 2002. The current ratio was 1.10 at September 27, 2003,
as compared to 1.21 at December 31, 2002. This reduction in working capital and
current ratio was due to TruServ refinancing the existing current and long-term
senior debt into a new Bank Facility. The new Bank Facility moved a significant
portion of TruServ's debt from a long-term liability to a current liability.
On August 29, 2003, TruServ closed a new four-year $275,000 Bank Facility. The
Bank Facility was used to refinance the existing senior revolving credit
facility and senior notes. Under the terms of the Bank Facility agreement, the
interest rate is variable at TruServ's option of LIBOR plus 2.25% or prime plus
0.25%. The unused commitment fee is 0.375%. The Bank Facility pricing includes a
performance grid based upon a fixed charge coverage ratio, measured quarterly
beginning in March 2004.
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, TruServ is subject to a fixed charge coverage ratio of
1.1 to 1. Additionally, TruServ is required to maintain $15,000 of excess
availability at all times. Availability is 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. TruServ had availability, under the Bank
Facility, of approximately $44,582 on September 27, 2003.
Substantially all of the assets of TruServ and a pledge of 100% of the stock of
TruServ's subsidiaries secure the Bank Facility. Borrowings under the Bank
Facility are subject to borrowing base limitations that fluctuate in part with
the seasonality of the business. Additionally, the qualification of accounts
receivable and inventories items as "eligible" for purposes of the borrowing
base is subject to unilateral change at the discretion of the lenders. The
borrowing base is calculated as follows:
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, 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
ten-year amortization for the portion predicated on real estate.
The Bank Facility imposes certain limitations on and requires compliance with
covenants from TruServ 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, 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.
Fees paid for closing the Bank Facility totaled $3,752 and TruServ will amortize
them on a straight-line basis over the four-year term.
Upon closing the Bank Facility, TruServ incurred a net expense of $19,221 to
exit the replaced credit agreements. The net expense consisted of $26,927 of
interest expense relating to the write-off of old and new senior note make whole
obligations offset by $7,706 of other income relating to debt forgiveness for a
portion of the existing refinanced debt.
TruServ believes that its cash from operations and existing credit facility will
provide sufficient liquidity to meet its working capital needs, planned capital
expenditures and debt obligations that are due to be repaid in fiscal year 2003.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
($ 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 with a borrowing ceiling of $217,860 at September 27, 2003;
approximately $166,961 was outstanding at September 27, 2003. A 50 basis point
movement in interest rates would result in an approximate $835 annualized
increase or decrease in interest expense and cash flows based on the outstanding
balance at September 27, 2003.
For the most part, TruServ has historically managed interest rate risk through a
combination of variable and fixed-rate debt instruments with varying maturities.
Following the refinancing of its senior debt (Note 7) TruServ is required by the
Bank Facility to enter into certain interest rate protection agreements, which
may include derivative
instruments, to manage its interest rate risk. Credit risk pertains primarily to
TruServ's trade receivables. TruServ extends credit to its members as part of
its day-to-day operations. TruServ believes that as no specific receivable or
group of receivables comprises a significant percentage of total trade accounts,
its risk in respect to trade receivables is limited. Additionally, TruServ
believes that its allowance for doubtful accounts is adequate with respect to
member credit risks. TruServ performs no speculative hedging activities. TruServ
does not have any VIE's and all related party transactions (i.e., transactions
with members) are at arm's length.
ITEM 4. CONTROLS AND PROCEDURES
TruServ's Chief Executive Officer and Chief Financial Officer have concluded
that as of September 27, 2003 TruServ's disclosure controls and procedures are
effective. There have been no significant changes in TruServ's internal controls
or in other factors that could significantly affect TruServ's internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
($ in thousands)
DERIVATIVE ACTION
In August 2000, an action was brought in Delaware Chancery Court (New Castle
County) by a former TruServ member ("Hudson City Properties") against certain
present and former directors and certain former officers of TruServ and against
TruServ. The complaint was brought derivatively on behalf of TruServ and alleged
that the individual defendants breached fiduciary duties in connection with the
accounting adjustments made by TruServ in the fourth quarter of 1999. Hudson
City Properties also sought to proceed on a class-action basis against TruServ
on behalf of all those affected by the moratorium on stock redemption and the
creation of the loss allocation accounts. Hudson City Properties alleged that
TruServ breached, and the named directors caused TruServ to breach, agreements
with members by suspending payment of the members' 1999 annual patronage
dividend, by declaring the moratorium on the redemption of members' TruServ
stock and by imposing annual minimum purchase requirements upon members. On May
12, 2003, the parties to this action signed a Stipulation of Settlement
resolving the lawsuit, subject to court approval. On May 15, 2003, the Delaware
Chancery Court entered an Order preliminarily approving the Settlement. The
Court conducted a Settlement Hearing on July 8, 2003, and approved the
Stipulation of Settlement as fair, reasonable, adequate and in the best
interests of TruServ and the class. On July 14, 2003, the Court entered a Final
Order and Judgment dismissing the lawsuit with prejudice. The Stipulation of
Settlement will be final and binding 30 days after the date the Final Order and
Judgment was entered. Under the terms of the Stipulation of Settlement, at such
time as TruServ's board of directors determines that it is in the best interest
of TruServ to lift the moratorium on stock redemptions, the loss allocation
accounts for all current and former members who are parties to the Stipulation
of Settlement will be reduced by approximately $5 million on a pro rata basis as
more fully described in the Stipulation of Settlement agreement. Additionally,
all of the current and former members who participated in the Stipulation of
Settlement released TruServ from any liability with respect to the moratorium on
stock redemptions and the creation of the 1999 loss allocation accounts.
On July 17, 2003, the Hagerstown, Maryland distribution facility, which was
subject to a remaining lease obligation of $33,383, was sold by the legal title
holder, a Delaware Business trust unrelated to TruServ. Title to the facility
was acquired by the purchasing party through a Massachusetts Nominee trust, both
of which are parties unrelated to TruServ. The purchasing party is the sole
beneficiary of the Massachusetts Nominee trust. The Delaware Business trust that
owned and leased this facility to TruServ would have qualified as a VIE as of
July 1, 2003 (see Note 9). TruServ's remaining obligation to the third-party
that had established the Delaware Business trust, which was previously accrued
for in the restructuring reserve (see Note 6), was reduced by the amount of the
net sales proceeds of the facility to a $9,368 senior term loan. This senior
term loan matures upon the earlier of a refinancing of TruServ's senior debt or
December 31, 2003. In addition, TruServ entered into a two year operating lease
agreement for the Hagerstown facility with the new trust now owning the
facility. The Hagerstown facility is the only asset held by the Massachusetts
Nominee trust; additionally, TruServ does not have a voting interest in, provide
guarantees to, have any involvement with or have any exposure to loss from the
new trust. Accordingly, the Massachusetts Nominee trust does not qualify as a
VIE of TruServ, as that term is defined by FIN 46.
TruServ has commenced a process, which, if successful, will allow it to
refinance all of its existing senior debt under one asset-based, revolving
credit facility at an interest rate approximately 9% more favorable to the
interest rates paid on its current senior debt. On July 25, 2003, TruServ signed
a $50,000 commitment letter with a bank to lead a "best efforts" syndication of
a $275,000, four-year, revolving credit facility under terms and conditions
negotiated between this lead bank and TruServ. As opposed to an underwritten
credit facility in which a lending institution essentially guarantees that an
entire transaction will be funded, TruServ is pursuing a best efforts deal where
the lead bank will solicit the participation of a group of banks, each
committing to a share of the entire $275,000 credit facility. As of August 12,
2003, TruServ has received commitments from additional lending institutions that
bring the aggregate commitments to $195,000, or 70.9% of the total facility. If
TruServ is successful in obtaining the remaining $80,000 of additional
commitments to complete this facility under terms materially consistent with
those already negotiated, TruServ will proceed to refinance its existing senior
debt. Upon a refinancing, TruServ would be required immediately to expense all
existing unamortized make-whole costs and prepaid bank fees. These amounts were
obligations owed to the existing lenders in 2002 for the amendments completed
and prepayments made in 2002 and totaled $18,500 as of June 28,2003. TruServ has
also negotiated with its current senior lenders concessions on make-whole costs
and other items contractually due to the lenders provided that TruServ is able
to refinance prior to September 16, 2003. TruServ would incur approximately
$2,400 of additional net expense if TruServ were able to complete the
refinancing by September 15, 2003. As a result of final negotiations with the
existing senior lenders, this additional expense of $2,400 is substantially
lower than the estimated contractual amount of $27,000 that TruServ previously
disclosed.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
($ in thousands)
THIRTEEN WEEKS ENDED JUNE 28, 2003 COMPARED TO THIRTEEN WEEKS ENDED JUNE 29,
2002
RESULTS OF OPERATIONS:
Revenues and Gross Margin
A reconciliation of net revenues and gross margin for the 13 weeks ending June
28, 2003 and June 29, 2002 follows:
Gross
Net % of Net Gross Margin %
Revenues Revenues Margin of Revenue
-----------------------------------------------------------
Thirteen weeks ended June 29, 2002 results $ 588,033 100.0% $ 74,401 12.7%
Same store sales:
Product price decreases, net of volume
increases resulting from price reductions (4,085) (0.7) (2,203)
Warehouse and relay revenues (7,581) (1.3) 677
Vendor direct revenues 18,268 3.1 (4)
Terminated members:
Warehouse and relay revenues (24,633) (4.2) (4,400)
Vendor direct revenues (9,265) (1.6) (88)
New members:
Warehouse and relay revenues 3,799 0.7 670
Vendor direct revenues 2,545 0.4 18
Advertising, transportation and other revenues (549) (0.1) (87)
Indirect cost of revenues - - (1,118)
---------------------------------------------
Total change (21,501) (3.7) (6,535)
---------------------------------------------
Thirteen weeks ended June 28, 2003 results $ 566,532 96.3% $ 67,866 12.0%
=============================================
Net revenues for the 13 weeks ended June 28, 2003 totaled $566,532. This
represented a decrease in revenues of $21,501, or 3.7%, as compared to the same
period last year. A key contributor to the decrease in revenue is the 6.6%
decline in the number of participating member retail outlets, which resulted in
a 5.8% revenue reduction. Partially offsetting this revenue reduction is
increased revenue from same store sales, representing a 1.1% revenue increase,
and new member revenue, also representing a 1.1% revenue increase. A major
factor in the same store sale increase, in comparing the two periods, is due to
the timing of the spring market. The spring market generates orders for
merchandise that are shipped directly from the vendor immediately after the
market, along with warehouse and relay orders that are shipped during the next
several months after the market. The spring market was held in February in 2002
and in April in 2003. Partially offsetting this revenue increase within same
store sales was the impact of TruServ members who have shifted some of their
merchandise purchases to other sources, product price reductions and the effect
of a slow economy.
Gross margin for the 13 weeks ended June 28, 2003 decreased by $6,535, or 8.8%,
over the prior year. The decrease in gross margin was due to the loss of gross
margin from terminated members and same store sales. Within same store sales the
negative gross margin impact was driven by product price decreases and lower
vendor direct margin rates of .89% in 2003, as compared to 1.0% in 2002.
Partially offsetting the unfavorable same store gross margin is lower
acquisition cost due
to increased global sourcing. Additionally, the indirect cost of revenues
negatively impacted the gross margin. As a result of increasing global sourcing
to lower acquisition costs, TruServ experienced higher freight-in costs and
lower discounts and rebates that unfavorably impacted indirect cost of revenues.
Also, as a result of the drop in the overall volume of purchases in the second
quarter of 2003, as compared to the second quarter of 2002, TruServ experienced
lower discounts and rebates from vendors. However, these reductions in gross
margin were partially offset by reduced direct inbound logistics and labor and
related overhead expenses, incurred to bring merchandise to the distribution
centers, which had been lowered as a result of reduced operating expenses from
the closure of distribution centers and headcount reductions in prior periods.
2003 2002 $ Expense Decrease
---- ---- ------------------
Logistics and manufacturing expenses $18,483 $21,535 $3,052
Logistics and manufacturing expenses decreased by $3,052, or 14.2%, as compared
to the same period last year. TruServ's decrease in expense was due to lower
direct distribution center expenses. These expenses decreased primarily due to
the prior period closure of distribution centers and headcount reductions that
TruServ had implemented in 2001 in response to a reduction in the member base.
This decrease in expense was partially offset by increased rent expense, net of
both reduced depreciation expense and gain amortization, as a result of a sale
leaseback transaction. See "Interest expense" below for a discussion of the
related impact from the sale leaseback transaction.
2003 2002 $ Expense Decrease
---- ---- ------------------
Selling, general and administrative expenses $21,019 $26,411 $5,392
Selling, general and administrative ("SG&A") expenses decreased $5,392, or
20.4%, as compared to the same period last year. SG&A expenses were mainly lower
due to the timing of the spring market, which was held in April in 2003 versus
in February in 2002. The result was that the vendor expense recoveries related
to the market were recognized in the second quarter of 2003, as compared to
vendor expense recoveries recognition in the first quarter of 2002 when last
year's spring market occurred. Additional reductions in SG&A expense were the
result of lower spending and lower bad debt expense due to a lower accounts
receivable balance and favorable account aging.
2003 2002 $ Expense Decrease
---- ---- ------------------
Interest expense:
Member $1,430 $ 1,690 $ 260
Third Parties 8,959 15,183 6,224
Interest expense to members decreased by $260, or 15.4%, as compared to the same
period last year, due to a lower average principal balance of debt outstanding.
However, this decrease was partially offset by a higher average interest rate.
The interest rate that TruServ offered to members to renew their maturing
subordinated debt for an additional three years was higher than the coupon rate
of their maturing debt. Third party interest expense decreased $6,224, or 41.0%,
as compared to the same period last year. This decrease is due to the lower
average principal balance of senior debt outstanding as compared to the same
period last year. TruServ achieved the lower average principal balance by
generating cash from operations and asset sales, which includes the sale
leaseback of seven
facilities at December 31, 2002. This decrease in interest expense was partially
offset by the increase in amortization of costs of the make-whole
obligations incurred by the early paydown of debt from the asset sales that
occurred in the second half of 2002.
2003 2002 $ Income Increase
---- ---- -----------------
Other income, net $(7,524) $(988) $6,536
Other income, net increased by $6,536, as compared to the same period last year.
This increase in income was due to the termination of the agreements with BMA
(see Note 10). The terminated agreements had related unrecognized income of
$7,100 that was recorded in income in the second quarter of 2003. Offsetting
this increase in income was the elimination of interest income from the BMA note
receivable that was substantially prepaid by BMA in July 2002.
2003 2002 $ Net margin Increase
---- ---- ---------------------
Net margin $24,697 $10,433 $14,264
The quarter resulted in net margin of $24,697, up from a net margin of $10,433
for the same period a year ago. The timing of the spring market favorably
impacted net margin vs. favorably impacting net margin in the first quarter of
the prior year when the 2002 spring market was held. TruServ experiences
increases in sales from its markets along with favorable program recoveries in
the quarter a market is held. Additionally interest expense savings, the
terminated BMA agreements and expense reductions more than offset the impact to
gross margin from the reduced merchandise volume and increased rent expense.
TWENTY-SIX WEEKS ENDED JUNE 28, 2003 COMPARED TO TWENTY-SIX WEEKS ENDED JUNE 29,
2002
RESULTS OF OPERATIONS:
Revenues and Gross Margin
A reconciliation of net revenues and gross margin for the 26 weeks ending June
28, 2003 and June 29, 2002 follows:
Gross
Net % of Net Gross Margin %
Revenues Revenues Margin of Revenue
-----------------------------------------------------------
Twenty-six weeks ended June 29, 2002 results $ 1,136,462 100.0% $ 128,587 11.3%
Same store sales:
Product price decreases, net of volume
increases resulting from price reductions (6,250) (0.5) (3,145)
Warehouse and relay revenues (31,993) (2.8) (1,718)
Vendor direct revenues (25,447) (2.2) (990)
Terminated members:
Warehouse and relay revenues (44,901) (4.0) (8,035)
Vendor direct revenues (20,778) (1.8) (212)
New members:
Warehouse and relay revenues 7,346 0.6 1,280
Vendor direct revenues 5,121 0.4 42
Advertising, transportation and other revenues (3,554) (0.3) (304)
Indirect cost of revenues - - (3,754)
---------------------------------------------
Total change (120,456) (10.6) (16,836)
---------------------------------------------
Twenty-six weeks ended June 28, 2003 results $ 1,016,006 89.4% $ 111,751 11.0%
=============================================
Net revenues for the 26 weeks ended June 28, 2003 totaled $1,016,006. This
represented a decrease in revenues of $120,456, or 10.6%, as compared to the
same period last year. A key contributor to the decrease in revenue is the 6.6%
decline in the number of participating member retail outlets, which represented
a 5.8% revenue reduction. The other significant contributor to the revenue
reduction is the decrease in same store sales, which resulted in a 5.5% revenue
reduction. This decrease in same store sales was the result of TruServ members
shifting some of their merchandise purchases to other sources, the impact of
product price reductions and the effect of a slow economy. Partially offsetting
these decreases in revenue was increased revenue from new members, representing
a 1.0% revenue increase.
Gross margin for the 26 weeks ended June 28, 2003 decreased by $16,836, or
13.1%, over the prior year. The decrease in gross margin was due to the loss of
members and the reduction in same store sales. Additionally, the indirect cost
of revenues negatively impacted the gross margin. The negative impact on gross
margin from indirect costs of revenues was due to TruServ experiencing in the
first half of 2003 lower discounts and rebates from vendors, as compared to the
first half of 2002 due to the lower volume of purchases. However, these
reductions in gross margin were partially offset by reduced direct inbound
logistics expenses and labor and related overhead expenses, incurred by TruServ
to bring merchandise to the distribution centers. TruServ reduced these expenses
as a result of closing distribution centers and reduced headcount. Additionally,
the increase in gross margin from new member sales volume partially served to
reduce the decrease in overall gross margin.
2003 2002 $ Expense Decrease
---- ---- ------------------
Logistics and manufacturing expenses $34,493 $37,065 $2,572
Logistics and manufacturing expenses decreased by $2,572, or 6.9%, as compared
to the same period last year. TruServ's decrease in expense was the result of
lower direct distribution center expenses. The reduction in direct distribution
center expense was primarily due to prior period closure of distribution centers
and headcount reductions. In 2001, TruServ had implemented a distribution center
closure plan in response to a reduction in the member base. This decrease in
expense was partially offset by increased rent expense, net of both reduced
depreciation expense and gain amortization, which is the result of a sale
leaseback transaction. See "Interest expense" below for a discussion of the
related impact from the sale leaseback transaction.
2003 2002 $ Expense Decrease
---- ---- ------------------
Selling, general and administrative expenses $44,082 $45,853 $1,771
Selling, general and administrative ("SG&A") expenses decreased $1,771, or 3.9%,
as compared to the same period last year. SG&A expenses decreased due to lower
spending, reduced depreciation and amortization expense and lower bad debt
expense. These reductions in SG&A were partially offset by reduced service
charge income. The reduction in depreciation and amortization expense was due to
capital expenditures and conversion funds incurred after the 1997 merger that
became fully depreciated by the end of fiscal 2002. The lower bad debt expense
and the reduction in service charge income were the result of a lower accounts
receivable balance and favorable account aging.
2003 2002 $ Expense Decrease
---- ---- ------------------
Interest expense:
Member $ 2,815 $ 3,356 $ 541
Third Parties 16,783 29,069 12,286
Interest expense to members decreased by $541, or 16.1%, as compared to the same
period last year, due to a lower average principal balance of debt outstanding.
However, this decrease was partially offset by a higher average interest rate.
The interest rate that TruServ offered to members to renew their maturing
subordinated debt for an additional 3 years was higher than the coupon rate of
their maturing debt. Third party interest expense decreased $12,286, or 42.3%,
as compared to the same period last year. This decrease is due to the lower
average principal balance of senior debt outstanding as compared to the same
period last year. The lower average principal balance was achieved by generating
cash from operations and asset sales, which includes the sale leaseback of seven
facilities at December 31, 2002. This decrease in interest expense was partially
offset by the increase in amortization of make-whole costs incurred by the early
paydown of debt from the asset sales that occurred in the second half of 2002.
2003 2002 $ Income Increase
---- ---- -----------------
Other income, net $(8,065) $(2,003) $6,062
Other income, net increased by $6,062, as compared to the same period last year.
This increase in income was due to the termination of the agreements with BMA
(see Note 10). The terminated agreements had related unrecognized income of
$7,100 that was recorded in income in the second quarter of 2003. Offsetting
this increase in income was the interest income recognized in fiscal 2002 from
the related note receivable with BMA that was significantly reduced by BMA in
July 2002.
2003 2002 $ Net margin Increase
---- ---- ---------------------
Net margin $20,780 $15,081 $5,699
The first six months resulted in net margin of $20,780, up from a net margin of
$15,081 for the same period a year ago. Interest expense savings, the effect of
terminating the BMA agreements and expense reductions more than offset the
impact to gross margin from the reduced merchandise volume and increased rent
expense.
LIQUIDITY AND CAPITAL RESOURCES:
In 2001, the Securities and Exchange Commission ("SEC") issued Financial
Reporting Release ("FRR") No. 61, which sets forth the views of the SEC
regarding certain disclosures relating to 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, 2002, describes TruServ's debt, credit facilities, guarantees and future
commitments, in order to facilitate a review of TruServ's liquidity.
TruServ generated cash from operating activities for the 26 weeks ended June 28,
2003 of $28,144, as compared to $42,470 for the 26 weeks ended June 29, 2002.
The main reason for the change in cash related to operating activities, when
comparing the two periods, is the slight erosion in working capital account
performance. The reduction in cash generated from working capital components in
2003 is mainly due to significant liquidation of excess inventory in 2002 which
did not repeat at the same level in 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 payable from fiscal year end is matched by the increase
in accounts receivable and inventory during the period. 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.
TruServ used cash from investing activities of $238 for the 26 weeks ended June
28, 2003, as compared to $4,497 of cash generated for the same period last year.
This is mainly due to a decrease in restricted cash in 2002, as asset sale
proceeds were distributed during 2002 to the senior lenders in accordance with
the intercreditor agreement. However, this was partially offset by the decrease
in additions to properties, which was lower by $4,371, as compared to the same
period last year. The additions to capital expenditures consist of various
building improvements and purchases of additional equipment and technology at
TruServ's distribution centers and at its corporate headquarters.
In the 26 weeks ended June 28, 2003, TruServ had a net increase in cash and cash
equivalents of $6,989, as cash flows were sufficient to avoid borrowing on the
revolving credit line and still permit TruServ to carry excess cash. TruServ
used the cash generated from operating activities in its financing activities to
help reduce its debt by $36,350 in the first half of 2003. In the 26 weeks ended
June 29, 2002, TruServ had a net decrease in cash and cash equivalents of
$75,381. This reduction in cash and cash equivalents was the result of TruServ
using excess cash available at December 31, 2001 to cover outstanding checks and
pay off short-term borrowings.
At June 28, 2003, TruServ's working capital was $106,747, as compared to $84,051
at December 31, 2002. The current ratio was 1.22 at June 28, 2003, as compared
to 1.21 at December 31, 2002.
TruServ believes that its cash from operations and existing credit facilities
will provide sufficient liquidity to meet its working capital needs, planned
capital expenditures and debt obligations that are due to be repaid in fiscal
year 2003.
TruServ has commenced a process, which, if successful, will allow it to
refinance all of its existing senior debt under one asset-based, revolving
credit facility at an interest rate approximately 9% more favorable to the
interest rates paid on its current senior debt. On July 25, 2003, TruServ signed
a $50,000 commitment letter with a bank to lead a "best efforts" syndication of
a $275,000, four-year, revolving credit facility under terms and conditions
negotiated between this lead bank and TruServ. As opposed to an underwritten
credit facility in which a lending institution essentially guarantees that an
entire transaction will be funded, TruServ is pursuing a best efforts deal where
the lead bank will solicit the participation of a group of banks, each
committing to a share of the entire $275,000 credit facility. As of August 12,
2003, TruServ has received commitments from additional lending institutions that
bring the aggregate commitments to $195,000, or 70.9% of the total facility. If
TruServ is successful in obtaining the remaining $80,000 of additional
commitments to complete this facility under terms materially consistent with
those already negotiated, TruServ will proceed to refinance its existing senior
debt. Upon a refinancing, TruServ would be required immediately to expense all
existing unamortized make-whole costs and prepaid bank fees. These amounts were
obligations owed to the existing lenders in 2002 for the amendments completed
and prepayments made in 2002 and totaled $18,500 as of June 28, 2003. TruServ
has also negotiated with its current senior lenders concessions on make-whole
costs and other items contractually due to the lenders provided that TruServ is
able to refinance prior to September 16, 2003. TruServ would incur approximately
$2,400 of additional net expense if TruServ were able to complete the
refinancing by September 15, 2003. As a result of final negotiations with the
existing senior lenders, this additional expense of $2,400 is substantially
lower than the estimated contractual amount of $27,000 that TruServ previously
disclosed.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
($ 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 with a borrowing ceiling of $143,200 at June 28, 2003; on average
approximately $12,181 was outstanding during the thirteen weeks ending June 28,
2003. A 50 basis point movement in interest rates would result in an approximate
$61 annualized increase or decrease in interest expense and cash flows based on
the average balance outstanding during the thirteen weeks ending June 28, 2003.
For the most part, TruServ manages interest rate risk through a combination of
variable and fixed-rate debt instruments with varying maturities. Credit risk
pertains primarily to TruServ's trade receivables. TruServ extends credit to its
members as part of its day-to-day operations. TruServ believes that as no
specific receivable or group of receivables comprises a significant percentage
of total trade accounts, its risk in respect to trade receivables is limited.
Additionally, TruServ believes that its allowance for doubtful accounts is
adequate with respect to member credit risks. TruServ has no investments in
derivative instruments and performs no speculative hedging activities. TruServ
does not have any variable interest entities ("VIE's") and all related party
transactions (i.e., transactions with members) are at arm's length.
ITEM 4. CONTROLS AND PROCEDURES
Based upon an evaluation within 90 days prior to the filing date of this report,
TruServ's Chief Executive Officer and Chief Financial Officer concluded that
TruServ's disclosure controls and procedures are effective. There have been no
significant changes in TruServ's internal controls or in other factors that
could significantly affect TruServ's internal controls subsequent to the date of
our most recent evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
($ in thousands)
The company is involved in various claims and lawsuits incidental to its
business. The following significant matters existed at June 28, 2003:
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' 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 June 21, 2002, the
court issued an oral ruling granting summary judgment to TruServ on its accounts
receivable claim and granting summary judgment to Bess on its counterclaim. The
judgment was entered on August 6, 2002. TruServ believes that the court's ruling
on Bess' counterclaim is not supported by either the facts or Delaware corporate
law. TruServ's motion for reconsideration and reversal of the August judgment on
Bess' counterclaim was denied on November 21, 2002. TruServ filed its notice of
appeal in the Second District of Illinois Appellate Court on December 2, 2002.
DERIVATIVE ACTION
In August 2000, an action was brought in Delaware Chancery Court (New Castle
County) by a former TruServ member ("Hudson City Properties") against certain
present and former directors and certain former officers of TruServ and against
TruServ. The complaint was brought derivatively on behalf of TruServ and
alleged that the individual defendants breached fiduciary duties in connection
with the accounting adjustments made by TruServ in the fourth quarter of 1999.
Hudson City Properties also sought to proceed on a class-action basis against
TruServ on behalf of all those affected by the moratorium on stock redemption
and the
creation of the loss allocation accounts. Hudson City Properties alleged that
TruServ breached, and the named directors caused TruServ to breach, agreements
with members by suspending payment of the members' 1999 annual patronage
dividend, by declaring the moratorium on the redemption of members' TruServ
stock and by imposing annual minimum purchase requirements upon members. On May
12, 2003, the parties to this action signed a Stipulation of Settlement
resolving the lawsuit, subject to court approval. On May 15, 2003, the Delaware
Chancery Court entered an Order preliminarily approving the Settlement. The
Court conducted a Settlement Hearing on July 8, 2003, and approved the
Stipulation of Settlement as fair, reasonable, adequate and in the best interest
of TruServ and the class. On July 14, 2003, the Court entered a Final Order and
Judgment dismissing the lawsuit with prejudice. The Stipulation of Settlement
will bebecame final and binding 30 days after the date the Final Order and Judgment was
entered. Under the terms of the Stipulation of Settlement, at such time as
TruServ's board of directors determines that it is in the best interests of
TruServ to lift the moratorium on stock redemptions, the loss allocation
accounts for all current and former members who are parties to the Stipulation
of Settlement will be reduced by approximately $5 million on a pro rata basis as
more fully described in the Stipulation of Settlement agreement. The majority of
the settlement was provided by TruServ's insurance carrier. Additionally, all of
the current and former members who participated in the Stipulation of Settlement
released TruServ and its current and former officers and directors from any
liability with respect to the moratorium on stock redemptions and the creation
of the 1999 loss allocation accounts.
KENNEDY ACTION
In June 2000, various former members of TruServ filed an action against TruServ
in the Circuit Court of the 19th Judicial Circuit (McHenry County, Illinois)
(the "Kennedy action"). The plaintiffs in the Kennedy action each allege that,
based upon representations made to them by TruServ and its predecessors that the
Coast to Coast brand name would be maintained, they voted for the merger of
ServiStar/Coast to Coast and Cotter & Company. The plaintiffs allege that after
the merger, the Coast to Coast brand name was eliminated and that each plaintiff
thereafter terminated or had its membership in TruServ terminated. The
plaintiffs further claim that TruServ breached its obligations by failing to
redeem their stock and by creating loss allocation accounts for the plaintiffs.
The plaintiffs have each asserted claims for fraud/misrepresentation, negligent
misrepresentation, claims under the state securities laws applicable to each
plaintiff, claims under the state franchise/dealership laws applicable to each
plaintiff, breach of fiduciary duty, unjust enrichment, estoppel and recoupment.
Similar claims were filed against TruServ as counterclaims to various complaints
filed by TruServ in McHenry County to recover accounts receivable balances from
other former members. Those claims were consolidated with the Kennedy action. In
March 2001, the Kennedy complaint was amended to add additional plaintiffs. Also
in March 2001, another action was filed against TruServ on behalf of additional
former members, in the same court, by the same law firm (the "A-Z action"). The
A-Z complaint alleges substantially similar claims as those in the Kennedy
action, with the principal difference being that the claims relate to the
elimination of the ServiStar brand name. The Kennedy and A-Z actions have been
consolidated for purposes of discovery, which is ongoing. The plaintiffs seek
damages for stock repurchase payments, lost profits and goodwill, out of pocket
expenses, attorney fees and punitive damages. In July 2002, the plaintiffs in
these consolidated actions amended their complaints to name as defendants two
former officers of TruServ. To the extent that TruServ may have indemnification
obligations to these former officers, TruServ's directors and officers'
liability insurance policies may be available to cover such claims.
TruServ intends to vigorously defend the remaining cases. However, a ruling in
favor of any or all of the plaintiffs in the Kennedy Action or the Bess Action
could have a material adverse effect on TruServ. The courts could rule that
TruServ violated its Agreement with members or its By-Laws in establishing the
loss allocation account or imposing the moratorium on stock redemptions. In the
event of such a ruling, TruServ could be required to do one or more of the
following:
- - lift the moratorium on stock redemptions; and
- - redeem members' stock presented for redemption at its full stated value.
Such actions could constitute events of default under TruServ's current Senior
Debt Agreements. Unless appropriate waivers were obtained from TruServ's
lenders, the amounts due under the Senior Debt could become immediately due and
payable or the Senior Debt agreements could have to be renegotiated. However,
there can be no assurances that TruServ would be able to obtain the requisite
waivers or successfully renegotiate its Senior Debt agreements. In the event
TruServ was unable to obtain the requisite waivers or successfully renegotiate
its Senior Debt agreements, a material adverse effect on TruServ's liquidity and
capital resources could result.
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
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 $130,803 for the fiscal year ended December 31, 1999. It is
TruServ's belief that had E&Y properly discharged its duties, the scope and
breadth of the Fourth Quarter Charge, as well as the accounting and operational
control deficiencies that necessitated the charge, would have been substantially
lessened, if not eliminated in their entirety. As a result of E&Y's failures,
TruServ has suffered significant financial damages. The factual allegations that
form the basis for TruServ's claim against E&Y include, in part, the issues
identified in the Securities and Exchange Commission (the "Commission") cease
and desist order described below. TruServ began discussion of its claims with
E&Y early in the fall of 2001. Pursuant to the dispute resolution procedures
required by TruServ's engagement letter with E&Y, TruServ and E&Y attempted to
mediate this dispute during the first six months of 2002. When those attempts
proved unsuccessful, and again pursuant to the dispute resolution procedures,
TruServ filed its claim with the American Arbitration Association on July 31,
2002. The arbitration, which is subject to certain confidentiality requirements,
is currently pending. Hearings are currently scheduled to begin in the spring of
2004.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
($ 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 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 werewas allocated to them and members who did
not request redemption were saddled with the losses of those members who
requested redemption. Moreover, the board of directors considered TruServ's debt
agreements and, in particular, the financial covenants thereunder, which
prohibit redemptions when TruServ, among other things, does not attain certain
profit margins.
At the time the board of directors declared the moratorium on redemptions,
TruServ's By-Laws did not impose limitations on the board's discretion to
initiate or to continue a moratorium on redemption. The By-Laws merely provided
that, upon termination of a member's agreement, TruServ was to redeem the
member's shares. Nevertheless, the board of directors concluded that 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.
TruServ's amended debt agreements preclude the lifting of the stock moratorium
until the expiration of the agreements, except for certain hardship cases, not
to exceed $2,000 annually. Given certain ongoing related litigation (see "Legal
Proceedings"), TruServ does not currently plan to engage in hardship redemptions
of stock. The expiration of the prohibition against stock redemptions under the
current amended debt agreements, could occur in 2003 if TruServ completes a
refinancing without such prohibition. At that time, the board of directors will
consider if and when it is appropriate to lift the moratorium. In doing so, the board of directors will consider the financial condition of TruServ, and
will not lift the moratorium unless it can conclude that effecting redemptions
of TruServ's capital stock will not "impair the capital" of TruServ, unfairly
advantage some members to the disadvantage of others, or violate the financial
covenants under its debt agreements. TheIn light of the current financial
circumstances of TruServ, the board of directors will be reviewing the continued
need for the stock moratorium and has informed its members that a decision
whether to maintain or lift the moratorium will be made prior to and announced
at the March 28, 2004 annual shareholders' meeting. If a decision is monitoringmade to
lift the financial performancestock moratorium, the effective date of TruServ quarterly.such lift would be determined
by then and announced at such time.
As of June 28,September 27, 2003, the aggregate value of the terminated members' equity
investments presented for redemption but deferred due to the moratorium was
approximately $30,542,$32,092, after the offset of the loss allocations resulting from
the 1999 loss, the 2001 loss and accounts receivable owed by the former members.
Historically, TruServ has offset amounts due by its members against amounts that
it pays to the members on redemption of their stock. OfDetails are as follows:
Fair Value of Stock Presented for Redemption but Deferred due to the total $30,542,
$17,347 represents the aggregate value of Class A common stock and $9,856
represents the aggregate value of the Non-Qualified Class B common stock,
historically paid out at the time of redemption. $44,827 represents the
aggregate value of the Qualified Class B common stock historically paid out by
means of a five-year subordinated installment note. Offsetting these gross
equity investment amounts at the time of redemption is $26,316 of 1999 loss
allocations, $8,699 of the 2001 loss allocable to terminated members upon
redemption of their stock if it were to be paid out as of June 28, 2003 and
$6,473 of accounts receivable owed by these former members.Moratorium
Class A common stock $ 18,268
Non-qualified Class B common stock 10,419
----------
Amounts historically paid out at time of redemption 28,687
Qualified Class B common stock (historically paid out by means
of a five-year subordinated installment note) 47,486
-------
Gross par value of stock presented for redemption but deferred
due to the moratorium 76,173
Reductions due to legal right of offsets:
1999 loss allocations 27,747
2001 loss allocable to terminated members 9,456
Accounts receivable owed by terminated members 6,878
----------
Reductions due to legal right of offsets 44,081
---------
Fair value of stock presented for redemption but deferred
due to the moratorium $ 32,092
=========
On a member by member basis, the net amount of $30,542$32,092 owed to terminated
members would be payable approximately $6,813$7,002 at the time of redemption, and
$23,729$25,090 in five-year installment notes.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At TruServ's Annual Meeting of Stockholders held on April 29, 2003,
the election results were as follows:
1. Election of directors for a term of one year:
Votes for Votes Withheld
Bryan R. Ableidinger 167,100 7,620
Laurence L. Anderson 166,320 8,400
J.W. Blagg 166,380 8,340
Michael S. Glode 167,520 7,200
Thomas S. Hanemann 167,220 7,500
Judith S. Harrison 167,100 7,620
Peter G. Kelly 165,000 9,720
Pamela Forbes Lieberman 167,220 7,500
David Y. Schwartz 166,200 8,520
Gilbert L. Wachsman 166,680 8,040
Charles W. Welch 167,520 7,200
2. Appointment of PricewaterhouseCoopers LLP as TruServ's
independent accountant for fiscal 2003.
For Against Abstain
--- ------- -------
166,200 4,500 4,020
3. Approval of proxy authorization to vote on other business:
For Against Abstain
--- ------- -------
155,880 10,200 8,580None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 4-A Loan and Security Agreement dated August 29, 2003
for $275,000,000 revolving credit facility between
TruServ Corporation and various financial
institutions
Exhibit 4-B By-Laws of TruServ Corporation, effective July 31,
2003
Exhibit 10-A Termination Agreement and General Release between
TruServ Corporation and Neil Hastie dated
July 25, 2003
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
NoneA Current Report on Form 8-K was filed on August 8, 2003
regarding second quarter earnings.
A Current Report on Form 8-K was filed on September 4,
2003 regarding TruServ's refinancing agreement.
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: AugustNovember 12, 2003 By /s/ DAVID A. SHADDUCK
-----------------------------------
David A. Shadduck
Senior Vice President and
Chief Financial Officer