-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, GFOjcBY4iISAoD2sN1njOVTw0foJ8bOzmDv+FrzLSfdXV4FwSnaRjyrPGAukSmmN XkHCLrJM4neThfJsjyYsfA== 0000950137-04-004069.txt : 20040513 0000950137-04-004069.hdr.sgml : 20040513 20040513172628 ACCESSION NUMBER: 0000950137-04-004069 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 20040403 FILED AS OF DATE: 20040513 FILER: COMPANY DATA: COMPANY CONFORMED NAME: TRUSERV CORP CENTRAL INDEX KEY: 0000025095 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-HARDWARE & PLUMBING & HEATING EQUIPMENT & SUPPLIES [5070] IRS NUMBER: 362099896 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 333-18397 FILM NUMBER: 04803923 BUSINESS ADDRESS: STREET 1: 8600 WEST BRYN MAWR AVE CITY: CHICAGO STATE: IL ZIP: 60631-3505 BUSINESS PHONE: 7736955000 MAIL ADDRESS: STREET 1: 8600 W. BRYN MAWR AVENUE CITY: CHICAGO STATE: IL ZIP: 60631-3505 FORMER COMPANY: FORMER CONFORMED NAME: COTTER & CO DATE OF NAME CHANGE: 19920703 10-Q 1 c85443e10vq.txt QUARTERLY REPORT UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (MARK ONE) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED April 3, 2004 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ______________ TO___________ COMMISSION FILE NUMBER 2-20910 TRUSERV CORPORATION (Exact name of registrant as specified in its charter) DELAWARE 36-2099896 -------- ---------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 8600 West Bryn Mawr Avenue Chicago, Illinois 60631-3505 ----------------- ---------- (Address of principal executive offices) (Zip Code) (773) 695-5000 -------------- (Registrant's telephone number, including area code) Not applicable -------------- (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] : No [ ] Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X] The number of shares outstanding of each of the issuer's classes of common stock, as of May 1, 2004. Class A Common Stock, $100 Par Value........................ 479,940 Shares Class B Common Stock, $100 Par Value........................ 1,779,613 Shares ITEM 1. FINANCIAL STATEMENTS ($ in thousands - except per share information) TRUSERV CORPORATION CONDENSED CONSOLIDATED BALANCE SHEET (Unaudited) ASSETS
April 3, December 31, 2004 2003 ------------- ------------- Current assets: Cash and cash equivalents $ 6,161 $ 9,234 Accounts and notes receivable, net of allowance for doubtful accounts of $7,997 and $8,395 272,256 203,010 Inventories 334,969 276,725 Other current assets 18,007 18,225 ------------- ------------- Total current assets 631,393 507,194 Properties, net of accumulated depreciation of $286,404 and $283,233 71,445 73,055 Goodwill, net 91,474 91,474 Other assets 9,225 9,737 ------------- ------------- Total assets $ 803,537 $ 681,460 ============= =============
See Notes to Condensed Consolidated Financial Statements 2 LIABILITIES AND MEMBERS' CAPITALIZATION
April 3, December 31, 2004 2003 ------------- ------------- Current liabilities: Accounts payable $ 332,196 $ 238,180 Drafts payable 31,388 44,540 Accrued expenses 68,566 72,931 Current maturities of long-term debt, notes, borrowings and capital lease obligations 117,271 91,958 Deferred stock redemptions 13,355 - Patronage dividend payable in cash 736 8,983 ------------- ------------- Total current liabilities 563,512 456,592 ------------- ------------- Long-term liabilities and deferred credits: Long-term debt, including capital lease obligations, less current maturities 126,048 100,324 Deferred gain on sale leaseback 49,293 50,135 Other long-term liabilities 16,052 13,656 Deferred stock redemptions 22,366 33,725 Redeemable nonqualified Class B non-voting common stock, $100 par value; 224,016 and 231,392 shares issued and fully paid 22,402 23,139 ------------- ------------- Total long-term liabilities and deferred credits 236,161 220,979 ------------- ------------- Total liabilities and deferred credits 799,673 677,571 ------------- ------------- Commitments and contingencies - - Members' equity: Redeemable Class A voting common stock, $100 par value; 750,000 shares authorized; 298,380 and 304,560 shares issued and fully paid; 6,300 and 9,840 shares issued (net of subscriptions receivable of $110, and $112) 30,358 31,440 Redeemable qualified Class B non-voting common stock and paid-in capital, $100 par value; 4,000,000 shares authorized; 924,559 and 952,436 shares issued and fully paid 93,755 96,542 Loss allocation (37,809) (40,502) Deferred patronage (24,858) (25,045) Accumulated deficit (55,603) (56,567) Accumulated other comprehensive loss (1,979) (1,979) ------------- ------------- Total members' equity 3,864 3,889 ------------- ------------- Total liabilities and members' equity $ 803,537 $ 681,460 ============= =============
See Notes to Condensed Consolidated Financial Statements 3 TRUSERV CORPORATION CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
For the thirteen weeks ended April 3, March 29, 2004 2003 --------- --------- Net revenues $ 499,362 $ 452,127 Cost of revenues 449,180 408,242 --------- --------- Gross Margin 50,182 43,885 Operating expenses: Logistics and manufacturing expenses 16,081 16,010 Selling, general and administrative expenses 29,001 23,080 Other income, net (498) (581) --------- --------- Operating Income 5,598 5,376 Interest expense to members 1,401 1,385 Third party interest expense 2,022 7,824 --------- --------- Net margin/(loss) before income taxes 2,175 (3,833) Income tax expense 51 84 --------- --------- Net margin/(loss) $ 2,124 $ (3,917) ========= =========
See Notes to Condensed Consolidated Financial Statements 4 TRUSERV CORPORATION CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
April 3, March 29, 2004 2003 -------- --------- Operating activities: Net margin / (loss) $ 2,124 $ (3,917) Adjustments to reconcile net margin / (loss) to cash and cash equivalents provided by / (used for) operating activities: Depreciation and amortization 4,595 7,147 Provision for allowance for doubtful accounts 352 (137) Provision for inventory reserves 2,873 1,495 Amortization of deferred gain on sale leaseback (699) (638) Net change in working capital components (39,214) 23,301 -------- --------- Net cash and cash equivalents provided by / (used for) operating activities (29,969) 27,251 -------- --------- Investing activities: Additions to properties (1,704) (745) Proceeds from sale of properties 90 43 Changes in restricted cash - 503 Changes in other assets 17 836 -------- --------- Net cash and cash equivalents provided by / (used for) investing activities (1,597) 637 -------- --------- Financing activities: Payment of patronage dividend (8,401) (5,721) Payment of notes, long-term debt and lease obligations (157) (7,512) Increase/ (decrease) in drafts payable (13,152) 3,085 Increase / (decrease) in revolving credit facilities, net 50,200 (19,065) Proceeds from Class A common stock subscription receivable 3 14 -------- --------- Net cash and cash equivalents provided by / (used for) financing activities 28,493 (29,199) -------- --------- Net decrease in cash and cash equivalents (3,073) (1,311) Cash and cash equivalents at beginning of period 9,234 9,001 -------- --------- Cash and cash equivalents at end of period $ 6,161 $ 7,690 ======== =========
See Notes to Condensed Consolidated Financial Statements. 5 TRUSERV CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) ($ in thousands) NOTE 1 - GENERAL The condensed consolidated balance sheet at April 3, 2004, the condensed consolidated statement of operations for the thirteen weeks ended April 3, 2004 and March 29, 2003, and the condensed consolidated statement of cash flows for the thirteen weeks ended April 3, 2004 and March 29, 2003 are unaudited and, in the opinion of the management of TruServ, include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of financial position at the balance sheet dates and results of operations and cash flows for the respective interim periods. The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. These financial statements should be read in conjunction with the consolidated financial statements for the year ended December 31, 2003 included in TruServ's 2003 Annual Report on Form 10-K. NOTE 2 - RECLASSIFICATIONS Certain reclassifications have been made to the prior year's condensed consolidated financial statements to conform to the current year's presentation. These reclassifications had no effect on Net margin for any period or on Total members' equity at the balance sheet dates. NOTE 3 - ESTIMATED PATRONAGE DIVIDENDS If financial and operating conditions permit, patronage dividends are declared and paid by TruServ after the close of each fiscal year. The estimated cash portion of the patronage dividend for the three-month period ended April 3, 2004 was $603, which was 30% of the quarter's estimated patronage income. Due to the net loss in the same period last year there was no estimated cash portion of the patronage dividend. TruServ's By-Laws and Internal Revenue Service regulations require the payment of at least 20% of patronage dividends in cash. In the past, TruServ paid the remainder primarily through the issuance of Class B common stock (in both qualified and nonqualified written notices of allocation, as those terms are used in the Internal Revenue Code); and in certain cases, TruServ paid a small portion of the dividend by means of Promissory (subordinated) notes. For 2004, to the extent TruServ declares a patronage dividend, it intends to issue, in 2005, the non-cash portion of the dividend in the form of Qualified Class B common stock, and, in the case of those members who have loss allocation accounts, to apply the value of the Qualified Class B common stock to reduce such account balances (see Note 4). To the extent TruServ declares a patronage dividend, it is allowed a deduction in that amount to determine taxable income. Based on the estimated patronage dividend, the U.S. federal effective income tax rate is 0%. NOTE 4 - LOSS ALLOCATION TO MEMBERS During the third quarter of 2000, TruServ management developed and the board of directors approved a plan to equitably allocate to members the loss incurred in 1999. This loss was previously recorded as a reduction of Retained earnings. 6 TruServ has allocated and distributed the 1999 loss among its members by establishing a Loss allocation account as a contra-equity account in the consolidated balance sheet with the offsetting credit recorded to the Accumulated deficit account. The Loss allocation account reflects the sum of each member's proportionate share of the 1999 loss, after being reduced by certain amounts that were not allocated to members. The allocation was generally based on a member's proportionate equity investment relative to the total equity investments of all the members, and therefore a member could not be allocated a loss in excess of its equity investment. The Loss allocation account will be satisfied, on a member by member basis, by applying the portion of future non-cash patronage dividends as a reduction to the Loss allocation account until fully satisfied. The Loss allocation amount may also be satisfied, on a member by member basis, by applying the par value of maturing member notes and related interest payments as a reduction to the Loss allocation account until such account is fully satisfied. However, in the event a member should terminate as a stockholder of TruServ, any unsatisfied portion of that member's Loss allocation account will be satisfied by reducing the redemption amount paid for the member's stock investment in TruServ. The board of directors determined that TruServ would retain the 2001 loss as part of the Accumulated deficit account. All or a portion of patronage income and all non-patronage income, if any, may be retained in the future to reduce the Accumulated deficit account. TruServ has determined for each member that was a stockholder in 2001, its share of the 2001 loss that has been retained in the Accumulated deficit account. The 2001 loss was allocated based upon both the member's proportionate stock investment, net of any 1999 loss allocation account, and also based on the member's purchases from the co-op in 2001. No member was allocated a loss amount greater than its net equity investments held as of year end 2001. In the event a member terminates its status as a stockholder of TruServ, any remaining 2001 loss in the Accumulated deficit account that is allocable to the terminating member will be distributed to the terminating member and satisfied by reducing the redemption amount paid for the member's stock investment in TruServ. A member's proportionate share of the 1999 and/or 2001 losses has been limited to the extent of its equity investment in TruServ. Any portion of a loss allocation that exceeds a member's equity investment is retained by TruServ in the Accumulated deficit account. All or a portion of patronage income and all non-patronage income, if any, may be retained in the future to reduce the Accumulated deficit account. 7 NOTE 5 - INVENTORIES
April 3, December 31, 2004 2003 ------------- ------------- Manufacturing inventories: Raw materials $ 2,670 $ 1,979 Work-in-process and finished goods 27,991 19,020 Manufacturing inventory reserves (220) (258) ------------- ------------- 30,441 20,741 ============= ============= Merchandise inventories: Warehouse inventory 312,600 262,444 Merchandise inventory reserves (8,072) (6,460) ------------- ------------- 304,528 255,984 ------------- ------------- Total $ 334,969 $ 276,725 ============= =============
Inventories are stated at the lower of cost, determined on the first-in, first-out basis, or market. The cost of inventory also includes indirect costs incurred to bring inventory to its existing location for resale. The amount of indirect costs included in ending inventory at April 3, 2004 and December 31, 2003 was $21,775 and $18,386, respectively. NOTE 6 - DEBT On August 29, 2003, TruServ entered into a new four-year $275,000 asset based revolving credit facility (the "Bank Facility"). The Bank Facility was used to refinance the existing third party senior debt. The interest rate for the initial term through April 30, 2004 was a variable rate (at TruServ's option) of London Interbank Offering Rate ("LIBOR") plus 2.25% or the prime rate plus 0.25%. The unused commitment fee is 0.375%. As of April 3, 2004, the weighted average interest rate was 3.42%. Letters of credit issued under the Bank Facility have a fee of 2.25%. Fees paid for closing the Bank Facility totaled $3,752 and these fees are being amortized by TruServ over the four-year term. Under the terms of the Bank Facility agreement, pricing is determined by a performance grid based upon a fixed charge coverage ratio, measured quarterly beginning in March 2004. Based on this performance pricing grid, TruServ achieved improved variable pricing for the quarter and therefore effective May 1, 2004 TruServ's variable interest rate will be LIBOR plus 2.0% or the prime rate and letters of credit will carry fees of 2.0%. The Bank Facility has no financial covenants, unless average daily excess availability for the last 60 days of each quarter drops below $35,000. As of April 3, 2004, TruServ's average excess availability for the last 60 days was greater than $35,000 and TruServ is therefore not subject to a maximum fixed charge coverage ratio of 1.1 to 1.0. Additionally, TruServ is required to maintain $15,000 of excess availability at all times. Availability is defined as the lesser of $275,000 or the calculated collateral value of eligible assets less the outstanding borrowings, letters of credit and reserves against availability that may be imposed at the reasonable discretion of the lenders. Availability at April 3, 2004 less the aggregate of outstanding borrowings of $181,800 together with letters of credit and reserves of $14,167 was $79,033. As of April 3, 2004 TruServ is in compliance with all terms and conditions of the Bank Facility. At April 3, 2004, TruServ had Current maturities of long-term debt, notes, borrowings and capital lease obligations of $117,271, which only $20,471 of 8 this amount has required payments during the next twelve months. The required payments consist of $19,778 of member subordinated and installments notes and $693 of capital leases and other. Historically, a minimum of 50% of the member subordinated notes have been renewed, extending the maturity for an additional three years. In 2003, this renewal rate was approximately 85%. The remaining $96,800 in current maturities of long-term debt, notes, borrowings and capital lease obligations is the current portion of the Bank Facility and as explained below reflects the seasonality of TruServ's business. The current and long-term portions of the Bank Facility do not have any required payments until 2007. At April 3, 2004, TruServ had $181,800 in revolving credit loans of which $96,800 is included in Current maturities of long-term debt, notes and capital lease obligations and $85,000 is included in Long-term debt, notes and capital lease obligations, less current maturities. Based on management's projection of seasonal working capital needs, the amount classified as Long-term debt, notes and capital lease obligations, less current maturities represents the lowest level of borrowings during the next twelve months. In March 2004, TruServ amended the Bank Facility primarily to clarify language in the loan agreement to better reflect the intent of the parties and to adjust the method of reporting financial calculations in light of new accounting pronouncements affecting TruServ since the Bank Facility was negotiated in August 2003. NOTE 7 - SEGMENT INFORMATION TruServ is principally engaged as a wholesaler of hardware and related products and is a manufacturer of paint products. TruServ identifies segments based on management responsibility and the nature of the business activities of each of its components. TruServ measures segment earnings as operating earnings, including an allocation for interest expense and income taxes. Information regarding the identified segments and the related reconciliation to consolidated information are as follows:
Thirteen weeks ended April 3, 2004 ---------------------------------------------- Consolidated Hardware Paint Totals ------------- ------------- ------------- Net sales to external customers $ 476,595 $ 22,767 $ 499,362 Interest expense 2,885 538 3,423 Depreciation and amortization 4,251 344 4,595 Segment net margin / (loss) (1,708) 3,832 2,124
Thirteen weeks ended March 29, 2003 ---------------------------------------------- Consolidated Hardware Paint Totals ------------- ------------- ------------- Net sales to external customers $ 431,729 $ 20,398 $ 452,127 Interest expense 7,738 1,471 9,209 Depreciation and amortization 6,784 363 7,147 Segment net margin / (loss) (5,807) 1,890 (3,917)
NOTE 8 - COMMITMENTS AND CONTINGENCIES In May 2000, TruServ filed a complaint in the Circuit Court of McHenry County, Illinois against Bess Hardware and Sports, Inc., ("Bess") to recover an accounts receivable balance in excess of $400. Bess filed a counterclaim, seeking a setoff against its accounts receivable balance for the par redemption value of Bess's shares of TruServ Stock. Bess contested the validity of a March 17, 2000 corporate resolution declaring a moratorium on the redemption of all 9 TruServ capital stock, as well as an allocation of Bess' proportionate share of the loss, which TruServ declared for its fiscal year 1999. On August 6, 2003, the Circuit Court entered judgment in favor of TruServ on its accounts receivable claim in the amount of $392, and entered judgment in favor of Bess on its counterclaim. Bess did not appeal the judgment on the accounts receivable claim. TruServ appealed the judgment on Bess's counterclaim. On January 21, 2004, the Second District of the Illinois Appellate Court issued a decision reversing the portion of the Circuit Court's ruling that had refused to enforce the Moratorium. In validating the Moratorium, the Second District found that TruServ's capital was impaired, and held that TruServ "was prohibited from immediately remitting the redemption price for [Bess's] TruServ stock." The Second District also held that as of April 10, 2000 -- the effective date of the termination of Bess's membership -- Bess ceased to be a TruServ stockholder and thus was not subject to the loss allocation plan passed by resolution of the TruServ board of directors on August 29, 2000. On February 9, 2004, Bess filed a Petition For Rehearing in the Second District of the Illinois Appellate Court. On March 3, 2004 the Petition For Rehearing was denied. TruServ provides guarantees for certain member loans, but is not required to provide a compensating balance for the guarantees. TruServ is required to pay off a portion of the full amount of these loans under these guarantees, ranging from 0-50% of the member's outstanding balance, in the event that a member defaults on their loan, after which the member will be liable to TruServ for the guaranteed amount. The amount of the guaranteed portion of these member loans, which are not recorded in TruServ's balance sheet, was approximately $601 and $1,854 as of April 3, 2004 and March 29, 2003, respectively. The balance of $601 as of April 3, 2004 includes approximately $169 that will mature in fiscal 2004. The remaining guarantees will expire periodically through 2013. TruServ carries a reserve of $60 relating to these guarantees. Additionally, TruServ sold certain member note receivables to a third party in 2002, payment of which TruServ has fully guaranteed. TruServ is required to pay off 100% of the outstanding balance of these member notes under these guarantees in the event that a member defaults on its notes, after which the member will be liable to TruServ for the guaranteed amount. The balance of these notes at April 3, 2004 and March 29, 2003 was $401 and $785, respectively. TruServ has recorded a liability and related receivable for $401 relating to these member notes, and carries a $40 reserve relating to these guarantees. The balance of $401 as of April 3, 2004 includes approximately $218 that will mature in fiscal 2004. The remaining guarantees will expire periodically through 2007. TruServ has a lifetime warranty or a customer satisfaction guarantee on the majority of its True Value paint products, which covers only replacement material. TruServ has historically experienced minimal returns on these warranties and guarantees and has determined any related liability to be immaterial. NOTE 9 - BENEFITS Pensions Plans The components of net periodic pension cost for TruServ administered pension plans were as follows for the quarter ended April 3, 2004 and March 29, 2003: 10
2004 2003 ------- ------- ($ in thousands) Components of net periodic pension cost: Service cost $ 1,400 $ 1,300 Interest cost 1,100 1,000 Expected return on assets (1,100) (1,100) Amortization of prior service cost 100 100 Amortization of actuarial loss/(gain) 300 200 Settlement loss/(gain) 500 900 ------- ------- Net pension cost $ 2,300 $ 2,400 ======= =======
Contributions TruServ expects to contribute $6,500 to its qualified pension plan and $1,550 to its supplemental retirement plan in 2004. Retirement Medical Plan The components of net periodic post-retirement benefit cost, was as follows for the quarter ended April 3, 2004 and March 29, 2003:
2004 2003 ------- ------- ($ in thousands) Component of net periodic post-retirement benefit cost: Interest cost $ 100 $ 100 ------- ------- Net periodic benefit cost $ 100 $ 100 ======= =======
Contributions TruServ expects to contribute $547 to its retirement medical plan to cover the cost of premiums and subsidies during 2004. NOTE 10 - NEW ACCOUNTING PRONOUNCEMENTS On January 1, 2003, TruServ adopted Emerging Issues Task Force ("EITF") Issue No. 02-16 "Accounting by a Customer (including a Reseller) for Certain Consideration Received from a Vendor" ("EITF 02-16"), which addresses the accounting and income statement classification for consideration given by a vendor to a retailer in connection with the sale of the vendor's products or for the promotion of sales of the vendor's products. The EITF concluded that such consideration received from vendors should be reflected as a decrease in prices paid for inventory and recognized in cost of sales as the related inventory is sold, unless specific criteria are met qualifying the consideration for treatment as reimbursement of specific, identifiable incremental costs. In January 2003, the EITF clarified that this issue is effective for arrangements with vendors initiated on or after January 1, 2003. Most of TruServ's arrangements with vendors in 2003 were initiated before January 1, 2003 and did not have a material impact on first quarter of 2003. However, most arrangements with vendors in 2004 were initiated in the fourth quarter of 2003, and the application of EITF 02-16 has impacted the first quarter 2004 results of operations and financial position as net margin was 11 negatively impacted in the first quarter of 2004 compared to the same period last year by $2,540. The first quarter of 2004 was impacted by the application of EITF 02-16 as vendor advertising funds are being earned in 2004 based on merchandise purchases and the vendor advertising funds are recognized in income when the merchandise is sold. In 2003, the vendor advertising funds were matched and recognized in net revenue when the advertising took place and the costs were incurred. Additionally, net revenue will be impacted by the application of EITF 02-16, as the advertising revenue that was recognized as the advertising occurred will now be classified as part of the cost of the product. Also impacting net revenue is the classification of monies earned for holding markets that are now considered a service to vendors and members. Monies earned from prior year markets were recorded as an offset in SG&A expenses and are now recorded into net revenue for 2004. Also, the expenses related to providing the markets were previously classified in SG&A expenses and are now classified in cost of revenue for 2004. NOTE 11 - Deferred Stock Redemptions Deferred stock redemptions are comprised of the aggregate net equity investments for each shareholder that has presented its stock for redemption and had such redemption deferred due to TruServ's declaration in March of 2000 of a moratorium on stock redemptions. These net equity investments are the aggregate par value of Class A common stock, Qualified Class B common stock and Nonqualified Class B common stock reduced by the aggregate amount that TruServ may legally offset to the Loss allocation, Accumulated deficit and Accounts receivable accounts. At the TruServ annual meeting on March 28, 2004, the board of directors of TruServ announced that it had voted to rescind the moratorium on stock redemptions effective July 6, 2004, provided that there does not occur a material adverse change in the financial position of the business or the operations of the business between March 28 and July 6, 2004. As of April 3, 2004, the deferred stock redemption liability on TruServ's financial statements totals $35,721. As TruServ offsets amounts due by its members against amounts that it pays to the members on redemption of their stock, the deferred stock redemption liability is the aggregate value of the former members' equity investments after the offset of the loss allocation resulting from the 1999 loss, the 2001 loss and the accounts receivable owed by the former members. In accordance with TruServ's By-Laws, TruServ intends to pay approximately $7,764 of the stock redemption liability in cash as soon as practical after it lifts the moratorium. TruServ intends to pay the balance of the redemption obligation in subordinated installment notes that would be payable in five equal annual installments and that would bear interest at the rate of 4.36%. The first installment payment of principal and interest of the subordinated installment notes would be due in December 2004, if TruServ lifts the moratorium. Therefore, TruServ would be required to pay in 2004, if it lifts the moratorium, approximately $13,355 that is classified under current liabilities in the balance sheet. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ($ in thousands) THIRTEEN WEEKS ENDED APRIL 3, 2004 COMPARED TO THIRTEEN WEEKS ENDED MARCH 29, 2003 12 RESULTS OF OPERATIONS: Overview The first quarter of 2004 was yet another positive chapter in the TruServ turn around. This was the first quarter since 1999 that TruServ experienced a quarter over prior year quarter increase in revenue. TruServ also realized a $6,041 improvement year over year in the bottom line. Revenue was up 10.4% versus first quarter last year. Revenue this year in the first quarter was $499,362 compared to $452,127 in the first quarter last year. The revenue increase was mainly generated from an increase in same store sales. Approximately one half of the same store sales increase relates to an additional four shipping days in the first quarter this year versus last year and the balance of the increase relates to an increase in existing member purchasing volume. The revenue impact of net participating member loss of $7,785 related to nonrecurrence of sales to members who left TruServ after the first quarter of 2003 net of new member sales. 103 members terminated their membership in the first quarter of 2004, which is the lowest level since the merger. Approximately 73.0% of these first quarter terminations were members who on average had warehouse and relay purchases less than $40 from TruServ in the full year 2003. When netted with new members in the quarter, TruServ's store count only dropped by 46 locations from 6,178 at year-end to 6,132. Management is seeing an increase in TruServ's success rate in converting new stores from the competition. The negative revenue impact from the net participating member loss was substantially offset by the classification of vendor dollars for supporting the Spring 2004 market as revenue, consistent with EITF 02-16. TruServ had a profit in the first quarter this year of $2,124 compared to a net loss of $3,917 last year. The primary driver in the improved earnings is the effect of last year's refinancing. TruServ's interest expense for the quarter of $3,423 was down $5,786 from $9,209 a year ago. The favorable earnings from the higher revenue and the fact the spring market was held in the first quarter this year compared to the second quarter last year, was partially offset by higher employee medical expense and legal costs, plus the $2,540 negative impact of a new accounting rule regarding how certain monies from vendors are to be recorded. Included in the results were incremental wholesale price reductions to the members of $3,146, which were essentially funded by negotiated lower purchase prices. TruServ's new revolving credit facility has performance pricing. This means TruServ can cause favorable and unfavorable adjustments to its credit facility interest rate based on the financial performance of TruServ. TruServ's financial performance for the fourth quarter of 2003 and the first quarter of 2004 has been such that TruServ has been able to lower its interest rate by 0.25% (from LIBOR + 2.25% to LIBOR + 2.0%). The rate was adjusted downward effective May 1, 2004. Going forward, this pricing adjustment will be determined each quarter. As Spring is the busiest season for TruServ's members, it is the busiest season for TruServ and requires the highest use of working capital. Since year-end, and consistent with prior years' first quarter trends, TruServ's accounts receivable and inventory have risen as well as accounts payable and bank borrowings. TruServ's debt increased to $243,319 from $192,282 at year-end, to support a rise in inventory, and is up 6.0% compared to $229,620 at the end of the first quarter last year. The higher investment in inventory has generated a fill rate in the first quarter of 95.8%, which is the highest fill rate for a first quarter since the merger in 1997. Management continues to work to optimize TruServ's inventory investment and concurrently its fill rate to its members. 13 Revenue and Gross Margin A reconciliation of net revenue and gross margin for the 13 weeks ending April 3, 2004 and March 29, 2003 follows:
Gross Net % of Net Gross Margin % Revenue Revenue Margin of Revenue ------------ -------- ------------ --------- ($ in thousands) Thirteen weeks ended March 29, 2003 results $ 452,127 100.0% $ 43,885 9.7% Same store sales: Warehouse and relay revenue 26,197 5.8 4,499 Vendor direct revenue 16,615 3.7 93 Paint Revenue 2,834 0.6 389 ------------ ------- ------------ Net same store sales 45,646 10.1 4,981 ------------ ------- ------------ Change in participating members: Terminated members: Warehouse and relay revenue (8,947) (2.0) (1,372) Vendor direct revenue (4,535) (1.0) (54) Paint Revenue (680) (0.2) (324) ------------ ------- ------------ Net terminated members (14,162) (3.2) (1,750) ------------ ------- ------------ New members: Warehouse and relay revenue 3,692 0.8 448 Vendor direct revenue 2,471 0.5 12 Paint Revenue 214 0.1 78 ------------ ------- ------------ Net new members 6,377 1.4 538 ------------ ------- ------------ Net change in participating members (7,785) (1.8) (1,212) ------------ ------- ------------ Advertising, transportation and other revenue 9,374 2.1 3,417 Indirect cost of revenue - - (889) ------------ ------- ------------ Total change 47,235 10.4 6,297 ------------ ------- ------------ Thirteen weeks ended April 3, 2004 results $ 499,362 110.4% $ 50,182 10.0% ============ ======= ============
Net revenue for the 13 weeks ended April 3, 2004 totaled $499,362, an increase of $47,235, or 10.4%, as compared to the same period last year. The increase in net revenue was in the same store sales and advertising, transportation, and other revenue categories and was partially offset by a decline in the change in participating member sales category. TruServ's same store sales increased $45,646, or 10.1%, due to four additional shipping days in the first quarter of 2004, which represented approximately 50% of the increase, together with the impact of an improved economy, renewed member confidence in their business and in the co-op, as well as various co-op programs and initiatives to drive merchandise sales. Advertising, transportation and other revenue increased $9,374, or 2.1%, mainly due to the timing of TruServ's spring market held in the first quarter of 2004, as compared to the second quarter of 2003, and partially offset by the EITF 02-16 impact on vendor advertising fund recognition as disclosed in Note 10, "New Accounting Pronouncements." Offsetting the favorable net revenue variance was a net decline in TruServ's number of participating member retail outlets of 4.6%,as compared to the same period last year, which resulted in revenue reduction of $7,785, or 1.8%. Although there is a net decline in revenue from the change in participating members in the first quarter of 2004, this represents an improvement relative to the net decline of $25,606 experienced in the first quarter of 2003. Also, another factor reducing net revenue in the same store sales and change in participating member categories is a product price reduction that lowered revenue by an incremental $3,146, as compared to the first quarter of 2003. 14 Gross margin for the 13 weeks ended April 3, 2004 increased by $6,297, or 14.3%, as compared to the first quarter of 2003. Same store sales gross margin contributed $4,981 to the favorable variance due to the volume increase in same store sales, and was partially offset by lower paint margins due to costs incurred to implement the new "Color Made Simple" program. Advertising, transportation, and other gross margin was also favorably impacted mainly due to the timing of TruServ's spring market held in the first quarter of 2004, as compared to the second quarter of 2003, and was partially offset by the impact of EITF 02-16 which reduced margin $2,540, (See note 10, "New Accounting Pronouncements"). Another contributing factor reducing gross margin was the net decline in participating member outlets that lowered gross margin by $1,212. Although, the net decline in participating members caused a gross margin reduction, the trend shows improvements, as the first quarter of 2003 had a gross margin loss of $2,903 from a net decline in participating members. Also, indirect cost of revenue, which is comprised of freight-in, vendor rebates, cash discounts and other cost incurred to prepare goods for resale, offset the favorable gross margin by $889. This negative impact was mainly due to an increase in freight-in cost associated with the increase in global sourcing of products. The product price reduction did not impact gross margin as lower product acquisition cost from both domestic and global suppliers offset the product price reduction.
2004 2003 $ Expense Increase ---- ---- ------------------ Logistics and manufacturing expenses $16,081 $16,010 $71
Logistics and manufacturing expenses increased by $71, or 0.4%, as compared to the same period last year. As the result of continuing cost reduction initiatives, TruServ was able to reduce its handling cost as a percent of warehouse sales and maintained expenses consistent with the same period last year despite a 7.9% increase in net warehouse and relay sales volume.
2004 2003 $ Expense Increase ---- ---- ------------------ Selling, general and administrative expenses $29,001 $23,080 $5,921
Selling, general and administrative ("SG&A") expenses increased $5,921, or 25.7%, as compared to the first quarter of 2003. The increase in SG&A expenses was partially due to higher health care costs, which reflects the upward trends in health care self-insurance costs in the first quarter compared to the same period last year. Also severance charges and professional fees that relate to higher litigation costs as well as professional work related to Sarbanes-Oxley preparation were higher in the first quarter compared to the same period last year.
2004 2003 $ Expense (Decrease) ---- ---- -------------------- Third party interest expense $2,022 $7,824 $(5,802)
Third party interest expense decreased $5,802, or 74.2%, as compared to the same period last year. Lower interest expense was achieved as TruServ completed the refinancing of its third party senior debt on August 29, 2003. The significant items that generated lower interest expense were the lower average interest rate savings of $3,709, the elimination of make-whole prepayment penalties of $1,452 and the lower bank fee amortization of $409.
2004 2003 $ Net margin Increase ---- ---- --------------------- Net margin/(loss) $2,124 ($3,917) $6,041
15 The quarter resulted in a net margin of $2,124, up from a net loss of $3,917 for the same period a year ago. The favorable increase in net margin of $6,041 is mainly due to the lower interest expense related to the August 29, 2003 refinancing of TruServ's third party debt. Other significant impacts to net margin / (loss) were the timing of TruServ's market and increased sales volume partially offset by the effects of EITF 02-16, as well as increased health insurance, professional fees and severance charges. LIQUIDITY AND CAPITAL RESOURCES: The information provided below, which should be read in conjunction with the information in TruServ's Annual Report on Form 10-K for the year ended December 31, 2003, describes TruServ's debt, credit facilities, guarantees and future commitments, in order to facilitate a review of TruServ's liquidity. TruServ used cash from operating activities for the 13 weeks ended April 3, 2004 of $29,969, as compared to generating cash of $27,251 for the 13 weeks ended March 29, 2003. TruServ's major working capital components individually move in the same direction with the seasonality of the business. The spring and early fall are the most active periods for the co-op and require the highest levels of working capital. The low point for accounts receivable, inventory and accounts payable is at the end of the calendar year. The increase in accounts receivable and inventory from fiscal year end is partially matched by the increase in accounts payable. The cash needed to meet the future payments for accounts payable will be provided by the cash generated from collections on accounts receivable and from the future sale of inventory. The unfavorable change in cash related to operating activities was mainly due to increased accounts receivable from higher sales volume and a higher days sales outstanding due to offering members an extension on terms through various programs compared to the same period last year. Inventory as of April 3, 2004 is $334,969, up $58,244 since the beginning of the year. This increase in the first quarter of 2004 is comparable to the first quarter of 2003. Inventory as compared to the same period last year is up $42,142, as TruServ maintained the increased level of inventory that existed at the end of 2003. The increased inventory levels over the same period last year was primarily due to the expansion of the merchandise assortment available through the TruServ distribution centers. TruServ increased its stockkeeping unit ("SKU") count 9.4%, to approximately 71,000 SKUs. An additional factor is the timing of TruServ's spring market, as the spring market was held in the first quarter of 2004 and was held in the second quarter of 2003. Also, TruServ's first quarter 2004 inventory levels reflect the impact of additional lead times related to increased importing of product. Accounts payable did not increase at the same level in the first quarter of 2004, as compared to the first quarter of 2003, as increased global sourcing of products requires TruServ to pay earlier for merchandise. Also, first quarter 2004 payments related to increased inventory that TruServ had acquired late in the fourth quarter of 2003 lowered TruServ's accounts payable balance. TruServ used cash from investing activities of $1,597 for the 13 weeks ended April 3, 2004, as compared to $637 of cash generated for the same period last year. This is mainly due to additions to properties owned using cash of $1,704, which is up from $745 compared to the same period last year. These capital expenditures are comprised of various building improvements and purchases of additional equipment and technology at TruServ's distribution centers and at its corporate headquarters. 16 TruServ used cash generated from its financing activities of $28,493 to fund its seasonal need for operating activities and its financing activities. The cash was generated from increased borrowings of $50,200 from the Bank Facility. The interest rate for the initial term of the Bank Facility through April 30, 2004 was a variable rate (at TruServ's option) of LIBOR plus 2.25% or the prime rate plus 0.25%. The unused commitment fee is 0.375%. As of April 3, 2004, the weighted average interest rate was 3.42%. Letters of credit issued under the Bank Facility have a fee of 2.25%. Under the terms of the Bank Facility agreement, pricing is determined by a performance grid based upon a fixed charge coverage ratio, measured quarterly beginning in March 2004. Based on this performance pricing grid, TruServ achieved improved variable pricing for the quarter and therefore, effective May 1, 2004, TruServ's variable interest rate will be LIBOR plus 2.0% or the prime rate and letters of credit will carry fees of 2.0%. The Bank Facility has no financial covenants, unless average daily excess availability for the last 60 days of each quarter drops below $35,000. As of April 3, 2004, TruServ's average excess availability for the last 60 days was greater than $35,000 and TruServ is therefore not subject to a maximum fixed charge coverage ratio of 1.1 to 1.0. Additionally, TruServ is required to maintain $15,000 of excess availability at all times. Availability is defined as the lesser of $275,000 or the calculated collateral value of eligible assets less the outstanding borrowings, letters of credit and reserves against availability that may be imposed at the reasonable discretion of the lenders. Availability at April 3, 2004 less the aggregate of outstanding borrowings of $181,800, together with letters of credit and reserves of $14,167, was $79,033. As of April 3, 2004 TruServ is in compliance with all terms and conditions of the Bank Facility. In the 13 weeks ended April 3, 2004, TruServ had a net decrease in cash and cash equivalents of $3,073. At April 3, 2004, TruServ's working capital was $67,881, as compared to $50,602 at December 31, 2003. The current ratio was 1.12 at April 3, 2004, as compared to 1.11 at December 31, 2003. TruServ believes that its cash from operations and existing credit facility will provide sufficient liquidity to meet its working capital needs, planned capital expenditures and debt obligations that are due to be repaid in fiscal year 2004. At April 3, 2004, TruServ has $20,471 of required payments during the next twelve months. The required payments consist of $19,778 of member subordinated and installments notes and $693 of capital leases and other. Historically, a minimum of 50% of the member subordinated notes have been renewed, extending the maturity for an additional three years. In 2003, this renewal rate was approximately 85%. The remaining $96,800 in current maturities of long-term debt, notes, borrowings and capital lease obligations is the current portion of the Bank Facility that reflects the seasonality of TruServ's business (See Note 6 "Debt"). The current and long-term portions of the Bank Facility do not have any required payments until 2007. CASH REQUIREMENTS: Below is the current schedule of the expected cash outflows necessary to meet financial commitments existing as of April 3, 2004 and thereafter: 17
2005 & 2007 & 2004 2006 2008 Thereafter Total ------------ ------------ ------------ ------------ ------------ ($ in thousands) Bank Facility(1) $ 96,800 $ - $ 85,000 $ - $ 181,800 Promissory (subordinated) and installment notes(2) 19,778 39,922 - - 59,700 Capital lease obligations 764 927 300 - 1,991 Operating lease obligations 24,546 53,470 46,506 238,793 363,315 Purchase obligations(3) 72,653 - - - 72,653 Redeemable non-qualified Class B non-voting common stock - - - 22,402 22,402 Deferred stock redemption(4) 13,355 11,183 11,183 - 35,721 ------------ ------------ ------------ ------------ ------------ Total $ 227,896 $ 105,502 $ 142,989 $ 261,195 $ 737,582 ============ ============ ============ ============ ============
(1) The amount shown due in 2004 represents management's estimate of the amount necessary to reduce the outstanding balance to the expected lowest level of borrowings during the next twelve months. There are no required payments until the maturity of the Bank Facility in August 2007. (2) The amounts shown are scheduled payments; however, historically a minimum of 50% of the promissory (subordinated) notes have been renewed, extending the maturity for an additional three years. In 2003, this renewal rate was approximately 85%. (3) Purchase obligations are typically short-term and fluctuate with the seasonality of TruServ's business. Also purchase obligations are continuously replaced throughout the year with new purchase obligations as existing purchase obligations are received into inventory. (4) At the TruServ annual meeting on March 28, 2004, the board of directors of TruServ announced that it had voted to rescind the moratorium on stock redemptions effective July 6, 2004, provided that there does not occur a material adverse change in the financial condition or the operations of the business between March 28 and July 6, 2004. TruServ intends to pay approximately $7,764 of the stock redemption liability in cash as soon as practical after it lifts the moratorium. TruServ intends to pay the balance of the redemption obligation in subordinated installment notes that would be payable in five equal annual installments and that would bear interest at the rate of 4.36%. The first installment payment of principal and interest of the subordinated installment notes would be due in December 2004, if it lifts the moratorium. Therefore, TruServ would be required to pay in 2004, if it lifts the moratorium, approximately $13,355. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK ($ in thousands) TruServ's operations are subject to certain market risks, primarily interest rate risk and credit risk. Interest rate risk pertains to TruServ's variable rate debt, which had approximately $181,800 outstanding at April 3, 2004. A 50 basis point movement in interest rates would result in an approximate $909 annualized increase or decrease in interest expense and cash flows based on the outstanding balance at April 3, 2004. For the most part, TruServ manages interest rate risk through a combination of variable and fixed-rate debt instruments with varying maturities. As required 18 by the Bank Facility, TruServ has purchased interest rate caps that limit its risk on $25,000 of variable rate debt for the entire term of the Bank Facility to a maximum underlying LIBOR rate of 3.5%, approximately 2.25% increase over current LIBOR. Credit risk pertains primarily to TruServ's trade receivables. TruServ extends credit to its members as part of its day-to-day operations. TruServ's management believes that as no specific receivable or group of receivables comprises a significant percentage of total trade accounts, its risk in respect to trade receivables is limited. Additionally, TruServ's management believes that its allowance for doubtful accounts is adequate with respect to member credit risks. TruServ performs no speculative hedging activities. TruServ does not have any interest in variable interest entities ("VIE's") and all related party transactions (i.e., transactions with members) are at arm's length. ITEM 4. CONTROLS AND PROCEDURES TruServ's Chief Executive Officer and Chief Financial Officer have concluded that as of April 3, 2004 TruServ's disclosure controls and procedures are effective. There has been no change in TruServ's internal control over financial reporting identified in connection with reaching the conclusion described above that occurred during TruServ's last fiscal quarter that has materially affected, or is reasonably likely to materially affect, TruServ's internal control over financial reporting. PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS ($ in thousands) BESS ACTION In May 2000, TruServ filed a complaint in the Circuit Court of McHenry County, Illinois against Bess Hardware and Sports, Inc., ("Bess") to recover an accounts receivable balance in excess of $400. Bess filed a counterclaim, seeking a setoff against its accounts receivable balance for the par redemption value of Bess's shares of TruServ Stock. Bess contested the validity of a March 17, 2000 corporate resolution declaring a moratorium on the redemption of all TruServ capital stock, as well as an allocation of Bess' proportionate share of the loss, which TruServ declared for its fiscal year 1999. On August 6, 2003, the Circuit Court entered judgment in favor of TruServ on its accounts receivable claim in the amount of $392, and entered judgment in favor of Bess on its counterclaim. Bess did not appeal the judgment on the accounts receivable claim. TruServ appealed the judgment on Bess's counterclaim. On January 21, 2004, the Second District of the Illinois Appellate Court issued a decision reversing the portion of the Circuit Court's ruling that had refused to enforce the Moratorium. In validating the Moratorium, the Second District found that TruServ's capital was impaired, and held that TruServ "was prohibited from immediately remitting the redemption price for [Bess's] TruServ stock". The Second District also held that as of April 10, 2000 -- the effective date of the termination of Bess's membership -- Bess ceased to be a TruServ stockholder and thus was not subject to the loss allocation plan passed by resolution of the TruServ board of directors on August 29, 2000. On February 9, 2004, Bess filed a Petition For Rehearing in the Second District of the Illinois Appellate Court. On March 3, 2004 the Petition For Rehearing was denied. CLAIMS AGAINST ERNST & YOUNG LLP TruServ is pursuing claims against its former outside auditors, Ernst & Young LLP ("E&Y"), for professional malpractice, breach of contract, deceptive 19 business practices and fraud. TruServ contends that E&Y failed to properly discharge its duties to TruServ and failed to identify, in a timely manner, and indeed concealed, certain material weaknesses in TruServ's internal financial and operational controls. As a result, TruServ was forced to make an unanticipated accounting adjustment in the fourth quarter of 1999 in the total amount of $121,333 (the "Fourth Quarter Charge"). As a result, TruServ reported a net loss of $130,803 for the fiscal year ended December 31, 1999. It is TruServ's belief that had E&Y properly discharged its duties, the scope and breadth of the Fourth Quarter Charge, as well as the accounting and operational control deficiencies that necessitated the charge, would have been substantially lessened. As a result of E&Y's failures, TruServ has suffered significant financial damages. The factual allegations that form the basis for TruServ's claim against E&Y include, in part, the issues identified in the Securities and Exchange Commission (the "Commission") cease and desist order described below. TruServ began discussion of its claims with E&Y early in the fall of 2001. Pursuant to the dispute resolution procedures required by TruServ's engagement letter with E&Y, TruServ and E&Y attempted to mediate this dispute during the first six months of 2002. When those attempts proved unsuccessful, and again pursuant to the dispute resolution procedures, TruServ filed its claim with the American Arbitration Association on July 31, 2002. The arbitration, which is subject to certain confidentiality requirements, is currently pending. Hearings are currently scheduled to begin in the fall of 2004. Recoveries under this matter, if any, may be subrogated to the rights of TruServ's insurer to the extent that it has made payments to or on behalf of TruServ associated with the 1999 loss. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS ($ in thousands) In March 2000, the board of directors of TruServ declared a moratorium on redemptions of the capital stock. In reaching its decision to declare the moratorium, the board of directors of TruServ reviewed the financial condition of TruServ and considered its fiduciary obligations and corporate law principles under Delaware law. The board of directors concluded that it should not redeem any of the capital stock (which TruServ's By-laws required to be redeemed at par value) while its net asset value was substantially less than par value, as that would likely violate legal prohibitions against "impairment of capital." In addition, the board of directors concluded that it would be a violation of its fiduciary duties to all members and that it would constitute a fundamental unfairness to members if some members were allowed to have their shares redeemed before the 1999 loss was allocated to them and members who did not request redemption were saddled with the losses of those members who requested redemption. Moreover, the board of directors considered TruServ's debt agreements in existence at that time and, in particular, the financial covenants thereunder, which prohibit redemptions when TruServ, among other things, did not attain certain profit margins. At the time the board of directors declared the moratorium on redemptions, TruServ's By-Laws did not impose limitations on the board's discretion to initiate or to continue a moratorium on redemption. The By-Laws merely provided that upon termination of a member's agreement, TruServ was to redeem the member's shares at par value. Nevertheless, the board of directors concluded that its fiduciary obligations to TruServ and its members would not permit it to effect redemptions under the circumstances described above. After the board of directors declared the moratorium, the board of directors amended the By-Laws to provide that if TruServ's funds available for redemption are insufficient to pay all or part of the redemption price of shares of capital stock presented for redemption, the board of directors may, in its sole discretion, delay the payment of all or part of the redemption price. 20 At the TruServ annual meeting on March 28, 2004, the board of directors of TruServ announced that it had voted to rescind the moratorium on stock redemptions effective July 6, 2004, provided that there does not occur a material adverse change in the financial condition or the operations of the business between March 28 and July 6, 2004. As of April 3, 2004, the deferred stock redemption liability on TruServ's financial statements totals $35,721. As TruServ offsets amounts due by its members against amounts that it pays to the members on redemption of their stock, the deferred stock redemption liability is the aggregate value of the former members' equity investments after the offset of the loss allocation resulting from the 1999 loss, the 2001 loss and the accounts receivable owed by the former members. Details are as follows: Fair Value of Stock Presented for Redemption but Deferred due to the Moratorium
Class A common stock $ 19,812 Non-qualified Class B common stock 11,467 -------- Amounts historically paid out at time of redemption 31,279 Qualified Class B common stock (historically paid out by means of a five-year subordinated installment note) 51,637 --------- Gross par value of stock presented for redemption but deferred due to the moratorium 82,916 Reductions due to legal right of offsets: 1999 loss allocations (29,223) 2001 loss allocable to terminated members (10,971) Accounts receivable owed by terminated members (7,001) -------- Reductions due to legal right of offsets (47,195) --------- Fair value of stock presented for redemption but deferred due to the moratorium $ 35,721 =========
In accordance with TruServ's By-Laws, TruServ intends to pay approximately $7,764 of the stock redemption liability in cash as soon as practical after it lifts the moratorium. TruServ intends to pay the balance of the redemption obligation in subordinated installment notes that would be payable in five equal annual installments and that would bear interest at the rate of 4.36%. The first installment payment of principal and interest of the subordinated installment notes would be due in December 2004, if TruServ lifts the moratorium. Therefore, TruServ would be required to pay in 2004, if it lifts the moratorium, approximately $13,355. ITEM 3. DEFAULTS UPON SENIOR SECURITIES None ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 21 At the company's Annual Meeting of Stockholders held on March 28, 2004, the election results were as follows: 1. Election of directors for a term of one year:
Votes for Votes Withheld Bryan R. Ableidinger 168,780 6,540 Laurence L. Anderson 167,820 7,500 Michael S. Glode 168,960 6,360 Thomas S. Hanemann 168,000 7,320 Judith S. Harrison 168,060 7,260 Pamela Forbes Lieberman 168,120 7,200 Kenneth A. Niefeld 168,840 6,480 David Y. Schwartz 167,580 7,740 Gilbert L. Wachsman 167,940 7,380 Brian A. Webb 168,780 6,540 Charles W. Welch 168,840 6,480
2. Appointment of PricewaterhouseCoopers LLP as the company's independent accountant for fiscal 2004.
For Against Abstain --- ------- ------- 168,180 3,660 3,480
3. Approval of proxy authorization to vote on other business:
For Against Abstain --- ------- ------- 158,400 8,280 8,640
ITEM 5. OTHER INFORMATION None ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits Exhibit 10-A Retail Member Agreement with TruServ Corporation Exhibit 10-B International Retail Member Agreement with TruServ Corporation Exhibit 10-C Undesignated Retail Member Agreement with TruServ Corporation Exhibit 31.1 Section 302 Certification (Chief Executive Officer) Exhibit 31.2 Section 302 Certification (Chief Financial Officer) Exhibit 32.1 Section 906 Certification (Chief Executive Officer and Chief Financial Officer) (b) Reports on Form 8-K A Current Report on Form 8-K was filed on February 27, 2003 regarding TruServ's fiscal year 2003 earnings. 22 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized. TRUSERV CORPORATION Date: May 13, 2004 By /s/ DAVID A. SHADDUCK ----------------------------------- David A. Shadduck Senior Vice President and Chief Financial Officer 23 EX-10.A 2 c85443exv10wa.txt RETAIL MEMBER AGREEMENT EXHIBIT 10.A RETAIL MEMBER AGREEMENT WITH TRUSERV CORPORATION A COOPERATIVE OF INDEPENDENT RETAILERS THIS AGREEMENT between _________________________________________________________ d/b/a __________________________________________________________________________ [ ] True Value [ ] Home & Garden Showplace [ ] Induserve [ ] Non-Branded [ ] Grand Rental Station [ ] Party Central [ ] Taylor Rental ________________________________________________________________________________ (Full Address) the retail member hereinafter referred to as the "Member," and TRUSERV CORPORATION, a Delaware Corporation, hereinafter referred to as the "Company." The Company is an organization operated on a cooperative basis by and for independent retailers who operate hardware stores, home or garden centers, rental stores or similar operations. MEMBER AND COMPANY AGREE AS FOLLOWS: 1. This agreement is subject to and incorporates herein the Company's By-Laws, Subscription to Shares agreement, and the Members' Policies and Procedures Manuals ("Manuals") all of which may be amended from time to time (hereinafter collectively referred to as "Agreement"). 2. The Company shall sell merchandise of the type typically sold in retail hardware stores, home and garden centers, rented at full service rental centers, or sold to commercial/industrial customers, provide for shipment or delivery of such merchandise to the Member's address indicated on this Agreement, permit use of the service mark associated with the program checked above ("Designated Mark") and other permitted Company owned servicemarks, trademarks, collective membership marks, tradenames or brandnames ("Marks") under the conditions of this Agreement and offer services to the Member as Company may decide to offer from time to time. 3. The Company shall invoice Member at the Company's then current prices for the merchandise and services involved, and apply all payments by Member toward final settlement of the Member's financial obligations to the Company. The excess, if any, of the payments made, less any additional expenses due to non-conformance with established payment policies or prescribed procedures, shall be paid or credited to the Member. 4. The Company shall pay to the Member a Patronage Dividend on the basis of the volume of and margins applicable to merchandise and services purchased by the Member from the Company during each such year that Patronage Dividends are available. The availability of Patronage Dividends shall be determined as of the end of each fiscal year of the Company and shall be payable out of the excess, if any, of gross margins from business done with or for Members, after deducting therefrom the following: (a) Expenses directly or indirectly related to such business; (b) Such reasonable charges and reserves for necessary corporate purposes as may from time to time be determined by the Company for depreciation and obsolescence, state and federal taxes, bad debts, casualty losses, insurance and other corporate and operating charges and expenses, all established and computed in accordance with generally accepted accounting principles; and (c) Such reasonable charges and reserves for working capital necessary for the operation of the Company and for deficits arising from such operation, including deficits from business other than business done with or for Members. 1 (d) In any fiscal year, to the extent a loss exists after deducting such expenses, charges and reserves, the Company will determine on a reasonable basis a plan to allocate the loss to Members. The Company shall reasonably allocate and pay any Patronage Dividend within a time reasonably determined by the Company following the end of each fiscal year, but in no event later than the fifteenth day of the ninth month after the close of each such fiscal year, in accordance with its By-Laws, policies and procedures as they may be amended or changed from time to time. 5. The Company shall hold Markets and other meetings from time to time for the purpose of keeping Members better informed on trends in the industry, presenting merchandise or services available and enabling Members to exchange ideas with fellow Members. 6. Upon execution of this Agreement, the Member shall purchase sixty (60) qualifying shares of the Company's Class A Common Stock at a purchase price of $100 per share for each store owned by Member, to a maximum of three hundred (300) shares for five (5) or more stores, as defined in the Subscription to Shares agreement. 7. The Member shall establish, operate and maintain a retail hardware store, and/or home or garden center ("Retail Store") retailing merchandise and services to consumers if the Designated Mark is True Value or Home & Garden Showplace, or a full service rental store ("Rental Center") renting appropriate merchandise if the Designated Mark is Taylor Rental, Grand Rental or Party Central, or sell commercial/industrial merchandise if the Designated Mark is Induserve ("MRO location") and sell or rent merchandise carrying any of the Company's Marks only at the authorized retail location indicated on this Agreement. 8. The Company has not granted any protected or exclusive territorial or geographical rights to Member and the Company may, at its sole discretion, accept any other Member at any location without limitation. 9. The Member shall utilize the Company as its primary supplier for the types of merchandise offered by the Company under each Agreement for which a Member signs. 10. The Member shall buy from the Company in accordance with the Company procedures and practices set forth in the Manuals, which include entering warehouse orders and claims using electronic order entry equipment functionally compatible with the Company's equipment, and entering all other orders using electronic equipment whenever possible. 11. The Member shall notify the Company, in writing, immediately upon any change in business name, form, ownership or control. 12. The Member shall pay in full on the date due all invoices on accounts receivable statements and any other financial obligations to the Company or its subsidiaries, and pay a one and one-half percent (1-1/2%) per month service charge, but not to exceed the maximum amount permitted by law, on past due balance of accounts. Upon termination of this Agreement, all invoices on accounts receivable statements and any other financial obligations to the Company or its subsidiaries, including future dated invoices, from the Member to the Company and its subsidiaries shall become immediately due and payable in full. 13. All information and material furnished to the Member, including without limitation, bulletins, price lists, illustrated catalogs, merchandising and pricing options, computer software, electronic data and the Manuals are confidential property of the Company, developed and promoted for the benefit of Members, and the Member agrees not to divulge or display any of the information contained in this material to anyone who is not a Member, or not affiliated with the Company without obtaining the prior written approval of the Company, and not to use such information in a way which is detrimental to the Company or its Members. The Member shall use such information and material only in connection with the Member's purchases from the Company and for the purpose of promoting the Member's business with the Member's customers. The Member acknowledges and confirms that any dissemination or other disclosure of such information and material for any other purpose, or to anyone not affiliated 2 with the Company, shall cause immediate and irreparable harm to fellow Members and the Company. All such information and material shall be immediately returned to the Company upon termination of this Agreement. 14. Member shall provide all financial statements, guarantees, security agreements and any other supporting materials or documents as may from time to time be requested by Company in relation to this Agreement. 15. Member represents that it has reviewed the By-Laws and prospectus of the Company, the receipt of which is hereby acknowledged, the By-Laws providing that Membership in the Company constitutes consent to take written notices of allocation into account at their stated dollar amount as provided in section 1385(a) of the IRC, unless such written notices clearly indicate on their face that they are nonqualified, in the taxable year in which received. By entering into this Agreement Member agrees and consents to be bound by Article IX, section 2(b) of the By-Laws. Such "membership consent" (within the meaning of section 1388(c)(2)(B) of the IRC) may be revoked by Member only by terminating its Membership in the Company in the manner provided in this Agreement. 16. Member acknowledges that the Company, with the approval of the Board of Directors, has the authority to set the composition of the Patronage Dividend each year, provided that at least twenty percent (20%) of each Member's share is paid in cash or qualified check in accordance with section 1385 of the IRC. 17. Member acknowledges that any cash payments, dividends, note maturities, interest or other payments may be applied to outstanding past due debt with Company at the Company's option and sole discretion. 18. Member acknowledges that the Member may receive different services, charges or freight rates based on the amount of merchandise purchased by Member. 19. Member's right to use any Designated Mark or other Mark shall be subject to the right and necessity of the Company to control the use of its Designated Mark and other Marks and to maintain the reputation for quality products and services and goodwill associated with such Marks. The Member's right to the display and use of the Designated Mark or any other Marks are permitted only on the following conditions: (a) The Designated Mark and any other Marks permitted by the Company, are the only Company owned trademarks or servicemarks which Member is entitled to use, and the Company may, at its sole discretion, choose to sell merchandise carrying any of the Company's Marks only to Members who are permitted to use a particular Designated Mark; (b) The Designated Mark or any other Marks cannot be used with the trademark or servicemark of any hardware store, home or garden center, building center, rental center or merchandising organization other than the Company's, and may only be used at the retail location indicated on this Agreement so long as the retail location continues to be an active retail location and as determined to be appropriate by the Board of Directors; (c) The Member's store and premises will be maintained in a clean and orderly condition; (d) If a Retail Store, the Member will offer sufficient breadth and depth of merchandise in the core retail departments to serve the needs of retail consumers. For a hardware store, these departments include: Builders Hardware and Supplies, Cleaning Supplies, Electrical Supplies, Lawn and Garden, Paint and related Sundries, Plumbing, Tools and Home Decor; if a Rental Center, the Member will offer sufficient breadth and depth of rental merchandise to serve the needs of rental consumers; and if a MRO location, the Member will offer sufficient breadth and depth of merchandise sufficient to serve the needs of commercial/industrial consumers. (e) If a Retail Store or an MRO location, the Member will maintain a retail inventory of representative quantities of the Company's merchandise as offered, advertised and promoted by the Company; (f) The Member's business operations will be conducted in such a fashion as to enhance the reputation of fellow Members and the Company; and 3 (g) That Member shall not be entitled to use the Designated Mark or any other Marks as part of its corporate or partnership name, with the exception of any Member who was a Member and used it as such prior to January, 1997. (h) That Member shall secure and maintain in force all required licenses, permits, and certificates relating to the conduct of its business pursuant to this Agreement. That Member shall comply with all applicable laws, ordinances and regulations. (i) In order to preserve the goodwill in the Designated Mark or Marks, that Member shall in all dealings with its customers, suppliers, Company, and public officials adhere to high standards of honesty, integrity, fair dealing and ethical conduct and Member agrees to refrain from any activity which may be injurious to Company and the goodwill associated with the Designated Mark or Marks. 20. During the term of this Agreement, Member shall not obtain any proprietary rights in the Designated Mark or any other Marks by use thereof. Member expressly acknowledges and agrees that the license granted under this Agreement to use the Designated Mark or any other Mark is non-exclusive and non-transferable, and that the Company has and retains the right to grant other licenses without any limitations as to territory, product, terms or otherwise. Within thirty days of termination of this Agreement, Member shall cease the use of all Marks, including the Designated Mark, and remove, at Member's expense, all store identification signs and decals which contain any Designated Mark or other Marks and Member shall cease any display or advertising, directly or indirectly, as a store using the Designated Mark or other Marks, including but not limited to, display in internet web sites and telephone directories. Member shall further delete the Designated Mark and any other Marks from its business name including, if applicable, Member's corporate name. Member shall transfer to the Company, at Member's expense, any internet domain names which contain the Designated Mark or any other Marks. Member agrees to confirm in writing thirty days after termination of this Agreement that Member has ceased using the Designated Mark and any other Marks. 21. If Member fails to comply with Section 20 within the time stated, Member authorizes and fully empowers the Company, or its agent, at Member's expense, to enter upon its store property and buildings, and remove all exterior and interior signs, decals and other identification items specified in that paragraph, to withhold any monies due Member until the terms of this paragraph are complied with and Member shall pay to the Company not as a penalty but as a hold-over royalty, the sum of $500 per day for each day beyond the thirty days that the Member fails to comply with that Paragraph. Company may, at its option, pursue any and all remedies available to Company for breach of this provision, including equitable or injunctive relief as well as collect the holdover royalty payment and any other damages. Member agrees to release, waive and forever discharge Company from any and all claims, demands, losses and liabilities, of any nature whatsoever, related to Company's exercise of its rights under that Section. 22. Company has not represented to Member that a "minimum", "guaranteed", or "certain" income can be expected or realized. Success depends, in part, on Member devoting dedicated personal efforts to the business and exercising good business judgment in dealings with customers, suppliers, and employees. Member also acknowledges that neither Company nor any of its employees or agents has represented that Member can expect to attain any specific sales, profits, or earnings. If Company has provided estimates to Member, such estimates are for informational purposes only and do not represent any guarantee of performance by Company to Member. COMPANY MAKES NO REPRESENTATIONS OR WARRANTIES EITHER EXPRESS OR IMPLIED REGARDING THE PERFORMANCE OF MEMBER'S BUSINESS. 23. Subject to Section 9, Member, as an independent retailer, is free to decide how to operate its business, determine what merchandise it will stock, sell or rent and how its store shall be identified utilizing the Designated Mark and additional words or phrases that identify the specific location indicated on this Agreement. 24. Member and Company understand and agree that this Agreement does not create a fiduciary relationship between Member and Company, and that Member and Company are and will be independent contractors, and that nothing in this Agreement is intended to make either Member or Company a general or special agent, joint venturer, partner, or employee of the other for any purpose. Member agrees to identify itself conspicuously in all dealings 4 with customers, suppliers, public officials, store personnel, and others as the independent owner of Member's store and to place notices of independent ownership on forms, business cards, stationery, advertising and other materials. 25. Member and Company may not make any express or implied agreements, warranties, guarantees, or representations, or incur any debt, in the name or on behalf of the other. Company will not be obligated for any damages to any person or property directly or indirectly arising out of Member's store's operation or the business conducted by Member under this Agreement. 26. The amount of any distributions with respect to Member's patronage made in written notices of allocation (as defined in section 1388 of the IRC) and which are received by Member from the Company, will be taken into account by Member at their stated dollar amounts in the manner provided in section 1385(a) of the IRC in the taxable year in which such written notices of allocation are received by Member; provided, however, that this Agreement shall not extend to written notices of allocation received by Member as part of a Patronage Dividend which clearly indicate on their face that they are nonqualified. The Member understands and agrees that the Promissory Notes and the shares of Class B Common Stock distributed by the Company in payment, or part payment, of the Patronage Dividends are "written notices of allocation" within the meaning of the statute and must be taken into account by Member. The stated dollar amount of the Promissory Notes is the principal amount thereof and the stated dollar amount of the shares of Class B Common Stock is the par value thereof. The first sentence of this paragraph is intended to constitute "consent in writing" within the meaning of section 1388(c)(2)(A) of the IRC and may be revoked as provided in section 1388(c)(3)(B) of the IRC, provided, however, that, so long as Member remains a member of the Company, revocation by Member of its "consent in writing" shall not revoke Member's "membership consent." 27. The Promissory Notes and Class A and Class B Common Stock need not be physically distributed to the Member but may be held in safekeeping for the Member (either in separate securities or as part of a bulk security) and that notices of the Member's allocation of Promissory Notes and Class B Common Stock to be deposited in safekeeping are "written notices of allocation" and shall be taken into account as provided for in this Agreement. 28. This Agreement is not assignable or transferable by the Member without the written consent of the Company, but Company shall have the right to assign this Agreement. Change in control or management of a corporate, partnership or limited liability company Member must be approved in writing by the Company. 29. This Agreement shall continue in force from year to year unless it is terminated as follows: (a) The Company shall have the right to immediately terminate this Agreement by written notice to the Member, (i) in the event and at the time or after the Member becomes insolvent, commits any act of bankruptcy, files a voluntary petition in bankruptcy, is adjudicated a bankrupt; (ii) if Member breaches any term, condition or obligation under this Agreement or any other agreement with the Company or one of its subsidiaries, which breach is not cured within thirty (30) days (ten (10) days in case of nonpayment of accounts receivable statements or any other financial obligations to the Company), or within the applicable cure period in an agreement with the Company after the Member's receipt of written notice of such breach from the Company; or (iii) if Member fails to obtain written consent by the Company to a change in control or management of a corporation, partnership or limited liability company Member. (b) This Agreement may be terminated unilaterally by the Member upon sixty (60) days written notice mailed to the Chief Executive Officer or Treasurer of the Company at the Company's principal office. (c) This Agreement may be terminated unilaterally by the Company upon sixty (60) days written notice mailed to the Member at the address shown on the books of the Corporation; provided, however, that such termination by the Company shall occur after the affirmative vote of two-thirds or more of the directors then in office that such termination is in the best interests of the Company as determined in the sole discretion of the Board of Directors. 5 30. This Agreement shall be automatically modified upon notice from the Company to the Member of any relevant change in the Certificate of Incorporation and/or By-Laws of the Company, or by resolution of the Board of Directors. 31. This Agreement, and any other agreement which Member signs with the Company, is the entire and complete Agreement between the Member and the Company and there are no prior agreements, representations, promises, or commitments, oral or written, which are not specifically contained in this Agreement or any other agreement which Member signs with the Company. The current form of the Company Member Agreement shall govern all past and present relations, actions or claims arising between the Company and the Member. 32. Should any provision of this Agreement be declared invalid under or in conflict with any existing or future law or regulation such provision shall be modified to conform with that law and such modification shall not affect any other provision of this Agreement which shall continue in full force and effect. 33. The failure on the part of the Company at any time or times to enforce its rights under this Agreement, its Certificate of Incorporation, its By-Laws, its Manuals, any Company policies or procedures, or any written agreements with Member shall not constitute or be held to be a waiver of any succeeding breach thereof. 34. The Company, but not the Member, shall have a lien on and a right, but not an obligation, of setoff against any Company issued stock or notes, dividends, interest payments or other funds held by or issued to Member, including those issued as Patronage Dividends, and against any cash portion of such Patronage Dividend which is in excess of twenty percent (20%) of the overall Patronage Dividend payable in any year for such indebtedness of the Member to the Company or its subsidiaries as may, for whatever cause, exist, including without limitation borrowings, accounts payable, and the Member's share of Company losses, as reasonably determined by the Company. Upon termination, Company shall have no obligation to redeem Member's investment unless and until all amounts due and owing the Company on accounts receivable statements, ancillary agreements with the Company or any other financial obligations to the Company or its subsidiaries are paid in full. In the event that the Company initiates proceedings to recover amounts due it by Member or for any breach of this Agreement or to seek equitable or injunctive relief against the Member, the Company shall be entitled to the recovery of all associated costs, interest and reasonable attorney's fees. This Agreement shall be enforced against either Member or Company, only in the state or federal courts located in Cook County or any Illinois county contiguous to Cook County, Illinois or in the county in which the Company's headquarters are then located, and only be interpreted in accordance with the substantive laws of Illinois without giving effect to its conflict of laws principles. 35. This Agreement may not be modified except as set forth herein or by a writing referencing this Agreement and signed by the Company. 6 Prospective Member's signature on this Agreement constitutes an offer only and this Agreement shall have no force or effect until duly accepted and signed by the Company at its principal office and National Headquarters. WITNESS the Member's hand and seal this _____ day of ________, 20__. ________________________________________________________________________________ Member's Legal Entity d/b/a __________________________________________________________________________ check: [ ] sole proprietor [ ] partnership [ ] corporation [ ] limited liability company Retail Location Address ________________________________________________________ City _________________ State ________________ Zip ___________ By: ____________________________________________________________________________ Title: _________________________________________________________________________ WITNESS ________________________________________________________________________ Address ________________________________________________________________________ City _________________ State ________________ Zip ___________ ACCEPTED this _____ day of ______________, 20____, at Chicago, Illinois, By TRUSERV CORPORATION, by its duly authorized agent. __________________________________________________________________________ __________________________________________________________________________ Title 7 EX-10.B 3 c85443exv10wb.txt INTERNATIONAL RETAIL MEMBER AGREEMENT EXHIBIT 10.B INTERNATIONAL RETAIL MEMBER AGREEMENT WITH TRUSERV CORPORATION A COOPERATIVE OF INDEPENDENT RETAILERS THIS AGREEMENT between _________________________________________________________ d/b/a __________________________________________________________________________ [ ] True Value [ ] Home & Garden Showplace [ ] Induserve [ ] Non-Branded [ ] Grand Rental Station [ ] Party Central [ ] Taylor Rental of _____________________________________________________________________________ (Full Address) the retail member hereinafter referred to as the "Member," and TRUSERV CORPORATION, a Delaware Corporation, hereinafter referred to as the "Company." The Company is an organization operated on a cooperative basis by and for independent retailers who operate hardware stores, home or garden centers, rental stores or other similar operations. MEMBER AND COMPANY AGREE AS FOLLOWS: 1. This agreement is subject to and incorporates herein the Company's By-Laws, Subscription to Shares agreement, and the Members' Policies and Procedures Manuals ("Manuals") all of which may be amended from time to time (hereinafter collectively referred to as "Agreement"). 2. The Company shall sell merchandise of the type typically sold in retail hardware stores, home and garden centers, rented at full service rental centers, or sold to commercial/industrial customers, permit use of the service mark associated with the program checked above ("Designated Mark") and other permitted Company owned servicemarks, trademarks, collective membership marks, tradenames or brandnames ("Marks") under the conditions of this Agreement and to offer services to the Member as Company may decide to offer from time to time. 3. The Company shall invoice Member at the Company's then current prices for the merchandise and services involved, and apply all payments by Member toward final settlement of the Member's financial obligations to the Company. The excess, if any, of the payments made, less any additional expenses due to non-conformance with established payment policies or prescribed procedures, shall be paid or credited to the Member. 4. The Company shall pay to the Member a Patronage Dividend on the basis of the volume of and margins applicable to merchandise and services purchased by the Member from the Company during each such year that Patronage Dividends are available. The availability of Patronage Dividends shall be determined as of the end of each fiscal year of the Company and shall be payable out of the excess, if any, of gross margins from business done with or for Members, after deducting therefrom the following: (a) Expenses directly or indirectly related to such business; (b) Such reasonable charges and reserves for necessary corporate purposes as may from time to time be determined by the Company for depreciation and obsolescence, state and federal taxes, bad debts, casualty losses, insurance and other corporate and operating charges and expenses, all established and computed in accordance with generally accepted accounting principles; and 1 (c) Such reasonable charges and reserves for working capital necessary for the operation of the Company and for deficits arising from such operation, including deficits from business other than business done with or for Members. (d) In any fiscal year, to the extent a loss exists after deducting such expenses, charges and reserves, the Company will determine on a reasonable basis to plan to allocate the loss to Members. The Company shall reasonably allocate and pay any Patronage Dividend within a time reasonably determined by the Company following the end of each fiscal year, but in no event later than the fifteenth day of the ninth month after the close of each such fiscal year, in accordance with its By-Laws, policies and procedures as they may be amended or changed from time to time. 5. The Company shall hold Markets and other meetings from time to time for the purpose of keeping Members better informed on trends in the industry, presenting merchandise or services available and enabling Members to exchange ideas with fellow Members. 6. Upon execution of this Agreement, the Member shall purchase sixty (60) qualifying shares of the Company's Class A Common Stock at a purchase price of $100 per share for each store owned by Member, to a maximum of three hundred (300) shares for five (5) or more stores, as defined in the Subscription to Shares agreement. 7. The Member shall establish, operate and maintain a retail hardware store, and/or home or garden center ("Retail Store") retailing merchandise and services to consumers if the Designated Mark is True Value, Home & Garden Showplace, or a full service rental store ("Rental Center") renting appropriate merchandise if the Designated Mark is Taylor Rental, Grand Rental or Party Central, or sell commercial/industrial merchandise if the Designated Mark is Induserve ("MRO location"), and sell or rent merchandise carrying any of the Company's Marks only at the authorized retail location indicated on this Agreement. 8. The Company has not granted any protected or exclusive territorial or geographical rights to Member and the Company may, at its sole discretion, accept any other Member at any location without limitation. 9. The Member shall utilize the Company as its primary supplier for the types of merchandise offered by the Company under each Agreement for which a Member signs. 10. The Member shall buy from the Company in accordance with the Company procedures and practices set forth in the Manuals, which include entering warehouse orders and claims using electronic order entry equipment functionally compatible with the Company's equipment, and entering all other orders using electronic equipment whenever possible. 11. The Member shall notify the Company, in writing, immediately upon any change in business name, form, ownership or control. 12. The Member shall pay in full on the date due all invoices on accounts receivable statements and any other financial obligations to the Company or its subsidiaries, and pay a one and one-half percent (1-1/2%) per month service charge, but not to exceed the maximum amount permitted by law, on past due balance of accounts. Upon termination of this Agreement all invoices on accounts receivable statements and any other financial obligations to the Company or its subsidiaries, including future dated invoices, from the Member to the Company and its subsidiaries shall become immediately due and payable in full. 13. That the prices at which the Company will sell the merchandise and services to the Member shall be specified by the Company before purchase of any merchandise or services. These prices are subject to change by the Company, provided, however, such change will not affect orders already received by the Company from the Member. The Company may quote prices FOB U.S. coastal port or airport if so instructed by the Member. Ocean freight (or air freight if that is so instructed by the Member), insurance and other appropriate charges shall be added 2 to the FOB price on the Company's invoices to the Member if such charges are incurred by the Company, and shall be the total price of merchandise and services. 14. That payment of the total price of the merchandise and services under this Agreement will be made in United States ("U.S.") dollars in advance of shipment, or within thirty (30) days of shipment if agreed upon by the Company, in its sole discretion. The Company has the right to require that the Member provide an irrevocable letter of credit in sufficient amount, payable on terms acceptable to the Company, prior to shipment, by a federally insured bank in the U.S. acceptable to the Company. Any such Letter of Credit shall state that "the credit will be subject to The Uniform Customs and Practices for Documentary Credits, 1993 revision, the International Chamber of Commerce Publication No. 500 or any subsequent revision thereto." 15. All information and material furnished to the Member, including without limitation, bulletins, price lists, illustrated catalogs, merchandising and pricing options, computer software, electronic data and the Manuals are confidential property of the Company, developed and promoted for the benefit of Members, and the Member agrees not to divulge or display any of the information contained in this material to anyone who is not a Member, or not affiliated with the Company without obtaining the prior written approval of the Company, and not to use such information in a way which is detrimental to the Company or its Members. The Member shall use such information and material only in connection with the Member's purchases from the Company and for the purpose of promoting the Member's business with the Member's customers. The Member acknowledges and confirms that any dissemination or other disclosure of such information and material for any other purpose, or to anyone not affiliated with the Company, shall cause immediate and irreparable harm to fellow Members and the Company. All such information and material shall be immediately returned to the Company upon termination of this Agreement. 16. Member shall provide all financial statements, guarantees, security agreements and any other supporting materials or documents as may from time to time be requested by Company in relation to this Agreement. 17. Member represents that it has reviewed the By-Laws and prospectus of the Company, the receipt of which is hereby acknowledged, the By-Laws providing that Membership in the Company constitutes consent to take written notices of allocation into account at their stated dollar amount as provided in section 1385(a) of the United States IRC, unless such written notices clearly indicate on their face that they are nonqualified, in the taxable year in which received. By entering into this Agreement, Member agrees and consents to be bound by Article IX, section 2(b) of the By-Laws. Such "membership consent" (within the meaning of section 1388(c)(2)(B) of the United States IRC) may be revoked by Member only by terminating its Membership in the Company in the manner provided in this Agreement. 18. Member acknowledges that the Company with the approval of the Board of Directors has the authority to set the composition of the Patronage Dividend each year, provided that at least twenty percent (20%) of each Member's share is paid in cash or by qualified check in accordance with section 1385 of the United States IRC. 19. Member acknowledges that any cash payments, dividends, note maturities, interest or other payments may be applied to outstanding past due debt with Company at the Company's option and sole discretion. 20. Member acknowledges that the Member may receive different services, charges or freight rates based on the amount of merchandise purchased by Member. 21. Member's right to use any Designated Mark or other Mark shall be subject to the right and necessity of the Company to control the use of its Designated Mark and other Marks and to maintain the reputation for quality products and services and goodwill associated with such Marks. The Member's right to the display and use of the Designated Mark or any other Company owned Marks are permitted only on the following conditions: (a) The Designated Mark and any other Marks permitted by the Company, are the only Company owned trademarks or servicemarks which Member is entitled to use, and the Company may, at its sole discretion, choose to sell merchandise carrying any of the Company's Marks only to Members who are permitted to use a particular Designated Mark; 3 (b) The Designated Mark or any other Marks cannot be used with the trademark or servicemark of any hardware store, home or garden center, building center, rental center or merchandising organization other than the Company's, and may only be used at the retail location indicated on this Agreement so long as the retail location continues to be an active retail location and as determined to be appropriate by the Board of Directors; (c) The Member's store and premises will be maintained in a clean and orderly condition; (d) If a Retail Store, the Member will offer sufficient breadth and depth of merchandise in the core retail departments to serve the needs of retail consumers. For a hardware store, these departments include: Builders Hardware and Supplies, Cleaning Supplies, Electrical Supplies, Lawn and Garden, Paint and related Sundries, Plumbing, Tools and Home Decor; if a Rental Center, the Member will offer sufficient breadth and depth of rental merchandise to serve the needs of rental consumers; and if a MRO location, the Member will offer sufficient breadth and depth of merchandise sufficient to serve the needs of commercial/industrial consumers. (e) If a Retail Store or an MRO location, the Member will maintain a retail inventory of representative quantities of the Company's merchandise as offered, advertised and promoted by the Company; (f) The Member's business operations will be conducted in such a fashion as to enhance the reputation of fellow Members and the Company; and (g) That Member shall not be entitled to use the Designated Mark or any other Marks as part of its corporate, partnership, or other business name. (h) That Member shall secure and maintain in force all required licenses, permits, and certificates relating to the conduct of its business pursuant to this Agreement. That Member shall comply with all applicable laws, ordinances and regulations. (i) In order to preserve the goodwill in the Designated Mark or Marks, that Member shall in all dealings with its customers, suppliers, Company, and public officials adhere to high standards of honesty, integrity, fair dealing and ethical conduct and Member agrees to refrain from any activity which may be injurious to Company and the goodwill associated with the Designated Mark or Marks. 22. During the term of this Agreement, Member shall not obtain any proprietary rights in the Designated Mark or any other Marks by use thereof. Member expressly acknowledges and agrees that the license granted under this Agreement to use the Designated Mark or any other Mark is non-exclusive and non-transferable, and that the Company has and retains the right to grant other licenses without any limitations as to territory, product, terms or otherwise. Within thirty days of termination of this Agreement, Member shall cease the use of all Marks, including the Designated Mark, and remove, at Member's expense, all store identification signs and decals which contain any Designated Mark or other Marks and Member shall cease any display or advertising, directly or indirectly, as a store using the Designated Mark or other Marks, including but not limited to, display in internet web sites and telephone directories. Member shall further delete the Designated Mark and any other Marks from its business name including, if applicable, Member's corporate name. Member shall transfer to the Company, at Member's expense, any internet domain names which contain the Designated Mark or any other Marks. Member agrees to confirm in writing thirty days after termination of this Agreement that Member has ceased using the Designated Mark and any other Marks. 23. If Member fails to comply with Section 22 within the time stated, Member authorizes and fully empowers the Company, or its agent, at Member's expense, to enter upon its store property and buildings, and remove all exterior and interior signs, decals and other identification items specified in that paragraph, to withhold any monies due Member or held by Company until the terms of this paragraph are complied with and Member shall pay to the Company not as a penalty but as a hold-over royalty, the sum of $500 per day for each day beyond the thirty days that the Member fails to comply with that Paragraph. Company may, at its option, pursue any and all remedies available to Company for breach of this provision, including equitable or injunctive relief as well as collect the hold-over royalty payment and any other damages. Member agrees to release, waive and forever discharge Company from any and all claims, demands, losses and liabilities, of any nature whatsoever, related to Company's exercise of its rights under that Paragraph. 4 24. Company has not represented to Member that a "minimum", "guaranteed", or "certain" income can be expected or realized. Success depends, in part, on Member devoting dedicated personal efforts to the business and exercising good business judgment in dealings with customers, suppliers, and employees. Member also acknowledges that neither Company nor any of its employees or agents has represented that Member can expect to attain any specific sales, profits, or earnings. If Company has provided estimates to Member, such estimates are for informational purposes only and do not represent any guarantee of performance by Company to Member. COMPANY MAKES NO REPRESENTATIONS OR WARRANTIES EITHER EXPRESS OR IMPLIED REGARDING THE PERFORMANCE OF MEMBER'S BUSINESS. 25. Subject to Section 9, Member, as an independent retailer, is free to decide how to operate its business, determine what merchandise it will stock, sell or rent and how its store shall be identified utilizing the Designated Mark and additional words or phrases that identify the specific location indicated on this Agreement. 26. Member and Company understand and agree that this Agreement does not create a fiduciary relationship between Member and Company, and that Member and Company are and will be independent contractors, and that nothing in this Agreement is intended to make either Member or Company a general or special agent, joint venturer, partner, or employee of the other for any purpose. Member agrees to identify itself conspicuously in all dealings with customers, suppliers, public officials, store personnel, and others as the independent owner of Member's store and to place notices of independent ownership on forms, business cards, stationery, advertising and other materials. 27. Member and Company may not make any express or implied agreements, warranties, guarantees, or representations, or incur any debt, in the name or on behalf of the other. Company will not be obligated for any damages to any person or property directly or indirectly arising out of Member's store's operation or the business conducted by Member under this Agreement. 28. The amount of any distributions with respect to Member's patronage made in written notices of allocation (as defined in section 1388 of the United States IRC) and which are received by Member from the Company, will be taken into account by Member at their stated dollar amounts in the manner provided in section 1385(a) of the United States IRC in the taxable year in which such written notices of allocation are received by Member; provided, however, that this Agreement shall not extend to written notices of allocation received by Member as part of a Patronage Dividend which clearly indicate on their face that they are nonqualified. The Member understands and agrees that the Promissory Notes and the shares of Class B Common Stock, if any, distributed by the Company in payment, or part payment, of the Patronage Dividends are "written notices of allocation" within the meaning of the statute and must be taken into account by Member. The stated dollar amount of the Promissory Notes is the principal amount thereof and the stated dollar amount of the shares of Class B Common Stock is the par value thereof. The first sentence of this paragraph is intended to constitute "consent in writing" within the meaning of section 1388(c)(2)(A) of the United States IRC and may be revoked as provided in section 1388(c)(3)(B) of the United States IRC, provided, however, that, so long as Member remains a member of the Company, revocation by Member of its "consent in writing" shall not revoke Member's "membership consent." 29. The Promissory Notes and Class B Common Stock need not be physically distributed to the Member but may be held in safekeeping for the Member (either in separate securities or as part of a bulk security) and that notices of the Member's allocation of Promissory Notes and Class B Common Stock to be deposited in safekeeping are "written notices of allocation" and shall be taken into account as provided for in this Agreement. 30. That the Company, in its sole discretion, may require the international Member to maintain on account with the Company a collateral deposit ("Collateral Deposit Account") in such U.S. dollar amounts as the Company may require from time to time, and that this Collateral Deposit Account shall be in lieu of the Class B Common Stock requirements applicable to the general Membership. The Company reserves the right to modify or eliminate the Collateral Deposit Account at its option, in which case all Class B Common Stock requirements in effect for the general Membership shall apply to the international Member. 5 31. This Agreement is not assignable or transferable by the Member without the written consent of the Company, but Company shall have the right to assign this Agreement. Change in control or management of a corporate, partnership or limited liability company Member must be approved in writing by the Company. 32. This Agreement shall continue in force from year to year unless it is terminated as follows: (a) The Company shall have the right to immediately terminate this Agreement by written notice to the Member, (i) in the event and at the time or after the Member becomes insolvent, commits any act of bankruptcy, files a voluntary petition in bankruptcy, is adjudicated a bankrupt; (ii) if Member breaches any term, condition or obligation under this Agreement or any other agreement with the Company or one of its subsidiaries, which breach is not cured within thirty (30) days (ten (10) days in case of nonpayment of accounts receivable statements or any other financial obligations to the Company, or within the applicable cure period in an agreement with the Company subsidiary) after the Member's receipt of written notice of such breach from the Company; or (iii) if Member fails to obtain written consent by the Company to a change in control or management of a corporation, partnership, or limited liability company Member. (b) This Agreement may be terminated unilaterally by the Member upon sixty (60) days written notice mailed to the Chief Executive Officer or Treasurer of the Company at the Company's principal office. (c) This Agreement may be terminated unilaterally by the Company upon sixty (60) days written notice mailed to the Member at the address shown on the books of the Corporation; provided, however, that such termination by the Company shall occur after the affirmative vote of two-thirds or more of the directors then in office that such termination is in the best interests of the Company as determined in the sole discretion of the Board of Directors. 33. This Agreement shall be automatically modified upon notice from the Company to the Member of any relevant change in the Certificate of Incorporation and/or By-Laws of the Company, or by resolution of the Board of Directors. 34. This Agreement, and any other agreement which Member signs with the Company, is the entire and complete Agreement between the Member and the Company and there are no prior agreements, representations, promises, or commitments, oral or written, which are not specifically contained in this Agreement or any other agreement which Member signs with the Company. The current form of the Company Member Agreement shall govern all past and present relations, actions or claims arising between the Company and the Member. 35. Should any provision of this Agreement be declared invalid under or in conflict with any existing or future law or regulation such provision shall be modified to conform with that law and such modification shall not affect any other provision of this Agreement which shall continue in full force and effect. 36. The failure on the part of the Company at any time or times to enforce its rights under this Agreement, , its Certificate of Incorporation, its By-Laws, or its Manuals any Company policies or procedures or any written agreements with Member shall not constitute or be held to be a waiver of any succeeding breach thereof. 37. The Company, but not the Member, shall have a lien on and a right, but not an obligation, of setoff against any collateral deposits established in accordance with this Agreement, and against any Company issued stock or notes, dividends, interest payments or other funds held by or issued to Member, including those issued as Patronage Dividends, and against any cash portion of such Patronage Dividend which is in excess of twenty percent (20%) of the overall Patronage Dividend payable in any year for such indebtedness of the Member to the Company or its subsidiaries as may, for whatever cause, exist, including without limitation borrowings, accounts payable, and the Member's share of Company losses, as reasonably determined by the Company. Upon termination, Company shall have no obligation to redeem Member's investment unless and until all amounts due and owing the Company on accounts receivable statements, ancillary agreements with the Company or any other financial obligations to the Company or its subsidiaries are paid in full. In the event that the Company initiates proceedings to recover amounts due it by Member or for any breach of this Agreement or to seek equitable or injunctive relief against the Member, the Company shall be entitled to the recovery of all associated costs, interest and reasonable attorney's fees. Any 6 claim arising out of the breach of this Agreement by either party shall be settled finally by arbitration under the Rules of Conciliation and Arbitration of the International Chamber of Commerce Court of Arbitration, then in effect, by a single arbitrator appointed in accordance with such rules, such arbitration to be held in Chicago, Illinois, U.S.A. Each party agrees to pay its own fees and costs for arbitration, and the cost of the arbitrator shall be shared equally by both parties. All arbitration proceedings shall be conducted in the English language. Any arbitration award or decision rendered in accordance with this paragraph shall be final. The parties hereto waive any right of application or appeal to any court of any jurisdiction, to the extent they may validly so agree, and in particular in connection with any question of law arising in the course of the reference to arbitration or on the award. The parties intend the aforesaid waiver to operate as an "exclusion agreement." Judgment upon the award rendered may be entered in any court for judicial acceptance or confirmation of the award or an order of enforcement as the case may be. This Agreement shall be governed by and the rights of the parties shall be construed in accordance with the substantive laws of the State of Illinois, U.S.A., excluding any conflicts of laws rules which would require the application of the substantive law of any jurisdiction other than the State of Illinois, U.S.A. The English language version of this Agreement shall in all cases prevail. 38. This Agreement may not be modified except as set forth herein or by a writing referencing this Agreement and signed by the Company. Prospective Member's signature on this Agreement constitutes an offer only and this Agreement shall have no force or effect until duly accepted and signed by the Company at its principal office and National Headquarters. WITNESS the Member's hand and seal this _____ day of ________, 20__. ________________________________________________________________________________ Member's Legal Entity d/b/a __________________________________________________________________________ check: [ ] sole proprietor [ ] partnership [ ] corporation [ ] limited liability company Retail Location Address ________________________________________________________ City ____________ Country ______________ Postal Code ___________ By: ____________________________________________________________________________ Title: _________________________________________________________________________ WITNESS ________________________________________________________________________ Address ________________________________________________________________________ City ____________ Country ______________ Postal Code _______________ ACCEPTED this _____ day of ______________, 20____, at Chicago, Illinois, By TRUSERV CORPORATION, by its duly authorized agent. _________________________________________________________________________ (SEAL) __________________________________________________________________________ Title 7 EX-10.C 4 c85443exv10wc.txt UNDESIGNATED RETAIL MEMBER AGREEMENT EXHIBIT 10.C UNDESIGNATED RETAIL MEMBER AGREEMENT WITH TRUSERV CORPORATION A COOPERATIVE OF INDEPENDENT RETAILERS THIS AGREEMENT between _________________________________________________________ d/b/a __________________________________________________________________________ (Full Address) the retail member hereinafter referred to as the "Member," and TRUSERV CORPORATION, a Delaware Corporation, hereinafter referred to as the "Company." The Company is an organization operated on a cooperative basis by and for independent retailers who operate hardware stores, home or garden centers, rental stores or similar retail operations. MEMBER AND COMPANY AGREE AS FOLLOWS: 1. This agreement is subject to and incorporates herein the Company's By-Laws, Subscription to Shares agreement, and the Members' Policies and Procedures Manuals ("Manuals"), all of which may be amended from time to time (hereinafter collectively referred to as "Agreement"). 2. The Company shall sell merchandise of the type typically sold in retail hardware stores, home and garden centers, rented at full service rental centers, or sold to commercial/industrial customers; provide for shipment or delivery of such merchandise to the Member's address indicated on this Agreement; and offer services to the Member as Company may decide to offer from time to time. 3. The Company shall specify certain Company owned trademarks, trade names or brand names, which may be used by the Member under the conditions of this Agreement. The trademarks, trade names and brand names specified by the Company for Members signing an Undesignated Retail Member Agreement with the Company ("Marks") are the only marks Member is entitled to use, and Member shall not obtain any right to use the True Value mark, or any other trademarks or service marks owned by or licensed through the Company, which are not specified by the Company for use by Members signing an Undesignated Retail Member Agreement. The Company may, at its sole discretion, change the specification of trademarks, trade names and brand names permitted to be used by Members signing an Undesignated Retail Member Agreement. 4. The Company shall invoice Member at the Company's then current prices for the merchandise and services involved and apply all payments by Member toward final settlement of the Member's financial obligations to the Company. The excess, if any, of the payments made, less any additional expenses due to non-conformance with established payment policies or prescribed procedures, shall be paid or credited to the Member. 5. The Company shall pay to the Member a Patronage Dividend on the basis of the volume of and margins applicable to merchandise and services purchased by the Member from the Company during each such year that Patronage Dividends are available. The availability of Patronage Dividends shall be determined as of the end of each fiscal year of the Company and shall be payable out of the excess, if any, of gross margins from business done with or for Members, after deducting therefrom the following: (a) Expenses directly or indirectly related to such business; (b) Such reasonable charges and reserves for necessary corporate purposes as may from time to time be determined by the Company for depreciation and obsolescence, state and federal taxes, bad debts, casualty losses, insurance and other corporate and operating charges and expenses, all established and computed in accordance with generally accepted accounting principles; and 1 (c) Such reasonable charges and reserves for working capital necessary for the operation of the Company and for deficits arising from such operation, including deficits from business other than business done with or for Members. (d) In any fiscal year, to the extent a loss exists after deducting such expenses, charges and reserves, the Company will determine on a reasonable basis a plan to allocate the loss to Members. 6. The Company shall reasonably allocate and pay any Patronage Dividend within a time reasonably determined by the Company following the end of each fiscal year, but in no event later than the fifteenth (15th) day of the ninth month after the close of each such fiscal year in accordance with its By-Laws, policies and procedures as they may be amended or changed from time to time. 7. The Company shall hold Markets and other meetings from time to time for the purpose of keeping Members better informed on trends in the industry, presenting merchandise or services available and enabling Members to exchange ideas with fellow Members. 8. Upon execution of this Agreement, the Member shall purchase sixty (60) qualifying shares of the Company's Class A Common Stock at a purchase price of $100 per share for each store owned by Member, to a maximum of three hundred (300) shares for five (5) or more stores, as defined in the Subscription to Shares agreement. 9. The Company has not granted any protected or exclusive territorial or geographical rights to Member, and the Company may, at its sole discretion, accept any other Member at any location without limitation. 10. The Member shall buy from the Company in accordance with the Company procedures and practices set forth in the Manuals, which include entering warehouse orders and claims using electronic order entry equipment functionally compatible with the Company's equipment, and entering all other orders using electronic equipment whenever possible. 11. The Member shall notify the Company, in writing, immediately upon any change in business name, form, ownership or control. 12. The Member shall pay in full on the date due all invoices on accounts receivable statements and any other financial obligations to the Company or its subsidiaries, and pay a one and one-half percent (1-1/2%) per month service charge, but not to exceed the maximum amount permitted by law, on past due balance of accounts. Upon termination of this Agreement, all invoices on accounts receivable statements and any other financial obligations owed by the Member to the Company or its subsidiaries, including future dated invoices, shall become immediately due and payable. 13. All information and material furnished to the Member, including without limitation, bulletins, price lists, illustrated catalogs, merchandising and pricing options, computer software, electronic data and the Manuals, are confidential property of the Company, developed and promoted for the benefit of Members, and the Member agrees not to divulge or display any of the information contained in this material to anyone who is not a Member, or not affiliated with the Company without obtaining the prior written approval of the Company, and not to use such information in a way which is detrimental to the Company or its Members. The Member shall use such information and material only in connection with the Member's purchases from the Company and for the purpose of promoting the Member's business with the Member's customers. The Member acknowledges and confirms that any dissemination or other disclosure of such information and material for any other purpose, or to anyone not affiliated with the Company, shall cause immediate and irreparable harm to fellow Members and the Company. All such information and material shall be immediately returned to the Company upon termination of this Agreement. 14. Member shall provide all financial statements, guarantees, security agreements and any other supporting materials or documents as may from time to time be requested by Company in relation to this Agreement. 2 15. Member represents that it has reviewed the By-Laws and prospectus of the Company, the receipt of which is hereby acknowledged, the By-Laws providing that Membership in the Company constitutes consent to take written notices of allocation into account at their stated dollar amount as provided in section 1385(a) of the IRC, unless such written notices clearly indicate on their face that they are nonqualified, in the taxable year in which received. By entering into this Agreement, Member agrees and consents to be bound by Article IX, section 2(b) of the By-Laws. Such "membership consent" (within the meaning of section 1388(c)(2)(B) of the IRC) may be revoked by Member only by terminating its Membership in the Company in the manner provided in this Agreement. 16. Member acknowledges that the Company, with the approval of the Board of Directors has the authority to set the composition of the Patronage Dividend each year, provided that at least twenty percent (20%) of each Member's share is paid in cash or qualified check in accordance with section 1385 of the IRC. 17. Member acknowledges that any cash payments, dividends, note maturities, interest or other payments may be applied to outstanding past due debt with Company at the Company's option and sole discretion. 18. Member acknowledges that the Member may receive different services, charges, rebates or freight rates based on the amount of merchandise purchased by Member. 19. Member's right to use any Mark shall be subject to the right and necessity of the Company to control the use of its Marks and to maintain the reputation for quality products and services and the goodwill associated with such Marks. The Member's right to the display and use of any Marks are permitted only on the following conditions: (a) The Marks specified by the Company for Members signing an Undesignated Retail Member Agreement with the Company are the only marks Member is entitled to use and Member shall not obtain any right to use the True Value mark, or any other trademarks or service marks owned by or licensed through the Company. (b) The Member's store and premises will be maintained in a clean and orderly condition. (c) The Member shall not be entitled to use any Mark as part of its corporate or partnership name, with the exception of any Member who was a Member and used it as such prior to January 1997. (d) That Member shall secure and maintain in force all required licenses, permits, and certificates relating to the conduct of its business pursuant to this Agreement. That Member shall comply with all applicable laws, ordinances and regulations. (e) In order to preserve the goodwill in the Marks, Member shall in all dealings with its customers, suppliers, Company, and public officials adhere to high standards of honesty, integrity, fair dealing and ethical conduct, and Member shall refrain from any activity which may be injurious to Company and the goodwill associated with the Marks. 20. During the term of this Agreement, Member shall not obtain any proprietary rights in any Marks by use thereof. Member expressly acknowledges and agrees that the license granted under this Agreement to use any Mark is non-exclusive and non-transferable, and that the Company has and retains the right to grant other licenses without any limitations as to territory, product, terms or otherwise. Within thirty (30) days of termination of this Agreement, Member shall cease the use of all Marks, and remove, at Member's expense, all store identification signs and decals which contain any Marks, and Member shall cease any display or advertising, directly or indirectly, as a store using any Marks, including but not limited to, display in Internet web sites and telephone directories. Member shall further delete any Marks from its business name including, if applicable, Member's corporate name. Member shall transfer to the Company, at Member's expense, any Internet domain names which contain any Mark. Member agrees to confirm in writing within thirty (30) days after termination of this Agreement that Member has ceased using the Marks. 21. If Member fails to comply with Paragraph 20 within the time stated, Member authorizes and fully empowers the Company, or its agent, at Member's expense, to enter upon its store property and buildings, and remove all 3 exterior and interior signs, decals and other identification items specified in that paragraph, to withhold any monies due Member until the terms of that paragraph are complied with, and Member shall pay to the Company, not as a penalty but as a holdover royalty, the sum of $500 per day for each day beyond the thirty (30) days that the Member fails to comply with Paragraph 20. Company may, at its option, pursue any and all remedies available to Company for breach of this provision, including equitable or injunctive relief as well as collect the hold-over royalty payment and any other damages. Member agrees to release, waive and forever discharge Company from any and all claims, demands, losses and liabilities of any nature whatsoever related to Company's exercise of its rights under that Paragraph. 22. Company has not represented to Member that a "minimum," "guaranteed" or "certain" income can be expected or realized. Success depends, in part, on Member devoting dedicated personal efforts to the business and exercising good business judgment in dealings with customers, suppliers and employees. Member also acknowledges that neither Company nor any of its employees or agents has represented that Member can expect to attain any specific sales, profits or earnings. If Company has provided estimates to Member, such estimates are for informational purposes only and do not represent any guarantee of performance by Company to Member. COMPANY MAKES NO REPRESENTATIONS OR WARRANTIES, EITHER EXPRESS OR IMPLIED,REGARDING THE PERFORMANCE OF MEMBER'S BUSINESS. 23. Member, as an independent retailer, is free to decide how to operate its business, determine what merchandise it will stock, sell or rent and how its store shall be identified. 24. Member and Company understand and agree that this Agreement does not create a fiduciary relationship between Member and Company and that Member and Company are and will be independent contractors, and that nothing in this Agreement is intended to make either Member or Company a general or special agent, joint venturer, partner, or employee of the other for any purpose. Member agrees to identify itself conspicuously in all dealings with customers, suppliers, public officials, store personnel and others as the independent owner of Member's store and to place notices of independent ownership on forms, business cards, stationery, advertising and other materials. 25. Member and Company may not make any express or implied agreements, warranties, guarantees, or representations, or incur any debt, in the name or on behalf of the other. Company will not be obligated for any damages to any person or property directly or indirectly arising out of Member's store's operation or the business conducted by Member under this Agreement. 26. The amount of any distributions with respect to Member's patronage made in written notices of allocation (as defined in section 1388 of the IRC) and which are received by Member from the Company, will be taken into account by Member at their stated dollar amounts in the manner provided in section 1385(a) of the IRC in the taxable year in which such written notices of allocation are received by Member; provided, however, that this Agreement shall not extend to written notices of allocation received by Member as part of a Patronage Dividend which clearly indicate on their face that they are nonqualified. The Member understands and agrees that the Promissory Notes and the shares of Class B Common Stock distributed by the Company in payment, or part payment, of the Patronage Dividends are "written notices of allocation" within the meaning of the statute and must be taken into account by Member. The stated dollar amount of the Promissory Notes is the principal amount thereof and the stated dollar amount of the shares of Class B Common Stock is the par value thereof. The first sentence of this paragraph is intended to constitute "consent in writing" within the meaning of section 1388(c)(2)(A) of the IRC and may be revoked as provided in section 1388(c)(3)(B) of the IRC, provided, however, that, so long as Member remains a member of the Company, revocation by Member of its "consent in writing" shall not revoke Member's "membership consent." 27. The Promissory Notes and Class A and Class B Common Stock need not be physically distributed to the Member but may be held in safekeeping for the Member (either in separate securities or as part of a bulk security) and that notices of the Member's allocation of Promissory Notes and Class B Common Stock to be deposited in safekeeping are "written notices of allocation" and shall be taken into account as provided for in this Agreement. 4 28. This Agreement is not assignable or transferable by the Member without the written consent of the Company, but Company shall have the right to assign this Agreement. Change in control or management of a corporate, partnership or limited liability company Member must be approved in writing by the Company. 29. This Agreement shall continue in force from year to year unless it is terminated as follows: (a) The Company shall have the right to immediately terminate this Agreement by written notice to the Member, (i) in the event and at the time or after the Member becomes insolvent, commits any act of bankruptcy, files a voluntary petition in bankruptcy, is adjudicated a bankrupt; (ii) if Member breaches any term, condition or obligation under this Agreement or any other agreement with the Company or one of its subsidiaries, which breach is not cured within thirty (30) days (ten (10) days in case of nonpayment of accounts receivable statements or any other financial obligations to the Company, or within the applicable cure period in an agreement with the Company) after the Member's receipt of written notice of such breach from the Company; or (iii) if Member fails to obtain written consent by the Company to a change in control or management of a corporation, partnership or limited liability company Member. (b) This Agreement may be terminated unilaterally by the Member upon sixty (60) days written notice mailed to the Chief Executive Officer or Treasurer of the Company at the Company's principal office. (c) This Agreement may be terminated unilaterally by the Company upon sixty (60) days written notice mailed to the Member at the address shown on the books of the Corporation; provided, however, that such termination by the Company shall occur after the affirmative vote of two-thirds or more of the directors then in office that such termination is in the best interests of the Company as determined in the sole discretion of the Board of Directors. 30. This Agreement shall be automatically modified upon notice from the Company to the Member of any relevant change in the Certificate of Incorporation and/or By-Laws of the Company, or by resolution of the Board of Directors. 31. This Agreement, and any other agreement which Member signs with the Company, is the entire and complete Agreement between the Member and the Company and there are no prior agreements, representations, promises, or commitments, oral or written, which are not specifically contained in this Agreement or any other agreement which Member signs with the Company. The current form of the Company Member Agreement shall govern all past and present relations, actions or claims arising between the Company and the Member. 32. Should any provision of this Agreement be declared invalid under or in conflict with any existing or future law or regulation such provision shall be modified to conform with that law and such modification shall not affect any other provision of this Agreement which shall continue in full force and effect. 33. Failure on the part of the Company at any time or times to enforce its rights under this Agreement, its Certificate of Incorporation, its By-Laws, its Manuals, any Company policies or procedures or any written agreements with Member shall not constitute or be held to be a waiver of any succeeding breach thereof. 34. The Company, but not the Member, shall have a lien on and a right, but not an obligation, of setoff against any Company issued stock or notes, dividends, interest payments or other funds held by or issued to Member, including those issued as Patronage Dividends, and against any cash portion of such Patronage Dividend which is in excess of twenty percent (20%) of the overall Patronage Dividend payable in any year for such indebtedness of the Member to the Company or its subsidiaries as may, for whatever cause, exist, including without limitation borrowings, accounts payable, and the Member's share of Company losses, as reasonably determined by the Company. Upon termination, Company shall have no obligation to redeem Member's investment unless and until all amounts due and owing the Company on accounts receivable statements, ancillary agreements with the Company or any other financial obligations to the Company or its subsidiaries are paid in full. In the event that the Company initiates proceedings to recover amounts due it by Member or for any breach of this Agreement or to seek equitable or injunctive relief against the Member, the Company shall be entitled to the recovery of all associated costs, interest 5 and reasonable attorney's fees. This Agreement shall be enforced against either Member or Company only in the state or federal courts located in Cook County or any Illinois county contiguous to Cook County, Illinois or in the county in which the Company's headquarters are then located, and shall only be interpreted in accordance with the substantive laws of Illinois without giving effect to its conflict of laws principles. 35. This Agreement may not be modified except as set forth herein or by a writing referencing this Agreement and signed by the Company. Prospective Member's signature on this Agreement constitutes an offer only, and this Agreement shall have no force or effect until duly accepted and signed by the Company at its principal office and National Headquarters. WITNESS the Member's hand and seal this _____ day of ________, 20__. ________________________________________________________________________________ Member's Legal Entity d/b/a __________________________________________________________________________ Check: [ ] sole proprietor [ ] partnership [ ] corporation [ ] limited liability company Retail Location Address ________________________________________________________ City: ____________________ State: __________________ Zip: ______________ By: ____________________________________________________________________________ Title: _________________________________________________________________________ WITNESS: _______________________________________________________________________ Address: _______________________________________________________________________ City: ____________________ State: __________________ Zip: ______________ ACCEPTED this _____ day of ______________, 20____, at Chicago, Illinois, By TRUSERV CORPORATION, by its duly authorized agent. __________________________________________________________________________ __________________________________________________________________________ Title 6 EX-31.1 5 c85443exv31w1.txt 302 CERTIFICATION OF CHIEF EXECUTIVE OFFICER EXHIBIT 31.1 CERTIFICATION I, Pamela Forbes Lieberman, certify that: 1. I have reviewed this quarterly report on Form 10-Q of TruServ Corporation; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of TruServ as of, and for, the periods presented in this quarterly report; 4. TruServ's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for TruServ and we have: a. designed such disclosure controls and procedures or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to TruServ, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b. evaluated the effectiveness of TruServ's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c. disclosed in this quarterly report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; 5. TruServ's other certifying officer and I have disclosed, based on our most recent evaluation, to TruServ's auditors and the audit committee of TruServ's board of directors: a. all significant deficiencies and material weaknesses in the design or operation of internal controls which are reasonably likely to adversely affect TruServ's ability to record, process, summarize and report financial information; and b. any fraud, whether or not material, that involves management or other employees who have a significant role in TruServ's internal control over financial reporting. TRUSERV CORPORATION Date: May 13, 2004 By /s/ PAMELA FORBES LIEBERMAN - ------------------------------ Pamela Forbes Lieberman President and Chief Executive Officer EX-31.2 6 c85443exv31w2.txt 302 CERTIFICATION OF CHIEF FINANCIAL OFFICER EXHIBIT 31.2 CERTIFICATION I, David A. Shadduck, certify that: 1. I have reviewed this quarterly report on Form 10-Q of TruServ Corporation; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of TruServ as of, and for, the periods presented in this quarterly report; 4. TruServ's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for TruServ and we have: a. designed such disclosure controls and procedures or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to TruServ, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b. evaluated the effectiveness of TruServ's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c. disclosed in this quarterly report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; 5. TruServ's other certifying officer and I have disclosed, based on our most recent evaluation, to TruServ's auditors and the audit committee of TruServ's board of directors: a. all significant deficiencies and material weaknesses in the design or operation of internal controls which are reasonably likely to adversely affect TruServ's ability to record, process, summarize and report financial information; and b. any fraud, whether or not material, that involves management or other employees who have a significant role in TruServ's internal control over financial reporting. TRUSERV CORPORATION Date: May 13, 2004 By /s/ DAVID A. SHADDUCK --------------------- David A. Shadduck Senior Vice President and Chief Financial Officer EX-32.1 7 c85443exv32w1.txt 906 CERTIFICATION OF CEO AND CFO EXHIBIT 32.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of TruServ Corporation (the "Company") on Form 10-Q for the quarter ended April 3, 2004, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), each of the undersigned officers of the Company certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to such officer's knowledge: (1) The Report fully complies with the requirements of Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of the dates and for the periods expressed in the Report. Date: May 13, 2004 /s/ PAMELA FORBES LIEBERMAN - -------------------------------------- Pamela Forbes Lieberman President and Chief Executive Officer /s/ DAVID A. SHADDUCK - - ------------------------------------- David A. Shadduck Senior Vice President and Chief Financial Officer A signed original of this written statement required by Section 906 has been provided to TruServ Corporation and will be retained by TruServ Corporation and furnished to the Securities and Exchange Commission or its staff upon request. -----END PRIVACY-ENHANCED MESSAGE-----