-----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, EPA3s0HcITsGoWDK3ijN00Mzom5kK4utsM+YbK0KEbkZFDLWrloUOWNmOluu4h0k /dhr/SnfE7z5+2Z1NCk3ww== 0000025095-98-000016.txt : 19980518 0000025095-98-000016.hdr.sgml : 19980518 ACCESSION NUMBER: 0000025095-98-000016 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980404 FILED AS OF DATE: 19980515 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: TRUSERV CORP CENTRAL INDEX KEY: 0000025095 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-HARDWARE [5072] IRS NUMBER: 362099896 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 333-18397 FILM NUMBER: 98625674 BUSINESS ADDRESS: STREET 1: 8600 WEST BRYN MAWR AVE CITY: CHICAGO STATE: IL ZIP: 60631 BUSINESS PHONE: 773-695-5000 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 FORM 10-Q 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended April 4, 1998 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 The number of shares outstanding of each of the issuer's classes of common stock, as of May 2, 1998. Class A Common Stock, $100 Par Value. 565,206 Shares. Class B Common Stock, $100 Par Value. 1,824,912 Shares. 2 PART I - FINANCIAL INFORMATION Item 1. FINANCIAL STATEMENTS TRUSERV CORPORATION CONDENSED CONSOLIDATED BALANCE SHEET (000's Omitted)
April 4, December 31, 1998 1997 --------- ----------- (UNAUDITED) ASSETS Current assets: Cash and cash equivalents $ 1,365 $ 2,224 Accounts and notes receivable 631,976 476,527 Inventories 654,590 543,946 Prepaid expenses 19,911 16,092 --------- Total current assets 1,307,842 1,038,789 Properties less accumulated depreciation 250,289 241,236 Estimated goodwill, net 106,984 107,711 Other assets 50,065 51,177 ---------- ---------- TOTAL ASSETS $1,715,180 $1,438,913 ========== ==========
See Notes to Condensed Consolidated Financial Statements. 3 TRUSERV CORPORATION CONDENSED CONSOLIDATED BALANCE SHEET (000's Omitted)
April 4, December 31, 1998 1997 --------- ----------- (UNAUDITED) LIABILITIES AND CAPITALIZATION Current liabilities: Accounts payable and accrued expenses $ 724,354 $ 572,565 Short-term borrowings 351,445 215,467 Current maturities of notes, long-term debt and lease obligations 63,048 62,640 Patronage dividends payable in cash 6,098 12,142 --------- --------- Total current liabilities 1,144,945 862,814 --------- --------- Long-term debt and obligations under capital leases 169,171 169,209 --------- --------- Capitalization: Estimated patronage dividends to be distributed principally by the issuance of Class B nonvoting common stock and if necessary, cash. 1,530 -- Promissory (subordinated) and installment notes 166,051 172,579 Class A common stock, net of subscriptions receivable; authorized 750,000 shares; issued and subscribed 564,548 and 537,115 shares (net of stock subscription receivable of $5,181,000 and $6,289,000) 51,274 47,423 Class B nonvoting common stock and paid-in capital; authorized 4,000,000 shares; issued and fully paid, 1,833,093 and 1,681,934 shares; issuable as partial payment of patronage dividends 177,655 shares as of December 31, 1997. 182,560 187,259 Retained earnings 670 685 ---------- ---------- 402,085 407,946 Foreign currency translation adjustment (1,021) (1,056) ---------- ---------- Total capitalization 401,064 406,890 ---------- ---------- TOTAL LIABILITIES AND CAPITALIZATION $1,715,180 $1,438,913 ========== ==========
See Notes to Condensed Consolidated Financial Statements. 4 TRUSERV CORPORATION CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (000's Omitted) (UNAUDITED)
For the three For the thirteen months ended weeks ended April 4, March 29, 1998 1997 ------------- ---------------- Revenues $1,030,205 $561,696 ---------- -------- Cost and expenses: Cost of revenues 949,726 518,179 Warehouse, general and administrative 64,109 35,119 Interest paid to Members 3,890 4,297 Other interest expense 8,421 3,033 Other income, net 160 (163) Income tax expense (119) 160 ---------- -------- 1,026,187 560,625 ---------- -------- Net margin before merger integration costs 4,018 1,071 Merger integration cost 1,847 -- ---------- -------- Net margins $ 2,171 $ 1,071 ========== ========
See Notes to Condensed Consolidated Financial Statements. 5 TRUSERV CORPORATION CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (000's Omitted) (UNAUDITED)
For the three For the thirteen months ended weeks ended April 4, March 29, 1998 1997 ------------- ---------------- Operating activities: Net margins $ 2,171 $ 1,071 Adjustments to reconcile net margins to cash and cash equivalents from operating activities: Statement of operations components not affecting cash and cash equivalents 7,960 6,307 Net change in working capital components (123,183) (28,013) --------- -------- Net cash and cash equivalents used for operating activities (113,052) (20,635) --------- -------- Investing activities: Additions to properties owned (15,497) (6,571) Changes in other assets 1,112 (318) --------- -------- Net cash and cash equivalents used for investing activities (14,385) (6,889) --------- -------- Financing activities: Proceeds from short-term borrowings 135,978 45,507 Proceeds from long-term borrowings 1,504 1,088 Payment of annual patronage dividend (6,700) (15,435) Payment of notes, long-term debt, lease obligations and common stock (4,204) (3,435) --------- -------- Net cash and cash equivalents provided by financing activities 126,578 27,725 --------- -------- Net increase (decrease) in cash and cash equivalents (859) 201 Cash and cash equivalents at beginning of the period 2,224 1,662 --------- -------- Cash and cash equivalents at end of the period $ 1,365 $ 1,863 ========= ========
See Notes to Condensed Consolidated Financial Statements. 6 TRUSERV CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 1 - BUSINESS COMBINATIONS On July 1, 1997, pursuant to an Agreement and Plan of Merger dated December 9, 1996 between Cotter & Company ("Cotter"), a Delaware corporation and Servistar Coast of Coast ("SCC"), SCC merged with and into Cotter, with Cotter being the surviving corporation (the "Merger"). Cotter was renamed TruServ Corporation ("TruServ" or the "Company"), effective with the Merger. Each outstanding share of SCC Common Stock and SCC Series A Stock (excluding those shares canceled pursuant to Article III of the Merger Agreement) were converted into the right to receive one fully paid and nonassessable share of TruServ Class A common stock and each two outstanding shares of SCC Preferred Stock were converted into the right to receive one fully paid and non- assessable share of TruServ Class B Common Stock. A total of 270,500 and 1,170,670 shares of TruServ Class A Common Stock and Class B Common Stock, respectively, were issued in connection with the Merger. Also 231,000 additional shares of TruServ Class A Common Stock were issued in exchange for Class B common stock to pre-Merger Stockholders of Cotter to satisfy the Class A Common Stock ownership requirement of 60 shares per store (up to a maximum of 5 stores) applicable to such Members as a result of the Merger. The Condensed Consolidated Balance Sheets as of April 4, 1998 and December 31, 1997 reflect the post-Merger Company. The financial information for the three months ended April 4, 1998, reflects the post-Merger results of the Company. The thirteen weeks ended March 29, 1997 reflect the financial information of the pre-Merger Company only. The following summarized unaudited pro forma operating data for the thirteen weeks ended March 29, 1997 are presented below giving effect to the Merger, as if it had been consummated at the beginning of the period. These pro forma results have been prepared for comparative purposes only and do not purport to be indicative of the results of operations that actually would have resulted had the Merger been in effect on the date indicated, or which may result in the future. The pro forma results exclude one-time non-recurring charges or credits directly attributable to the transaction. The pro forma adjustments consist of (i) an adjustment for amortization of the estimated excess of cost over the fair value of the net assets of SCC, (ii) an adjustment for interest expense on promissory notes issued in connection with the Merger, (iii) an adjustment for interest expenses on short-term borrowings issued in connection with the Merger and (iv) an adjustment for incremental differences in depreciation expense.
Three Thirteen Months Ended Weeks Ended April 4, March 29, 1998 1997 ------------ ------------ Actual Pro Forma (1) ------------ ------------ (000's OMITTED) Revenue $1,030,205 $967,173 ========== ======== Net margin $ 2,171 $ 1,376 ========== ======== (1) Assumes the Merger was consummated at January 1, 1997.
7 To refinance the existing debt of SCC and pay related fees and expenses, the Company entered into a revolving loan agreement of up to $300,000,000 in short-term credit facilities with a group of banks and an additional $100,000,000 of long-term debt. The total purchase price of approximately $141,400,000 was allocated to assets and liabilities of the Company based on the estimated fair value as of the date of acquisition. The allocation was based on preliminary estimates which may be revised up until July 1, 1998. The excess of consideration paid over the estimated fair value of net assets acquired in the amount of $109,200,000 has been recorded as goodwill and is being amortized on a straight-line basis over forty years. In connection with the purchase business combination, an estimated liability of $38,200,000 was recognized for costs associated with the Merger plan. The Merger plan specifies that certain former SCC positions approximately 1,200 in total, will be eliminated substantially within one year. As of April 4, 1998, approximately 86% of these employees have been terminated with the related cost of benefits of approximately $8,300,000 charged against the liability. The Merger plan specifies the closing of redundant former SCC distribution centers and the elimination of overlapping former SCC inventory items stockkeeping units substantially within a one-year period. Distribution centers closing costs include net occupancy and costs after facilities are vacated. In addition, stockkeeping unit reduction costs include losses on the sale of inventory items which have been discontinued solely as a result of the Merger. As of April 4, 1998, $1,659,000 relating to distribution center closing cost and the reduction of stockkeeping units have been charged against the liability. Merger integrations costs of $2,529,000 consist of one time non-recurring expenses directly attributable to the Merger including distribution center closings, severance pay, information service costs and general and administrative costs. NOTE 2 - GENERAL The condensed consolidated balance sheet, statement of operations and statement of cash flows at and for the period ended April 4, 1998 and the condensed consolidated statement of operations and statement of cash flows for the period ended March 29, 1997 are unaudited and, in the opinion of the management of the Company, include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of financial position, results of operations and cash flows for the respective interim periods. The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles 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 generally accepted accounting principles for complete financial statements. This financial information should be read in conjunction with the consolidated financial statements for the year ended December 31, 1997 included in the Company's 1997 Annual Report on Form 10-K. NOTE 3 - ESTIMATED PATRONAGE DIVIDENDS Patronage dividends are declared and paid by the Company after the close of each fiscal year. The 1997 annual patronage dividend was distributed through a payment of 30% of the total distribution in cash, with the balance being paid through the issuance of the Company's Class B nonvoting common stock. Such patronage dividends, consisting of substantially all of the Company's patronage source income, have been paid since 1949. The estimated patronage dividend for the three months ended April 4, 1998 is $2,186,000 compared to $1,341,000 for the corresponding thirteen weeks period in 1997. 8 NOTE 4 - INVENTORIES
Inventories consisted of: April 4, December 31, 1998 1997 -------- ----------- (UNAUDITED) (000's Omitted) Manufacturing inventories: Raw materials $ 5,445 $ 4,878 Work-in-process and finished goods 41,405 29,241 -------- -------- 46,850 34,119 Merchandise inventories 607,740 509,827 -------- -------- $654,590 $543,946 ======== ========
NOTE 5 - COMPREHENSIVE INCOME As of January 1, 1998, the Company adopted Statement 130, Reporting Comprehensive Income. Statement 130 establishes new rules for the reporting and display of comprehensive income and its components; however, the adoption of this Statement had no impact on the Company's net margin or capitalization. Statement 130 requires unrealized gains or losses on the Company's foreign currency translation adjustments, which prior to adoption were reported separately in shareholder's equity to be included in other comprehensive income. Prior year financial statements have been reclassified to conform to the requirements of Statement 130. The impact of the foreign currency translation adjustment had no material impact on the Comprehensive Income on the Company. Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS BUSINESS COMBINATION On July 1, 1997, TruServ Corporation (the "Company"), formerly Cotter & Company ("Cotter"), merged with Servistar Coast to Coast Corporation ("SCC") ( the "Merger" ). The transaction was accounted for using the purchase accounting method. Accordingly, the financial information for the three months ended April 4, 1998 reflects the results of the post-Merger Company and the financial information for the thirteen weeks ended March 29, 1997 reflects the results of the pre-Merger Company. To facilitate the comparison of interim results for 1998 and 1997, supplemental comparisons have been provided using pro forma financial information. This pro forma information has been prepared for comparative purposes only and does not purport to be indicative of the results of operation that actually would have resulted had the Merger been in effect on the dates indicated, or which may result in the future.
Three months ended Thirteen weeks ended April 4, March 29,1997 1998 -------------------- Actual Actual Pro Forma (1) ----------------- ------ ------------ (000'S OMITTED) Revenue $1,030,205 $561,696 $967,173 Gross margin 80,479 43,517 74,365 Warehouse, general and administrative expense 64,109 35,119 63,142 Interest expense 12,311 7,330 10,412 Merger integration cost 1,847 -- -- Net margin 2,171 1,071 1,376 (1) Assumes the Merger was consummated at January 1, 1997.
9 THREE MONTHS ENDED APRIL 4, 1998 COMPARED TO THIRTEEN WEEKS ENDED MARCH 29, 1997 RESULTS OF OPERATIONS: Revenues for the three months ended April 4, 1998 totaled $1,030,205,000. This represented an increase of $468,509,000 or 83.4% compared to the comparable period last year. The increase was due to the addition of Servistar Coast to Coast revenues that resulted from the July 1, 1997 merger of Cotter and SCC. Gross margins increased by $36,962,000 or 84.9% and as a percentage of revenues, increased to 7.8% from 7.7% for the comparable period last year. The increase in gross margin percentage resulted primarily from increased sales in manufactured products. Warehouse, general and administrative expenses as a percentage of revenues decreased to 6.2% from 6.3% compared with the prior year. The Company incurred additional warehousing expenses in association with commonizing inventory assortments and increased inventory levels but continued to reduce other expense in its continuing efforts to reduce operating costs. Many of the potential cost efficiencies related to the Merger have not yet been realized and costs should be reduced as the Merger strategy is further implemented. Interest paid to Members decreased by $407,000 or 9.5% primarily due to a lower average interest rate and the lower principal balance. Other interest expense increased $5,388,000 due to higher borrowings compared to the same period last year. The higher borrowings were required because of the increased cash requirement resulting from increased inventory levels. The effective borrowing rate has been lowered due to the renegotiation of the rates since the date of the Merger. The combination of increased gross margins, offset by increased expenses and increased borrowing costs, resulted in a net margin of $2,171,000 compared to $1,071,000 for the same period last year. ACTUAL THREE MONTHS ENDED APRIL 4, 1998 COMPARED TO PRO FORMA THIRTEEN WEEKS ENDED MARCH 29, 1997 ASSUMING THE MERGER WAS CONSUMMATED ON JANUARY 1, 1997 RESULTS OF OPERATIONS: Revenues for the three months ended April 4, 1998 totaled $1,030,205,000. This represented an increase of $63,032,000 or 6.5% compared to the comparable period last year. The increase was attributable to revenue increases in lumber/building materials, manufacturing products, and seasonal merchandise. Gross margins increased by $6,114,000 or 8.2% and as a percentage of revenues, increased to 7.8% from 7.7% for the comparable period last year. The increase in gross margins resulted from improved vendor negotiations and improved manufacturing margins. Warehouse, general and administrative expenses increased by $967,000 or 1.5% but as a percentage of revenues decreased to 6.2% from 6.5%. The decrease in the percentage of revenues was attributed to the Company's continued efforts to reduce operating costs through reduction of duplicate office and distribution center functions. Interest paid to Members decreased by $607,000 or 13.5% primarily due to lower principal balance and lower average interest rates. Other interest expense increased from $5,915,000 to $8,421,000 primarily due to higher short-term borrowings because of the increased cash requirement resulting from increased inventory levels. The combination of increased gross margin and controlled warehouse, general and administrative expense, partially offset by higher interest expense, resulted in a net margin of $2,171,000 compared to $1,376,000 for the comparable period last year. 10 THREE MONTHS ENDED APRIL 4, 1998 COMPARED WITH THE YEAR ENDED DECEMBER 31, 1997 LIQUIDITY AND CAPITAL RESOURCES: The Company has a seasonal need for cash. During the first quarter of the year, as seasonal inventories are purchased for resale or manufacture and shipment, cash and cash equivalents are used for operating activities. In subsequent quarterly periods, the Company anticipates that cash and cash equivalents will be provided by operating activities and financing activities, if necessary. During the first quarter of 1998, inventories increased by $110,644,000 to support anticipated future orders of seasonal merchandise resulting from the commonization of inventory. Accounts and notes receivable increased by $155,449,000 due to the seasonal payment terms extended to the Company's Members. Short-term borrowings increased by $135,978,000 and accounts payable and accrued expenses increased by $151,789,000 in support of the increased inventories and favorable seasonal terms obtained from vendors which were passed on to the Company's Members. At April 4, 1998, net working capital decreased to $162,897,000 from $175,975,000 at December 31, 1997. The current ratio decreased to 1.14 at April 4, 1998 compared to 1.20 at December 31, 1997. At December 31, 1997, the Company had established a $300,000,000 five- year revolving credit facility with a group of banks. In addition, the Company has various short-term lines of credit available under informal agreements with lending banks, cancelable by either party under specific circumstances. The borrowings under these agreements were $350,000,000 and $210,000,000 at April 4, 1998 and December 31, 1997, respectively. The Company's capital is primarily derived from Class A common stock and retained earnings, together with promissory (subordinated) notes and nonvoting Class B common stock issued in connection with the Company's annual patronage dividend. The Company believes the funds derived from these capital resources, as well as operations and the credit facilities noted above, will be sufficient to satisfy capital needs. Total capital expenditures, including those made under capital leases, were $15,497,000 for the three months ended April 4, 1998 compared to $6,571,000 during the comparable period in 1997. These capital expenditures relate to additional equipment and technological improvements at the regional distribution centers and at the corporate headquarters. 11 PART II - OTHER INFORMATION Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS At the Company's Annual Meeting of Stockholders held on April 7, 1998, the following individuals were reelected to the Board of Directors:
Votes Withheld Term Votes for Votes against Abstained ------- --------- ------------- --------- J.W.(Bill) Blagg 3 years 320,640 --- 7,200 Daniel A. Cotter 3 years 318,420 --- 9,420 Jay B. Feinsod 3 years 320,460 --- 7,380 Dennis A. Swanson 3 years 320,760 --- 7,080 John M.(Mitch) West, Jr. 3 years 320,640 --- 7,200 Barbara B. Wilkerson 3 years 320,460 --- 7,380
In addition to the foregoing, the following persons were, on April 7, 1998, Directors of the Company whose terms of office continued after the annual meeting: James Burnett James Howenstine Paul E. Pentz William M. Claypool, III Jarrald T. Kabelin George V. Sheffer William M. Halterman Peter G. Kelley John Wake Jr. William Hood Robert J. Ladner
The annual meeting also included the following votes: 1) The proposal to amend Article Fourth, Paragraph 7 of the Company's Certificate of incorporation to delete the words "provided, however, that the stockholders shall approve any such provision in the By-Laws" was passed. The number of affirmative votes cast was 298,260, the number of negative votes cast was 14,280, and the number of abstentions was 15,300. 2) The proposal to approve the appointment of Ernst & Young LLP, independent public accountants, as auditor of the company for the fiscal year 1998 was passed. The number of affirmative votes cast was 319,440, the number of negative votes cast was 3,600, and the number of abstentions was 4,800. Item 5. OTHER INFORMATION. The Board accepted the resignation of David Guthrie from the Board of Directors effective April 1, 1998. Mr. Guthrie submitted his resignation for the purpose of devoting more time to his personal business. The Board approved the appointment of James Burnett, effective April 1, 1998 to fill the vacancy created by Mr. Guthrie's resignation. Item 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits Exhibit 4. Instruments defining the rights of security holders, including indentures; incorporated herein by reference those items included as Exhibits 4A through 4K, inclusive, in the Company's Post-Effective Amendment No. 5 on Form S-2 to Form S-4 Registration Statement (No. 333-18397) filed with the Securities and Exchange Commission on March 31, 1998. (b) Reports on Form 8-K NONE 12 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 15, 1998 By /s/ KERRY J. KIRBY Kerry J. Kirby Executive Vice President, Finance and Chief Financial Officer (Mr. Kirby is the principal accounting officer and has been duly authorized to sign on behalf of the Registrant.) EX-27 2 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINES SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONDENSED CONSOLIDATED BALANCE SHEET AND STATEMENT OF OPERATIONS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 3-MOS DEC-31-1998 APR-04-1998 1,365 0 631,976 0 654,590 1,307,842 505,003 254,714 1,715,180 1,142,037 166,051 0 0 51,274 182,560 1,715,180 1,030,205 1,030,205 949,726 949,726 65,956 0 12,311 2,053 (118) 2,171 0 0 0 2,171 0 0
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