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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 June 28, 1997 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)
COTTER & COMPANY
(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 June 28, 1997.
Class A Common Stock, $100 Par Value. 47,710 Shares.
Class B Common Stock, $100 Par Value. 1,088,833 Shares.
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PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
COTTER & COMPANY
CONDENSED CONSOLIDATED BALANCE SHEET
(000's Omitted)
June 28, December 28,
1997 1996
-------- ------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents $ 1,876 $ 1,662
Accounts and notes receivable 343,089 307,205
Inventories 348,431 347,554
Prepaid expenses 16,250 13,517
-------- --------
Total current assets 709,646 669,938
Properties owned,
less accumulated depreciation 163,402 167,331
Properties under capital leases,
less accumulated amortization 2,934 3,680
Other assets 30,379 13,036
-------- --------
TOTAL ASSETS $906,361 $853,985
======== ========
See Notes to Condensed Consolidated Financial Statements.
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COTTER & COMPANY
CONDENSED CONSOLIDATED BALANCE SHEET
(000's Omitted)
June 28, December 28,
1997 1996
-------- ------------
(UNAUDITED)
LIABILITIES AND CAPITALIZATION
Current liabilities:
Accounts payable and accrued expenses $325,148 $338,440
Short-term borrowings 147,430 70,594
Current maturities of notes,
long-term debt and lease obligations 43,780 43,458
Patronage dividends payable in cash 4,477 16,142
-------- --------
Total current liabilities 520,835 468,634
-------- --------
Long-term debt and obligations under
capital leases 79,395 80,145
-------- --------
Capitalization:
Promissory (subordinated) and instalment notes 182,025 185,366
Class A common stock and partially
paid subscriptions (Authorized 100,000 shares;
issued and fully paid, 47,710 and 48,480 shares) 4,771 4,876
Class B nonvoting common stock and
paid-in capital (Authorized 2,000,000 shares;
issued and fully paid, 1,088,833 and 1,043,521
shares; issuable as partial payment of patronage
dividends, 83,794 and 84,194 shares) 118,608 114,053
Retained earnings 1,614 1,751
-------- --------
307,018 306,046
Foreign currency translation adjustment (887) (840)
-------- --------
Total capitalization 306,131 305,206
-------- --------
TOTAL LIABILITIES AND CAPITALIZATION $906,361 $853,985
======== ========
See Notes to Condensed Consolidated Financial Statements.
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COTTER & COMPANY
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(000's Omitted)
(UNAUDITED)
FOR THE THIRTEEN FOR THE TWENTY-SIX
WEEKS ENDED WEEKS ENDED
------------------ ----------------------
June 28, June 29, June 28, June 29,
1997 1996 1997 1996
-------- -------- ---------- ----------
Revenues $645,070 $644,399 $1,206,766 $1,223,008
-------- -------- ---------- ----------
Cost and expenses:
Cost of revenues 597,740 593,972 1,115,919 1,129,497
Warehouse, general and
administrative 26,900 32,816 61,409 67,014
Interest paid to Members 4,255 4,727 8,552 9,385
Other interest expense 3,472 2,656 6,505 4,885
Other (income) expense, net (306) 83 (469) (176)
Income tax expense (benefit) (219) 145 (59) 320
-------- -------- ---------- ----------
631,842 634,399 1,191,857 1,210,925
-------- -------- ---------- ----------
Net margin before
merger integration costs 13,228 10,000 14,909 12,083
Merger integration costs 1,422 -- 2,032 --
-------- -------- ---------- ----------
Net margins $ 11,806 $ 10,000 $ 12,877 $ 12,083
======== ======== ========== ==========
See Notes to Condensed Consolidated Financial Statements.
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COTTER & COMPANY
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE TWENTY-SIX WEEKS ENDED
(000's Omitted)
(UNAUDITED)
June 28, June 29,
1997 1996
-------- --------
Operating activities:
Net margins $12,877 $12,083
Adjustments to reconcile net margins to cash and
cash equivalents from operating activities:
Statement of operations components not affecting
cash and cash equivalents 12,373 12,916
Net change in working capital components (58,541) (92,404)
------- -------
Net cash and cash equivalents used for
operating activities (33,291) (67,405)
------- -------
Investing activities:
Additions to properties owned (15,158) (12,745)
Changes in other assets (8,218) 201
------- -------
Net cash and cash equivalents used for
investing activities (23,376) (12,544)
------- -------
Financing activities:
Proceeds from short-term borrowings 76,836 82,344
Proceeds from long-term borrowings 2,371 --
Payment of annual patronage dividend (16,142) (18,188)
Payment of notes, long-term debt, lease
obligations and common stock (6,184) (5,548)
------- -------
Net cash and cash equivalents provided by
financing activities 56,881 58,608
------- -------
Net increase (decrease) in cash and cash equivalents 214 (21,341)
Cash and cash equivalents at beginning of the period 1,662 22,473
------- -------
Cash and cash equivalents at end of the period $ 1,876 $ 1,132
======= =======
See Notes to Condensed Consolidated Financial Statements.
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COTTER & COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - GENERAL
The condensed consolidated balance sheet, statement of operations and
statement of cash flows at and for the period ended June 28, 1997 and the
condensed consolidated statement of operations and statement of cash flows
for the period ended June 29, 1996 are unaudited. In the opinion of the
management of Cotter & Company (the "Company"), these financial statements
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 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 28, 1996 included in the Company's Post-Effective
Amendment No. 6 to Form S-2 Registration Statement (No. 33-39477) and
in the Company's 1996 Annual Report on Form 10-K.
On April 1, 1997, the stockholders of the Company and the shareholders
of ServiStar Coast to Coast Corporation ("SCC") agreed by a majority
vote to merge the two companies effective July 1, 1997. The transactions
will be recorded using the purchase accounting method. SCC is a
hardware wholesaler with annual revenues of $1,700,000,000 and with a
strong market presence in retail lumber and building materials.
Following consummation of the merger, the Company was renamed TruServ
Corporation. In accordance with the merger, the Company will be
distributing a Patronage Dividend based on its results of operations
for the twenty-six week period ended June 28, 1997.
Certain amounts in the June 29, 1996 financial statements have been
reclassified to conform with the June 28, 1997 presentation.
NOTE 2 - PATRONAGE DIVIDENDS
Patronage dividends were declared and will be paid by the Company
after the close of the current twenty-six week period ended June 28,
1997. This semi-annual patronage dividend will be 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 in accordance with the patronage dividend policy that was
changed effective in 1997 to increase the Class B nonvoting common
stock requirements after payment of at least 20% in cash and any
further distribution in cash versus promissory notes. The patronage
dividend for the twenty-six weeks ended June 28, 1997 is $13,014,000
compared to estimate of $12,201,000 for the corresponding period in
1996. Patronage dividends for the twenty-six week period will be paid in
the third quarter of 1997. Such patronage dividends, consisting of
substantially all of the Company's patronage source income, have been
paid since 1949.
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NOTE 3 - INVENTORIES
Inventories consisted of:
June 28, December 28,
1997 1996
-------- ------------
(UNAUDITED)
(000's Omitted)
Manufacturing inventories:
Raw materials $ 3,123 $ 2,797
Work-in-process and finished goods 32,284 24,558
-------- --------
35,407 27,355
Merchandise inventories 313,024 320,199
-------- --------
$348,431 $347,554
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NOTE 4 - MERGER INTEGRATION COSTS
Merger integration costs consist of expenses incurred with the consolidation
and restructuring of certain functions due to the aforementioned merger.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
TWENTY-SIX WEEKS ENDED JUNE 28, 1997 COMPARED TO TWENTY-SIX WEEKS ENDED
JUNE 29, 1996
RESULTS OF OPERATIONS:
Revenues for the twenty-six weeks ended June 28, 1997 totaled
$1,206,766,000. This represented a decrease of $16,242,000 or 1.3%
compared to the same period last year. The decrease was due to
seasonal merchandise which was affected by adverse weather conditions.
These decreases were concentrated in the merchandise categories of
Electrical & Plumbing, Farm & Garden, and Sporting Goods & Toys.
Comparable store sales increased 0.1%.
Gross margins decreased by $2,664,000 or 2.8% and, as a percentage of
revenues, declined from 7.6% to 7.5% for the same period last year.
The reduction resulted from the decrease in sales volume plus a change
in the sales mix between Stock, Relay, and Direct Shipment Sales. The
lower margin Direct Shipment Sales was the only category to show an
increase for the twenty-six week period.
Warehouse, general and administrative expenses decreased by $5,605,000
and, as a percentage of revenues, decreased from 5.5% to 5.1%. The
decrease was attributed to the Company's continued efforts to reduce
operating costs.
Interest paid to Members decreased by $833,000 or 8.9% primarily due
to a lower average interest rate. Other interest expense increased
$1,620,000 or 33.2% due to higher borrowings compared to the same
period last year. The higher borrowings was required because of
increased inventory levels.
Merger integration costs consist of expenses incurred with the
consolidation and restructuring of certain functions due to the
aforementioned merger.
The continued effort of expense reduction, partially offset by the
combination of decreased gross margin and increased borrowing costs,
resulted in a higher net margin. Net margins were $12,877,000
compared to $12,083,000 for the same period last year.
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TWENTY-SIX WEEKS ENDED JUNE 28, 1997 COMPARED WITH THE YEAR ENDED DECEMBER
28, 1996
LIQUIDITY AND CAPITAL RESOURCES:
The Company has a seasonal need for cash. During the first six months
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.
Accounts and notes receivable increased by $35,884,000 due to the
seasonal payment terms extended to the Company's Members. Short-term
borrowings increased by $76,836,000 and accounts payable and accrued
expenses decreased by $13,292,000.
At June 28, 1997, net working capital decreased to $188,811,000 from
$201,304,000 at December 28, 1996. The current ratio decreased to
1.36 at June 28, 1997 compared to 1.43 at December 28, 1996.
On June 28, 1997 the Company had established a $125,000,000 five-year
revolving credit facility with a group of banks and had various short-term
lines of credit available under informal agreements with lending banks,
cancelable by either party under specific circumstances. Borrowing under
these agreements were $147,430,000 at June 28, 1997. Effective with the
merger, this revolving credit facility was increased to $300,000,000. In
addition, the Company has a $50,000,000 private shelf agreement.
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 $15,158,000 for the twenty-six weeks ended June 28, 1997 compared
to $12,745,000 during the comparable period in 1996. These capital
expenditures relate to additional equipment and technological
improvements at the regional distribution centers and at the World
Headquarters. Funding of any additional 1997 capital expenditures is
anticipated to come from operations and external sources, if
necessary.
A portion of the Company's information systems are not "Year 2000
Compliant." This means that the Company will need to incur certain
costs to modify non-compliant systems prior to the Year 2000 in order
to ensure that those systems continue to serve the needs of the
Company and its Membership. Based upon an initial investigation of
our systems, we estimate that such costs could exceed $8 million.
Actual costs may exceed this estimate depending on our merger efforts
and system resource constraints. Further, based upon current FASB
Guideline, costs incurred to modify systems to be Year 2000 compliant
must be expensed. Accordingly, such costs will reduce our patronage
dividends in years in which they are incurred.
THIRTEEN WEEKS ENDED JUNE 28, 1997 COMPARED TO THIRTEEN WEEKS ENDED
JUNE 29, 1997
RESULTS OF OPERATIONS:
Revenues increased by $671,000 or 0.1% compared to the same period
last year. Most merchandise categories were comparable to the same
period last year with Lumber & Building Materials showing an increase
for the thirteen week period. Comparable store sales increased 1.8%.
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Gross margins decreased by $3,097,000 or 6.1% compared to the same
period last year. Gross margins as a percentage of revenues declined
to 7.3% from 7.8% for the same period last year. The reduction
resulted from a change in the sales mix which was weighted heavily
toward the lower margin Direct Shipment sales. Direct Shipments
showed the largest increase for the thirteen week period.
Warehouse, general and administrative expenses decreased by $5,916,000
or 18.0% and as a percent of revenues, decreased to 4.2% from 5.1% for
the same period last year. The decrease was attributed to the
Company's continued efforts to reduce operating costs.
Interest paid to Members decreased by $472,000 or 10.0% primarily due
to a lower average interest rate. Other interest expense increased
$816,000 or 30.7% due to higher borrowings compared to the same period
last year. The higher borrowings was required because of increased
inventory levels.
Merger integration costs consist of expenses incurred with the
consolidation and restructuring of certain functions due to the
aforementioned merger.
Net margins were $11,806,000 compared to $10,000,000 for the same
period last year.
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 1, 1997,
the Stockholders approved the Agreement and Plan of Merger dated
December 9, 1996, providing for the merger of ServiStar Coast to Coast
Corporation with and into Cotter & Company, thereafter known as
TruServ Corporation. The Agreement and Plan of Merger addressed,
among other things, the following items:
(a) Additional capital requirements;
(b) New form of Retail Member Agreement;
(c) Revised By-Laws and
(d) Restatement of Certificate of Incorporation, including without
limitation:
1) Authorizing an increase in the maximum outstanding Class A Common
Stock to 750,000 shares and Class B Common Stock to 4,000,000 shares;
2) Elimination of cumulative voting;
3) Elimination of required uniform ownership of Class A Common Stock
and
4) Changing the corporate name.
The approval of the new form of Retail Member Agreement automatically
superseded all prior Cotter & Company Retail Member Agreements.
The number of affirmative votes cast for the above items were 37,520,
the number of negative votes cast were 2,100 and the number of
abstentions were 540.
In addition, the Stockholders of Class B common stock voted to
increase the number of authorized shares of Class B Common Stock to
4,000,000 shares. The number of affirmative votes were 927,296, the
number of negative votes cast were 47,881, and the number of
abstentions were 6,904.
The Company consummated the Merger on July 1 ,1997.
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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 4G, inclusive, in the Company's
Post-Effective Amendment No. 6 to Form S-2 Registration Statement
(No. 33-39477) filed with the Securities and Exchange Commission on
April 3, 1997.
(b) Reports on Form 8-K
1) Current Report on Form 8-K, dated as of March 5, 1997.
2) Form 8K/A Amendment to Current Report on Form 8-K, dated as of
March 26, 1997.
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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.
COTTER & COMPANY
Date: August 12, 1997 By /s/KERRY J. KIRBY
Kerry J. Kirby
Executive Vice President
and Chief Financial Officer
(Mr. Kirby is the principal accounting officer and has been duly
authorized to sign on behalf of the Registrant.)