1
EXHIBIT 99.A
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS.
PAGE(S)
-------
Unaudited Consolidated Balance Sheet at December 31, 2000 and December 31, 1999.................. F-2
Unaudited Consolidated Statement of Operations for each of the three years in
the period ended December 31, 2000............................................................ F-3
Unaudited Consolidated Statement of Cash Flows for each of the three years in the
period ended December 31, 2000................................................................ F-4
Unaudited Consolidated Statement of Members' Equity
for each of the three years in the period ended December 31, 2000............................. F-5
Notes to Unaudited Consolidated Financial Statements............................................. F-6 to F-21
2
TRUSERV CORPORATION
UNAUDITED CONSOLIDATED BALANCE SHEET
ASSETS
DECEMBER 31, DECEMBER 31,
2000 1999
--------------- ---------------
(RESTATED)
(000'S OMITTED)
Current assets:
Cash and cash equivalents................................................... $ 18,316 $ 1,815
Restricted cash (Note 12)................................................... 1,000 --
Accounts and notes receivable, net of allowance for doubtful accounts of
$7,710,000 and $5,613,000............................................. 396,587 460,419
Inventories (Note 2)........................................................ 443,663 482,415
Other current assets........................................................ 12,274 9,937
--------------- ---------------
Total current assets.................................................. 871,840 954,586
Properties, net (Note 3)....................................................... 216,146 244,845
Goodwill, net.................................................................. 94,051 101,787
Other assets................................................................... 53,977 34,179
--------------- ---------------
Total assets.......................................................... $ 1,236,014 $ 1,335,397
=============== ===============
LIABILITIES AND CAPITALIZATION
Current liabilities:
Accounts payable............................................................ $ 356,196 $ 442,140
Outstanding checks.......................................................... 129,490 102,764
Accrued expenses............................................................ 85,161 68,798
Short-term borrowings (Note 4).............................................. 138,085 167,007
Current maturities of notes, long-term debt and capital lease
obligations (Notes 4, 5 and 7) .......................................... 61,350 88,088
Patronage dividend payable in cash.......................................... 10,558 --
--------------- ---------------
Total current liabilities............................................. 780,840 868,797
Long-term debt, including capital lease obligations, less current maturities
(Notes 4 and 5)............................................................. 288,929 309,796
Deferred credits (Note 12)..................................................... 9,821 1,872
--------------- ---------------
Total liabilities and deferred credits......................................... 1,079,590 1,180,465
--------------- ---------------
Minority interest.............................................................. 4,999 4,677
Commitments and contingencies (Note 6)......................................... -- --
Members' capitalization:
Promissory (subordinated) and installment notes (Note 7).................... 65,846 83,804
Members' equity:
Redeemable Class A voting common stock, $100 par value; 750,000 shares
authorized; 411,180 and 405,060 shares issued and fully paid; 98,880
and 106,380 shares issued (net of subscriptions receivable of
$1,922,000 and $3,874,000)............................................. 49,084 47,270
Redeemable Class B non-voting common stock and paid-in capital, $100
par value; 4,000,000 shares authorized; 1,732,962 and 1,764,797
shares issued and fully paid........................................... 174,596 177,779
Loss allocation (Note 1)................................................. (92,460) --
Deferred patronage (Note 1).............................................. (27,288) (27,663)
Retained earnings / (deficit)............................................ (17,381) (130,089)
Accumulated other comprehensive loss..................................... (972) (846)
--------------- ---------------
Total Members' equity................................................. 85,579 66,451
--------------- ---------------
Total Members' capitalization.................................... 151,425 150,255
--------------- ---------------
Total liabilities and Members' capitalization............... $ 1,236,014 $ 1,335,397
=============== ===============
The accompanying notes are an integral part of the
Unaudited Consolidated Financial Statements
F-2
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TRUSERV CORPORATION
UNAUDITED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEARS ENDED
-------------------------------------------------------
DECEMBER 31, DECEMBER 31, DECEMBER 31,
2000 1999 1998
--------------- ---------------- --------------
(RESTATED) (RESTATED)
(000'S OMITTED)
Revenues .................................................... $ 3,993,642 $ 4,502,326 $ 4,328,238
--------------- ---------------- --------------
Cost and expenses:
Cost of revenues.......................................... 3,716,245 4,320,861 4,030,103
Logistics and manufacturing expenses...................... 89,944 99,282 96,329
Selling, general and administrative expenses.............. 122,860 142,134 136,685
Interest paid to Members.................................. 11,131 14,498 16,390
Other interest expense.................................... 56,575 46,204 38,710
Gain on sale of assets (Note 12).......................... (30,337) (11,724) (954)
Other income, net......................................... (7,809) (1,630) (1,642)
--------------- ---------------- --------------
3,958,609 4,609,625 4,315,621
--------------- ---------------- --------------
Net margin / (loss) before income taxes and cumulative
effect of a change in accounting principle................ 35,033 (107,299) 12,617
Income tax expense (Note 8).................................. 916 17,020 597
--------------- ---------------- --------------
Net margin / (loss) before cumulative effect of
a change in accounting principle.......................... 34,117 (124,319) 12,020
Cumulative effect on prior years of a change
in accounting principle, net of tax....................... -- 6,484 --
--------------- ---------------- --------------
Net margin / (loss).......................................... $ 34,117 $ (130,803) $ 12,020
=============== ================ ==============
See note 1 for restatement of 1999 and 1998 operations.
The accompanying notes are an integral part of the
Unaudited Consolidated Financial Statements
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TRUSERV CORPORATION
UNAUDITED CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED
-----------------------------------------------------
DECEMBER 31, DECEMBER 31, DECEMBER 31,
2000 1999 1998
--------------- -------------- --------------
(RESTATED) (RESTATED)
(000'S OMITTED)
Operating activities:
Net margin / (loss)....................................... $ 34,117 $ (130,803) $ 12,020
Adjustments to reconcile net margin / (loss)
to net cash and cash equivalents provided by /
(used for) operating activities:
Depreciation and amortization......................... 43,033 41,131 32,112
Provision for losses on accounts and notes
receivable.......................................... 9,147 5,148 2,808
Gain on sale of assets................................ (30,337) (11,724) (954)
Changes in operating assets and liabilities:
Accounts and notes receivable....................... 52,187 63,059 (69,585)
Inventories......................................... 38,752 112,703 (52,572)
Other current assets................................ (2,337) 26,110 (19,795)
Accounts payable.................................... (81,944) 56,087 20,010
Accrued expenses.................................... 16,839 2,229 (41,698)
Other adjustments, net.............................. 4,116 17,667 (1,251)
--------------- -------------- --------------
Net cash and cash equivalents provided by /
(used for) operating activities................... 83,573 181,607 (118,905)
--------------- -------------- --------------
Investing activities:
Additions to properties................................... (12,526) (44,930) (70,733)
Proceeds from sale of properties (Note 12)................ 23,113 39,714 32,645
Changes in restricted cash (Note 12)...................... (1,000) -- --
Changes in other assets................................... (8,716) (5,316) (5,923)
--------------- -------------- --------------
Net cash and cash equivalents provided by / (used for)
investing activities.............................. 871 (10,532) (44,011)
--------------- -------------- --------------
Financing activities:
Payment of patronage dividend............................. -- (14,507) (12,142)
Payment of notes, long-term debt and lease obligations.... (67,355) (57,340) (41,966)
Proceeds from long-term borrowings........................ 1,098 731 158,821
Increase / (decrease) in outstanding checks............... 26,726 (3,912) 16,813
Increase / (decrease) in short-term borrowings............ (28,922) (91,140) 42,680
Purchase of common stock.................................. (599) (5,359) (3,618)
Proceeds from sale of Redeemable Class A common stock..... 1,109 617 1,754
--------------- -------------- --------------
Net cash and cash equivalents provided
by / (used for) financing activities.............. (67,943) (170,910) 162,342
--------------- -------------- --------------
Net increase / (decrease) in cash and cash equivalents....... 16,501 165 (574)
Cash and cash equivalents at beginning of year............ 1,815 1,650 2,224
--------------- -------------- --------------
Cash and cash equivalents at end of year..................... $ 18,316 $ 1,815 $ 1,650
=============== ============== ==============
See Note 9 for supplemental cash flow information.
The accompanying notes are an integral part of the
Unaudited Consolidated Financial Statements
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TRUSERV CORPORATION
UNAUDITED CONSOLIDATED STATEMENT OF MEMBERS' EQUITY
Redeemable
Common Stock
Par Value Retained
Class A Class B Earnings /
# of Shares $ # of Shares $ (Deficit)
---------- ---------- ----------- ------------ ----------
(000'S OMITTED, EXCLUDING SHARE DATA)
Balances at December 31, 1997 as originally
reported........................................... 537,115 $ 47,423 1,859,589 $ 187,259 $ 685
Effect of restatement - Note 1..................... 170
---------- ---------- ----------- ------------ ----------
Balances at December 31, 1997 (Restated)........... 537,115 47,423 1,859,589 187,259 855
Net margin......................................... 12,020
Foreign currency translation adjustment............
Patronage dividend................................. 195,135 19,512 (11,786)
Stock issued for increase in Class A requirements.. 7,810 781 (7,810) (781)
Stock issued for paid-up subscriptions............. 62,385 6,637
Stock purchased and retired........................ (49,610) (4,961) (103,470) (10,347)
---------- ---------- ----------- ------------ ----------
Balances at and for the year ended
December 31, 1998 (Restated)....................... 557,700 49,880 1,943,444 195,643 1,089
Net loss........................................... (130,803)
Foreign currency translation adjustment............
Amortization of deferred patronage................. (375)
Stock issued for paid-up subscriptions............. 8,650 2,881
Stock purchased and retired........................ (54,910) (5,491) (178,647) (17,864)
---------- ---------- ----------- ------------ ----------
Balances at and for the year ended
December 31, 1999 (Restated)....................... 511,440 47,270 1,764,797 177,779 (130,089)
Net margin......................................... 34,117
Foreign currency translation adjustment............
Amortization of deferred patronage................. (375)
Loss allocation.................................... 113,918
Patronage dividend................................. 30 3 226,990 22,699 (34,952)
Class B stock applied against loss allocation...... (214,580) (21,458)
Stock issued for paid-up subscriptions............. 14,550 3,407
Stock purchased and retired........................ (15,960) (1,596) (44,245) (4,424)
---------- ---------- ----------- ------------ ----------
Balances at and for the year ended
December 31, 2000.................................. 510,060 $ 49,084 1,732,962 $ 174,596 $ (17,381)
========== ========== =========== ============ ==========
Accumulated
Other Total
Comprehensive Total Comprehensive
Loss Deferred Income / Members' Income /
Allocation Patronage (Loss) Equity (Loss)
---------- ---------- ----------- ------------ ----------
(000'S OMITTED, EXCLUDING SHARE DATA)
Balances at December 31, 1997 as originally
reported........................................... $ -- $ -- $ (1,056) $ 234,311
Effect of restatement - Note 1..................... (4,800) (4,630)
---------- ---------- ----------- ------------ ----------
Balances at December 31, 1997 (Restated)........... -- (4,800) (1,056) 229,681
Net margin......................................... 12,020 $ 12,020
Foreign currency translation adjustment............ (318) (318) (318)
Patronage dividend................................. (23,238) (15,512)
Stock issued for increase in Class A requirements.. --
Stock issued for paid-up subscriptions............. 6,637
Stock purchased and retired (15,308)
---------- ---------- ----------- ------------ ----------
Balances at and for the year ended
December 31, 1998 (Restated)....................... -- (28,038) (1,374) 217,200 $ 11,702
Net loss........................................... (130,803) $ (130,803)
Foreign currency translation adjustment............ 528 528 528
Amortization of deferred patronage................. 375 --
Stock issued for paid-up subscriptions............. 2,881
Stock purchased and retired........................ (23,355)
---------- ---------- ----------- ------------ ----------
Balances at and for the year ended
December 31, 1999 (Restated)....................... -- (27,663) (846) 66,451 $ (130,275)
Net margin......................................... 34,117 $ 34,117
Foreign currency translation adjustment............ (126) (126) (126)
Amortization of deferred patronage................. 375 --
Loss allocation.................................... (113,918) --
Patronage dividend................................. (12,250)
Class B stock applied against loss allocation...... 21,458
Stock issued for paid-up subscriptions............. 3,407
Stock purchased and retired........................ (6,020)
---------- ---------- ----------- ------------ ----------
Balances at and for the year ended
December 31, 2000.................................. $ (92,460) $ (27,288) $ (972) $ 85,579 $ 33,991
========== ========== =========== ============ ==========
Redeemable Class A common stock amounts are net of unpaid subscription amounts
of $1,925,000 relating to 98,880 issued shares at December 31, 2000; $3,874,000
relating to 106,380 issued shares at December 31, 1999; $5,890,000 relating to
178,020 issued shares at December 31, 1998; and $6,289,000 relating to 149,875
issued shares at December 31, 1997.
The accompanying notes are an integral part of the
Unaudited Consolidated Financial Statements
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TRUSERV CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS AND ACCOUNTING POLICIES
Principal business activity
TruServ Corporation ("TruServ" or the "company") is a member-owned wholesaler of
hardware and related merchandise. The company also manufactures paint and paint
applicators. The company's goods and services are sold predominantly within the
United States, primarily to retailers of hardware, lumber/building materials and
related lines, each of whom has purchased 60 shares per store (up to a maximum
of 5 stores (300 shares)) of the company's Class A common stock upon becoming a
member. The Class A stock is redeemable by the company and has voting rights
(the "Redeemable Class A voting common stock"). The company operates in a single
industry as a member-owned wholesaler cooperative. All members are entitled to
receive patronage dividend distributions from the company on the basis of gross
margins of merchandise and/or services purchased by each member. In accordance
with the company's By-laws, the annual patronage dividend is paid to members out
of gross margins from operations and other patronage source income, after
deduction for expenses and provisions authorized by the Board of Directors.
Business Combination
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 to Coast Corporation ("SCC"), SCC merged with and into Cotter (the
"Merger), with Cotter being the surviving corporation. Cotter was renamed
TruServ Corporation 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 non-assessable share of TruServ Redeemable Class A voting
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's Class B common stock, which is redeemable and has no voting rights
(the "Redeemable Class B common stock"). A total of 270,500 and 1,170,670 shares
of TruServ Redeemable Class A voting common stock and Redeemable Class B common
stock, respectively, were issued in connection with the Merger. Also, 231,000
additional shares of TruServ Redeemable Class A voting common stock were issued
in exchange for Redeemable Class B common stock to pre-Merger stockholders of
Cotter to satisfy the Redeemable Class A voting 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.
In connection with the merger, an estimated liability of $24,649,000 was
recognized for costs associated with the Merger plan. The schedule below shows
the original composition of the estimated liability for costs associated with
the plan and the utilization of those reserves during subsequent periods:
RDC MOVING &
SHUTDOWN SEVERANCE RELOCATION TOTAL
---------- ---------- ---------- -----------
July 1, 1997 Charge to Goodwill $ 5,645 $ 14,804 $ 4,200 $ 24,649
Utilization of Reserves (600) (5,700) (2,000) (8,300)
---------- ---------- ---------- -----------
Balance as of December 31, 1997 5,045 9,104 2,200 16,349
Utilization of Reserves (1,500) (6,100) (2,200) (9,800)
Adjustments to Goodwill (1,393) (1,156) 0 (2,549)
---------- ---------- ---------- -----------
Balance as of December 31, 1998 2,152 1,848 0 4,000
Utilization of Reserves (1,469) (1,848) 0 (3,317)
---------- ---------- ---------- -----------
Balance as of December 31, 1999 683 0 0 683
Utilization of Reserves (683) 0 0 (683)
---------- ---------- ---------- -----------
Balance as of December 31, 2000 $ - $ - $ - $ -
========== ========== ========== ===========
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Consolidation
The consolidated financial statements include the accounts of the company and
all wholly owned subsidiaries. The consolidated financial statements also
include the accounts of TruServ Canada Cooperative, Inc., a Canadian
member-owned wholesaler of hardware, variety and related merchandise, in which
the company has a majority equity interest.
Restatement of financial information
Based upon additional review of relevant accounting literature, the company has
restated the accompanying unaudited financial statements as of and for the years
ended December 31, 1999, 1998 and 1997 to expense as incurred certain costs
previously accrued in connection with the SCC merger. The net loss in 1999 was
reduced by $340,000 and the net margin in 1998 and 1997 was reduced by
$8,460,000 and $4,630,000, respectively. Such costs relate to data center costs
and related amortization that represented incremental costs to exit an activity
that would not have been incurred by the company had it decided not to close the
SCC corporate office at the time of the merger. As a result of the restatement,
goodwill was reduced by $13,600,000 at December 31, 1997, net of amortization of
$170,000 in 1997 and $340,000 in 1998 and 1999. The impact of these adjustments
on the company's financial results as previously reported is summarized as
follows:
(000's omitted)
--------------------------------------------------------------------------------------------
1997 1998 1999
---------------------------- ---------------------------- ---------------------------
AS REPORTED AS RESTATED AS REPORTED AS RESTATED AS REPORTED AS RESTATED
----------- ----------- ----------- ----------- ----------- -----------
REVENUES $ 3,331,686 $3,331,686 $ 4,328,238 $ 4,328,238 $ 4,502,326 $ 4,502,326
NET MARGIN / (LOSS)
BEFORE INCOME TAXES AND
CUMULATIVE EFFECT OF A CHANGE
IN ACCOUNTING PRINCIPLE 44,316 39,686 21,077 12,617 (107,639) (107,299)
NET MARGIN / (LOSS)
BEFORE CUMULATIVE EFFECT OF
A CHANGE IN ACCOUNTING
PRINCIPLE 42,716 38,086 20,480 12,020 (124,659) (124,319)
NET MARGIN / (LOSS) 42,716 38,086 20,480 12,020 (131,143) (130,803)
MEMBERS' EQUITY 234,311 229,681 230,290 217,200 79,201 66,451
Capitalization
The company's capital (Capitalization) is derived from Redeemable Class A voting
common stock, retained earnings, loss allocation, deferred patronage,
installment notes and accumulated other comprehensive loss, together with
promissory (subordinated) notes and Redeemable Class B common stock issued in
connection with the company's annual patronage dividend. The By-laws provide for
partially meeting the company's capital requirements by payment of the year-end
patronage dividend.
Patronage dividend
Patronage dividends in the amount of $34,952,000 were paid on March 31, 2001,
approximately thirty percent of which were paid in cash (TruServ by-laws and the
IRS require that the payment of at least twenty percent of patronage dividends
be in cash). The remainder was paid through the issuance of the company's
Redeemable Class B common stock and, in certain cases, a small portion of the
dividend was paid by means of Promissory (Subordinated) Notes of the company.
The Redeemable Class B common stock issued for the December 31, 2000 patronage
dividend has been designated as qualified notices of allocation. No patronage
dividends were declared for the fiscal year ended December 31, 1999. Patronage
F-7
8
dividends earned for fiscal year 1998 were declared and were paid to TruServ
members in the first quarter of 1999 with at least thirty percent of the
patronage dividend paid in cash and the remainder paid through the issuance of
the company's Redeemable Class B common stock. The Redeemable Class B common
stock issued for the December 31, 1998 patronage dividend has been designated as
non-qualified notices of allocation and is not taxable to the member until
redeemed at a future date. The non-qualified notices, in addition to not being
taxable, will be included as part of a member's required investment in
Redeemable Class B common stock. Any further distributions after meeting the
Redeemable Class B common stock requirements agreed upon in the Merger Agreement
will be paid in cash, up to the limits set by financial covenants of the bank
debt or in promissory notes. TruServ follows the practice of accounting for
deferred patronage charges and credits as a separate component of
capitalization. Deferred patronage consists of net charges and expenses
primarily related to the merger integration process which are included in the
computation of net margin in different periods for financial statement purposes
than for patronage purposes. Deferred patronage has been adjusted to include the
amounts identified in the note "Restatement of financial information" above.
Membership may be terminated without cause by either the company or the member
upon sixty days' written notice. In the event membership is terminated, the
company undertakes to purchase, and the member is required to sell to the
company, all of the member's Redeemable Class A voting common stock and
Redeemable Class B common stock at par value. Payment for the Redeemable Class A
voting common stock will be in cash. Payment for the qualified Redeemable Class
B common stock will be in the form of a note payable in five equal annual
installments and with interest set at comparable treasury rates plus 2.0%.
However, the company has initiated a moratorium, effective March 17, 2000, on
the redemption of its stock. The Board of Directors will review this matter from
time to time in light of the then current financial condition of the company.
Loss allocation to members
During the third quarter of fiscal year 2000, company 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. The company has allocated the 1999 loss by establishing a Loss
allocation account as a contra-equity account in the consolidated balance sheet
with the offsetting credit recorded to Retained earnings / (deficit). The Loss
allocation account reflects the sum of each member's proportionate share of the
1999 loss, after being reduced by certain amounts that are not allocable to
members. The Loss allocation account is not a receivable from members and does
not represent an amount currently due from members. Rather, the Loss allocation
account will be satisfied, on a member by member basis, by withholding the
portion of future patronage dividends that would have been paid in qualified
Redeemable Class B common stock, at par value, and applying such amount as a
reduction in the Loss allocation account until fully satisfied. The current
levels of members' stock investments in the company will not be affected.
However, in the event a member should terminate as a stockholder of the company,
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 the company.
Cash equivalents
The company classifies all highly liquid investments with an original maturity
of three months or less as cash equivalents.
Inventories
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
to bring inventory to its existing location for resale (see Note 2).
Properties
Properties are recorded at cost. Depreciation and amortization are computed by
using the straight-line method over the following estimated useful lives:
buildings and improvements--10 to 40 years; machinery and warehouse, office and
computer equipment and software--5 to 10 years; transportation equipment--3 to 7
years; and leasehold improvements--the lesser of the life of the lease, without
regard to options for renewal, or the useful life of the underlying property.
F-8
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Goodwill
Goodwill represents the excess of cost over the fair value of net assets
acquired and is amortized using the straight-line method over 40 years.
Amortization of goodwill was approximately $3,054,000, $2,591,000 and $2,398,000
for fiscal year 2000, 1999 and 1998, respectively.
Conversion funds
In connection with the Merger, the company made available to the members funds
to assist their stores in defraying various conversion costs associated with the
Merger and costs associated with certain upgrades and expansions of their store.
The total amount of conversion funds distributed was $27,175,000 with an
amortization period of 5 years. The annual amortization expense for fiscal year
2000, 1999 and 1998 was $4,385,000, $3,466,000 and $0, respectively.
Asset impairment
For purposes of determining impairment, management groups long-lived assets
based on a geographic region or revenue producing activity as appropriate. Such
impairment review includes, among other criteria, management's estimate of
future cash flows for the region or activity. If the estimated future cash flows
(undiscounted and without interest charges) are not sufficient to recover the
carrying value of the long-lived assets, including associated goodwill, of the
region or activity, such assets would be determined to be impaired and would be
written down to fair value. There was no reserve for impairment of long-lived
assets as of December 31, 2000 or 1999.
Start-up costs
In April 1998, the AICPA issued Statement of Position ("SOP") 98-5, "Reporting
the Costs of Start-up Activities." The SOP was effective beginning on January 1,
1999, and requires that start-up costs capitalized prior to January 1, 1999 be
written-off and any future start-up costs be expensed as incurred. The
unamortized balance of start-up costs was written off as of January 1, 1999 as a
cumulative effect of an accounting change and resulted in an increase in the
1999 net loss of approximately $6,500,000, net of tax.
Revenue recognition
The company recognizes revenue when the customer takes possession of the
merchandise or when services are rendered (the revenue of which was not
material), net of reserves for returns.
Advertising expenses
Advertising costs are expensed in the period the advertising takes place. Such
costs amounted to $82,675,000, $81,337,000 and $86,220,000 in fiscal year 2000,
1999 and 1998, respectively, and are included in Cost of revenues.
Amortization of bank financing fees
Amounts paid for bank fees incurred in connection with the company's financing
arrangements are capitalized and amortized to interest expense over the lives of
the underlying financing agreements.
Repairs and maintenance expense
Repairs and maintenance expenditures which extend the useful lives of the
company's property and equipment are capitalized and depreciated over the
remaining useful lives of the underlying assets. Otherwise such expenditures are
expensed as incurred.
F-9
10
Research and development costs
Research and development costs related to the company's manufacturing operations
are expensed as incurred. Such costs amounted to $993,000, $965,000 and
$1,171,000 in fiscal year 2000, 1999 and 1998, respectively, and are included in
Logistic and manufacturing expenses.
Shipping and handling costs
Amounts billed to customers for shipping and handling costs are included in
Revenues. Amounts incurred for shipping and handling are included in Cost of
revenues.
Income taxes
Deferred tax assets and liabilities are determined based on the differences
between the financial statement and tax bases of assets and liabilities using
enacted tax rates in effect for the year in which the differences are expected
to reverse.
Per share information
There is no existing market for the common stock of the company and there is no
expectation that any market will develop. The company's Redeemable Class A
voting common stock is owned by members and former members whose stock has not
yet been redeemed as a result of the moratorium. The company's Redeemable Class
B non-voting common stock now outstanding was issued to members in partial
payment of the annual patronage dividend. Accordingly, no earnings per share
information is presented in the consolidated financial statements.
Retirement plans
The company sponsors two noncontributory defined benefit retirement plans
covering substantially all of its employees. Company contributions to
union-sponsored defined contribution plans are based on collectively bargained
rates multiplied by hours worked. The company's policy is to fund annually all
tax-qualified plans to the extent deductible for income tax purposes.
Fair value of financial instruments
The carrying amounts of the company's financial instruments at December 31, 2000
and 1999 approximate fair value. Fair value was estimated using discounted cash
flow analyses, based on the company's incremental borrowing rate for similar
borrowings. The carrying amount of debt and credit facilities approximate fair
value due to their stated interest rates approximating market rates and as a
result of such facilities being renegotiated in fiscal 2000. These estimated
fair value amounts have been determined using available market information or
other appropriate valuation methodologies.
Concentration of credit risk
Credit risk pertains mostly to the company's trade receivables. The company
extends credit to its members as part of its day-to-day operations. The company
believes that as no specific receivable or group of receivables comprises a
significant percentage of total trade accounts, its risk with respect to trade
receivables is limited. Additionally, the company believes that its allowance
for doubtful accounts is adequate with respect to member credit risks.
Use of estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
F-10
11
New accounting pronouncements
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin ("SAB") No. 101, "Revenue Recognition in Financial Statements," which
was amended by SAB No. 101A in March 2000 and SAB No. 101B in June 2000. These
SABs, which provide guidance on the recognition, presentation and disclosure of
revenue in financial statements, were effective in the fourth quarter of fiscal
2000 and were adopted by the company at that time. As the company's existing
revenue recognition, presentation and disclosures are in compliance with these
SABs, their adoption did not affect the company's results of operations for
fiscal 2000 or its financial position as of December 31, 2000.
In October 2000, the FASB's Emerging Issues Task Force ("EITF") issued EITF
Issue No. 99-19, "Reporting Revenue Gross as a Principal versus Net as an
Agent." This standard provides guidance on whether a company should recognize
revenue based on the gross amount billed to a customer because it has earned
revenue from the sale of the goods or services or the net amount retained (that
is, the amount billed to the customer less the amount paid to a supplier)
because it has earned a commission or fee. The standard provides a number of
factors or indicators that should be used to determine the appropriate
treatment. This standard was effective in the fourth quarter of fiscal 2000 and
was adopted by the company as of January 1, 2000. Since the underlying selling
terms and conditions, shipping terms, risk of loss, payment terms and credit
risk related to its warehouse shipment sales, direct shipment sales and relay
sales support the company's presentation of such sales as gross, the adoption of
this standard did not affect the company's presentation of its results of
operations for fiscal 2000 or its financial position as of December 31, 2000.
In November 2000, the EITF issued EITF Issue No. 00-10, "Accounting for Shipping
and Handling Fees and Costs." This standard states that all amounts billed to
customers in sale transactions related to shipping and handling represent
revenues earned for goods provided and, accordingly, should be classified as
revenues. The standard also addresses disclosure of the classification of
shipping and handling costs; if shipping and handling costs are significant and
are not included as part of cost of sales, disclosure should be made for both
the amount of such costs and the line items on the income statement that include
them. This standard was effective in the fourth quarter of fiscal 2000 and was
adopted by the company at that time. As the company's existing treatment of
shipping and handling revenues and costs are in compliance with Issue No. 00-10,
the adoption of this standard did not affect the company's results of operations
for fiscal 2000 or its financial position as of December 31, 2000.
2. INVENTORIES
Inventories consisted of the following at December 31:
2000 1999
------------- ------------
(000'S OMITTED)
Manufacturing inventories:
Raw materials................................................................. $ 2,242 $ 2,473
Work-in-process and finished goods............................................ 30,705 39,456
------------- ------------
32,947 41,929
Merchandise inventories.......................................................... 410,716 440,486
------------- ------------
$ 443,663 $ 482,415
============= ============
The company performed physical inventory counts at certain of its distribution
centers in October 2000; adjustments to recorded inventory quantities and
amounts resulting from such counts were recorded after the amount and
composition of such adjustments were analyzed. The adjustment recorded in the
fourth quarter of fiscal year 2000 was an increase to inventory and a decrease
to Cost of revenues of approximately $22,200,000. In the fourth quarter of
fiscal year 1999, the company wrote off approximately $74,000,000 of inventory
following the resolution of certain unreconciled differences.
Indirect costs included in the cost of inventory for fiscal year 2000, 1999 and
1998 were $133,907,000, $140,934,000 and $156,560,000, respectively, of which
$134,763,000, $150,191,000 and $148,970,000 was included in Cost of revenues for
F-11
12
the respective years. The amount of indirect costs included in ending inventory
at December 31, 2000, 1999 and 1998 was $29,144,000, $30,000,000 and
$39,257,000, respectively.
3. PROPERTIES
Properties consisted of the following at December 31:
2000 1999
------------- ------------
(000'S OMITTED)
Buildings and improvements....................................................... $ 189,732 $ 193,676
Machinery and warehouse equipment................................................ 96,696 100,705
Office and computer equipment.................................................... 157,417 152,439
Transportation equipment......................................................... 38,204 38,913
------------- ------------
482,049 485,733
Less accumulated depreciation.................................................... (276,170) (252,834)
------------- ------------
205,879 232,899
Land ............................................................................ 10,267 11,946
------------- ------------
$ 216,146 $ 244,845
============= ============
Depreciation expense for fiscal year 2000, 1999 and 1998 was $35,594,000,
$35,074,000 and $29,714,000, respectively.
4. LONG-TERM DEBT AND BORROWING ARRANGEMENTS
Long-term debt consisted of the following at December 31:
2000 1999
------------- ------------
(000'S OMITTED)
Senior Notes (rates at December 31, 2000 / 1999):
11.85%/9.10%.................................................................. $ 32,000 $ 36,000
10.63%/7.88%.................................................................. 50,000 50,000
10.16%/7.41%.................................................................. 25,000 25,000
10.10%/7.35%.................................................................. 105,000 105,000
10.04%/7.29%.................................................................. 50,000 50,000
9.98%/7.23%................................................................... 25,000 25,000
Redeemable (subordinated) term notes:
Fixed interest rates ranging from 5.24% to 7.79%.............................. 18,624 28,712
Industrial Revenue Bonds 4.50%................................................... -- 4,000
Capital lease obligations........................................................ 2,645 5,000
------------- ------------
308,269 328,712
Less amounts due within one year................................................. (19,340) (18,916)
------------- ------------
$ 288,929 $ 309,796
============= ============
Principal payments for the 11.85%/9.10% senior note are due quarterly in
incrementally increasing amounts through maturity in 2007. Principal payments
for the 10.63%/7.88% senior note are due annually in the amount of $4,545,000
starting in November 2002 through maturity in 2012. Principal payments for the
10.16%/7.41% senior note are due annually in the amount of $3,571,000 starting
November 2001 through maturity in 2007. Principal payments for the 10.10%/7.35%
senior note are due annually in increasing amounts starting January 2002 through
maturity in July 2008. Principal payments for the 10.04%/7.29% senior note are
due annually in the amount of $10,000,000 starting June 2006 through maturity in
June 2010. The 9.98%/7.23% senior note is due in full in November 2002.
F-12
13
The redeemable (subordinated) term notes have two to four year terms and are
issued in exchange for promissory (subordinated) notes that were held by
promissory note holders who do not own the company's Redeemable Class A voting
common stock. They are also available for purchase by investors that are
affiliated with the company.
The industrial revenue bonds were paid in 2000.
Total maturities of long-term debt for fiscal years 2001, 2002, 2003, 2004, 2005
and thereafter are $19,340,000, $52,718,000, $31,371,000, $28,417,000,
$30,153,000 and $146,270,000, respectively.
At July 1, 1997, the company had established a $300,000,000 five-year revolving
credit facility with a group of banks. The agreements were amended and restated
in April 2000, which include increased interest rates, new financial ratios and
covenants, and the collateralization of the company's assets. The borrowings
under the agreement were $127,000,000 and $135,000,000 at December 31, 2000 and
1999, respectively. A commitment fee of .05% per annum is paid on the unused
portion of the commitments. Also, the company had amounts due under a commercial
paper program of $19,000,000 at December 31, 1999 that were paid in 2000. The
weighted average interest rate on these borrowings was 8.9% and 6.4% for the
years ended December 31, 2000 and 1999, respectively.
The company's Canadian subsidiaries have short-term borrowings of $7,736,000 and
$8,629,000 at December 31, 2000 and 1999, respectively. The subsidiaries have a
combined line of credit of C$27,400,000. The weighted average interest rate on
these borrowing was 7.10% and 6.40% for the years ended December 31, 2000 and
1999, respectively.
Under the senior notes and the revolving credit facility the company is required
to meet certain restrictive financial ratios and covenants relating to minimum
EBITDA, minimum fixed charge coverage, minimum borrowing base to debt ratio,
maximum capital expenditures and asset sales, as well as other customary
covenants, representations and warranties, funding conditions and events of
default. As of December 31, 2000, the Company was in compliance with the
covenant requirements. However, as of February 24, 2001, the Company failed to
comply with a covenant under both the senior notes agreement and the revolving
credit facility which requires the Company to achieve a minimum monthly
borrowing base ratio. As a result, the senior note holders and the participants
in the revolving credit facility could declare this failure to comply with the
covenant an "event of default," in which case the senior notes and the amounts
outstanding under the credit facility would become immediately callable. The
Company is in the course of renegotiating the senior notes and the revolving
credit facility with its lending group, and, if successful, will replace the
current revolving credit facility, and possibly the senior notes, with an
asset-based lending agreement by approximately September 1, 2001. However, in
the event the Company is not successful in renegotiating such an agreement, the
senior notes would remain callable and would therefore be reclassified from a
long-term liability to a current liability.
The company provides guarantees for certain member loans, but is not required to
provide a compensating balance for the guarantees. The amount of member loans
guaranteed by the company was approximately $6,709,511 and $6,443,000 as of
December 31, 2000 and 1999, respectively.
F-13
14
5. LEASE COMMITMENTS
The company rents buildings and warehouses, and office, computer and
transportation equipment under operating and capital leases. The following is a
schedule of future minimum lease payments under capital and long-term
non-cancelable operating leases, together with the present value of the net
minimum lease payments, as of December 31, 2000:
CAPITAL OPERATING
------------- ------------
(000'S OMITTED)
2001.......................................................................... $ 1,020 $ 21,582
2002.......................................................................... 621 19,583
2003.......................................................................... 439 14,737
2004.......................................................................... 439 13,573
2005.......................................................................... 332 12,966
Thereafter.................................................................... 73 57,454
------------- ------------
Net minimum lease payments....................................................... $ 2,924 $ 139,895
============
Less amount representing interest................................................ (279)
-------------
Present value of net minimum lease payments...................................... 2,645
Less amount due within one year.................................................. (924)
-------------
$ 1,721
=============
Capitalized leases expire at various dates and generally provide for purchase
options but not renewals. Purchase options provide for purchase prices at either
fair market value or a stated value, which is related to the lessor's book value
at the expiration of the lease term. During 1999, the company entered into an
agreement for the sale and leaseback of its Henderson facility, which resulted
in a recognized loss of $1,295,000. The 30-month Henderson lease commenced in
May 1999 and has annual payments of approximately $612,000. During 1998, the
company entered into an agreement for the sale and leaseback of its Harvard
facility. The $2,139,000 gain realized on the sale has been deferred and will be
amortized over the 15-year lease term. The lease commenced in November 1998 and
has annual payments of approximately $2,700,000.
The Hagerstown, Maryland distribution center is subject to a synthetic lease
with monthly payments that are recorded in Other interest expense. The lease
payment commitments are for three years with two one-year renewal options and a
principal payment due at the expiration of the lease agreement. All obligations
under this lease arrangement are guaranteed by the company.
Rent expense under operating leases was $29,942,000, $31,702,000 and $28,291,000
for the years ended December 31, 2000, 1999 and 1998, respectively.
6. COMMITMENTS AND CONTINGENCIES
The company is involved in various claims and lawsuits incidental to its
business. The following significant matters existed at December 31, 2000:
The former president of the company, Paul Pentz, has filed a claim against the
company alleging that Mr. Pentz is due additional bonus and SERP payments (see
Note 10) in addition to amounts already received. The company has filed a
countersuit claiming Mr. Pentz breached his fiduciary duties as president of the
company. Mr. Pentz's motion for summary judgement was recently denied. The
company intends to vigorously contest Mr. Pentz's claim and, accordingly, has
recorded no related reserve at December 31, 2000.
A former member in New York has filed a claim against the company's Board of
Directors alleging that the Board failed in its fiduciary duty to oversee and
manage the company's affairs in fiscal 1999. The claim seeks unidentified
damages. The plaintiffs in the lawsuit seeks to proceed on a class action basis.
The company intends to vigorously contest this claim and believes that, in the
event of an unfavorable outcome, it carries adequate insurance coverage;
accordingly, no related reserve has been recorded at December 31, 2000.
F-14
15
Nineteen former members have filed a claim against the company alleging that
they voted for the Merger (see Note 1) based upon representations made to them
by the company and its predecessors that the Coast to Coast name brand would be
maintained. (Certain other former TruServ members have filed similar claims.)
The plaintiffs allege, however, that, following the Merger, the Coast to Coast
name brand was eliminated and that each plaintiff thereafter terminated or had
its membership in TruServ terminated. Additionally, the plaintiffs allege that
the company breached its obligations by failing to redeem those members' stock
and by creating the Loss Allocation Account (see Note 1). Based upon the above,
the plaintiffs have asserted claims for fraud, misrepresentation, breach of
fiduciary duty and unjust enrichment. The claim seeks unidentified damages. The
company intends to vigorously contest this claim and believes that, in the event
of an unfavorable outcome, it carries adequate insurance coverage; accordingly,
no related reserve has been recorded at December 31, 2000.
In March 2001, a similar action was brought on behalf of former SCC members in
the same court by the same firm. The complaint alleges substantially similar
claims as those made by the other former TruServ members. The lawsuit is at an
early stage and the extent of the damages being claimed has not yet been
determined.
7. CAPITALIZATION
Promissory (subordinated) and installment notes consisted of the following at
December 31:
2000 1999
------------- ------------
(000'S OMITTED)
Promissory (subordinated) notes:
Due on December 31, 2000--6.50%............................................... $ -- $ 21,823
Due on December 31, 2000--7.42%............................................... -- 14,019
Due on December 31, 2000--7.58%............................................... -- 27,271
Due on December 31, 2001--5.74%............................................... 14,376 14,514
Due on December 31, 2001--8.06%............................................... 22,237 22,448
Due on December 31, 2002--7.86%............................................... 23,259 24,559
Due on December 31, 2003--7.90%............................................... 22,525 --
Due on December 31, 2005--7.90%............................................... 1,692 --
Term (subordinated) notes
Due on June 30, 2002--8.06%................................................... 12,408 12,513
Installment notes at interest rates of 4.75% to 8.20%
with maturities through 2004.................................................. 11,359 15,829
------------- ------------
107,856 152,976
Less amounts due within one year................................................. (42,010) (69,172)
------------- ------------
$ 65,846 $ 83,804
============= ============
Prior to 1997, promissory notes were issued for partial payment of the annual
patronage dividend. Promissory notes are subordinated to indebtedness to banking
institutions, trade creditors and other indebtedness of the company as specified
by its Board of Directors. Prior experience indicates that the maturities of a
significant portion of the notes due within one year are extended, for a
three-year period, at interest rates substantially equivalent to competitive
market rates of comparable instruments. The company anticipates that this
practice of extending notes will continue and, accordingly, these notes are
classified as a component of capitalization.
Total maturities of promissory and installment notes for fiscal years 2001,
2002, 2003, 2004 and 2005 are $42,010,000, $39,655,000, $24,451,000, $48,000 and
$1,692,000, respectively.
Term notes were issued in connection with the redemption of excess Redeemable
Class B common stock. Term notes are subordinated to indebtedness to banking
institutions, trade creditors and other indebtedness of the company as specified
by its Board of Directors.
F-15
16
8. INCOME TAXES
Income tax expense / (benefit) consisted of the following for the years ended
December 31:
2000 1999 1998
------------ ----------- -----------
(000'S OMITTED)
Current:
Federal......................................................... $ 231 $ -- $ --
State........................................................... 315 460 710
Foreign......................................................... 306 281 290
------------ ----------- -----------
Total current................................................... 852 741 1,000
------------ ----------- -----------
Deferred:
Federal......................................................... -- 14,010 --
State........................................................... -- 2,472 --
Foreign......................................................... 64 (203) (403)
------------- ----------- -----------
Total deferred.................................................. 64 16,279 (403)
------------ ----------- -----------
$ 916 $ 17,020 $ 597
============ =========== ===========
The company operates as a nonexempt cooperative and is allowed a deduction in
determining its taxable income for amounts paid as qualified patronage dividends
based on margins from business done with or on behalf of members and for the
redemption of nonqualified notices of allocation. The reconciliation of income
tax expense to income tax computed at the U.S. federal statutory tax rate of 35%
was as follows for the years ended December 31:
2000 1999 1998
------------ ----------- -----------
(000'S OMITTED)
Tax at U.S. statutory rate......................................... $ 12,262 $ -- $ 4,416
Effects of:
Patronage dividend.............................................. (12,233) -- (12,258)
State income taxes, net of federal tax benefit.................. 205 1,906 462
Increase / (decrease) in valuation allowance.................... (2,503) 14,010 6,675
Non-deductible goodwill......................................... 2,819 -- --
Other, net...................................................... 366 1,104 1,302
------------ ----------- -----------
$ 916 $ 17,020 $ 597
============ =========== ===========
Deferred income taxes reflect the net tax effects of net operating loss
carryforwards, which expire in years through 2020; alternative minimum tax
credit carryforwards and nonqualified notices of allocations, which do not
expire; and temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts used for income tax
purposes. To the extent tax benefits are subsequently recognized in excess of
the net deferred tax assets, approximately $28,800,000 of the reduction in the
valuation allowance for deferred tax assets will result in a reduction of
goodwill.
F-16
17
The significant components of the company's deferred tax assets and liabilities
were as follows for the years ended December 31:
2000 1999 1998
------------ ----------- -----------
(000'S OMITTED)
Deferred tax assets:
Net operating loss carryforwards................................ $ 58,462 $ 65,569 $ 15,868
AMT credit carryforward......................................... 784 553 911
Nonqualified notices of allocation.............................. 13,548 13,830 16,697
Bad debt provision.............................................. 2,744 2,129 2,049
Vacation pay.................................................... 2,996 3,460 3,122
Contributions to fund retirement plans.......................... -- 792 3,871
Book depreciation in excess of tax depreciation................. 532 -- --
Inventory reserves.............................................. 1,272 -- --
Rent expense.................................................... 2,458 2,289 2,072
Merger-related valuations and accruals.......................... 2,936 2,141 5,865
Inventory capitalization........................................ 2,657 2,808 --
Other........................................................... 5,739 4,156 3,752
------------ ----------- -----------
Total deferred tax assets.......................................... 94,128 97,727 54,207
Valuation allowance for deferred tax assets........................ (89,700) (93,213) (33,067)
------------ ----------- -----------
Net deferred tax assets............................................ 4,428 4,514 21,140
Deferred tax liabilities:
Tax depreciation in excess of book depreciation................. -- 3,383 1,450
Inventory capitalization........................................ -- -- 1,725
Contributions to fund retirement plans.......................... 3,296 -- --
Other........................................................... 1,132 1,131 1,475
------------ ----------- -----------
Total deferred tax liabilities..................................... 4,428 4,514 4,650
------------ ----------- -----------
Net deferred taxes................................................. $ -- $ -- $ 16,490
============ =========== ===========
9. SUPPLEMENTAL CASH FLOW INFORMATION
The patronage dividend and promissory (subordinated) and redeemable
(subordinated) term note renewals relating to non-cash operating and financing
activities were as follows for the years ended December 31:
2000 1999 1998
------------ ----------- -----------
(000'S OMITTED)
Patronage dividend payable in cash................................. $ 10,558 $ -- $ 14,507
Promissory (subordinated) notes.................................... (1,820) (5,436) (3,252)
Redeemable Class A voting common stock............................. 3 -- --
Redeemable Class B common stock.................................... (2,585) (15,974) 9,950
Installment notes.................................................. 2,515 9,722 5,532
Loss allocation.................................................... 21,458 -- --
Member indebtedness................................................ 4,823 11,688 8,287
------------ ----------- -----------
Patronage dividend $ 34,952 $ -- $ 35,024
============ =========== ===========
Note renewals and interest rollover................................ $ 22,525 $ 36,385 $ 24,058
============ =========== ===========
Additionally, in fiscal year 2000, the company's non-cash financing and
investing activities are due to an asset sale and related agreements with
Builder Marts of America, Inc. that included a note receivable of $19,500,000
and debit memos of $4,000,000. The company's non-cash financing and investing
activities in fiscal year 1999 and 1998 include $305,000 and $610,000,
respectively, related to the acquisition of transportation equipment by entering
into capital leases.
F-17
18
Cash paid for interest during fiscal years 2000, 1999 and 1998 totaled
$60,059,000, $58,730,000 and $52,722,000, respectively. Cash paid for income
taxes during fiscal years 2000, 1999 and 1998 totaled $777,000, $848,000 and
$903,000, respectively.
10. BENEFIT PLANS
The change in the projected benefit obligation and in the plan assets for the
company administered pension plans was as follows for the years ended December
31:
2000 1999
------------- ------------
(000'S OMITTED)
Change in projected benefit obligation:
Projected benefit obligation at beginning of year............................. $ 160,727 $ 200,951
Service cost.................................................................. 6,414 8,377
Interest cost................................................................. 9,474 12,312
Benefit payments.............................................................. (4,980) (7,382)
Actuarial losses / (gains).................................................... 18,946 (23,601)
Curtailments.................................................................. -- 2,495
Settlements................................................................... (114,083) (34,022)
Special retirement benefits................................................... -- 1,597
------------- ------------
Projected benefit obligation at end of year................................... $ 76,498 $ 160,727
------------- ------------
Change in plan assets:
Fair value of plan assets at beginning of year................................ $ 178,426 $ 196,953
Actual return on assets....................................................... 3,068 16,891
Employer contributions........................................................ 14,070 5,986
Benefit payments.............................................................. (4,980) (7,382)
Settlements................................................................... (114,083) (34,022)
------------- ------------
Fair value of plan assets at end of year...................................... $ 76,501 $ 178,426
------------- ------------
Reconciliation of funded status:
Funded status................................................................. $ 3 $ 17,699
Unrecognized transition asset................................................. (788) (2,642)
Unrecognized prior service cost............................................... 5,792 6,743
Unrecognized actuarial gain / (loss).......................................... 5,815 (23,781)
------------- ------------
Prepaid benefit / (accrued cost).............................................. $ 10,822 $ (1,981)
============= ============
The company has classified $4,280,000 of prepaid pension expense as of December
31, 2000 in Other current assets.
The components of net periodic pension cost for the company administered pension
plans were as follows for the years ended December 31:
2000 1999 1998
------------ ----------- -----------
(000'S OMITTED)
Components of net periodic pension cost:
Service cost.................................................... $ 6,414 $ 8,377 $ 7,418
Interest cost................................................... 9,474 12,312 13,259
Expected return on assets....................................... (12,987) (15,951) (16,083)
Amortization of transition assets............................... (529) (720) (835)
Amortization of prior service cost.............................. 951 984 984
Amortization of actuarial gain / (loss)......................... (91) 53 --
Special termination benefit..................................... -- 1,597 --
Curtailment loss................................................ -- 112 --
Settlement gain................................................. (1,965) (5,075) (1,745)
------------ ----------- -----------
Net pension cost............................................. $ 1,267 $ 1,689 $ 2,998
============ =========== ===========
One of the company's pension plans is the supplemental executive retirement plan
("SERP"), which is an unfunded unqualified defined benefit plan. The funded
status in the table above is net of an accrued pension liability of $1,279,000
and $10,165,000 related to the SERP at December 31, 2000 and 1999, respectively.
F-18
19
The company also participates in union-sponsored defined contribution plans.
Costs related to these plans were $169,000, $315,000 and $861,000 for fiscal
year 2000, 1999 and 1998, respectively.
In the third quarter of fiscal year 2000, the company purchased from an
insurance company non-participating annuity contracts to satisfy pension
obligations related to certain former employees who were fully vested in their
pension benefits. As a result of this transaction, the company recognized a
pre-tax gain of approximately $5 million in fiscal year 2000 related to the
settlement of these pension obligations. Such gain has been recorded as Other
income, net. This gain was offset in the fourth quarter by approximately $3
million due to market value decreases on assets and settlement losses on
employees leaving the plan.
Plan assets consist primarily of publicly traded common stocks and corporate
debt instruments.
The assumptions used to determine the company's pension obligations were as
follows for the years ended December 31:
2000 1999
---- ----
Weighted average assumptions:
Discount rate................................... 7.50% 8.00%
Expected return on assets....................... 9.50% 9.50%
Rate of compensation increase................... 4.50% 4.50%
The company also maintains a defined benefit retirement medical plan for former
SCC employees who met certain age and service criteria that was frozen at the
time of the Merger. The company contributes $105 per month per person for such
employees who elect coverage for themselves and their dependants. The company
also maintains similar benefits for some former SCC executives who were also
contractually eligible for such coverage.
The components of the retiree medical plan costs for the company administered
plan consist of interest cost of $354,000 and $335,000 in fiscal year 2000 and
1999, respectively.
The accumulated post retirement benefit obligation ("APBO") of $5,189,000 on
December 31, 1998 was increased by interest cost in 1999 of $335,000, and offset
by claims paid of $460,000 and an actuarial gain of $510,000, resulting in an
APBO of $4,554,000 at December 31, 1999. Reductions to the APBO in 2000 were
claims paid of $427,000, offset by interest cost of $354,000 and an actuarial
loss of $266,000, resulting in an APBO of $4,747,000 at December 31, 2000.
The funded status at December 31, 1999 was a liability of $4,797,000, which
includes the APBO of $4,554,000 plus an unrecognized gain of $243,000. The
funded status at December 31, 2000 was a liability of $4,724,000, which includes
the APBO of $4,747,000, offset by an actuarial loss of $23,000.
The plan has no assets. During 2000 and 1999, the company contributed to the
plan $427,000 and $460,000, respectively, and there were benefit payments of
$427,000 and $460,000, respectively.
The effect of a one percentage point increase in the medical trend rate would
increase the service and interest cost components by $13,000 and the
post-retirement benefit obligation by $158,000. The effect of a one percentage
point decrease in the medical trend rate would decrease the service and interest
cost components by $10,000 and the post-retirement benefit obligation by
$131,000.
The assumptions used to determine the company's health benefit obligations were
as follows for the years ended December 31:
2000 1999
---- ----
Weighted average assumptions:
Discount rate.............................. 7.50% 8.00%
Medical trend rate......................... 5.00% 5.00%
F-19
20
11. SEGMENT INFORMATION
The company is principally engaged as a wholesaler of Hardware and related
products and is a manufacturer of paint products. The company identifies
segments based on management responsibility and the nature of the business
activities of each component of the company. The company 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:
DECEMBER 31, 2000
(000'S OMITTED)
ELIMINATION
OF INTERSEGMENT CONSOLIDATED
HARDWARE PAINT OTHER ITEMS TOTALS
------------ ----------- ----------- -------------- --------------
Net sales to external customers $ 3,745,524 $ 139,109 $ 109,009 $ - $ 3,993,642
Intersegment sales - 1,856 - (1,856) -
Interest expense 62,184 4,661 861 - 67,706
Depreciation & amortization 40,482 1,752 799 - 43,033
Segment net margin / (loss) 24,984 9,000 133 - 34,117
Identifiable segment assets 1,162,319 52,020 21,675 - 1,236,014
Expenditures for long-lived assets 11,365 627 534 - 12,526
DECEMBER 31, 1999
(000'S OMITTED)
ELIMINATION
OF INTERSEGMENT CONSOLIDATED
HARDWARE PAINT OTHER ITEMS TOTALS
------------ ----------- ----------- -------------- --------------
Net sales to external customers $ 4,242,572 $ 148,001 $ 111,753 $ - $ 4,502,326
Intersegment sales - 1,810 - (1,810) -
Interest expense 53,993 6,014 695 - 60,702
Depreciation & amortization 38,576 1,704 851 - 41,131
Segment net margin / (loss) (146,200) 14,707 690 - (130,803)
Identifiable segment assets 1,247,320 63,975 24,102 - 1,335,397
Expenditures for long-lived assets 41,906 2,207 817 - 44,930
DECEMBER 31, 1998
(000'S OMITTED)
ELIMINATION
OF INTERSEGMENT CONSOLIDATED
HARDWARE PAINT OTHER ITEMS TOTALS
------------ ----------- ----------- -------------- --------------
Net sales to external customers $ 4,062,390 $ 157,627 $ 108,221 $ - $ 4,328,238
Intersegment sales - 2,340 - (2,340) -
Interest expense 46,809 7,512 779 - 55,100
Depreciation & amortization 29,691 1,652 769 - 32,112
Segment net margin / (loss) 342 11,502 176 - 12,020
Identifiable segment assets 1,488,108 80,121 19,445 - 1,587,674
Expenditures for long-lived assets 67,199 2,710 824 - 70,733
The company does not have a significant concentration of members in any
geographic region of the United States or in any foreign countries.
F-20
21
12. ASSET SALE
Effective December 29, 2000, the company sold the assets, primarily inventory,
of the Lumber and Building Materials ("LBM") division to Builder Marts of
America, Inc. ("BMA"). In connection with this sale, the company received
consideration of $20.2 million in cash (of which $1.0 million will be held in
escrow until December 31, 2001 to satisfy any contingencies or disputes between
the parties and which, accordingly, is classified as Restricted cash), a $19.5
million note receivable (payable in annual installments through December 31,
2007 and carrying an interest rate of 7.75% per annum) and $4.0 million in debit
memos to be used as an offset against amounts payable to BMA existing at the
date of the sale. Additionally, the company recorded deferred credits totaling
$9.5 million related to certain non-compete, cooperation, trademark and license,
and lease agreements entered into with BMA; such amount will be amortized to
income over the lives of the underlying agreements, generally 5-10 years. The
company also relieved $4.6 million of goodwill (net) and $0.7 million of
inventory related to the LBM division at the time of the sale. As a result of
the above, the company recognized a gain of $28.9 million in the fourth quarter,
which is classified as Gain on sale of assets.
13. QUARTERLY FINANCIAL SUMMARY
Selected quarterly financial information for each of the four quarters in fiscal
2000 and 1999 is as follows (000's omitted):
FIRST SECOND THIRD FOURTH
QUARTER(1) QUARTER QUARTER QUARTER
---------- ---------- ---------- ----------
2000
Sales........................................................... $1,027,605 $1,137,262 $ 944,269 $ 884,506
Net margin / (loss) before income taxes......................... (8,869) 11,940 9,663 22,299
Net margin / (loss)............................................. (8,924) 11,923 9,447 21,671
1999
Sales........................................................... $1,070,892 $1,264,108 $1,117,496 $1,049,830
Net margin / (loss) before income taxes and cumulative effect
of a change in accounting principle........................... (17,724) 19,862 4,483 (113,920)
Net margin / (loss) before cumulative effect of a change in
accounting principle.......................................... (17,811) 18,270 5,864 (130,642)
Net margin / (loss)............................................. (24,295) 18,270 5,864 (130,642)
(1) On January 1, 1999, the company wrote off the unamortized balance of
start-up costs upon the adoption of SOP 98-5.
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