UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 29, 2001 OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
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COMMISSION FILE NUMBER 2-20910
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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
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(Address of principal executive offices) (Zip Code)
(773) 695-5000
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(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 October 27, 2001.
Class A Common Stock, $100 Par Value............................. 453,180 Shares
Class B Common Stock, $100 Par Value........................... 1,731,490 Shares
ITEM 1. FINANCIAL STATEMENTS
TRUSERV CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET
ASSETS
September 29, December 31,
2001 2000
------------- ------------
(Unaudited)
(000's omitted)
Current assets:
Cash and cash equivalents $ 40,636 $ 18,316
Restricted cash 7,765 1,000
Accounts and notes receivable, net of allowance for doubtful accounts of
$12,761,000 and $7,170,000 294,229 396,587
Inventories (Note 6) 370,707 443,663
Other current assets 19,357 12,274
---------- ----------
Total current assets 732,694 871,840
Properties, net 199,771 216,146
Goodwill, net 92,119 94,051
Other assets 39,172 53,977
---------- ----------
Total assets $1,063,756 $1,236,014
========== ==========
See Notes to Condensed Consolidated Financial Statements
TRUSERV CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET
LIABILITIES AND MEMBERS' CAPITALIZATION
September 29, December 31,
2001 2000
------------- ------------
(Unaudited)
(000's omitted)
Current liabilities:
Accounts payable $ 281,617 $ 356,196
Outstanding checks 40,680 129,490
Accrued expenses 96,140 85,161
Short-term borrowings 150,981 138,085
Current maturities of notes, long-term debt and capital lease
obligations (Note 2) 339,868 341,188
Patronage dividend payable in cash - 10,459
----------- -----------
Total current liabilities 909,286 1,060,579
Long-term debt, including capital lease obligations,
less current maturities (Note 2) 6,683 9,091
Deferred credits 9,022 9,821
----------- -----------
Total liabilities and deferred credits 924,991 1,079,491
Minority interest 4,844 4,999
Commitments and contingencies - -
Members' capitalization:
Promissory (subordinated) and installment notes 60,983 65,846
Members' equity:
Redeemable Class A voting common stock, $100 par value; 750,000
shares authorized; 451,680 and 411,180 shares issued and fully paid;
58,380 and 98,880 shares issued (net of subscriptions receivable of
$1,251,000 and $1,922,000) 49,755 49,084
Redeemable Class B non-voting common stock and paid-in capital, $100
par value; 4,000,000 shares authorized; 1,731,490 and 1,731,482 shares
issued and fully paid 174,448 174,448
Loss allocation (Note 5) (92,074) (92,460)
Deferred patronage (26,727) (27,288)
Retained deficit (31,535) (17,134)
Accumulated other comprehensive loss (929) (972)
----------- -----------
Total members' equity 72,938 85,678
----------- -----------
Total members' capitalization 133,921 151,524
----------- -----------
Total liabilities and members' capitalization $ 1,063,756 $ 1,236,014
=========== ===========
See Notes to Condensed Consolidated Financial Statements
TRUSERV CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
For the thirteen weeks ended For the thirty-nine weeks ended
--------------------------------- ---------------------------------
September 29, September 30, September 29, September 30,
2001 2000 2001 2000
------------- ------------- ------------- -------------
(000's omitted)
Revenues $ 621,977 $ 944,269 $ 2,024,092 $ 3,109,136
Costs and expenses:
Cost of revenues 549,401 872,388 1,823,466 2,897,681
Logistics and manufacturing
expenses 22,832 21,986 68,630 68,520
Selling, general and
administrative expenses 34,534 27,532 92,525 86,079
Restructuring expenses (Note 7) 3,261 -- 8,211 --
Interest paid to Members 1,939 2,776 5,871 8,407
Other interest expense 13,652 14,981 41,979 42,906
Gain on sale of properties (135) (233) (188) (1,300)
Other income, net (1,162) (4,824) (3,004) (5,891)
----------- ----------- ----------- -----------
624,322 934,606 2,037,490 3,096,402
----------- ----------- ----------- -----------
Net margin/(loss) before income
taxes (2,345) 9,663 (13,398) 12,734
Income tax expense 132 216 442 288
----------- ----------- ----------- -----------
Net margin/(loss) $ (2,477) $ 9,447 $ (13,840) $ 12,446
=========== =========== =========== ===========
See Notes to Condensed Consolidated Financial Statements.
TRUSERV CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
For the thirty-nine weeks ended
-------------------------------
September 29, September 30,
2001 2000
(000's omitted)
Operating activities:
Net margin/(loss) $ (13,840) $ 12,446
Adjustments to reconcile net loss to cash and
cash equivalents used for operating activities:
Depreciation and amortization 31,548 32,915
Provision for allowance for doubtful accounts 5,744 7,372
Net change in working capital components 105,407 (46,463)
--------- ---------
Net cash and cash equivalents provided by operating activities 128,859 6,270
--------- ---------
Investing activities:
Additions to properties owned (8,843) (10,053)
Proceeds from sale of properties owned 123 8,165
Changes in restricted cash (6,765) -
Changes in other assets 1,359 (733)
--------- ---------
Net cash and cash equivalents used for investing activities (14,126) (2,621)
--------- ---------
Financing activities:
Payment of patronage dividend (9,484) -
Proceeds from long-term borrowings - 1,068
Payment of notes, long-term debt and lease obligations (7,686) (14,885)
Decrease in outstanding checks (88,810) (39,894)
Proceeds from short-term borrowings, net of repayments 12,896 51,110
Purchase of common stock - (1,505)
Proceeds from Class A common stock subscription receivable 671 387
--------- ---------
Net cash and cash equivalents used for financing activities (92,413) (3,719)
--------- ---------
Net increase/(decrease) in cash and cash equivalents 22,320 (70)
Cash and cash equivalents at beginning of period 18,316 1,815
--------- ---------
Cash and cash equivalents at end of period $ 40,636 $ 1,745
========= =========
See Notes to Condensed Consolidated Financial Statements.
TRUSERV CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - GENERAL
The condensed consolidated balance sheet at September 29, 2001, the condensed
consolidated statement of operations for the thirteen and thirty-nine weeks
ended September 29, 2001 and September 30, 2000, and the condensed consolidated
statement of cash flows for the thirty-nine weeks ended September 29, 2001 and
September 30, 2000 are unaudited and, in the opinion of the management of
TruServ, include all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation of financial position at the
balance sheet dates and results of operations and cash flows for the respective
interim periods. The accompanying unaudited condensed consolidated financial
statements have been prepared in accordance with accounting principles generally
accepted in the United States of America for interim financial information and
with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by accounting principles generally accepted in the United States of America for
complete financial statements. These financial statements should be read in
conjunction with the consolidated financial statements for the year ended
December 31, 2000 included in TruServ's 2000 Annual Report on Form 10-K.
NOTE 2 - DEBT COVENANT VIOLATION
Under the senior note agreements and the revolving credit facility, TruServ 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 maximum asset sales, as well as other
customary covenants, representations and warranties, funding conditions and
events of default. As of December 31, 2000, TruServ was in compliance with the
covenant requirements.
However, as of February 24, 2001, TruServ failed to comply with a covenant under
the revolving credit facility and the senior note agreements, which requires
TruServ to achieve a minimum monthly borrowing base ratio. As a result, either
the senior note holders or the participants in the revolving credit facility
could declare this failure to comply with the covenant as an "event of default,"
in which case the senior notes and the amounts outstanding under the revolving
credit facility would become callable as immediately payable.
On March 30, 2001, the participants in the revolving credit facility issued to
TruServ "reservation of rights" letters under which the participants effectively
stated their intention to not call as immediately payable TruServ's outstanding
debt obligations until May 1, 2001, although they were not precluded from doing
so. All other rights of the participants were preserved. Additional letters were
issued on April 30, 2001, July 3, 2001 and August 30, 2001 which extended the
reservation of rights until July 30, 2001, September 30, 2001 and February 28,
2002, respectively. The senior note holders also issued letters reserving their
right to accelerate the maturity of the notes although agreeing not to do so at
this time.
The reservation of rights letters provided by the participants in the revolving
credit facility permanently reduced the credit limit under this facility on May
11, 2001 from $275,000,000 to $250,000,000 and on September 4, 2001 from
$250,000,000 to $200,000,000. Additionally, the interest rate on the amounts
outstanding under the revolving credit facility was increased by approximately
2%; this increased interest rate also applies to the outstanding senior notes.
As a result of this increased interest rate, TruServ will incur additional
interest expense in fiscal year 2001. If this increased interest rate continues
through December 31, 2001, the additional interest expense would aggregate
approximately $6.5 million.
On September 28, 2001, TruServ signed a $350,000,000 fully underwritten
revolving credit facility commitment from Bank of America for borrowings against
TruServ's accounts receivable and inventory. However, TruServ is still in
discussions with the current lenders to amend the existing agreements and with
other potential lenders regarding refinancing the existing agreements and could
replace the existing agreements with an asset-based lending agreement with a new
lending group in the fourth quarter of 2001. However, no assurances can be given
as to the outcome. TruServ's failure to successfully amend or refinance its
current borrowing arrangements could cause the current lending group to call as
immediately payable TruServ's currently outstanding debt obligations. TruServ's
resulting inability to satisfy its debt obligations would force TruServ to
pursue other alternatives to improve liquidity, possibly including, among other
things, restructuring actions, sales of assets and seeking additional sources of
funds or liquidity. In particular, TruServ has engaged an investment banking
firm to assist it in exploring the sale of the paint manufacturing business. No
assurances can be given
that TruServ would be successful in pursuing such possible alternatives or, even
if successful, that such undertakings would not have a material adverse impact
on TruServ.
Accordingly, the balances outstanding under the senior note agreements and the
revolving credit facility have been classified as current liabilities as of
December 31, 2000 and September 29, 2001. However, the financial statements do
not include any other adjustments that might result from the outcome of this
uncertainty.
NOTE 3 - RECLASSIFICATIONS
Certain reclassifications have been made to the prior year's condensed
consolidated financial statements to conform with the current year's
presentation. These reclassifications had no effect on net margin/(loss) for any
period or on total members' equity at the balance sheet dates.
NOTE 4 - ESTIMATED PATRONAGE DIVIDENDS
If financial and operating conditions permit, patronage dividends are declared
and paid by TruServ after the close of each fiscal year. Patronage dividends in
the amount of $34,705,000 were paid on March 31, 2001 relating to the fiscal
year ended December 31, 2000, approximately thirty percent of which were paid in
cash (TruServ's by-laws and the IRS require that the payment of at least twenty
percent of patronage dividends be in cash). The remainder was paid primarily
through the issuance of TruServ'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
as part of the December 31, 2000 patronage dividend has been designated as
qualified notices of allocation. Over ninety-five percent of the Redeemable
Class B common stock issued with the fiscal year 2000 patronage dividend was
applied to the loss allocation account. There is no estimated patronage dividend
for the period ended September 29, 2001 and the estimated patronage dividend for
the corresponding period in 2000 was $12,799,000.
NOTE 5 - LOSS ALLOCATION TO MEMBERS
During the third quarter of fiscal year 2000, TruServ management developed and
the Board of Directors approved a plan to equitably allocate to members the loss
incurred in 1999. This loss was previously recorded as a reduction of retained
earnings. TruServ has allocated the 1999 loss by establishing a loss allocation
account as a contra-equity account in the consolidated balance sheet with the
offsetting credit recorded to retained 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 TruServ 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 TruServ.
NOTE 6 - INVENTORIES
Inventories consisted of:
September 29, December 31,
2001 2000
------------- ------------
(000's omitted)
Manufacturing inventories:
Raw materials $ 2,765 $ 2,242
Work-in-process and finished goods 26,622 30,705
-------- --------
29,387 32,947
Merchandise inventories 341,320 410,716
-------- --------
Total $370,707 $443,663
======== ========
Inventories are stated at the lower of cost, determined on the first-in,
first-out basis, or market. The cost of inventory also includes indirect costs
incurred to bring inventory to its existing location for resale. The amount of
indirect costs included in
ending inventory at September 29, 2001 and December 31, 2000 was $24,639,000 and
$29,144,000, respectively.
NOTE 7 - RESTRUCTURING CHARGE
During fiscal 2001, TruServ continued the workforce reductions initiated in
fiscal year 2000 related to regional distribution center closures and workforce
reductions at the company's corporate headquarters. In the third quarter of
fiscal 2001, TruServ announced that it was closing the Brookings, South Dakota
distribution center. This announcement in the third quarter will result in the
severance of 160 additional employees, all of whom were notified as to the terms
and conditions of their severance and the benefits they would receive. In the
second quarter, a corporate headquarters workforce reduction resulted in the
severance of 150 additional employees, all of whom were notified as to the terms
and conditions of their severance and the benefits they would receive.
Additional shutdown costs necessary to exit the distribution centers were also
identified. The above-described actions taken by TruServ have been reflected in
the schedule below and are included in restructuring expenses in TruServ's
condensed consolidated statement of operations. TruServ expects annual savings
of approximately $14.9 million from the above-described restructuring
activities.
Total
Facility Asset Restructuring
Severance Exit Costs Impairment Reserve
----------- ----------- ---------- -------------
Restructuring reserve
at December 31, 2000 $ 861,000 $ 1,051,000 $ -- $ 1,912,000
Q1 2001:
Restructuring charge 560,000 -- -- 560,000
Use of reserves (83,000) (89,000) -- (172,000)
Q2 2001:
Restructuring charge 3,527,000 863,000 -- 4,390,000
Use of reserves (1,090,000) (856,000) -- (1,946,000)
Q3 2001:
Restructuring charge 1,502,000 1,405,000 354,000 3,261,000
Use of reserves (1,501,000) (921,000) -- (2,422,000)
----------- ----------- ----------- -----------
Restructuring reserve
at September 29, 2001 $ 3,776,000 $ 1,453,000 $ 354,000 $ 5,583,000
=========== =========== =========== ===========
NOTE 8 - SEGMENT INFORMATION
TruServ is principally engaged as a wholesaler of hardware and related products
and is a manufacturer of paint products. TruServ identifies segments based on
management responsibility and the nature of the business activities of each
component of the company. TruServ measures segment earnings as operating
earnings including an allocation for interest expense and income taxes.
Information regarding the identified segments and the related reconciliation to
consolidated information are as follows:
THIRTEEN WEEKS ENDED SEPTEMBER 29, 2001
(000'S OMITTED)
ELIMINATION
OF INTERSEGMENT CONSOLIDATED
HARDWARE PAINT OTHER ITEMS TOTALS
--------- --------- --------- --------------- ------------
Net sales to external customers $ 558,539 $ 37,189 $ 26,249 $ -- $ 621,977
Intersegment sales -- 351 -- (351) --
Interest expense 14,702 753 136 -- 15,591
Depreciation and amortization 9,658 394 150 -- 10,202
Segment net margin/(loss) (5,682) 3,235 (30) -- (2,477)
Expenditures for long-lived assets 1,491 179 184 -- 1,854
THIRTEEN WEEKS ENDED SEPTEMBER 30, 2000
(000'S OMITTED)
ELIMINATION
OF INTERSEGMENT CONSOLIDATED
HARDWARE PAINT OTHER ITEMS TOTALS
--------- --------- --------- --------------- ------------
Net sales to external customers $877,622 $ 39,369 $ 27,278 $ -- $ 944,269
Intersegment sales -- 352 -- (352) --
Interest expense 16,647 893 217 -- 17,757
Depreciation and amortization 9,641 425 194 10,260
Segment net margin 5,676 3,634 137 -- 9,447
Expenditures for long-lived assets 3,050 107 257 3,414
THIRTY-NINE WEEKS ENDED SEPTEMBER 29, 2001
(000'S OMITTED)
ELIMINATION
OF INTERSEGMENT CONSOLIDATED
HARDWARE PAINT OTHER ITEMS TOTALS
--------- --------- --------- --------------- ------------
Net sales to external customers $ 1,840,515 $ 106,249 $ 77,328 $ -- $ 2,024,092
Intersegment sales -- 1,536 -- (1,536) --
Interest expense 44,307 3,096 447 -- 47,850
Depreciation and amortization 29,771 1,272 505 -- 31,548
Segment net margin/(loss) (22,478) 8,427 211 -- (13,840)
Identifiable segment assets 989,439 47,805 26,512 -- 1,063,756
Expenditures for long-lived assets 8,044 451 348 -- 8,843
THIRTY-NINE WEEKS ENDED SEPTEMBER 30, 2000
(000'S OMITTED)
ELIMINATION
OF INTERSEGMENT CONSOLIDATED
HARDWARE PAINT OTHER ITEMS TOTALS
--------- --------- --------- --------------- ------------
Net sales to external customers $ 2,914,534 $ 113,030 $ 81,572 $ -- $ 3,109,136
Intersegment sales -- 1,699 -- (1,699) --
Interest expense 46,576 4,106 631 -- 51,313
Depreciation and amortization 31,020 1,310 585 32,915
Segment net margin 2,386 9,704 356 -- 12,446
Identifiable segment assets 1,217,420 61,159 29,100 1,307,679
Expenditures for long-lived assets 9,044 553 456 10,053
NOTE 9 - ASSET SALE
Effective December 29, 2000, TruServ sold the assets, primarily inventory, of
the lumber and building materials business to Builder Marts of America, Inc. The
lumber and building materials business generated approximately $1.1 billion of
TruServ's revenue in fiscal year 2000; however, the sale of the business will
not materially impact net margin.
NOTE 10 - NEW ACCOUNTING PRONOUNCEMENTS
Effective January 1, 2000, TruServ adopted Statement of Financial Accounting
Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging
Activities," as amended by SFAS No. 138, "Accounting for Certain Derivative
Instruments and Certain Hedging Activities." These new standards require that
all derivative instruments be recognized as either assets or liabilities in the
balance sheet and measured at their fair value. The new standards also require
that changes in the fair value of derivatives be recorded in each period in
current earnings or comprehensive income, depending on the intended use of the
derivatives. The adoption of these new standards had no impact on TruServ's
results of operations, its financial position or its cash flows.
In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No.
141, "Business Combinations." SFAS No. 141 requires the use of the purchase
method of accounting and prohibits the pooling of interest method of accounting
for business combinations initiated after June 30, 2001 and for purchase
business combinations completed on or after July 1, 2001. SFAS No. 141 also
requires recognition of acquired intangible assets apart from goodwill if the
acquired intangible assets meet certain criteria. TruServ will apply the
provisions of SFAS No. 141 in accounting for all future business combinations.
In June 2001, the FASB approved SFAS No. 142, "Goodwill and Other Intangible
Assets." SFAS No. 142 addresses the accounting for goodwill and other intangible
assets subsequent to their acquisition. SFAS No. 142 requires, among other
things, that goodwill and other indefinite-lived intangible assets no longer be
amortized and that such assets be tested for impairment at least annually. SFAS
No. 142 is effective January 1, 2002 for TruServ, and TruServ is currently
evaluating the impact this standard will have on its financial statements.
In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations." SFAS No. 143 addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. SFAS No. 143 is effective January 1, 2003 for
TruServ and TruServ is currently evaluating the impact this standard will have
on its financial statements.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets," replacing SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" and
portions of Accounting Principles Board ("APB") Opinion No. 30, "Reporting the
Results of Operations." SFAS No. 144 provides a single accounting model for
long-lived assets to be disposed of and changes the criteria to be met to
classify an asset as held-for-sale. SFAS No. 144 retains the requirement of APB
Opinion No. 30 to report discontinued operations separately from continuing
operations and extends that reporting to a component of an entity that either
has been disposed of or is classified as held-for-sale. SFAS No. 144 is
effective January 1, 2002 for TruServ and TruServ is currently evaluating the
impact this standard will have on its financial statements.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THIRTEEN WEEKS ENDED SEPTEMBER 29, 2001 COMPARED TO THIRTEEN WEEKS ENDED
SEPTEMBER 30, 2000
RESULTS OF OPERATIONS:
Revenues for the thirteen weeks ended September 29, 2001 totaled $621,977,000.
This represented a decrease of $322,292,000, or 34.1%, compared to the same
period last year. The key contributor to the decreased revenue is the sale of
the lumber and building materials business to Builder Marts of America, Inc. in
December 2000, which accounts for $259,541,000 of the negative variance in
comparison to the prior year. Revenues were also negatively impacted due to the
decrease in the number of participating members, which accounts for
approximately $47,204,000 of the variance to the prior year. The remaining
revenue reduction occurred in same store direct shipment sales, which generates
a lower gross margin for TruServ.
Although revenue declined, gross margins for the thirteen weeks ended September
29, 2001 increased by $695,000, or 1.0%, over the prior year. Gross margin as a
percent of revenue increased to 11.7% from 7.6% for the comparable period last
year. The increase in the gross margin percentage resulted from a change in
sales mix, as the higher margin handled sales are 61% of revenue in 2001
compared to 43% in 2000. The change in sales mix is due to the reduction in
direct shipment sales, which includes the sale of the lumber and building
materials business and a shift away from direct hardware shipment sales, which
have lower margin percentages.
Logistics and manufacturing expenses increased $846,000, or 3.8%, as compared to
the same period last year. Direct regional distribution center expenses
decreased by $4,044,000 compared to the same period last year, but were more
than offset by a reduction in estimated capitalizable indirect inventory-related
costs, as inventory levels have decreased $46,974,000 for the thirteen weeks
ended September 29, 2001 and decreased $22,825,000 for the corresponding period
in 2000.
Selling, general and administrative (S,G&A) expenses increased $7,002,000, or
25.4%, as compared to the same period last year. TruServ's expenses were higher
due to benefit costs, which relate to both a one time pension annuitization gain
of $5,000,000 recorded last year and net additional cost related to benefit
programs of $3,257,000 this year. TruServ has also experienced unusual legal and
refinancing costs of $2,680,000. These charges were partially offset by
TruServ's workforce reductions at the company's corporate headquarters, which
generated savings of $2,685,000.
Restructuring expenses of $3,261,000 in the third quarter of 2001 relate to the
announced closing of the Brookings, South Dakota distribution center.
Interest paid to members decreased by $837,000, or 30.2%, as compared to the
same period last year, primarily due to a lower
average principal balance of debt outstanding. Other interest expense decreased
$1,329,000, or 8.9%, as compared to the same period last year. The interest
expense savings from the lower average principal balance of senior debt
outstanding as compared to the same period last year was partially offset by the
interest rate increase of approximately 2% imposed as a result of the debt
covenant violation under the revolving credit facility and the senior note
agreements. The incremental increase in interest expense for the thirteen weeks
ended September 29, 2001 aggregate approximately $2,011,000 as a result of this
rate increase.
The quarter resulted in a net loss of $2,477,000, down from net margin of
$9,447,000 from the same period a year ago. Net margin was impacted by a
one-time pension annuitization gain recognized in the third quarter of last
year. In addition, TruServ incurred restructuring charges, increased benefit
costs and unusual legal and refinancing costs in the third quarter of this year.
These charges were partially offset by TruServ's workforce reductions at the
company's corporate headquarters.
THIRTY-NINE WEEKS ENDED SEPTEMBER 29, 2001 COMPARED TO THIRTY-NINE WEEKS ENDED
SEPTEMBER 30, 2000
RESULTS OF OPERATIONS:
Revenues for the thirty-nine weeks ended September 29, 2001 totaled
$2,024,092,000. This represented a decrease of $1,085,044,000, or 34.9%,
compared to the same period last year. The key contributor to the decrease in
revenue is the sale of the lumber and building materials business to Builder
Marts of America, Inc. in December 2000, which accounts for $846,472,000 of the
negative variance in comparison to the prior year. Revenues were also negatively
impacted due to the decrease in the number of participating members, which
accounts for approximately $134,223,000 of the variance to prior year. The
remaining revenue reduction occurred in same store sales, with 86% of this
reduction in direct sales, which generates a lower gross margin for TruServ.
Gross margins decreased by $10,829,000, or 5.1%, as compared to the same period
last year, but the gross margin as a percent of revenue increased to 9.9% from
6.8% for the comparable period last year. The increase in the gross margin
percentage resulted from a change in sales mix, as the higher margin handled
sales are 56% of revenue in 2001 compared to 40% in 2000. The change in sales
mix on a year-to-date basis is predominately driven by the sale of the lumber
and building materials business.
Logistics and manufacturing expenses increased $110,000, or .2%, as compared to
the same period last year. Direct regional distribution center expenses
decreased by $10,589,000 compared to the same period last year, but were more
than offset by a reduction in estimated capitalizable indirect inventory-related
costs, as inventory levels have decreased $72,956,000 for the thirty-nine weeks
ended September 29, 2001 and increased $4,694,000 for the corresponding period
in 2000.
Selling, general and administrative (S,G&A) expenses increased $6,446,000, or
7.5%, as compared to the same period last year. The company reduced headcount in
corporate staff and operational expenses as a result of the sale of the lumber
and building materials business in December 2000 and reduced corporate staff and
operational expenses as a result of the restructuring initiative in 2001.
However, the expenses that were eliminated did not fully offset the higher
benefit costs and the unusual legal and refinancing costs. The higher benefit
costs relate to both a one time pension annuitization gain recorded last year
and net additional cost related to benefit programs recorded in 2001.
Restructuring expenses of $8,211,000 for 2001 relate to regional distribution
center closings and workforce reductions at TruServ's corporate headquarters.
Interest paid to members decreased by $2,536,000, or 30.2%, as compared to the
same period last year, primarily due to a lower average principal balance of
debt outstanding. Other interest expense decreased $927,000, or 2.2%, as
compared to same period last year. The interest expense savings from the lower
average principle balance of senior debt outstanding, as compared to the same
period last year, was partially offset by the interest rate increase of
approximately 2% imposed as a result of the debt covenant violation under the
revolving credit facility and the senior note agreements.
The net loss for the first nine months was $13,840,000, down from net margin of
$12,446,000 from the same period a year ago. Net margin was impacted by a
one-time pension annuitization gain in the first nine months of last year,
restructuring charges, increased benefit costs and unusual legal and refinancing
costs incurred in the first nine months of this year. These charges were
partially offset by TruServ's workforce reductions at the company's corporate
headquarters.
LIQUIDITY AND CAPITAL RESOURCES:
Cash provided by operating activities for the thirty-nine weeks ended September
29, 2001 was $128,859,000, compared to cash provided of $6,270,000 for the
thirty-nine weeks ended September 30, 2000. Inventories decreased by $72,956,000
from December 31, 2000 as a result of TruServ's initiative to improve inventory
turns by reducing excess and slow moving inventory. Accounts payable decreased
by $74,579,000 since December 31, 2000, as a result of lower inventory levels.
Additionally, both the reduced direct shipments and the sale of the lumber and
building material business in
December 2000, that were billed through TruServ, have also reduced the accounts
payable balance along with reducing the accounts receivable balance by
$102,358,000 since December 31, 2000. TruServ used the cash generated from
operating activities in the first thirty-nine weeks of fiscal 2001 in its
financing activities.
Investing activities used cash of $7,361,000 for the thirty-nine weeks ended
September 29, 2001, compared to cash used of $2,621,000 for the same period last
year. TruServ sold its distribution center located in Westfield, Massachusetts
in the second quarter of fiscal 2000, which generated proceeds of $6,250,000.
Additions to properties owned used of cash of $8,843,000, which is down
$1,210,000 compared to the same period last year. These capital expenditures are
comprised of various building improvements and purchases of additional equipment
and technology at the company's regional distribution centers and at its
corporate headquarters.
In the thirteen weeks ended September 29, 2001 TruServ had a net increase in
cash and cash equivalents of $29,085,000.
At September 29, 2001, TruServ's working capital deficit was ($176,592,000), as
compared to a deficit of ($188,739,000) at December 31, 2000. The current ratio
was 0.806 at September 29, 2001, as compared to 0.822 at December 31, 2000.
At July 1, 1997, TruServ established a $300,000,000 five-year revolving credit
facility with a group of banks. This agreement was amended and restated in April
2000 after a default was triggered as a result of the loss in 1999. The
amendment includes increased interest rates, new financial ratios and covenants,
and the collateralization of TruServ's assets. TruServ had borrowed under the
agreement $140,000,000 and $127,000,000 at September 29, 2001 and December 31,
2000, respectively. However, the net borrowing after excess cash at September
29, 2001 was $119,000,000. TruServ also pays a commitment fees of .05% per annum
on the unused portion of the commitments.
Under the senior note agreements and the revolving credit facility, TruServ 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 maximum asset sales, as well as other
customary covenants, representations and warranties, funding conditions and
events of default. As of December 31, 2000, TruServ was in compliance with the
covenant requirements.
However, as of February 24, 2001, TruServ failed to comply with a covenant under
the revolving credit facility and the senior note agreements which requires
TruServ to achieve a minimum monthly borrowing base ratio. As a result, either
the senior note holders or the participants in the revolving credit facility
could declare this failure to comply with the covenant as an "event of default,"
in which case the senior notes and the amounts outstanding under the revolving
credit facility would become callable as immediately payable.
On March 30, 2001, the participants in the revolving credit facility issued to
TruServ "reservation of rights" letters under which the participants effectively
stated their intention to not call as immediately payable TruServ's outstanding
debt obligations until May 1, 2001, although they were not precluded from doing
so. All other rights of the participants were preserved. Additional letters were
issued on April 30, 2001, July 3, 2001 and August 30, 2001, which extended the
reservation of rights until July 30, 2001, September 30, 2001 and February 28,
2002, respectively. The senior note holders also issued letters reserving their
right to accelerate the maturity of the notes although agreeing not to do so at
this time.
The reservation of rights letters provided by the participants in the revolving
credit facility permanently reduced the credit limit under this facility on May
11, 2001 from $275,000,000 to $250,000,000 and on September 4, 2001 from
$250,000,000 to $200,000,000. Additionally, the interest rate on the amounts
outstanding under the revolving credit facility was increased by approximately
2%; this increased interest rate also applies to the outstanding senior notes.
As a result of this increased interest rate, TruServ will incur additional
interest expense in fiscal year 2001. If this increased interest rate continues
through December 31, 2001, the additional interest expense would aggregate
approximately $6.5 million.
On September 28, 2001, TruServ signed a $350,000,000 fully underwritten
revolving credit facility commitment from Bank of America for borrowings against
TruServ's accounts receivable and inventory. However, TruServ is still in
discussions with the current lenders to amend the existing agreements and with
other potential lenders regarding refinancing the existing agreements and could
replace the existing agreements with an asset-based lending agreement with a new
lending group in the fourth quarter of 2001. However, no assurances can be given
as to the outcome. TruServ's failure to successfully amend or refinance its
current borrowing arrangements could cause the current lending group to call as
immediately payable TruServ's currently outstanding debt obligations. TruServ's
resulting inability to satisfy its debt obligations would force TruServ to
pursue other alternatives to improve liquidity, possibly including among other
things,
restructuring actions, sales of assets and seeking additional sources of funds
or liquidity. In particular, TruServ has engaged an investment banking firm to
assist us in exploring the sale of the paint manufacturing business. No
assurances can be given that TruServ would be successful in pursuing such
possible alternatives or, even if successful, that such undertakings would not
have a material adverse impact on TruServ.
Accordingly, the balances outstanding under the senior note agreements and the
revolving credit facility have been classified as current liabilities as of
December 31, 2000 and September 29, 2001. However, the financial statements do
not include any other adjustments that might result from the outcome of this
uncertainty.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
TruServ's operations are subject to certain market risks, primarily interest
rate risk and credit risk. Interest rate risk pertains to the company's variable
rate debt, which totals approximately $148,000,000 at September 29, 2001. A 50
basis point movement in the interest rates would result in an approximate
$740,000 annualized increase or decrease in interest expense and cash flows. For
the most part, interest rate risk is managed through a combination of variable
and fixed-rate debt instruments with varying maturities. Credit risk pertains
mostly to TruServ's trade receivables. TruServ extends credit to its members as
part of its day-to-day operations. TruServ believes that as no specific
receivable or group of receivables comprises a significant percentage of total
trade accounts, its risk with respect to trade receivables is limited.
Additionally, TruServ believes that its allowance for doubtful accounts is
adequate with respect to member credit risks.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Between June, 2000 and March, 2001 actions were filed against TruServ by former
members of TruServ in the Circuit Court of the 19th Judicial Circuit (McHenry
County, Illinois). The plaintiffs in the action each allege that, based upon
representations made to them by TruServ and its predecessors that the Coast to
Coast brand name would be maintained, they voted for the merger of Servistar
Coast to Coast ("SCC") and Cotter & Company. The plaintiffs allege, however,
that after the merger the Coast to Coast brand name was eliminated and that each
plaintiff thereafter terminated or had its membership in TruServ terminated. The
plaintiffs further claim that TruServ breached its obligations by failing to
redeem their stock and by creating loss allocation accounts for the plaintiffs.
Based upon this alleged conduct, the plaintiffs have each asserted claims for
fraud/misrepresentation, negligent misrepresentation, claims under the state
securities laws applicable to each plaintiff, claims under the state
franchise/dealership laws applicable to each plaintiff, breach of fiduciary
duty, unjust enrichment, estoppel and recoupment. The complaint states that each
plaintiff is entitled to in excess of $50,000 in damages; however, the damages
being sought are not specified. Discovery has recently commenced in this action
and it is too early to determine the extent of the damages being claimed. In
March of 2001, a similar action was brought on behalf of former SCC members in
the same court, by the same law firm. The complaint alleges substantially
similar cases as those made by the former TruServ members. The lawsuit is in an
early stage and the extent of damages being claimed has not yet been determined.
In August, 2000, an action was brought in Delaware Chancery Court (New Castle
County) by an alleged former TruServ member against certain present and former
directors of TruServ and against TruServ. The plaintiff in the lawsuit seeks to
proceed on a class-action basis on behalf of all those affected by the
moratorium and the creation of the loss allocation accounts. The complaint
alleges that the named directors breached their fiduciary duties in connection
with the accounting adjustments taken by the company in the fourth quarter of
1999 and that TruServ breached, and the named directors caused TruServ to
breach, agreements with members by suspending payment of the members' 1999
annual patronage dividend, by declaring a moratorium on the redemption of
members' TruServ stock and by imposing minimum annual purchase requirements upon
members. The plaintiff seeks monetary and non-monetary relief in connection with
the various claims asserted in the complaint. The lawsuit is in an early stage
and the extent of the damages being claimed has not yet been determined.
In October, 1999, Paul Pentz, the former president of TruServ, filed a claim in
the Circuit Court of the 20th Judicial Circuit (Collier County, Florida) against
TruServ alleging he is due bonus and retirement compensation payments in
addition to amounts already paid to him. TruServ has filed a counterclaim
against Mr. Pentz alleging that he breached his fiduciary duties as president of
TruServ. Mr. Pentz's motion to dismiss the counterclaim was denied.
TruServ intends to vigorously defend all of these cases and, accordingly, has
recorded no related reserves at December 31, 2000 or at September 29, 2001.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
In March, 2000, the board of directors of TruServ declared a moratorium on
redemption of the capital stock. In reaching its decision to declare the
moratorium, the board of directors of TruServ reviewed the financial condition
of the company. The board also considered its fiduciary obligations and
corporate law principles under Delaware law. The board of directors concluded
that it should not redeem any of the capital stock while its net asset value was
substantially less than par value, as that would likely violate legal
prohibitions against "impairment of capital." In addition, the board of
directors concluded that it would be a violation of its fiduciary duties to all
members and that it would constitute a fundamental unfairness to members if some
members were allowed to have their shares redeemed before the impact of the 1999
loss were allocated to them. Members who did not request redemption would be
saddled with the losses of those members who requested redemption. Moreover, the
board considered TruServ's debt agreements, and in particular, the financial
covenants thereunder, which prohibit redemptions when the company, among other
things, does not attain certain profit margin.
On August 28, 2000, the board of directors of TruServ decided to allocate a
substantial portion of its 1999 operating losses among the TruServ members, on a
pro rata basis, in proportion to each member's ownership of Class B common stock
as of December 31, 1999. A loss allocation account was established for each
member during the third quarter of 2000, reflecting that member's allocated loss
as of December 31, 1999. The loss account will be satisfied by offsetting future
qualified Class B common stock issued as part of the patronage dividend against
the amount in the account. In the event of the dissolution of a member or
termination of his or its membership and upon release of the moratorium, the
redemption proceeds to which that
member would have been entitled would also be offset against the amount of the
loss allocated to the member that had not yet been satisfied.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Under the senior note agreements and the revolving credit facility, TruServ 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 maximum asset sales, as well as other
customary covenants, representations and warranties, funding conditions and
events of default. As of February 24, 2001, TruServ failed to comply with a
covenant under the revolving credit facility and the senior note agreements
which requires the company to achieve a minimum monthly borrowing base ratio. As
a result, either the senior note holders or the participants in the revolving
credit facility could declare this failure to comply with the covenant as an
"event of default," in which case the senior notes and the amounts outstanding
under the revolving credit facility would become callable as immediately
payable.
On March 30, 2001, the participants in the revolving credit facility issued to
TruServ "reservation of rights" letters under which the participants effectively
stated their intention to not call as immediately payable TruServ's outstanding
debt obligations until May 1, 2001, although they were not precluded from doing
so. All other rights of the participants were preserved. Additional letters were
issued on April 30, 2001, July 3, 2001 and August 30, 2001, which extended the
reservation of rights until July 30, 2001, September 30, 2001 and February 28,
2002, respectively. The senior note holders also issued letters reserving their
right to accelerate the maturity of the notes although agreeing not to do so at
this time.
The reservation of rights letters provided by the participants in the revolving
credit facility permanently reduced the credit limit under this facility on May
11, 2001 from $275,000,000 to $250,000,000 and on September 4, 2001 from
$250,000,000 to $200,000,000. Additionally, the interest rate on the amounts
outstanding under the revolving credit facility was increased by approximately
2%; this increased interest rate also applies to the outstanding senior notes.
As a result of this increased interest rate, TruServ will incur additional
interest expense in fiscal year 2001. If this increased interest rate continues
through December 31, 2001, the additional interest expense would aggregate
approximately $6.5 million.
On September 28, 2001, TruServ signed a $350,000,000 fully underwritten
revolving credit facility commitment from Bank of America for borrowings against
TruServ's accounts receivable and inventory. However, TruServ is still in
discussions with the current lenders to amend the existing agreements and with
other potential lenders regarding refinancing the existing agreements and could
replace the existing agreements with an asset-based lending agreement with a new
lending group in the fourth quarter of 2001. However, no assurances can be given
as to the outcome. TruServ's failure to successfully amend or refinance its
current borrowing arrangements could cause the current lending group to call as
immediately payable TruServ's currently outstanding debt obligations. TruServ's
resulting inability to satisfy its debt obligations would force TruServ to
pursue other alternatives to improve liquidity, possibly including among other
things, restructuring actions, sales of assets and seeking additional sources of
funds or liquidity. In particular, TruServ has engaged an investment banking
firm to assist it in exploring the sale of the paint manufacturing business. No
assurances can be given that TruServ would be successful in pursuing such
possible alternatives or, even if successful, that such undertakings would not
have a material adverse impact on the company.
Accordingly, the balances outstanding under the senior note agreements and the
revolving credit facility have been classified as current liabilities as of
December 31, 2000 and September 29, 2001. However, the financial statements do
not include any other adjustments that might result from the outcome of this
uncertainty.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION.
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None
(b) Current Reports on Form 8-K, filed July 6, 2001, July 20,
2001, August 13, 2001, August 21, 2001, September 5, 2001, and
September 28, 2001.
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: November 13, 2001 By /s/PAMELA FORBES LIEBERMAN
---------------------------------
Pamela Forbes Lieberman
Chief Operating Officer,
Chief Financial Officer and
Senior Vice President