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 MARCH 30, 2002 OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
----- ------
COMMISSION FILE NUMBER 2-20910
--------------------------------------
TRUSERV CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 36-2099896
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
8600 West Bryn Mawr Avenue
Chicago, Illinois 60631-3505
----------------- ----------
(Address of principal executive offices) (Zip Code)
(773) 695-5000
--------------
(Registrant's telephone number, including area code)
Not applicable
--------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| : No |_|
The number of shares outstanding of each of the issuer's classes of common
stock, as of April 27, 2002.
Class A Common Stock, $100 Par Value........................ 458,160 Shares
Class B Common Stock, $100 Par Value.......................1,731,490 Shares
ITEM 1. FINANCIAL STATEMENTS
TRUSERV CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET
ASSETS
March 30, December 31,
2002 2001
----------- -----------
(Unaudited)
(000's omitted)
Current assets:
Cash and cash equivalents $ 16,456 $ 88,816
Restricted cash 27,888 29,075
Accounts and notes receivable, net of allowance for doubtful accounts of
$10,357,000 and $9,402,000 321,760 243,275
Inventories (Note 5) 351,054 333,976
Other current assets 12,039 16,688
----------- -----------
Total current assets 729,197 711,830
Properties, net 174,140 180,347
Goodwill, net 91,474 91,474
Other assets 34,750 37,186
----------- -----------
Total assets $ 1,029,561 $ 1,020,837
=========== ===========
LIABILITIES AND MEMBERS' CAPITALIZATION
Current liabilities:
Accounts payable $ 321,642 $ 251,657
Outstanding checks 35,217 87,385
Accrued expenses 109,662 119,490
Short-term borrowings 141,807 141,755
Current maturities of long-term debt, notes and capital lease obligations (Note 10) 91,209 93,291
Patronage dividend payable in cash (Note 3) 917 -
----------- -----------
Total current liabilities 700,454 693,578
Long-term debt, including capital lease obligations, less current maturities (Note 10) 235,051 236,268
Deferred credits 8,520 8,758
----------- -----------
Total liabilities and deferred credits 944,025 938,604
Commitments and contingencies - -
Members' capitalization:
Estimated patronage dividend payable in stock (Note 3) 3,670 -
Promissory (subordinated) and installment notes, net of current portion 42,515 42,973
Members' equity:
Redeemable Class A voting common stock, $100 par value; 750,000 shares
authorized; 457,380 and 455,220 shares issued and fully paid; 52,680 and
54,840 shares issued (net of subscriptions receivable of
$1,026,000 and $1,110,000) 49,980 49,896
Redeemable Class B non-voting common stock and paid-in capital, $100
par value; 4,000,000 shares authorized; 1,731,490 and 1,731,490 shares
issued and fully paid 174,448 174,448
Loss allocation (Note 4) (90,026) (89,972)
Deferred patronage (26,354) (26,541)
Accumulated deficit (68,693) (68,568)
Accumulated other comprehensive loss (4) (3)
----------- -----------
Total members' equity 39,351 39,260
----------- -----------
Total members' capitalization 85,536 82,233
----------- -----------
Total liabilities and members' capitalization $ 1,029,561 $ 1,020,837
=========== ===========
See Notes to Condensed Consolidated Financial Statements.
TRUSERV CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
For the thirteen weeks ended
----------------------------
March 30, March 31,
2002 2001
------------ -------------
(000's omitted)
Revenues $ 553,228 $ 654,346
Costs and expenses:
Cost of revenues 501,097 603,696
Logistics and manufacturing expenses 13,544 19,963
Selling, general and administrative expenses 19,373 29,292
Restructuring charges and other related expenses (Note 6) - 560
Interest expense to members 1,666 1,953
Other interest expense 13,886 13,404
Gain on sale of assets (61) (62)
Other income, net (1,015) (560)
--------- ---------
548,490 668,246
--------- ---------
Net margin/(loss) before income taxes 4,738 (13,900)
Income tax expense 90 36
--------- ---------
Net margin/(loss) $ 4,648 $ (13,936)
========= =========
See Notes to Condensed Consolidated Financial Statements.
TRUSERV CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
For the thirteen weeks ended
----------------------------
March 30, March 31,
2002 2001
-------- --------
(000's omitted)
Operating activities:
Net margin/(loss) $ 4,648 $(13,936)
Adjustments to reconcile net margin/(loss) to cash and
cash equivalents provided by/(used for) operating activities:
Depreciation and amortization 9,351 10,702
Provision for allowance for doubtful accounts 1,010 1,340
Restructuring charges and other related expenses - 560
Gain on sale of assets (61) (62)
Net change in working capital components (33,277) 52,192
-------- --------
Net cash and cash equivalents provided by/(used for) operating activities (18,329) 50,796
-------- --------
Investing activities:
Additions to properties (1,868) (3,212)
Proceeds from sale of properties 108 25
Changes in restricted cash 1,187 (545)
Changes in other assets 1,113 (551)
-------- --------
Net cash and cash equivalents provided by/(used for) investing activities 540 (4,283)
-------- --------
Financing activities:
Payment of patronage dividend - (8,788)
Payment of notes, long-term debt and lease obligations (2,539) (3,693)
Decrease in outstanding checks (52,168) (79,178)
Proceeds from short-term borrowings, net of repayments 52 40,364
Proceeds from Class A common stock subscription receivable 84 180
-------- --------
Net cash and cash equivalents used for financing activities (54,571) (51,115)
-------- --------
Net decrease in cash and cash equivalents (72,360) (4,602)
Cash and cash equivalents at beginning of period 88,816 15,491
-------- --------
Cash and cash equivalents at end of period $ 16,456 $ 10,889
======== ========
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 March 30, 2002, the condensed
consolidated statement of operations for the thirteen weeks ended March 30, 2002
and March 31, 2001, and the condensed consolidated statement of cash flows for
the thirteen weeks ended March 30, 2002 and March 31, 2001 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, 2001 included in TruServ's 2001 Annual Report on Form
10-K.
NOTE 2 - RECLASSIFICATIONS
Certain reclassifications have been made to the prior year's condensed
consolidated financial statements to conform to the current year's presentation.
These reclassifications had no effect on net margin/(loss) for any period or on
total members' equity at the balance sheet dates.
NOTE 3 - ESTIMATED PATRONAGE DIVIDENDS
If financial and operating conditions permit, patronage dividends are declared
and paid by TruServ after the close of each fiscal year. The estimated patronage
dividend for the three month period ended March 30, 2002 was $4,587,000 and
there was no estimated patronage dividend for the corresponding period in 2001.
TruServ's By-Laws and the IRS require that the payment of at least twenty
percent of patronage dividends be in cash. In the past the remainder was
primarily paid 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. However, this year the remaining
non-cash dividend that otherwise would have been paid in the form of Class B
common stock will most likely be used to either offset prior years losses
charged to the accumulated deficit account or reduce existing loss allocation
account balances or a combination of the two.
NOTE 4 - 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 among its members by establishing
a Loss allocation account as a contra-equity account in the consolidated balance
sheet with the offsetting credit recorded to the Accumulated deficit account.
The Loss allocation account reflects the sum of each member's proportionate
share of the 1999 loss, after being reduced by certain amounts that were not
allocated to members. The 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 or member note payments
that would have been paid to the members at par value, and applying such amount
as a reduction in the Loss allocation account until fully satisfied. 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.
TruServ has retained the fiscal 2001 loss as part of the Accumulated deficit
account. A final determination of whether to retain or distribute the fiscal
2001 loss to members will be made prior to filing the 2001 Federal tax return in
September 2002. Nevertheless, members will be assigned a share of the 2001 loss
regardless of whether the loss is retained in the Accumulated deficit account or
will be distributed to the members. TruServ has the right to use 100% of future
patronage income to offset the Accumulated deficit account as well as to set off
the Accumulated deficit account against other amounts owed to members. In the
event a member leaves TruServ, any remaining portion of the member's share of
the Accumulated deficit account will be offset against amounts due to the member
upon redemption.
NOTE 5 - INVENTORIES
INVENTORIES CONSISTED OF THE FOLLOWING:
Inventories consisted of the following:
March 30, December 31,
2002 2001
-------- -----------
(000's omitted)
Manufacturing inventories:
Raw materials $ 2,855 $ 1,607
Work-in-process and finished goods 23,991 22,298
-------- --------
26,846 23,905
Merchandise inventories 324,208 310,071
-------- --------
Total $351,054 $333,976
======== ========
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 March 30, 2002 and December 31,
2001 was $24,659,000 and $23,272,000, respectively.
NOTE 6 - RESTRUCTURING CHARGE
During the first quarter of 2002, TruServ had uses of the restructuring reserve
for prior year restructuring charges related to regional distribution center
closures and workforce reductions at the company's corporate headquarters.
TruServ did incur restructuring charges of $560,000 during the first quarter of
2001 related to severance for the Henderson, North Carolina distribution center
closure. Use of the restructuring reserve in the first quarter of 2001 mainly
related to the Indianapolis, Indiana regional distribution center closure.
Restructuring reserve summary:
For the thirteen weeks ended
----------------------------
March 30, 2002 March 31, 2001
---------------------------------------------- --------------------------------------------------
Severance & Total Severance & Total
Outplacement Facility Restructuring Outplacement Facility Restructuring
Costs Exit Costs Reserve Costs Exit Costs Reserve
------------ ------------ ------------ ------------ ------------ ------------
Restructuring reserve,
beginning of quarter $ 8,270,000 $ 17,979,000 $ 26,249,000 $ 861,000 $ 1,051,000 $ 1,912,000
Q1:
- ---
Restructuring charge - - - 560,000 - 560,000
Use of reserves (1,864,000) (988,000) (2,852,000) (83,000) (89,000) (172,000)
------------ ------------ ------------ ------------ ------------ ------------
Restructuring reserve,
end of quarter $ 6,406,000 $ 16,991,000 $ 23,397,000 $ 1,338,000 $ 962,000 $ 2,300,000
============ ============ ============ ============ ============ ============
NOTE 7 - SEGMENT INFORMATION
TruServ is principally engaged as a wholesaler of hardware and related products
and is a manufacturer of paint products. TruServ identifies segments based on
management responsibility and the nature of the business activities of each
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 MARCH 30, 2002
-----------------------------------
(000's omitted)
Consolidated
Hardware Paint Totals
-------- ----- ------
Net sales to external customers $ 526,043 $ 27,185 $ 553,228
Interest expense 14,404 1,148 15,552
Depreciation and amortization 8,989 362 9,351
Segment net margin/(loss) 1,520 3,128 4,648
Identifiable segment assets 967,412 62,149 1,029,561
Expenditures for long-lived assets 1,790 78 1,868
THIRTEEN WEEKS ENDED MARCH 31, 2001
-----------------------------------
(000's omitted)
Elimination
of Intersegment Consolidated
Hardware Paint Other Items Totals
-------- ----- ----- ----- ------
Net sales to external customers $ 600,138 $ 28,449 $ 25,763 $ - $ 654,350
Intersegment sales - 547 - (547) -
Interest expense 13,942 1,279 136 - 15,357
Depreciation and amortization 10,092 437 173 - 10,702
Segment net margin/(loss) (16,663) 2,607 120 - (13,936)
Identifiable segment assets 1,108,591 74,413 28,656 - 1,211,660
Expenditures for long-lived assets 2,914 265 33 - 3,212
NOTE 8 - ASSET SALE
Effective October 22, 2001, TruServ sold its ownership interest in TruServ
Canada Cooperative, Inc. along with the headquarters and warehouse building and
other parcels of real estate to the current management group of the cooperative.
The Canadian operations generated revenue of $25,763,000 in the thirteen weeks
ended March 31, 2001 and $84,397,000 in 2001 to its date of sale in October;
however, the sale of the business does not materially impact net margin.
NOTE 9 - NEW ACCOUNTING PRONOUNCEMENTS
In January 2002, TruServ adopted Statement of Financial Accounting Standards
("SFAS") No. 142, "Goodwill and Other Intangible Assets." SFAS No. 142 changed
the accounting for goodwill and certain other intangible assets from an
amortization method to an impairment only approach. Due to the adoption of SFAS
No. 142, TruServ stopped amortizing goodwill at the beginning of fiscal 2002.
TruServ has completed its initial impairment assessment as required by SFAS No.
142 and has determined that no impairment exists. The reported Net
margin/(loss), Goodwill amortization and adjusted Net margin/(loss) are as
follows:
For the thirteen weeks ended
----------------------------
March 30, March 31,
2002 2001
-------- --------
(000's omitted)
Reported Net margin/(loss) $ 4,648 $(13,936)
Add back: Goodwill amortization - 729
-------- --------
Adjusted Net margin/(loss) $ 4,648 $(13,207)
======== ========
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. TruServ is currently evaluating the
impact this standard will have on its financial statements.
In January 2002, TruServ adopted SFAS No. 144, "Accounting for the Impairment 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. The adoption of this standard did not have a
material impact on the Company's financial position or results of operations.
NOTE 10 - SUBSEQUENT EVENT
On April 11, 2002, TruServ entered into various amendments to its existing
revolving credit facility and other senior lending agreements after the company
failed to comply with a covenant, as of February 24, 2001, which constituted an
event of default. The amendment to the revolving credit facility extends the
terms of the facility from June 2002 to June 2004. The amount of the commitment
remains at $200 million. There are, however, borrowing base limitations that
fluctuate in part with the seasonality of the business. The borrowing base
formula limits advances to the sum of 85% of eligible accounts receivable, 50%
of eligible inventory, 60% of the appraised value of eligible real estate and
50% of the appraised value of eligible machinery and equipment; availability is
further increased by seasonal over-advances and decreased by reserves against
availability. The interest rate on the revolving credit facility was increased
to the prime rate plus 3.25%. The revolving credit facility has certain minimum
unusable commitment amounts, which vary based upon the projected working capital
needs of TruServ. The unused commitment fee is 0.75% per annum.
The amendments to the various senior notes maintain the existing debt
amortization schedules of the various notes. Interest rates on the notes are at
the previous non-default rates, which range from 9.98% to 11.85%. The senior
note and revolving credit facility amendments also require initial, quarterly
and annual maintenance fees. All of the proceeds from certain asset sales,
amortization of certain notes receivable and 80% of any excess cash flow, as
defined in the amended senior note and revolving credit facility agreements,
will be used to prepay all parties to these amendments in accordance with an
amended intercreditor agreement. The intercreditor agreement establishes how the
assets of TruServ, which are pledged as collateral, are shared and how certain
debt prepayments are allocated among the senior lenders. The commitment under
the revolving credit facility will be permanently reduced by the amount of the
prepayments allocated and paid on the revolving credit facility.
The amendments all require TruServ to meet certain restrictive covenants
relating to minimum sales, minimum adjusted EBITDA (earnings before interest,
taxes, depreciation and amortization), minimum fixed charge coverage, minimum
interest coverage and maximum capital expenditures. The term of the revolving
credit facility is accelerated to June 30, 2003, if on that date: total senior
debt outstanding is in excess of $270 million, or total senior debt outstanding,
plus the unused amount of the commitment under the revolving credit facility,
less $30 million, is in excess of $320 million. The senior lenders may
accelerate their notes if the company does not have a revolving credit facility
in place to fund its seasonal cash flows.
The amendments limit the amount of the cash portion of patronage dividends to
the 20% minimum required to be paid under applicable IRS regulations in order
for TruServ to maintain its status as a cooperative, unless TruServ's operating
performance achieves certain EBITDA targets, in which case up to 30% of the
patronage dividend may be paid in cash. The amendments also require the
continuation of the stock redemption moratorium through the term of the amended
senior debt. It is an event of default under the amendments to exceed certain
levels of subordinated note payments. In addition, an event of default arises
under the amendments in the event that TruServ fails to comply with its
corporate governance policy requiring the retention by TruServ of at least two
outside directors prior to May 31, 2002, at least four outside directors prior
to September 1, 2002 and at least five outside directors prior to November 1,
2002. The amendments also contain requirements for other customary covenants,
representations and warranties, funding conditions and events of default. These
amendments eliminate the "event of default" discussed above.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THIRTEEN WEEKS ENDED MARCH 30, 2002 COMPARED TO THIRTEEN WEEKS ENDED MARCH 31,
2001
RESULTS OF OPERATIONS:
A reconciliation of revenue and gross margin for the thirteen weeks ending March
30, 2002 and March 31, 2001 follows:
% of
Change in Gross GM %
(dollar amounts in thousands) Revenue revenue Margin of revenue
------- --------- -------- ----------
Quarter ended March 31, 2001 results $ 654,346 $ 50,650 7.7%
--------- ---------
Same store sales:
Warehouse and relay revenues (11,922) (11.8%) 2,636
Vendor direct revenues 6,478 6.4% 72
Terminated members (51,874) (51.3%) (6,187)
New members 6,517 6.5% 847
Lumber and building materials business (21,233) (21.0%) (403)
Canadian business (25,763) (25.5%) (3,606)
Advertising, transportation, and other revenues (3,321) (3.3%) 3,778
Indirect cost of revenues - 0.0% 4,344
--------- ------- ---------
Total change (101,118) (100.0%) 1,481
--------- ======= ---------
Quarter ended March 30, 2002 results $ 553,228 $ 52,131 9.4%
========= =========
Revenues for the thirteen weeks ended March 30, 2002 totaled $553,228,000. This
represented a decrease in revenues of $101,118,000, or 15.5%, compared to the
same period last year. The key contributors to the decrease in revenue are the
12.7% decline in the number of participating member retail outlets, the sale of
TruServ Canada Cooperative, Inc. in October of 2001, and the residual lumber
sales in 2001 from the lumber and building materials business that was sold to
Builder Marts of America, Inc. in December 2000.
Although revenue declined, gross margins for the thirteen weeks ended March 30,
2002 increased by $1,481,000, or 2.9%, over the prior year. Gross margin as a
percent of revenue increased to 9.4% from 7.7% for the comparable period last
year. The indirect cost of revenues favorably impacted the gross margin dollars
as a result of the closure of distribution centers and headcount reductions
which reduced the direct inbound logistics and labor and related overhead
expenses incurred to bring merchandise to the distribution centers. Additional
improvements in gross margin were attained by certain product price increases, a
reduction in member returns and allowances, and the timing of promotional
activities. The favorable impacts to gross margin were partially offset by the
loss of gross margins from terminated members and sold businesses.
Logistics and manufacturing expenses decreased $6,419,000, or 32.2%, as compared
to the same period last year. The sale of the Canadian operations accounted for
$3,421,000 of this positive variance. The remainder of the decrease occurred in
direct regional distribution center expenses, which decreased primarily due to
the closure of distribution centers and headcount reductions due to a reduction
in the member base.
Selling, general and administrative ("S,G&A") expenses decreased $9,919,000, or
33.9%, as compared to the same period last year. S,G&A expenses were mainly
lower due to the timing of the spring market in February 2002 versus May 2001.
The effects of TruServ's 2001 workforce reductions at the company's corporate
headquarters generated savings of $2,071,000 compared to last year. Also in
2002, TruServ adopted SFAS No. 142, "Goodwill and Other Intangible Assets,"
which changed the accounting for goodwill from an amortization method to an
impairment only approach. Goodwill amortization in the first quarter of 2001 was
$729,000.
Restructuring expenses of $560,000 in the first quarter of 2001 related to the
Henderson, North Carolina distribution center closing. No restructuring expenses
were recorded in the first quarter of 2002.
Interest paid to members decreased by $287,000, or 14.7%, as compared to the
same period last year, due to a lower average
principal balance of debt outstanding partially offset by a higher average
interest rate. Other interest expense increased $482,000, or 3.6%, as compared
to the same period last year. This increase is due to higher bank fees of
$705,000 as a result of TruServ amending its existing credit facility and senior
note agreements due to the debt covenant violation under the revolving credit
facility and the senior note agreements in 2001. The interest rate increase of
approximately 2% imposed through February 27, 2002 as a result of the debt
covenant violation was more than offset by the lower average principal balance
of senior debt outstanding as compared to the same period last year. The
incremental increase in interest expense for the thirteen weeks ended March 30,
2002 aggregated approximately $1,395,000 as a result of this rate increase.
The quarter resulted in net margin of $4,648,000 up from a net loss of
$13,936,000 from the same period a year ago. Net margin was favorably impacted
by the closure of regional distribution centers and headcount reductions that
occurred from the restructuring activities in 2001. The loss of participating
member retail outlets were partially offset by certain product price increases
and a reduction in member returns and allowances, and lower advertising cost. In
addition, TruServ's spring market, which generates favorable program recoveries,
was held in February 2002 compared to May 2001.
LIQUIDITY AND CAPITAL RESOURCES:
The Securities and Exchange Commission ("SEC") recently issued Financial
Reporting Release No. 61, which sets forth the views of the SEC regarding
certain disclosures relating to liquidity and capital resources. The information
provided below, which should be read in conjunction with TruServ's Annual Report
on Form 10-K for the year ended December 31, 2001, describes TruServ's debt,
credit facilities, guarantees and future commitments in order to facilitate a
review of TruServ's liquidity.
Cash used for operating activities for the thirteen weeks ended March 30, 2002
was $18,329,000, compared to cash provided of $50,796,000 for the thirteen weeks
ended March 31, 2001. The main reason for this change in cash related to
operating activities is due to the decrease in accounts receivable for 2001,
which relates to the collection of approximately $60,000,000 remaining accounts
receivable from the lumber and building materials business which was sold in
December 2000. The use of cash for accounts receivable and inventory is
partially offset by the cash provided by accounts payable during the first
quarter of 2002 reflecting the normal seasonal nature of the business.
Investing activities provided cash of $540,000 for the thirteen weeks ended
March 30, 2002, compared to cash used of $4,283,000 for the same period last
year. Additions to properties owned used cash of $1,868,000, which is down
$1,344,000 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 March 30, 2002 TruServ had a net decrease in cash
and cash equivalents of $72,360,000. This decrease was primarily related to cash
being used in TruServ's financing activities as the company was able to cover
its outstanding checks without borrowing additional funds. In the thirteen weeks
ended March 31, 2001 TruServ had a net decrease in cash and cash equivalents of
$4,602,000. In the first quarter of 2001, TruServ's cash flow generated by
operating activities was primarily used for its financing activities.
At March 30, 2002, TruServ's working capital was $28,743,000, as compared to
$18,252,000 at December 31, 2001. The current ratio was 1.04 at March 30, 2002,
as compared to 1.03 at December 31, 2001.
On April 11, 2002, TruServ entered into various amendments to its existing
revolving credit facility and other senior lending agreements after the company
failed to comply with a covenant, as of February 24, 2001, which constituted an
event of default. The amendment to the revolving credit facility extends the
terms of the facility from June 2002 to June 2004. The amount of the commitment
remains at $200 million. There are, however, borrowing base limitations that
fluctuate in part with the seasonality of the business. The borrowing base
formula limits advances to the sum of 85% of eligible accounts receivable, 50%
of eligible inventory, 60% of the appraised value of eligible real estate and
50% of the appraised value of eligible machinery and equipment; availability is
further increased by seasonal over-advances and decreased by reserves against
availability. The interest rate on the revolving credit facility was increased
to the prime rate plus 3.25%. The revolving credit facility has certain minimum
unusable commitment amounts, which vary based upon the projected working capital
needs of TruServ. The unused commitment fee is 0.75% per annum.
The amendments to the various senior notes maintain the existing debt
amortization schedules of the various notes. Interest rates on the notes are at
the previous non-default rates, which range from 9.98% to 11.85%. The senior
note and revolving credit facility amendments also require initial, quarterly
and annual maintenance fees. All of the proceeds from certain asset sales,
amortization of certain notes receivable and 80% of any excess cash flow, as
defined in the amended senior note and
revolving credit facility agreements, will be used to prepay all parties to
these amendments in accordance with an amended intercreditor agreement. The
intercreditor agreement establishes how the assets of TruServ, which are pledged
as collateral, are shared and how certain debt prepayments are allocated among
the senior lenders. The commitment under the revolving credit facility will be
permanently reduced by the amount of the prepayments allocated and paid on the
revolving credit facility.
The amendments all require TruServ to meet certain restrictive covenants
relating to minimum sales, minimum adjusted EBITDA (earnings before interest,
taxes, depreciation and amortization), minimum fixed charge coverage, minimum
interest coverage and maximum capital expenditures. The term of the revolving
credit facility is accelerated to June 30, 2003, if on that date: total senior
debt outstanding is in excess of $270 million, or total senior debt outstanding,
plus the unused amount of the commitment under the revolving credit facility,
less $30 million, is in excess of $320 million. The senior lenders may
accelerate their notes if the company does not have a revolving credit facility
in place to fund its seasonal cash flows.
The amendments limit the amount of the cash portion of patronage dividends to
the 20% minimum required to be paid under applicable IRS regulations in order
for TruServ to maintain its status as a cooperative, unless TruServ's operating
performance achieves certain EBITDA targets, in which case up to 30% of the
patronage dividend may be paid in cash. The amendments also require the
continuation of the stock redemption moratorium through the term of the amended
senior debt. It is an event of default under the amendments to exceed certain
levels of subordinated note payments. In addition, an event of default arises
under the amendments in the event that TruServ fails to comply with its
corporate governance policy requiring the retention by TruServ of at least two
outside directors prior to May 31, 2002, at least four outside directors prior
to September 1, 2002 and at least five outside directors prior to November 1,
2002. The amendments also contain requirements for other customary covenants,
representations and warranties, funding conditions and events of default. These
amendments eliminate the "event of default" discussed above.
TruServ believes that its cash from operations and existing credit facilities
will provide sufficient liquidity to meet its working capital needs, planned
capital expenditures and debt obligations that are due to be repaid in fiscal
year 2002.
CRITICAL ACCOUNTING POLICIES
Financial Reporting Release No. 60, recently released by the SEC, recommends
that all registrants include a discussion of "critical" accounting policies or
methods used in the preparation of financial statements in their Annual Report
on Form 10-K and update that disclosure in their Form 10-Q for any significant
changes to their "critical" accounting policies or methods. A significant change
in accounting policy occurred with the adoption of SFAS No. 142 and the
accounting for Goodwill, net. The impairment analysis completed for Goodwill,
using discounted cash flows, showed that Goodwill was not impaired. The
assumptions used included a discount rate that was a blended senior debt
borrowing rate, an allocation of debt to the Paint segment based on EBITDA, and
Revenue and EBIT that are consistent with amounts required to establish bank
covenants. While TruServ believes that reasonable assumptions were used in the
assessment, a future decline in EBIT below these assumptions due to lower
revenue or higher expenses could result in the recognition of an impairment loss
on Goodwill.
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 $141,807,000 at March 30, 2002. A 50 basis
point movement in the interest rates would result in an approximate $709,000
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. TruServ has no investments in derivative instruments and
performs no speculative hedging activities. TruServ does not have any special
purpose entities ("SPE's") and all related party transactions are at arms
length.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In June 2000, former members of TruServ filed an action against 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 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 further specified.
Discovery has recently commenced in the action and it is too early to determine
the extent of the damages being claimed. In March 2001, a similar action was
brought on behalf of additional former members in the same court, by the same
law firm. The complaint alleges substantially similar claims as those made in
the June 2000 action, except that the March 2001 action relates to the ServiStar
brand name instead of the Coast to Coast brand name. The lawsuit is in an early
stage and the extent of damages being claimed has not yet been determined. In
total, approximately 40 former members have brought claims against TruServ based
on this type of allegation in the Circuit Court of the 19th Judicial Circuit
(McHenry County, Illinois).
In August 2000, an action was brought in Delaware Chancery Court (New Castle
County) by a 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 made by TruServ 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, a 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. The case was removed to Federal Court
and transferred to the Northern District of Illinois. 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.
Trial has been scheduled for June 2002.
TruServ intends to vigorously defend all of these cases.
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 TruServ and considered its fiduciary obligations and corporate law principles
under Delaware law. The board of directors concluded that it should not redeem
any of the capital stock 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 and
members who did not request redemption were saddled with the losses of those
members who requested redemption. Moreover, the board of directors considered
TruServ's debt agreements and, in particular, the financial covenants
thereunder, which prohibit redemptions when TruServ, among other things, does
not attain certain profit margins.
TruServ's amended debt agreements preclude the lifting of the stock moratorium
until June 2004 except for certain hardship cases, not to exceed $2,000,000
annually. Subsequent to the expiration of the prohibition against stock
redemptions under the debt agreements, the board of directors will consider the
financial condition of TruServ, and will not lift the moratorium unless it can
conclude that effecting redemptions of TruServ's capital stock will not "impair
the capital" of TruServ, unfairly
advantage some members to the disadvantage of others, or violate the financial
covenants under its debt agreements. The board of directors is monitoring the
financial performance of TruServ quarterly.
As of March 30, 2002, the amount of Class A common stock and Class B common
stock presented for redemption but deferred due to the moratorium is
approximately $30,421,000 after the offset of the loss allocation account. The
$30,421,000 includes approximately $12,640,000 related to the Class A common
stock historically paid out at the time of redemption and $38,248,000 related to
Class B common stock historically paid out in five equal annual installments,
offset by the amount of the loss allocation accounts related to the Class B
common stock in an aggregate amount of $20,467,000.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
On April 11, 2002, TruServ entered into various amendments to its existing
revolving credit facility and other senior lending agreements after the company
failed to comply with a covenant, as of February 24, 2001, which constituted an
event of default. The amendment to the revolving credit facility extends the
terms of the facility from June 2002 to June 2004. The amount of the commitment
remains at $200 million. There are, however, borrowing base limitations that
fluctuate in part with the seasonality of the business. The borrowing base
formula limits advances to the sum of 85% of eligible accounts receivable, 50%
of eligible inventory, 60% of the appraised value of eligible real estate and
50% of the appraised value of eligible machinery and equipment; availability is
further increased by seasonal over-advances and decreased by reserves against
availability. The interest rate on the revolving credit facility was increased
to the prime rate plus 3.25%. The revolving credit facility has certain minimum
unusable commitment amounts, which vary based upon the projected working capital
needs of TruServ. The unused commitment fee is 0.75% per annum.
The amendments to the various senior notes maintain the existing debt
amortization schedules of the various notes. Interest rates on the notes are at
the previous non-default rates, which range from 9.98% to 11.85%. The senior
note and revolving credit facility amendments also require initial, quarterly
and annual maintenance fees. All of the proceeds from certain asset sales,
amortization of certain notes receivable and 80% of any excess cash flow, as
defined in the amended senior note and revolving credit facility agreements,
will be used to prepay all parties to these amendments in accordance with an
amended intercreditor agreement. The intercreditor agreement establishes how the
assets of TruServ, which are pledged as collateral, are shared and how certain
debt prepayments are allocated among the senior lenders. The commitment under
the revolving credit facility will be permanently reduced by the amount of the
prepayments allocated and paid on the revolving credit facility.
The amendments all require TruServ to meet certain restrictive covenants
relating to minimum sales, minimum adjusted EBITDA (earnings before interest,
taxes, depreciation and amortization), minimum fixed charge coverage, minimum
interest coverage and maximum capital expenditures. The term of the revolving
credit facility is accelerated to June 30, 2003, if on that date: total senior
debt outstanding is in excess of $270 million, or total senior debt outstanding,
plus the unused amount of the commitment under the revolving credit facility,
less $30 million, is in excess of $320 million. The senior lenders may
accelerate their notes if the company does not have a revolving credit facility
in place to fund its seasonal cash flows.
The amendments limit the amount of the cash portion of patronage dividends to
the 20% minimum required to be paid under applicable IRS regulations in order
for TruServ to maintain its status as a cooperative, unless TruServ's operating
performance achieves certain EBITDA targets, in which case up to 30% of the
patronage dividend may be paid in cash. The amendments also require the
continuation of the stock redemption moratorium through the term of the amended
senior debt. It is an event of default under the amendments to exceed certain
levels of subordinated note payments. In addition, an event of default arises
under the amendments in the event that TruServ fails to comply with its
corporate governance policy requiring the retention by TruServ of at least two
outside directors prior to May 31, 2002, at least four outside directors prior
to September 1, 2002 and at least five outside directors prior to November 1,
2002. The amendments also contain requirements for other customary covenants,
representations and warranties, funding conditions and events of default. These
amendments eliminate the "event of default" discussed above.
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 January 8, 2002.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
TRUSERV CORPORATION
Date: May 14, 2002 By /s/DAVID A. SHADDUCK
--------------------
David A. Shadduck
Senior Vice President and
Chief Financial Officer