UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 29, 2002
[ ] 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 July 27, 2002.
Class A Common Stock, $100 Par Value........................ 470,100 Shares
Class B Common Stock, $100 Par Value. .....................1,731,490 Shares
1
ITEM 1. FINANCIAL STATEMENTS
TRUSERV CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET
ASSETS
June 29, December 31,
2002 2001
----------- -----------
(Unaudited)
(000's omitted)
Current assets:
Cash and cash equivalents $ 13,435 $ 88,816
Restricted cash 20,102 29,075
Accounts and notes receivable, net of allowance for doubtful accounts of
$9,319,000 and $9,402,000 (Note 14) 287,058 243,275
Inventories (Note 5) 317,650 333,976
Other current assets 19,411 16,688
----------- -----------
Total current assets 657,656 711,830
Properties, net (Note 13) 165,682 180,347
Goodwill, net (Note 13) 91,474 91,474
Other assets (Note 14) 23,201 37,186
----------- -----------
Total assets $ 938,013 $ 1,020,837
=========== ===========
LIABILITIES AND MEMBERS' CAPITALIZATION
Current liabilities:
Accounts payable $ 295,944 $ 251,657
Outstanding checks 47,292 87,385
Accrued expenses (Note 7 & 10) 102,066 119,490
Short-term borrowings (Note 6) 74,403 141,755
Current maturities of long-term debt, notes and capital lease obligations (Notes 6 and 14) 82,305 93,291
Patronage dividend payable in cash (Note 3) 2,948 --
----------- -----------
Total current liabilities 604,958 693,578
Long-term debt, including capital lease obligations, less current maturities (Notes 6 & 14) 214,730 236,268
Deferred credits 8,255 8,758
----------- -----------
Total liabilities and deferred credits 827,943 938,604
Commitments and contingencies (Note 8) -- --
Members' capitalization:
Promissory (subordinated) and installment notes, net of current portion 57,271 42,973
Members' equity:
Redeemable Class A voting common stock, $100 par value; 750,000 shares
authorized; 468,420 and 455,220 shares issued and fully paid; 41,640 and
54,840 shares issued (net of subscriptions receivable of
$964,000 and $1,110,000) 50,042 49,896
Redeemable Class B non-voting common stock and paid-in capital, $100
par value; 4,000,000 shares authorized; 1,731,490 shares
issued and fully paid 174,448 174,448
Loss allocation (Note 4) (88,735) (89,972)
Deferred patronage (26,167) (26,541)
Accumulated deficit (56,809) (68,568)
Accumulated other comprehensive income/(loss) 20 (3)
----------- -----------
Total members' equity (Note 9) 52,799 39,260
----------- -----------
Total members' capitalization 110,070 82,233
----------- -----------
Total liabilities and members' capitalization $ 938,013 $ 1,020,837
=========== ===========
See Notes to Condensed Consolidated Financial Statements.
2
TRUSERV CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
For the thirteen weeks ended For the twenty-six weeks ended
------------------------------- -------------------------------
June 29, June 30, June 29, June 30,
2002 2001 2002 2001
----------- ----------- ----------- -----------
(000's omitted) (000's omitted)
Revenues $ 597,856 $ 747,765 $ 1,151,084 $ 1,402,115
Costs and expenses:
Cost of revenues 525,834 670,365 1,026,931 1,274,065
Logistics and manufacturing
expenses 19,218 25,416 32,762 45,379
Selling, general and
administrative expenses 26,349 29,118 45,722 58,410
Restructuring charges and
other related expenses (Note 10) 241 4,390 241 4,950
Interest expense to members 1,690 1,979 3,356 3,932
Non-member interest expense 15,183 14,923 29,069 28,327
Gain on sale of assets (164) (53) (225) (115)
Other income, net (988) (1,220) (2,003) (1,780)
----------- ----------- ----------- -----------
Total costs and expenses 587,363 744,918 1,135,853 1,413,168
----------- ----------- ----------- -----------
Net margin/(loss) before income taxes 10,493 2,847 15,231 (11,053)
Income tax expense 60 274 150 310
----------- ----------- ----------- -----------
Net margin/(loss) $ 10,433 $ 2,573 $ 15,081 $ (11,363)
=========== =========== =========== ===========
See Notes to Condensed Consolidated Financial Statements.
3
TRUSERV CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
For the twenty-six weeks ended
------------------------------
June 29, June 30,
2002 2001
--------- ---------
(000's omitted)
Operating activities:
Net margin/(loss) $ 15,081 $ (11,363)
Adjustments to reconcile net margin/(loss) to cash and
cash equivalents provided by operating activities:
Depreciation and amortization 18,522 21,346
Provision for allowance for doubtful accounts 453 3,643
Restructuring charges and other related expenses (Note 10) 241 4,950
Gain on sale of assets (225) (115)
Net change in working capital components 12,979 82,625
--------- ---------
Net cash and cash equivalents provided by operating activities 47,051 101,086
--------- ---------
Investing activities:
Additions to properties (6,578) (6,989)
Proceeds from sale of properties 230 80
Changes in restricted cash 8,973 (130)
Changes in other assets (2,709) 746
--------- ---------
Net cash and cash equivalents used for investing activities (84) (6,293)
--------- ---------
Financing activities:
Payment of patronage dividend -- (9,213)
Payment of notes, long-term debt and lease obligations (15,049) (5,697)
Decrease in outstanding checks (40,093) (72,774)
Payment of short-term borrowings, net of proceeds (67,352) (9,385)
Proceeds from Class A common stock subscription receivable 146 343
--------- ---------
Net cash and cash equivalents used for financing activities (122,348) (96,726)
--------- ---------
Net decrease in cash and cash equivalents (75,381) (1,933)
Cash and cash equivalents at beginning of period 88,816 15,491
--------- ---------
Cash and cash equivalents at end of period $ 13,435 $ 13,558
========= =========
See Notes to Condensed Consolidated Financial Statements.
4
TRUSERV CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - GENERAL
The condensed consolidated balance sheet at June 29, 2002, the condensed
consolidated statement of operations for the thirteen and twenty-six weeks ended
June 29, 2002 and June 30, 2001, and the condensed consolidated statement of
cash flows for the twenty-six weeks ended June 29, 2002 and June 30, 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 cash
portion of the patronage dividend for the six-month period ended June 29, 2002
was $2,948,000 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, for fiscal 2002 it is the intent of the company to issue the remaining
non-cash dividend in the form of Class B common stock which will be first used
to reduce existing loss allocation account balances and remaining Class B common
stock will then be issued to members (Note 4).
NOTE 4 - TREATMENT OF LOSSES
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 condensed
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
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.
The board of directors has determined that TruServ will retain the fiscal 2001
loss as part of the Accumulated deficit account. However, TruServ will determine
each shareholder's portion of the 2001 loss that is retained in the Accumulated
deficit account. TruServ has the right to use 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.
5
NOTE 5 - INVENTORIES
Inventories consisted of the following:
June 29, December 31,
2002 2001
-------- ------------
(000's omitted)
Manufacturing inventories:
Raw materials $ 2,571 $ 1,607
Work-in-process and finished goods 24,862 22,298
-------- --------
27,433 23,905
Merchandise inventories 290,217 310,071
-------- --------
Total $317,650 $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 June 29, 2002 and December 31,
2001 was $20,225,000 and $23,272,000, respectively.
NOTE 6 - AMENDED FINANCING AGREEMENT
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
remained at $200,000,000. 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. Since April 11, 2002 the revolving credit
facility has been reduced and was $196,065,000 at June 29, 2002 and is at
$187,221,000 as of August 13, 2002, due to prepayments from asset sales in 2002.
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. These prepayments on the senior notes are
subject to make-whole provisions or a premium related to accelerated debt
prepayment. 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 prepayments to senior note holders were
$6,507,000 in the second quarter 2002, resulting in make-whole liabilities of
$1,745,000, which are recorded as additional debt offset by a contra account to
debt in the second quarter 2002. The contra account will be amortized to
interest expense over the remaining life of the original note. Under the terms
of the amended senior note agreements, in the event of early termination of the
note agreements, make-whole liabilities may be triggered based on certain
circumstances and then prevailing market interest rates relative to the interest
rates on the senior notes.
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. TruServ intends to attain this
reduced level of senior debt outstanding by June 30, 2003 by entering into
sale/lease-back transactions or mortgages on various regional distribution
centers along with using proceeds from operations. 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
6
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 agreements. 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 is in
compliance with all covenants as of June 29, 2002.
NOTE 7 - LEASE COMMITMENTS
The Hagerstown, Maryland distribution center is subject to a synthetic lease
with quarterly payments that are recorded in Non-member interest expense. The
lease payment commitments are for three years with two one-year renewal options
and a principal payment due at the expiration of the lease agreement, which is
April 30, 2003. All obligations under this lease arrangement are guaranteed by
the company. As of August 13, 2002, the synthetic lease has a remaining
principal balance of $38,504,000, which is due at the end of the lease term.
This debt and the original cost of the facility are not recorded in the
company's balance sheet because the synthetic lease does not meet the
requirement for capital lease treatment under Statement of Financial Accounting
Standard ("SFAS") No. 13, "Accounting for Leases." In the fourth quarter of
2001, management announced their decision to close and sell the Hagerstown
facility and as a result recorded a loss representing the difference between the
lease obligation and management's estimation of the fair value of the building
is recorded in accrued expense as a cost to exit the facility.
NOTE 8 - COMMITMENTS AND CONTINGENCIES
In June 2002, TruServ reached a confidential settlement with Paul Pentz, a
former President of TruServ, which TruServ found to be satisfactory. Mr Pentz,
in October 1999 had filed a claim in the Circuit Court of the 20th Judicial
Circuit (Collier County, Florida) against TruServ alleging he was 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 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. In June 2002, the parties entered into a
confidential settlement agreement.
NOTE 9 - MEMBERS' EQUITY
As of June 29, 2002, the amount of Class A common stock and Class B common stock
presented for redemption, but deferred due to the moratorium, is approximately
$38,182,000 after the offset of the loss allocation account. The $38,182,000
includes approximately $13,626,000 related to the Class A common stock
historically paid out at the time of redemption and $48,686,000 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 $24,130,000.
NOTE 10 - RESTRUCTURING CHARGE
Restructuring expenses of $241,000 were incurred in the first six months of
2002. The expenses related to additional outplacement costs at TruServ's
corporate headquarters of $185,000, plus additional facility exit costs at
TruServ's Hagerstown, Maryland distribution center of $150,000, offset by the
reversal of excess outplacement costs at TruServ's Hagerstown, Maryland and
Brookings, South Dakota distribution centers. TruServ had uses of previously
established restructuring reserves in the first six months of 2002 of $4,447,000
($2,852,000 in the first quarter of 2002 and $1,595,000 in the second quarter of
2002) related to regional distribution center closures and workforce reductions
at the company's corporate headquarters. TruServ incurred restructuring charges
of $4,950,000 ($560,000 in the first quarter of 2001 and $4,390,000 in the
second quarter of 2001) during the first six months of 2001 related mainly to
severance for the Henderson, North Carolina distribution center closure and for
the headcount reductions at TruServ's corporate headquarters, and for facility
exit costs for the Henderson, North Carolina and Indianapolis, Indiana
distribution center closures. Use of previously established restructuring
reserves of $2,118,000 ($172,000 in the first quarter of 2001 and $1,946,000 in
the second quarter of 2001) mainly related to TruServ's various distribution
center closures and the headcount reductions at TruServ's corporate
headquarters.
7
Restructuring reserves summary:
For the twenty-six weeks ended
-----------------------------------------------------------------------------------------------------
June 29, 2002 June 30,2001
----------------------------------------------- -------------------------------------------------
Severance and Total Severance and Total
Outplacement Facility Restructuring Outplacement Facility Restructuring
Costs Exit Costs Reserve Costs Exit Costs Reserve
------------- ---------- ------------- ------------- ---------- -------------
(000's omitted)
Restructuring reserve,
beginning of period $ 8,270 $ 17,979 $ 26,249 $ 861 $ 1,051 $ 1,912
Q1 activity:
- -----------
Restructuring charge -- -- -- 560 -- 560
Use of reserves (1,864) (988) (2,852) (83) (89) (172)
-------- -------- -------- -------- -------- --------
Q2 activity:
- -----------
Restructuring charge 185 150 335 3,527 863 4,390
Restructuring reversal (94) -- (94) -- -- --
Use of reserves (1,498) (97) (1,595) (1,090) (856) (1,946)
-------- -------- -------- -------- -------- --------
Restructuring reserve,
end of period $ 4,999 $ 17,044 $ 22,043 $ 3,775 $ 969 $ 4,744
======== ======== ======== ======== ======== ========
8
NOTE 11 - 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:
9
THIRTEEN WEEKS ENDED JUNE 29, 2002
----------------------------------
(000'S OMITTED)
CONSOLIDATED
HARDWARE PAINT TOTALS
-------- ----- ------
Net sales to external customers $565,281 $ 32,575 $597,856
Interest expense 15,533 1,340 16,873
Depreciation and amortization 8,806 365 9,171
Segment net margin/(loss) 7,106 3,327 10,433
Expenditures for long-lived assets 4,539 171 4,710
THIRTEEN WEEKS ENDED JUNE 30, 2001
----------------------------------
(000'S OMITTED)
ELIMINATION
OF INTERSEGMENT CONSOLIDATED
HARDWARE PAINT OTHER ITEMS TOTALS
-------- ----- ----- -------------- ------------
(NOTE 12)
Net sales to external customers $ 681,838 $ 40,611 $ 25,316 $ -- $ 747,765
Intersegment sales -- 638 -- (638) --
Interest expense 15,663 1,064 175 -- 16,902
Depreciation and amortization 10,021 441 182 -- 10,644
Segment net margin/(loss) (133) 2,585 121 -- 2,573
Expenditures for long-lived assets 3,639 7 131 -- 3,777
TWENTY-SIX WEEKS ENDED JUNE 29, 2002
------------------------------------
(000'S OMITTED)
CONSOLIDATED
HARDWARE PAINT TOTALS
-------- ----- ------------
Net sales to external customers $1,091,324 $ 59,760 $1,151,084
Interest expense 29,937 2,488 32,425
Depreciation and amortization 17,795 727 18,522
Segment net margin/(loss) 8,626 6,455 15,081
Identifiable segment assets 877,461 60,552 938,013
Expenditures for long-lived assets 6,329 249 6,578
TWENTY-SIX WEEKS ENDED JUNE 30, 2001
------------------------------------
(000'S OMITTED)
ELIMINATION
OF INTERSEGMENT CONSOLIDATED
HARDWARE PAINT OTHER ITEMS TOTALS
-------- ----- ----- --------------- ------------
(NOTE 12)
Net sales to external customers $ 1,281,976 $ 69,060 $ 51,079 $ -- $ 1,402,115
Intersegment sales -- 1,185 -- (1,185) --
Interest expense 29,605 2,343 311 -- 32,259
Depreciation and amortization 20,113 878 355 -- 21,346
Segment net margin/(loss) (16,796) 5,192 241 -- (11,363)
Identifiable segment assets 1,092,710 69,604 25,066 -- 1,187,380
Expenditures for long-lived assets 6,553 272 164 -- 6,989
NOTE 12 - 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
10
Canadian operations generated revenue of $51,079,000 in the twenty-six weeks
ended June 30, 2001 and $84,397,000 in 2001 to its date of sale in October;
however, the sale of the business did not materially impact net margin.
NOTE 13 - NEW ACCOUNTING PRONOUNCEMENTS
In January 2002, TruServ adopted 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 For the twenty-six weeks ended
June 29, June 30, June 29, June 30,
2002 2001 2002 2001
-------- -------- -------- --------
(000's omitted)
Reported Net margin/(loss) $ 10,433 $ 2,573 $ 15,081 $(11,363)
Add back: Goodwill amortization -- 559 -- 1,288
-------- -------- -------- --------
Adjusted Net margin/(loss) $ 10,433 $ 3,132 $ 15,081 $(10,075)
======== ======== ======== ========
In August 2001, the Financial Accounting Standards Board ("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. In
addition, the adoption of this standard required TruServ to reclassify the
Brookings, South Dakota regional distribution center from Properties, net to
Other current assets in the second quarter of 2002 (Note 14).
In April, 2002, the FASB issued SFAS No. 145, "Rescission of FAS 4, 44 and 64,
Amendment of FAS 13 and Technical Corrections as of April 2002." SFAS No. 145
rescinds SFAS No. 4, "Reporting Gains and Losses from Extinguishment of Debt"
(eliminating the extraordinary treatment of gains or losses on debt modification
other than for certain exceptions), amends SFAS No. 64, "Extinguishments of Debt
Made to Satisfy Sinking-Fund Requirements," amends SFAS No. 13, "Accounting for
Leases" (to eliminate an inconsistency between the required accounting for
sale-leaseback transactions and the required accounting for certain lease
modifications that have economic effects that are similar to sale-leaseback
transactions) and amends other existing authoritative pronouncements (to make
various technical corrections, clarify meanings or describe their applicability
under changed conditions). SFAS No. 145 is effective for TruServ for fiscal 2003
but earlier application is encouraged. The Company is currently evaluating the
impact this standard will have on its financial statements.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal." SFAS No. 146 addresses financial accounting and
reporting for costs associated with exit or disposal activities and nullifies
Emerging Issues Task Force ("EITF") Issue No. 94-3, "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)." The principal difference
between SFAS No. 146 and EITF Issue No. 94-3 relates to the requirement for
recognition of a liability for a cost associated with an exit or disposal
activity. SFAS No. 146 requires that a liability for a cost associated with an
exit or disposal activity be recognized only when the liability is incurred;
under EITF Issue No. 94-3, a liability for an exit cost, as defined in EITF
Issue No. 94-3, was recognized at the date of an entity's commitment to an exit
plan. SFAS No. 146 also requires that a liability for a cost associated with an
exit or disposal activity be recognized and measured initially at fair value and
only when the liability is incurred. SFAS No. 146 is effective for TruServ for
any exit or disposal activities undertaken after December 15, 2002 but earlier
application is encouraged.
NOTE 14 - SUBSEQUENT EVENTS
In July 2002, TruServ received a payment of $16,900,000 from Builder Marts of
America, Inc. on a note receivable that it held in connection with the fiscal
2000 sale of the lumber and building materials business. The note, which had a
remaining balance of $17,000,000, as of June 29, 2002, was to be paid in annual
installments through December 31, 2007 and carried an interest rate of 7.75% per
annum. All but the remaining $100,000 of the note receivable has been classified
on the condensed consolidated balance sheet as Accounts and notes receivable.
On August 9, 2002, TruServ sold its Brookings, South Dakota regional
distribution center to Rainbow Play Systems Properties of Brookings, LLC for net
proceeds after all closing costs of $6,141,000.
In accordance with the amended intercreditor agreement, the proceeds from the
above describe transactions, along with other miscellaneous asset sale proceeds,
were used to pay down short-term borrowings and prepay long-term senior debt in
August 2002. Accordingly, the prepayment of long-term senior debt of $14,627,000
has been classified as a current maturity of long-term debt.
In July 2002, management announced its intention to retain ownership of its
paint manufacturing business. This business was on the market for the last year
with the intent of generating proceeds to pay down debt. Management believes
there are adequate alternative sources to meet the current lenders' debt
reduction target of June 30, 2003.
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
THIRTEEN WEEKS ENDED JUNE 29, 2002 COMPARED TO THIRTEEN WEEKS ENDED JUNE 30,
2001
A reconciliation of revenue and gross margin for the thirteen weeks ending June
29, 2002 and June 30, 2001 follows:
% of
Change in Gross GM %
(dollar amounts in thousands) Revenue Revenue Margin of revenue
--------- --------- -------- ----------
THIRTEEN WEEKS ENDED JUNE 30, 2001 RESULTS $ 747,765 $ 77,400 10.4%
--------- --------
Same store sales
Product price increases 3,823 2.6% 3,823
Warehouse and relay revenues (18,327) (12.2%) (1,952)
Vendor direct revenues (49,419) (33.0%) (528)
Terminated members (66,347) (44.3%) (8,659)
New members 6,330 4.2% 1,088
Lumber and building materials business (29) 0.0% 95
Canadian business (25,316) (16.9%) (3,645)
Advertising, transportation, and other revenues (624) (0.4%) (1,538)
Indirect cost of revenues - 0.0% 5,938
--------- --------- --------
Total change (149,909) (100.0%) (5,378)
--------- ========= --------
THIRTEEN WEEKS ENDED JUNE 29, 2002 RESULTS $ 597,856 $ 72,022 12.0%
========= ========
Revenues for the thirteen weeks ended June 29, 2002 totaled $597,856,000. This
represented a decrease in revenues of $149,909,000, or 20.0%, compared to the
same period last year. The key contributors to the decrease in revenue are the
11.0% decline in the number of participating member retail outlets, the loss of
same store sales, and the sale of TruServ Canada Cooperative, Inc. in October of
2001.
Gross margin for the thirteen weeks ended June 29, 2002 decreased by $5,378,000,
or 6.9%, over the prior year. Gross margin as a percent of revenue increased to
12.0% from 10.4% for the comparable period last year. The key contributors to
the decrease in gross margin dollars were the decline in the number of
participating member retail outlets and sold businesses. The unfavorable impacts
to gross margin were partially offset by product price increases along with the
indirect cost of revenues, which favorably impacted the gross margin dollars as
a result of distribution center closures and headcount reductions which reduced
the direct inbound logistics and labor and related overhead expenses incurred to
bring merchandise to the distribution centers.
Logistics and manufacturing expenses decreased $6,198,000, or 24.4%, as compared
to the same period last year. The sale of the Canadian operations accounted for
$3,282,000 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, headcount reductions due to a reduction in
the member base and other cost saving initiatives.
Selling, general and administrative ("SG&A") expenses decreased $2,769,000, or
9.5%, as compared to the same period last year. SG&A expenses were mainly
favorable due to lower bad debt expense of $2,850,000 due to better performing
receivables. Additional reductions in SG&A expenses for fiscal 2002 compared to
fiscal 2001 are due to $2,875,000 of lower non-restructuring severance and
related benefit costs due to non-restructuring separations that occurred in the
prior year and non-recurrence of $1,204,000 of workforce reduction costs at
TruServ's corporate headquarters. 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 second quarter of 2001 was $559,000. These favorable savings
were predominately offset by the adverse effect of the timing of the spring
market in May 2001 versus February 2002.
Restructuring expenses of $241,000 were incurred in the second quarter 2002.
These expenses related to additional outplacement costs at TruServ's corporate
headquarters of $185,000, plus additional facility exit costs at TruServ's
Hagerstown, Maryland distribution center of $150,000, offset by the reversal of
excess outplacement costs at TruServ's Hagerstown, Maryland and Brookings, South
Dakota distribution centers. Restructuring expenses of $4,390,000 in the second
quarter of 2001 related to
12
severance and outplacement costs of $3,527,000 mainly at TruServ's world
headquarters, and facility exit costs of $863,000 related to TruServ's
Indianapolis, Indiana and Henderson, North Carolina distribution center
closings.
Interest paid to members decreased by $289,000, or 14.6%, 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. Non-member
interest expense increased $260,000, or 1.7%, as compared to the same period
last year. This increase is due to higher bank fees of $1,423,000 and higher
interest rates causing an incremental increase in expense of $384,000 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. These increased bank fees and
interest rates were partially offset by lower interest expense of $1,547,000
from the lower average principal balance of senior debt outstanding as compared
to the same period last year.
The quarter resulted in net margin of $10,433,000 up from net margin of
$2,573,000 from the same period a year ago. Net margin was favorably impacted by
the results of the closure of regional distribution centers and headcount
reductions that occurred from the restructuring activities in 2001, the
non-recurrence of the significant 2001 restructuring charges, along with better
gross margin results that are partially offset by the loss of participating
member retail outlets.
TWENTY-SIX WEEKS ENDED JUNE 29, 2002 COMPARED TO TWENTY-SIX WEEKS ENDED JUNE 30,
2001
A reconciliation of revenue and gross margin for the twenty-six weeks ending
June 29, 2002 and June 30, 2001 follows:
% of
Change in Gross GM %
(dollar amounts in thousands) Revenue Revenue Margin of revenue
--------- --------- -------- ----------
TWENTY-SIX WEEKS ENDED JUNE 30, 2001 RESULTS $ 1,402,115 $ 128,050 9.1%
----------- ---------
Same store sales
Product price increases 6,350 2.5% 6,350
Warehouse and relay revenues (32,776) (13.0%) (1,843)
Vendor direct revenues (42,941) (17.1%) (456)
Terminated members (118,221) (47.1%) (14,846)
New members 12,847 5.1% 1,935
Lumber and building materials business (21,262) (8.5%) (308)
Canadian business (51,079) (20.3%) (7,251)
Advertising, transportation, and other revenues (3,949) (1.6%) 2,240
Indirect cost of revenues - 0.0% 10,282
----------- ------------ ---------
Total change (251,031) (100.0%) (3,897)
----------- ============ ---------
TWENTY-SIX WEEKS ENDED JUNE 29, 2002 RESULTS $ 1,151,084 $ 124,153 10.8%
=========== =========
Revenues for the twenty-six weeks ended June 29, 2002 totaled $1,151,084,000.
This represented a decrease in revenues of $251,031,000, or 17.9%, compared to
the same period last year. The key contributors to the decrease in revenue are
the 11.9% decline in the number of participating member retail outlets, the loss
of same store sales, the sale of TruServ Canada Cooperative, Inc. in October of
2001, and the residual 2001 lumber sales from the lumber and building materials
business that was sold to Builder Marts of America, Inc. in December 2000.
Gross margin for the twenty-six weeks ended June 29, 2002 decreased by
$3,897,000, or 3.0%, over the prior year. Gross margin as a percent of revenue
increased to 10.8% from 9.1% for the comparable period last year. The key
contributors to the decrease in gross margin dollars were the decline in the
number of participating member retail outlets and sold businesses. The
unfavorable impacts to gross margin were partially offset by product price
increases along with the indirect cost of revenues which 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.
Logistics and manufacturing expenses decreased $12,617,000, or 27.8%, as
compared to the same period last year. The sale of the Canadian operations
accounted for $6,702,000 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, headcount
reductions due to a reduction in the member base and other cost saving
initiatives.
13
Selling, general and administrative ("SG&A") expenses decreased $12,688,000, or
21.7%, as compared to the same period last year. SG&A expenses were mainly
favorable due to lower bad debt expense of $3,153,000 due to better performing
receivables. Additional reductions in SG&A for fiscal 2002 compared to fiscal
2001 are due to lower non-restructuring severance and related benefit costs of
$3,368,000 due to non-restructuring separations that occurred in the prior year,
and workforce reductions at TruServ's corporate headquarters of $3,276,000 that
occurred in the prior 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 half of 2001 was $1,288,000.
Restructuring expenses of $241,000 incurred in the twenty-six weeks ended June
29, 2002 relate to additional outplacement costs at TruServ's corporate
headquarters of $185,000 plus additional facility exit costs at TruServ's
Hagerstown, Maryland distribution center of $150,000, offset by the reversal of
excess outplacement cost at TruServ's Hagerstown, Maryland and Brookings, North
Dakota distribution centers. Restructuring expenses of $4,950,000 for the same
period ended June 30, 2001 related to regional distribution center closings and
workforce reductions at TruServ's corporate headquarters.
Interest paid to members decreased by $576,000, 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. Non-member
interest expense increased $742,000, or 2.6%, as compared to the same period
last year. This increase is due to higher bank fees of $2,128,000 and higher
interest rates causing an incremental increase in expense of $1,710,000 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. These increased bank fees and
interest rates were partially offset by lower interest expense of $3,096,000
from the lower average principal balance of senior debt outstanding as compared
to the same period last year.
The first six months resulted in net margin of $15,081,000 up from a net loss of
$11,363,000 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 non-recurrence of the
significant 2001 restructuring charges, along with better gross margin results
that were partially offset by the loss of participating member retail outlets.
LIQUIDITY AND CAPITAL RESOURCES
The Securities and Exchange Commission ("SEC") recently issued Financial
Reporting Release ("FRR") 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 the
information in TruServ's 2001 Annual Report on Form 10-K, fulfills the
requirement of FRR 61 by describing TruServ's debt, credit facilities,
guarantees and future commitments in order to facilitate a review of TruServ's
liquidity.
Cash provided by operating activities for the twenty-six weeks ended June 29,
2002 was $47,051,000, compared to cash provided of $101,086,000 for the
twenty-six weeks ended June 30, 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 $61,000,000 remaining
accounts receivable from the lumber and building materials business which was
sold in December 2000. The use of cash provided by the increase in accounts
payable and the reduction of inventory was partially offset by the use of cash
for accounts receivable during the first half of 2002 reflecting the normal
seasonal nature of the business.
Investing activities used cash of $84,000 for the twenty-six weeks ended June
29, 2002, compared to cash used of $6,293,000 for the same period last year.
Additions to owned properties used cash of $6,578,000, which is down $411,000
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. Additional use of cash was in changes in other assets of
$2,709,000 compared to cash provided in 2001 of $746,000. Also restricted cash
decreased, which generated cash of $8,973,000 compared to an increase of
$130,000 for the same period last year, as asset sale proceeds were distributed
during 2002 to the senior lenders in accordance with the intercreditor
agreement.
In the twenty-six weeks ended June 29, 2002, TruServ had a net decrease in cash
and cash equivalents of $75,381,000. This decrease was primarily related to
excess cash being used to pay down the revolver when the debt amendments were
completed and is only borrowing its daily need for cash against the revolving
credit facility. TruServ had held the revolver borrowing level at $140,000,000
since September 2001. In the twenty-six weeks ended June 30, 2001 TruServ had a
net decrease in cash and cash equivalents of $1,933,000. In the first six months
of 2001, TruServ's cash flow generated by operating activities was primarily
used for its financing activities.
At June 29, 2002, TruServ's working capital was $52,698,000, as compared to
$18,252,000 at December 31, 2001. The current ratio was 1.09 at June 29, 2002,
as compared to 1.03 at December 31, 2001.
14
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
remained at $200,000,000. 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. Since April 11, 2002, the revolving credit
facility has been reduced and was $196,065,000 at June 29, 2002 and is at
$187,221,000 as of August 13, 2002, due to prepayments from asset sales in 2002.
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. These prepayments on the senior notes are
subject to make-whole provisions or a premium related to accelerated debt
prepayment. 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 prepayments to senior note holders were
$6,507,000 in the second quarter 2002, resulting in make-whole liabilities of
$1,745,000, which are recorded as additional debt offset by a contra account to
debt in the second quarter 2002. The contra account will be amortized to
interest expense over the remaining life of the original note. Under the terms
of the amended senior note agreements, in the event of early termination of the
note agreements, make-whole liabilities may be triggered based on certain
circumstances and then prevailing market interest rates relative to the interest
rates on the senior notes.
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. TruServ intends to attain this
reduced level of senior debt outstanding by June 30, 2003 by entering into
sale/lease-back transactions or mortgages on various regional distribution
centers along with using proceeds from operations. 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 agreements. 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 is in
compliance with all covenants as of June 29, 2002.
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 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 showed that
Goodwill was not impaired. The analysis was completed using discounted cash
flows. The discount
15
rate used was a blended senior debt borrowing rate of 13.3%. The allocation of
debt to the Paint segment assumed a debt capacity of 2.5 times EBITDA with the
remainder of the debt carried by the Hardware segment. Revenue and Earnings
before Interest and Taxes ("EBIT") are estimated to attain plan for Fiscal Year
2002 and 2003 and for future years are expected to decline by 3.0%. While
TruServ believes that these are reasonable assumptions, a decline in EBIT below
plan due to lower revenue or higher expenses from plan 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 $74,403,000 at June 29, 2002. A 50 basis point movement
in the interest rates would result in an approximate $372,000 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"). All related party transactions are at arms length,
which are primarily product and service sales to shareholders of TruServ.
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 complaints state 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. The parties have entered into
settlement negotiations, but a final settlement has not been reached at this
time and no assurances can be given that one will be entered into.
In May 2000, TruServ filed a complaint in the Circuit Court of McHenry County,
Illinois against Bess Hardware and Sports, Inc., ("Bess") to recover an accounts
receivable balance in excess of $400,000. Bess filed a counterclaim, seeking a
setoff against its accounts receivable balance for the par redemption value of
Bess' shares of TruServ Stock. Bess contested the validity of a March 17, 2000,
corporate resolution declaring a moratorium on the redemption of all TruServ
capital stock, as well as an allocation of Bess' proportionate share of the loss
which TruServ declared for its fiscal year 1999. On June 21, 2002, the court
issued an oral ruling granting summary judgment to TruServ on its accounts
receivable claim, and granting summary judgment to Bess
on its counterclaim. The judgement was entered on August 6, 2002. TruServ
believes that the court's ruling is not supported by either the facts or
Delaware corporate law and TruServ has asked the court to reconsider and reverse
its ruling.
TruServ intends to vigorously defend all of these cases.
In June 2002, TruServ reached a confidential settlement with Paul Pentz, a
former president of TruServ, which TruServ found to be satisfactory. Mr. Pentz,
in October 1999, had filed a claim in the Circuit Court of the 20th Judicial
Circuit (Collier County, Florida) against TruServ alleging he was 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 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.
16
On May 24, 2002, TruServ filed a Form 8-K in which it disclosed that the
Midwest Regional Office of the Securities and Exchange Commission (the
"Commission") intended to recommend to the Commission an enforcement proceeding
against TruServ seeking a Cease and Desist Order relating to the 1999 loss and
to the deficiencies in TruServ's internal controls. TruServ has entered into
negotiations with the Commission staff and is in the process of making an Offer
of Settlement to the Commission in connection with the Commission's
investigation of these matters. TruServ will make such Offer of Settlement
without admitting or denying the findings in any Commission Order. If the
Commission accepts TruServ's Offer of Settlement, TruServ will be subject to a
Cease and Desist Order requiring it to maintain books and records in conformance
with the requirements of the Securities Exchange Act of 1934 and to undertake
certain other ancillary procedures.
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 prohibited redemptions when TruServ, among other things, did
not attain certain profit margins.
TruServ's amended debt agreements preclude the lifting of the stock moratorium
during the term of the agreement, which expires June 30, 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 June 29, 2002, the amount of Class A common stock and Class B common stock
presented for redemption but deferred due to the moratorium is approximately
$38,182,000 after the offset of the loss allocation account. The $38,182,000
includes approximately $13,626,000 related to the Class A common stock
historically paid out at the time of redemption and $48,686,000 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 $24,130,000.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the company's Annual Meeting of Stockholders held on May 30, 2002,
the election results were as follows:
1. Election of directors for a term of one year:
Votes for Votes Withheld
Bryan R. Ableidinger 198,780 15,540
Laurence L. Anderson 195,840 18,480
J.W. Blagg 197,280 17,040
Peter G. Kelly 194,700 19,620
Robert J. Ladner 196,620 17,700
Pamela Forbes Lieberman 197,760 16,560
David Y. Schwartz 194,040 20,280
George V. Sheffer 196,380 17,940
Gilbert L. Wachsman 196,080 18,240
17
2. Appointment of PricewaterhouseCoopers LLP as the company's
independent accountant for fiscal 2002:
For Against Abstain
----- ---------- ---------
203,160 6,180 4,980
3. Approval of proxy authorization to vote on other business:
For Against Abstain
----- ---------- ---------
183,180 20,640 10,500
ITEM 5. OTHER INFORMATION.
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 99.1 Section 906 Certification (Chief Executive Officer)
Exhibit 99.2 Section 906 Certification (Chief Financial Officer)
(b) Current Reports on Form 8-K, filed April 12, 2002, April 17,
2002, May 3, 2002, May 20, 2002, May 24, 2002, and June 19, 2002.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
TRUSERV CORPORATION
Date: September 4, 2002 By /s/DAVID A. SHADDUCK
-----------------------
David A. Shadduck
Senior Vice President and
Chief Financial Officer
19