<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 27, 1997 or
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 2-20910
TRUSERV CORPORATION
(Exact name of the 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 October 25, 1997.
Class A Common Stock, $100 Par Value 548,567 Shares
Class B Common Stock, $100 Par Value 1,787,304 Shares
<PAGE> 2
TRUSERV CORPORATION
-------------------
TABLE OF CONTENTS
-----------------
<TABLE>
PAGE
NUMBER
------
PART I - FINANCIAL INFORMATION
<S> <C>
Important Explanatory Note 3
Condensed Consolidated Balance Sheets as of
September 27, 1997 and December 28, 1996. 4
Condensed Consolidated Statements of Operations
for the Thirteen Weeks Ended September 27, 1997
and September 28, 1996 and the Thirty-Nine Weeks
Ended September 27, 1997 and September 28, 1996. 6
Condensed Consolidated Statements of Cash Flows
for the Thirty-Nine Weeks Ended September 27,
1997 and September 28,1996. 7
Notes to Condensed Consolidated Financial
Statements 8
Management's Discussion and Analysis of
Financial Condition and Results of
Operations. 10
PART II - OTHER INFORMATION
Submission of Matters to a Vote of Security
Holders 14
Exhibits and Reports on Form 8-K 15
SIGNATURE 16
</TABLE>
<PAGE> 3
TRUSERV CORPORATION
-------------------
IMPORTANT EXPLANATORY NOTE
--------------------------
On July 1, 1997, TruServ Corporation ( the "Company"), formerly
Cotter & Company, merged with Servistar Coast to Coast Corporation
("SCC" ) (the "Merger"). The transaction was accounted for using
the purchase accounting method. The Condensed Consolidated Balance
Sheet as of September 27, 1997 reflects the post-Merger Company.
The Condensed Consolidated Balance Sheet as of December 28, 1996
reflects the pre-Merger Company. The financial information for
the thirteen weeks ended September 27, 1997, reflects the
post-Merger results of theCompany. The thirty-nine weeks ended
September 27, 1997 reflect the results of the pre-Merger Company
for the twenty-six weeks ended June 28, 1997 and the results of
the post-Merger Company for the thirteen weeks ended September
27, 1997. The thirteen weeks and thirty-nine weeks ended
September 28, 1996 reflect the financial information of the
pre-Merger Company only.
<PAGE> 4
PART 1 - FINANCIAL INFORMATION
------------------------------
Item 1. FINANCIAL STATEMENTS
TRUSERV CORPORATION
-------------------
CONDENSED CONSOLIDATED BALANCE SHEETS
-------------------------------------
(000'S OMITTED)
<TABLE>
<CAPTION>
September 27, December 28,
1997 1996
------------- ------------
(UNAUDITED) (AUDITED)
<S> <C> <C>
ASSETS
- ------
Current Assets:
Cash and cash equivalents $ 4,876 $ 1,662
Accounts and notes receivable 489,710 307,205
Inventories 555,847 347,554
Prepaid expenses 28,215 13,517
------------ -----------
Total current assets 1,078,648 669,938
Properties owned,
less accumulated depreciation 255,303 167,331
Properties under capital leases,
less accumulated amortization 2,641 3,680
Goodwill, net 114,250 -
Other assets 27,754 13,036
------------ -----------
TOTAL ASSETS $ 1,478,596 $ 853,985
============ ===========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
<PAGE> 5
TRUSERV CORPORATION
-------------------
CONDENSED CONSOLIDATED BALANCE SHEETS
-------------------------------------
(000'S OMITTED)
<TABLE>
<CAPTION>
September 27, December 28,
1997 1996
------------- ------------
(UNAUDITED) (AUDITED)
<S> <C> <C>
LIABILITIES AND CAPITALIZATION
- ------------------------------
Current liabilities:
Accounts payable and accrued expenses $618,655 $338,440
Short-term borrowings 251,117 70,594
Current maturities of notes,
long term debt and lease obligation 46,854 43,458
Patronage dividends payable in cash 10,890 16,142
-------- --------
Total current liabilities 927,516 468,634
-------- --------
Long-term debt and obligations under
capital leases 130,803 80,145
--------- --------
Capitalization:
Estimated patronage dividend payable 3,380 -
Promissory (subordinated) and
installment notes 181,568 185,366
Class A common stock and partially
paid subscriptions (Authorized
100,000 shares; issued and fully
paid, 549,007 and 48,480 shares) 42,859 4,876
Class B nonvoting common stock and
paid-in capital (Authorized
4,000,000 shares: issued and fully
paid, 1,789,224 and 1,043,521 shares;
issuable as partial payment of
patronage dividend, 105,160 and
84,194 shares respectively) 191,370 114,053
Retained Earnings 2,001 1,751
---------- ---------
421,178 306,046
Foreign currency translation
adjustment (901) (840)
---------- ---------
Total capitalization 420,277 305,206
---------- ---------
TOTAL LIABILITIES AND CAPITALIZATION $1,478,596 $ 853,985
========== =========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
<PAGE> 6
TRUSERV CORPORATION
-------------------
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
-----------------------------------------------
(000'S OMITTED
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THIRTEEN FOR THE THIRTY-NINE
WEEKS ENDED WEEKS ENDED
----------------------- ----------------------
September September September September
27, 28, 27, 28,
1997 1996 1997 1996
----------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
Revenue $1,036,622 $599,893 $2,243,388 $1,822,901
Cost and expenses:
Cost of revenues 952,086 543,983 2,068,005 1,678,480
Warehouse, general
and administrative 66,316 36,773 127,725 98,787
Interest paid to
Members 4,237 4,393 12,789 13,778
Other interest expense 5,979 2,721 12,484 7,606
Other income, net 455 311 (14) 135
Income tax expense 160 160 101 480
----------- --------- ---------- ----------
1,029,233 588,341 2,221,090 1,799,266
----------- --------- ---------- ----------
Net margin before
merger integration cost 7,389 11,552 22,298 23,635
Merger integration costs 1,562 - 3,594 -
----------- --------- ---------- ----------
Net margins $ 5,827 $ 11,552 $ 18,704 $ 23,635
=========== ========== ========== ==========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
<PAGE> 7
TRUSERV CORPORATION
-------------------
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
-----------------------------------------------
FOR THE THIRTY-NINE WEEKS ENDED
-------------------------------
(000's Omitted)
(UNAUDITED)
<TABLE>
<CAPTION>
September 27, September 28,
1997 1996
------------- -------------
<S> <C> <C>
Operating activities:
Net margins $18,704 $ 23,635
Adjustments to reconcile to cash and
cash equivalents from operating
activities:
Statement of operations components
not affecting cash and cash
equivalents 19,931 18,828
Net change in working capital
components, net of acquisition (41,802) (100,410)
---------- ---------
Net cash and cash equivalents
used for operating activitie (3,167) (57,947)
---------- ----------
Investing activities:
Additions to properties owned (27,509) (16,487)
Proceeds from sale of properties owned 1,100 210
Changes in other assets (1,639) 3,973
---------- ----------
Net cash and cash equivalents used
for investing activities (28,048) (12,304)
---------- ----------
Financing activities:
Proceeds from short-term borrowings 180,523 75,382
Proceeds from long-term borrowings 52,371 -
Payment of patronage dividend (20,699) (18,315)
Purchase of common stock, net (19,530) (468)
Payment of notes, long-term debt and
lease obligations (158,236) (7,251)
---------- ----------
Net cash and cash equivalents
provided by financing activities 34,429 49,348
---------- ----------
Net increase (decrease) in cash and
cash equivalents 3,214 (20,903)
Cash and cash equivalents at beginning
of the period 1,662 22,473
---------- ----------
Cash and cash equivalents at end of
the period $ 4,876 $ 1,570
========== ==========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
<PAGE> 8
TRUSERV CORPORATION
-------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
(UNAUDITED)
NOTE 1 - BUSINESS COMBINATIONS
On July 1, 1997, pursuant to an Agreement and Plan of Merger dated
December 9, 1996 between Cotter & Company ("Cotter"), a Delaware
corporation and Servistar Coast to Coast ("SCC"). SCC merged with
and into Cotter, with Cotter being the surviving corporation
(the "Merger"). Cotter was renamed TruServ Corporation ("TruServ"
or the "Company"), effective with the Merger. Each outstanding
share of SCC Common Stock and SCC Series A Stock (excluding those
shares canceled pursuant to Article III of the Merger Agreement)
were converted into the right to receive one fully paid and
nonassessable share of TruServ Class A Common Stock and each two
outstanding shares of SCC Preferred Stock were converted into the
right to receive one fully paid and nonassessable share of TruServ
Class B Common Stock. A total of 270,498 and 1,065,510 shares of
TruServ Class A Common Stock and Class B Common Stock, respectively,
were issued in connection with the Merger. Also 238,550 additional
shares of TruServ Class A Common Stock were purchased by pre-Merger
Stockholders of Cotter to satisfy the Class A Common Stock ownership
requirement of 60 shares per store (up to a maximum of 5 stores)
applicable to such Members as a result of the Merger. The transaction
was accounted for using the purchase accounting method.
Immediately following the Merger, the number of outstanding Shares
was 556,758 and 1,915,793 for TruServ Class A Common Stock and
Class B Common Stock, respectively.
To refinance the existing debt of SCC and pay related fees and
expenses,the Company entered into a revolving loan agreement of
up to $300.0 million in short-term credit facilities with a
group of banks and an additional $50.0 million private
long-term debt placement.
The total purchase price of approximately $139.0 million was allocated
to assets and liabilities of the Company based on the estimated fair
value as of the date of acquisition. The allocation was based on
preliminary estimates which may be revised at a later date. The
excess of consideration paid over the estimated fair value of net
assets acquired in the amount of $115.0 million has been recorded
as goodwill and is being amortized on a straight-line basis over
forty years.
In connection with the purchase business combination, an estimated
liability of $34.7 million was recognized for costs associated
with the Merger plan. The consolidation plan specifies that certain
former SCC corporate positions, approximately 1,200 in total,
will be eliminated substantially within one year. As of September
27, 1997, approximately 15% of these employees have been terminated
with the related benefits of approximately $1.8 million charged
against the liability. The Merger plan specifies the closing of
redundant former SCC distribution centers and the elimination of
overlapping former SCC inventory items stockkeeping units
substantially within a one-year period. Distribution centers
closing costs include net occupancy and costs after facilities
are vacated. In addition, stockkeeping unit reduction costs
include losses on the sale of inventory items which have been
discontinued solely as a result of the Merger. As of September
27, 1997 no amounts relating to distribution center closing cost
and the reduction of stockkeeping units have been charged
against the liability.
The Condensed Consolidated Balance Sheet as of September 27, 1997
reflects the post-Merger Company. The Condensed Consolidated
Balance Sheet as of December 28, 1996 reflects the pre-Merger
Company. The financial information for the thirteen weeks ended
September 27, 1997, reflects the post-Merger results of the Company.
The thirty-nine weeks ended September
<PAGE> 9
27, 1997 reflect the results of the pre-Merger Company for
the twenty-six weeks ended June 28, 1997 and the results of
the post-Merger Company for the thirteen weeks ended September
27, 1997. The thirteen weeks and thirty-nine weeks ended
September 28, 1996 reflect the financial information of the
pre-Merger Company only.
The results for the thirty-nine weeks ended September 27, 1997
include merger integration cost of $3.6 million. As of September
27, 1997, certain corporate positions have been eliminated which
total $0.6 million. The Merger integration cost also includes
distribution center closing costs totaling $1.5 million.
The following summarized unaudited pro forma operating data for the
thirty-nine weeks ended September 27, 1997 and September 28, 1996
are presented giving effect to the Merger, as if it had been
consummated at the beginning of the respective periods, and
therefore, reflect the results of the Company and SCC on a
consolidated basis. These pro forma results have been prepared
for comparative purposes only and do not purport to be indicative of
the results of operations that actually would have resulted had the
Merger been in effect on the dates indicated, or which may result
in the future. The pro forma results exclude one-time non-recurring
charges or credits directly attributable to the transaction.
The pro forma adjustment consisted of (i) an adjustment for amortization
of the estimated excess of cost over the fair value of the net assets
of SCC, (ii) an adjustment for interest expense on promissory notes to
be issued in connection with the Merger, (iii) adjustment for
interest expenses on short-term borrowings to be issued in connection
with the Merger and (iv) an adjustment for incremental differences
in depreciation expense.
<TABLE>
<CAPTION>
PRO FORMA
-----------------------------------
THIRTY-NINE WEEKS ENDED
-----------------------------------
(000'sS OMITTED)
September 27, September 28,
1997 1996
--------------- ---------------
<S> <C> <C>
Revenue $3,135,917 $3,168,264
========== ==========
Net margin $ 33,289 $ 39,997
========== ==========
</TABLE>
NOTE 2 - GENERAL
- ----------------
The condensed consolidated balance sheet as of September 27, 1997
and the statements of operations for the thirteen and thirty-nine
week periods and cash flows for the thirty-nine week periods ended
September 27, 1997 and September 28, 1996 are unaudited.
In the opinion of the management of the Company, these financial
statements include all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation of
financial position, results of operations and cash flow for the
respective interim periods. The accompanying condensed consolidated
financial statements have been prepared in accordance with the
rules and regulation of the Securities and Exchange Commission.
Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for
complete financial statements. This financial information should be
read in conjunction with the consolidated financial statements for
the year ended December 28, 1996 included in the Company's
Post-Effective Amendment No. 6 to Form S-2 Registration Statement
(No. 33-39477) and in the Company's 1996 Annual Report on Form 10-K.
NOTE 3 - PATRONAGE DIVIDENDS
- ----------------------------
In accordance with the Merger Agreement, patronage dividends earned
through June 28, 1997 were declared, and paid to former Cotter Members
in the third quarter of 1997. The patronage dividend was distributed
through a payment of 30% of the total distribution in cash with the
balance being paid through the issuance of the Company's Class B
nonvoting common stock in accordance with the patronage dividend
policy that was changed effective in January, 1997 to increase the
Class B nonvoting common stock requirements after payment of at
least 20% in cash. Any further distributions after meeting the
Class B Common Stock requirements will be in cash rather than
in promissory notes. Such patronage dividends, consisting of
substantially all of the Company's patronage source income,
have been paid since 1949.The estimated patronage dividend for
the thirteen weeks ended September 27, 1997 is
<PAGE> 10
$5,670,000 plus the dividend declared and paid for the twenty-six
weeks ended June 28, 1997 is $18,684,000 compared to $23,584,000
for the corresponding period in 1996.
The SCC pre-Merger patronage dividend of $19,843,000 was paid to
former SCC dealers subsequent to the third quarter. At September
27, 1997, $8,334,000 of the total dividend was payable in cash
with the remaining amount payable in Class B Common Stock of the
Company.
Patronage dividends will be determined at the end of each fiscal year
for the former Cotter Members and the former SCC Members, respectively,
as specified in the Merger Agreement.
NOTE 4- INVENTORIES
- -------------------
Inventories consisted of:
<TABLE>
<CAPTION>
September 27, December 28,
1997 1996
------------- ------------
(UNAUDITED)
(000's OMITTED)
<S> <C> <C>
Manufacturing inventories:
Raw materials $ 2,997 $ 2,797
Work-in-process and
finished goods 29,740 24,558
---------- ----------
32,737 27,355
Merchandise inventories 523,110 320,199
---------- ----------
$ 555,847 $ 347,554
========== ==========
</TABLE>
Item 2. MANAGEMENT `S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
------------------------------------------------------------
AND RESULTS OF OPERATIONS
-------------------------
BUSINESS COMBINATION
- --------------------
On July 1, 1997, TruServ Corporation (the "Company"), formerly Cotter
& Company, merged with Servistar Coast to Coast Corporation ("SCC")
(the "Merger"). The transaction was accounted for using the purchase
accounting method. Accordingly, the financial information for the
thirteen weeks ended September 27, 1997 reflects the results of the
post-Merger Company and the financial information for the thirty-nine
weeks ended September 27, 1997 reflects the results of the pre-Merger
Company for the twenty-six weeks ended June 28, 1997 and the results
of the post-Merger Company for the thirteen weeks ended September 27,
1997. To facilitate the comparison of interim results for 1997 and
1996, supplemental comparisons have been provided using pro forma
financial information. This pro forma information has been prepared
for comparative purposes only and does not purport to be indicative
of the results of operation that actually would have resulted had the
Merger been in effect on the dates indicated, or which may result in
the future.
<TABLE>
<CAPTION>
THIRTY-NINE WEEKS ENDED
--------------------------------------------------------
September 27, 1997 September 28,1996
--------------------- ---------------------------------
Pro Forma Pro Forma Pro Forma
Actual (1) Actual (2) (1)
---------- ---------- ---------- ---------- ----------
(000's OMITTED)
<S> <C> <C> <C> <C> <C>
Revenue $2,243,388 $3,135,917 $1,822,901 $2,287,434 $3,168,264
Gross margin 175,383 218,719 144,421 181,974 236,874
Warehouse, general
and administrative 127,725 154,732 98,787 131,194 170,147
Interest expense 25,273 31,767 21,384 24,318 30,013
Merger integration
cost 3,594 - - - -
Net margin 18,704 33,289 23,635 26,569 39,997
</TABLE>
(1) Assumes the Merger was consummated on January 1.
(2) Assumes the Merger was consummated on July 1.
<PAGE> 11
ACTUAL THIRTY-NINE WEEKS ENDED SEPTEMBER 27, 1997 COMPARED TO ACTUAL
- --------------------------------------------------------------------
THIRTY-NINE WEEKS ENDED SEPTEMBER 28, 1996
- ------------------------------------------
RESULTS OF OPERATIONS:
- ----------------------
Revenues for the thirty-nine weeks ended September 27, 1997 totaled
$2,243,388,000. This represented an increase of $420,487,000 or 23.1%
compared to the same period last year. The increase was due to the
addition of Servistar Coast to Coast revenues that resulted from
the July 1, 1997 merger of Cotter and SCC.
Gross margins increased by $30,962,000 or 21.4% and as a percentage of
revenues, declined from 7.9% to 7.8% for the same period last year.
Much of the percentage reduction resulted from a change in the sales
mix between Stock, Relay and Direct Shipment Sales partially offset
by an increase in sales volume. The dollar increase in gross margin
is due to the combination of Servistar Coast to Coast that resulted
from the July 1, 1997 Merger of Cotter and SCC.
Warehouse, general and administrative expenses increased by
$28,938,000 and, as a percentage of revenues increased to
5.7% from 5.4% compared with the prior year. The increase was attributed
to the increase in operating costs resulting from the Merger. Many of
potential cost efficiencies related to the Merger have not yet been
realized and costs should be reduced as the Merger strategy is
implemented.
Interest paid to Members decreased by $989,000 or 7.2% primarily due
to a lower average interest rate. Other interest expense increased
$4,878,000 due to higher borrowings compared to the same period last
year. The higher borrowings was required because of the increased
cash requirement resulting from the Merger and increased inventory
levels. The effective borrowing rate has been lowered due to the
renegotiation of the borrowing rates since the date of the Merger.
Merger integration costs consisted of expenses incurred with the
consolidation and elimination of certain functions due to the
aforementioned Merger.
The combination of decreased gross margins, increase of expenses
and increased borrowing costs, resulted in a net margin of
$18,704,000 compared to $23,635,000 for the same period last year.
ACTUAL THIRTY-NINE WEEKS ENDED SEPTEMBER 27, 1997 COMPARED TO PRO FORMA
- -----------------------------------------------------------------------
THIRTY-NINE WEEKS ENDED SEPTEMBER 28, 1996 ASSUMING THE MERGER WAS
- ------------------------------------------------------------------
CONSUMMATED JULY 1, 1996
- ------------------------
RESULTS OF OPERATIONS:
- ----------------------
Revenues for the thirty-nine weeks ended September 27, 1997 totaled
$2,243,388,000. This represented a decrease of $43,996,000 or 1.9%
compared to the same period last year. The decrease was due to seasonal
merchandise which was affected by adverse weather conditions.
Gross margins decreased by $6,591,000 or 3.6% and as a percentage of
revenues, declined from 8.0% to 7.8% for the same period last year.
The reduction resulted from the decrease in sales volume plus a change
in the sale mix between Stock, Relay and Direct Shipment Sales.
Warehouse, general and administrative expenses decreased by $3,469,000
and, as a percentage of revenues remained comparable with prior year.
The decrease was attributed to the Company's continued efforts to
reduce operating costs through reduction of duplicate office and
distribution center functions.
Interest paid to Members decreased by $1,189,000 or 8.5% primarily
due to a lower average interest rate. Other interest expense
increased $2,144,000 or 20.7% due to higher borrowings compared to
the same period last year. The higher borrowings was required
because of the increased cash requirement to increase inventory
levels to provide improved service levels to the Members.
<PAGE> 12
Merger integration costs consisted of expenses incurred with the
consolidation and restructuring of certain functions due to the
aforementioned Merger.
The combination of decreased gross margin and increased
borrowing costs, resulted in a net margin of $18,704,000
compared to $26,569,000 for the same period last year.
PRO FORMA THIRTY-NINE WEEKS ENDED SEPTEMBER 27, 1997 COMPARED TO
- ----------------------------------------------------------------
PRO FORMA THIRTY-NINE WEEKS ENDED SEPTEMBER 28, 1996 ASSUMING THE
- -----------------------------------------------------------------
MERGER WAS CONSUMMATED JANUARY 1
- ---------------------------------
RESULTS OF OPERATIONS:
- ----------------------
Revenues for the thirty-nine weeks ended September 27, 1997 totaled
$3,135,917,000. This represented a decrease of $32,347,000 or 1.0%
compared to the same period last year. The decrease was due to
seasonal merchandise which was affected by adverse weather conditions.
Gross margins decreased by $18,155,000 or 7.7% and as a percentage of
revenues, declined from 7.5% to 6.9% for the same period last year.
The reduction resulted from the decrease in sales volume plus a change
in the sale mix between Stock, Relay and Direct Shipment Sales.
Warehouse, general and administrative expenses decreased by $15,415,000
or 9.1% and, as a percentage of revenues decreased from 5.4% to 4.9%.
The decrease was attributed to the Company's continued efforts to
reduce operating costs through reduction of duplicate office and
distribution center functions.
Interest paid to Members decreased by $1,189,000 or 8.3% primarily due
to a lower average interest rate. Other interest expense increased
$2,943,000 or 18.8% due to higher borrowings compared to the same
period last year. The higher borrowings were required because of
of the need to increase inventory levels to provide improved service
levels to the Members.
The combination of decreased gross margin and increased borrowing
costs partially offset by operating expenses decreases resulted
in a net margin of $33,289,000 compared to $39,997,000 for the
same period last year.
<TABLE>
<CAPTION>
THIRTEEN WEEKS ENDED
-----------------------------------------
September 27, Septeber 28,1996
1997 -------------------------
Actual Actual Pro Forma (1)
------------- ---------- -------------
<S> <C> <C> <C>
Revenue $ 1,036,622 $ 599,893 $ 1,064,376
Gross margins 84,536 55,910 93,463
Warehouse, general and
administrative expense 66,316 36,773 69,180
Interest expense 10,216 7,114 10,048
Merger integration cost 1,562 - -
Net margin 5,827 11,552 14,486
</TABLE>
(1) Assumes the Merger was consummated at July 1.
<PAGE> 13
ACTUAL THIRTEEN WEEKS ENDED SEPTEMBER 27, 1997 COMPARED TO ACTUAL THIRTEEN
- --------------------------------------------------------------------------
WEEKS ENDED SEPTEMBER 28, 1996
- ------------------------------
RESULTS OF OPERATIONS:
- ----------------------
Revenues for the thirteen weeks ended September 27, 1997 totaled
$1,036,622,000. This represented an increase of $436,729,000 or
72.8% compared to the same period last year. The increase was
due to the addition of Servistar Coast to Coast revenues that
resulted from the July 1, 1997 merger of Cotter and SCC.
Gross margins increased by $28,626,000 or 51.2% and as a
percentage of revenues, declined from 9.3% to 8.2% for the same
period last year. Much of the reduction resulted from the change
in the sale mix between Stock, Relay and Direct Shipment Sales
partially offset by an increase in sales volume. The dollar
increase om gross margin is due to the addition of SErvistar
Coast to Coast revenues that resulted from the July 1, 1997
Merger of Cotter and SCC.
Warehouse, general and administrative expenses increased by
$29,543,000 or 80.3% and, as a percentage of revenues increased
from 6.1% to 6.4%. The increase was attributed to the increase
in operating costs resulting from the Merger. Many of the potential
cost efficiencies related to the Merger have not yet been realized and
cost should be reduced as the Merger strategy is implemented.
Interest paid to Members decreased by $156,000 or 3.6% primarily
due to a lower average interest rate. Other interest expense
increased $3,258,000 or 119.7% due to higher borrowings compared
to the same period last year. The higher borrowings was required
because of the increased cash requirement resulted from the Merger
and increased inventory levels.
Merger integration costs consisted of expenses incurred with the
consolidation and restructuring of certain functions due to the
aforementioned Merger.
The combination of the increase in expenses and increased borrowing
costs, resulted in a net margin of $5,827,000 compared to $11,552,000
for the same period last year.
ACTUAL THIRTEEN WEEKS ENDED SEPTEMBER 27, 1997 COMPARED TO PRO FORMA
- --------------------------------------------------------------------
THIRTEEN WEEKS ENDED SEPTEMBER 28, 1996 ASSUMING THE MERGER WAS
- ---------------------------------------------------------------
CONSUMMATED ON JULY 1, 1996
- ----------------------------
RESULTS OF OPERATIONS:
- ----------------------
Revenues for the thirteen weeks ended September 27, 1997 totaled
$1,036,622,000. This represented a decrease of $27,754,000 or 2.6%
compared to the same period last year. The decrease was due to
seasonal merchandise which was affected by adverse weather conditions.
Gross margins decreased by $8,927,000 or 9.6% and as a percentage of
revenues, declined from 8.8% to 8.2% for the same period last year.
The reduction resulted from the decrease in sales volume plus a change
in the sale mix between Stock, Relay and Direct Shipment Sales.
Warehouse, general and administrative expenses decreased by $2,864,000
or 4.1% and, as a percentage of revenues remained comparable with prior
year. The decrease was attributed to the Company's continued efforts to
reduce operating costs through reduction of duplicate office and
distribution center functions.
Interest paid to Members decreased by $356,000 or 7.8% primarily due
to a lower average interest rate. Other interest expense increased
$524,000 or 9.6% due to higher borrowings compared to the same period
last year. The higher borrowings was required because of increased
cash requirement to increase inventory levels to provide improved
service levels to the Members.
Merger integration costs consisted of expenses incurred with the
consolidation and restructuring of certain functions due to the
aforementioned merger.
The continued effort of expense reduction, partially offset by the
combination of decreased gross margin and increased borrowing costs,
resulted in a net margin of $5,827,000 compared to $14,486,000 for
the same period last year.
LIQUIDITY AND CAPITAL RESOURCES:
- --------------------------------
The Company has a seasonal need for cash. During the first nine
months of the year, as seasonal inventories are purchased for resale
of manufacture and shipment, cash and cash equivalent are used for
operating activities. In the last quarter of the year, the Company
anticipates that cash and cash equivalents will be provided by operating
activities and financing activities.
Accounts and notes receivable increased by $182,505,000 due to
(1) seasonal payment terms extended to the Company's Members and
(2) the additional Members resulting from the Merger. Short-term
borrowings increased by $180,523,000 and accounts payable and
accrued expenses increased by $280,712,000.
At September 27, 1997, net working capital decreased to $151,132,000
from $201,304,000 at December 28, 1996. The current ratio decreased
to 1.16 at September 27, 1997 compared to 1.40 at December 28, 1996.
At September 27, 1997, the Company had established a $300,000,000
five-year revolving credit facility with a group of banks and had
various short-term lines of credit available under informal agreements
with lending banks, cancelable by either party under specific
circumstances. Borrowing under this agreements were $251,117,000 at
September 27, 1997.t
The Company's capital is primarily derived from Class A common stock
and retained earnings, together with promissory (subordinated) notes
and nonvoting Class B common stock issued in connection the Company's
annual patronage dividend. The Company believes the funds derived
from these capital resources, as well as operations and the credit
facilities noted above will be sufficient to satisfy capital needs.
Total capital expenditures, including those made under capital leases,
were $27,509,000 for the thirty-nine weeks ended September 27, 1997
compared to $16,487,000 during the comparable period in 1996. These
capital expenditures related to additional equipment and technological
improvements at the regional distribution centers and at the World
Headquarters. Funding of any additional 1997 capital expenditures
is anticipated to come from operations and external sources, if
necessary.
A portion of the Company's information systems are not "Year 2000
Complaint". This means that the Company will need to incur certain
costs to modify non-compliant systems prior to the Year 2000 in order
to ensure that those systems continue to serve the needs of the
Company and its Membership. Based upon an initial investigation of our
systems, we estimate that such costs could exceed $10,000,000. Actual
costs may exceed this estimate depending on our merger efforts and
system resource constraints. Further, based upon current FASB
Guideline, costs incurred to modify systems to be Year 2000 compliant
must be expensed. Accordingly, such costs will reduce our patronage
dividends in years in which they were incurred.
PART II - OTHER INFORMATION
---------------------------
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
At the Company's Annual Meeting of Stockholders held on April 1, 1997,
the Stockholders approved the Agreement and Plan of Merger dated
December 9, 1966, providing for the merger of Servistar Coast to Coast
Corporation with and into Cotter & Company, thereafter known as TruServ
Corporation. The agreement and Plan of Merger addressed, among other
things, the following items:
<TABLE>
<C> <S>
(a) Additional capital requirements;
(b) New form of Retail Member Agreement;
<PAGE> 16
(c) Revised By-Laws and
(d) Restatement of Certificate of Incorporation, including
without limitation:
1) Authorizing an increase in the maximum outstanding
Class A Common Stock to 750,000 shares and Class B
Common Stock to 4,000,000 shares;
2) Elimination of cumulative voting;
3) Elimination of required uniform ownership of Class
A Common Stock and
4) Changing the corporate name.
</TABLE>
The approval of the new form of Retail Member Agreement automatically
superseded all prior Cotter & Company Retail Member Agreements.
The nomination of the listed initial Board of Directors of TruServ
Corporation:
<TABLE>
<S> <C>
W. (Bill) Blagg Peter G. Kelly
William M. Claypool Robert J. Ladner
Daniel A. Cotter Paul E. Pentz
Jay Feinsod George V. Sheffer
Dave Guthrie Dennis A. Swanson
William M. Halterman John Wake, Jr.
William Hood John M. (Mitch) West, Jr.
James Howensteine Barbara B. Wilkerson
Jerrald T. Kabelin
</TABLE>
The number of affirmative votes cast for the above items was 37,520,
the number of negative votes cast was 2,100 and the number of
abstentions was 540.
In addition, the Stockholders of Class B Common Stock voted to
increase the number of authorized shares of Class B Common Stock
to 4,000,000 shares. The number of affirmative votes was 927,296,
the number of negative votes cast was 47,881, and the number of
abstentions was 6,904.
The Company consummated the merger on July 1, 1997.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
(a) Exhibits
Exhibit 4. Instruments defining the rights of security
holders, including indentures, incorporated herein by
reference those items included as Exhibits 4A through
4G, inclusive, in the Company `s Post-Effective Amendment
No. 4 to Form S-2 to Form S-4 Registration Statement
(No. 33-18397) filed with the Securities and Exchange
Commission on July 2, 1997.
(b) Reports on Form 8-K
1) Current Report on Form 8-K dated as of March 5, 1997.
2) Form 8K/A Amendment to Current Report on Form 8-K,
dated March 26, 1997.
<PAGE> 17
SIGNATURES
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
<TABLE>
<S> <C> <C>
Date: November 11, 1997 By: /S/ KERRY J. KIRBY
Executive Vice-President
and Chief Financial Officer
</TABLE>
(Mr. Kirby is the principal accounting officer and has been duly
authorized to sign on behalf of the Registrant.)
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED BALANCE SHEET AND STATEMENT OF OPERATIONS AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-27-1997
<CASH> $ 4,876
<SECURITIES> 0
<RECEIVABLES> 489,710
<ALLOWANCES> 0
<INVENTORY> 555,847
<CURRENT-ASSETS> 1,078,648
<PP&E> 504,691
<DEPRECIATION> 246,747
<TOTAL-ASSETS> 1,478,596
<CURRENT-LIABILITIES> 927,516
<BONDS> 130,803
0
0
<COMMON> 234,229
<OTHER-SE> 186,048
<TOTAL-LIABILITY-AND-EQUITY> 1,478,596
<SALES> 2,243,388
<TOTAL-REVENUES> 2,243,388
<CGS> 2,199,310
<TOTAL-COSTS> 2,199,310
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 25,273
<INCOME-PRETAX> 18,805
<INCOME-TAX> 101
<INCOME-CONTINUING> 18,704
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 17,707
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
