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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 30, 2000 or
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( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 2-20910
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TRUSERV CORPORATION
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(Exact name of registrant as specified in its charter)
DELAWARE 36-2099896
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
8600 West Bryn Mawr Avenue
Chicago, Illinois 60631-3505
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(Address of principal executive offices) (Zip Code)
(773) 695-5000
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(Registrant's telephone number, including area code)
Not applicable
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(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 28, 2000.
Class A Common Stock, $100 Par Value. 473,109 Shares
Class B Common Stock, $100 Par Value. 1,720,552 Shares
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PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
TRUSERV CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET
(In thousands)
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------ -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1,745 $ 1,815
Accounts and notes receivable, net of allowance for
doubtful account of $9,767 and $5,613 438,747 460,419
Inventories (note 5) 487,109 482,415
Other current assets 26,071 9,937
---------- ----------
Total current assets 953,672 954,586
Properties, net 222,005 244,845
Goodwill, net 112,247 114,537
Other assets 29,859 34,179
---------- ----------
TOTAL ASSETS $1,317,783 $1,348,147
========== ==========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
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TRUSERV CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET
(In thousands, except share data)
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------ -----------
(UNAUDITED)
<S> <C> <C>
LIABILITIES AND CAPITALIZATION
Current liabilities:
Accounts payable $ 459,814 $ 544,904
Accrued expenses 86,312 75,347
Short-term borrowings 218,118 167,007
Current maturities of notes, long-term debt
and capital lease obligations 84,739 88,088
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Total current liabilities 848,983 875,346
----------- -----------
Long-term debt and obligations under capital leases 302,633 309,796
----------- -----------
Capitalization:
Promissory (subordinated) and installment notes 83,037 83,804
Class A common stock, net of subscriptions receivable of
$3,734 and $3,874; 750,000 shares authorized; 509,340
and 511,440 shares issued and subscribed 47,200 47,270
Class B nonvoting common stock and paid-in capital;
4,000,000 shares authorized; 1,720,552 and 1,764,797
shares issued and fully paid 182,314 177,779
Loss allocation to Members (note 3) (113,918) -
Deferred patronage dividends (13,782) (14,063)
Retained earnings (accumulated deficit) (17,655) (130,939)
Accumulated other comprehensive income (1,029) (846)
----------- -----------
Total capitalization 166,167 163,005
----------- -----------
TOTAL LIABILITIES AND CAPITALIZATION $ 1,317,783 $ 1,348,147
=========== ===========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
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TRUSERV CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(In thousands)
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THIRTEEN FOR THE THIRTY-NINE
WEEKS ENDED WEEKS ENDED
-------------------------------- --------------------------------
September 30, October 2, September 30, October 2,
2000 1999 2000 1999
------------ ----------- ------------ -----------
<S> <C> <C> <C> <C>
Revenues $ 944,269 $ 1,117,496 $ 3,109,136 $ 3,452,496
Costs and expenses:
Cost of revenues 872,388 1,047,249 2,897,681 3,246,326
Logistics and manufacturing
expenses 21,986 23,485 68,520 76,119
Selling, general and
administrative expenses 27,532 29,039 86,079 87,609
Interest paid to Members 2,776 3,779 8,407 10,532
Other interest expense 14,981 12,569 42,906 34,906
Gain on sale of properties (233) (3,459) (1,300) (9,307)
Other (income) loss, net (note 4) (4,824) 436 (5,891) (55)
----------- ----------- ----------- -----------
934,606 1,113,098 3,096,402 3,446,130
----------- ----------- ----------- -----------
Net margin before income
taxes and cumulative effect
of a change in accounting
principle 9,663 4,398 12,734 6,366
Income tax expense (benefit) 216 (1,381) 288 298
----------- ----------- ----------- -----------
Net margin before cumulative
effect of a change in
accounting principle 9,447 5,779 12,446 6,068
Cumulative effect on prior
years of a change in
accounting principle --- --- --- 6,484
----------- ----------- ----------- -----------
Net margin (loss) $ 9,447 $ 5,779 $ 12,446 $ (416)
=========== =========== =========== ===========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
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TRUSERV CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THIRTY-NINE WEEKS ENDED
-------------------------------
September 30, October 2,
2000 1999
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<S> <C> <C>
Operating activities:
Net margin before cumulative effect of a change in
account principle $ 12,446 $ 6,068
Cumulative effect on prior years of a change in accounting
principle --- (6,484)
Adjustments to reconcile net margin to cash and
cash equivalents used for operating activities:
Depreciation and amortization 32,915 28,381
Provision for allowance for doubtful accounts 7,372 2,711
Net change in working capital components (86,357) (31,976)
-------- --------
Net cash and cash equivalents used for operating activities (33,624) (1,300)
-------- --------
Investing activities:
Additions to properties owned (10,053) (39,754)
Proceeds from sale of properties owned 8,165 26,764
Changes in other assets (733) (6,078)
-------- --------
Net cash and cash equivalents used for investing activities (2,621) (19,068)
-------- --------
Financing activities:
Proceeds from short-term borrowings, net of repayments 51,110 55,993
Proceeds from long-term borrowings 1,068 703
Annual patronage dividend paid --- (14,507)
Payment of notes, long-term debt, lease obligations and
common stock (16,003) (15,989)
-------- --------
Net cash and cash equivalents provided by financing
activities 36,175 26,200
-------- --------
Net increase (decrease) in cash and cash equivalents (70) 5,832
Cash and cash equivalents at beginning of period 1,815 1,650
-------- --------
Cash and cash equivalents at end of period $ 1,745 $ 7,482
======== ========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
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TRUSERV CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - GENERAL
The condensed consolidated balance sheet at September 30, 2000 and the condensed
consolidated statement of operations and statement of cash flows for the
thirteen and thirty-nine weeks ended September 30, 2000 and October 2, 1999 are
unaudited and, in the opinion of the management of the Company, include all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair presentation of financial position, results of operations and cash flows
for the respective interim periods. The accompanying unaudited condensed
consolidated financial statements have been prepared in accordance with
generally accepted accounting principles 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 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 31, 1999 included in the
Company's 1999 Annual Report on Form 10-K.
NOTE 2 - RECLASSIFICATIONS
Certain reclassifications have been made to the prior period financial
statements to conform with the current presentation. These reclassifications
had no effect on net margin (loss) for any period.
NOTE 3 - ESTIMATED PATRONAGE DIVIDENDS AND LOSS ALLOCATION TO MEMBERS
If financial and operating conditions permit, patronage dividends are declared
and paid by the Company after the close of each fiscal year. No annual patronage
dividend was declared for 1999. The most recent annual patronage dividend was
distributed through a payment of approximately 40% of the total distribution in
cash, with the balance being paid through the issuance of the Company's Class B
nonvoting common stock. The estimated patronage dividend accrued for the period
ended September 30, 2000 is $12,799,000. There was no estimated patronage
dividend for the corresponding period in 1999.
During the third quarter of fiscal year 2000, 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 decrease to Retained
Earnings as of December 31, 1999, resulting in an Accumulated Deficit. The
Company has allocated the 1999 loss by establishing a Loss Allocation account
as a contra-equity account in the condensed consolidated balance sheet with the
offsetting increase recorded to Retained Earnings (Accumulated Deficit). The
Loss Allocation account reflects the sum of each Member's proportionate share of
the 1999 loss, after being reduced by certain amounts that are not allocable to
Members. The Loss Allocation account is not a receivable from Members and does
not represent an amount currently due from Members. Rather, the Loss Allocation
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account will be satisfied, on a Member by Member basis, by withholding the
portion of future patronage dividends that would have been paid in Qualified B
Stock, at par value, and applying such amount as a reduction in the Loss
Allocation account until fully satisfied. The current levels of Members' stock
investments in the Company will not be affected. However, in the event a Member
should terminate as a shareholder of the Company, any unsatisfied portion of
that Member's Loss Allocation account will be satisfied by reducing the
redemption amount of the Member's stock investment in the Company.
The accrual of the estimated patronage dividend of $12,799,000 and the
establishment of the Loss Allocation account of $113,918,000 are non-cash
financing activities.
NOTE 4 - OTHER INCOME
During the third quarter of fiscal year 2000, the Company purchased from an
insurance company non-participating annuity contracts to satisfy pension
obligations related to certain former employees who were fully vested in their
pension benefits. As a result of this transaction, the Company recognized as a
pre-tax gain in the third quarter of fiscal year 2000 approximately $5 million
related to the settlement of these pension obligations. Such gain has been
recorded as Other income, net.
NOTE 5 - INVENTORIES
Inventories consisted of:
September 30, December 31,
2000 1999
---- ----
(UNAUDITED)
(In thousands)
Manufacturing inventories
Raw materials $ 3,228 $ 2,473
Work-in-process and finished goods 32,271 33,508
---------- ----------
35,499 35,981
Merchandise inventories 451,610 446,434
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Total $ 487,109 $ 482,415
========== ==========
Inventories are stated at the lower of cost, determined on the "first-in,
first-out" basis, or market. The Company performs periodic physical inventory
counts at its distribution centers; adjustments to recorded inventory quantities
and amounts resulting from such counts are recorded after the amount and
composition of such adjustments have been analyzed. An extensive review of the
physical inventory quantities and amounts will be conducted and adjustments
recorded during the fourth quarter of fiscal year 2000.
NOTE 6 - SEGMENT INFORMATION
The Company operates as a single reportable segment as the largest Member-owned
wholesaler cooperative of hardware, lumber and building materials and related
merchandise in the United States. Operations outside the United States were
immaterial for the periods ended September 30, 2000 and October 2, 1999. The
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Company's sales to its Members are divided into three categories, as follows:
(1) warehouse shipment sales (approximately 40% of total sales); (2) direct
shipment sales (approximately 57% of total sales); and (3) relay sales
(approximately 3% of total sales). Warehouse shipment sales are sales of
products purchased, warehoused and resold by the Company upon orders from the
Members. Direct shipment sales are sales of products purchased by the Company
but delivered directly to Members from manufacturers. Relay sales are sales of
products purchased by the Company in response to the requests of several Members
for a product which is (i) included in future promotions, (ii) not normally held
in inventory and (iii) not susceptible to direct shipment. Generally, the
Company will give notice to all Members of its intention to purchase products
for relay shipment and then purchase only as many of such products as the
Members order. When the product shipment arrives at the Company, it is not
warehoused; rather, the Company breaks up the shipment and "relays" the
appropriate quantities to the Members who placed orders.
The Company's product offering, comprised of more than 63,000 stockkeeping units
("SKUs"), may be divided into seven classes of merchandise which are set forth,
with their corresponding percentage of total revenue, in the following table:
For the Thirty-nine Weeks Ended
-------------------------------
September 30, October 2,
2000 1999
---- ----
Lumber and Buildings Materials 31.2% 33.6%
Farm and Garden 17.1% 16.9%
Hardware Goods 16.2% 15.5%
Electrical and Plumbing 12.5% 11.9%
Painting and Cleaning 10.6% 10.0%
Appliance and Housewares 8.3% 8.1%
Sporting Goods and Toys 4.1% 4.0%
NOTE 7 - CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE
In April 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-5, "Reporting the Costs of Start-Up Activities", which
requires that costs related to start-up activities be expensed as incurred.
Prior to 1999, the Company capitalized its costs incurred in connection with
opening new distribution centers. The Company adopted the provisions of the SOP
in its financial statements for the fiscal year ended December 31, 1999. The
effect of the adoption of SOP 98-5 was to record a charge for the cumulative
effect of a change in accounting principle of $6,484,000 in order to expense
unamortized costs that had been previously capitalized prior to 1999.
NOTE 8 - SUBSEQUENT EVENTS
The Company signed a letter of intent with an unrelated third party to sell
the Company's Lumber and Building Materials division. This sale is expected to
close during the fourth quarter of fiscal year 2000.
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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THIRTEEN WEEKS ENDED SEPTEMBER 30, 2000 COMPARED TO THIRTEEN WEEKS ENDED OCTOBER
2, 1999
RESULTS OF OPERATIONS:
Revenues for the thirteen weeks ended September 30, 2000 totaled $944,269,000.
This represented a decrease of $173,227,000, or 15.5%, compared to the
comparable period last year. The revenue decrease is predominately attributable
to lower revenue in lumber and building materials, which declined $120,676,000,
or 30.6%, compared to the same quarter last year. The decline is due to the
negative impact of industry wide trends towards lower pricing and unit volume.
Gross margins increased by $1,634,000, or 2.3%, and as a percentage of revenues,
increased to 7.6% from 6.3% for the comparable period last year. The increase in
gross margin percentage resulted from decreased revenues in lumber and building
materials, which are direct shipped to Members with lower gross margin
percentages. In addition to the shift in sales mix, the gross margin was
positively impacted from the reduced transportation costs due to the
consolidation of the distribution network and a reduction in estimated
capitalizable inventory-related costs.
Logistics and manufacturing expenses as a percentage of revenues increased to
2.3% from 2.1% compared to the prior year, primarily as a result of the decrease
in revenues. However, such expenses were down $1,499,000, or 6.4%, as the
company benefited from prior year initiatives to consolidate the distribution
network.
Selling, general and administrative (S,G&A) expenses decreased $1,507,000, or
5.2%, and would have been greater except for the reduction in the capitalization
of costs to inventory of $7,054,000 as a result of reduced operating expenses
subject to the capitalization calculation. S,G&A expenses as a percentage of
revenues increased to 2.9% from 2.6% compared to the prior year , primarily as a
result of the decrease in revenues. The reduced expenses were generated by the
savings from the company's headcount reductions in corporate staff functions,
decreased usage of outside services, and reduced travel expenses.
Interest paid to Members decreased by $1,003,000, or 26.5%, primarily due to a
lower principal balance. Other interest expense increased $2,412,000, or 19.2%,
due to higher interest rates.
Other income increased by $5,260,000, primarily attributable to the settlement
gain recognized upon the purchase of pension annuities to satisfy the pension
benefit obligation related to certain retirees.
The combinations of margin improvement, reduced logistics and manufacturing and
SG&A expenses, and the positive impact recorded in other income related to the
pension settlement gain, resulted in a net margin of $9,447,000 for the third
quarter of 2000 as compared to a net margin of $5,779,000 for the third quarter
of 1999.
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THIRTY-NINE WEEKS ENDED SEPTEMBER 30, 2000 COMPARED TO THIRTY-NINE WEEKS ENDED
OCTOBER 2, 1999
RESULTS OF OPERATIONS:
Revenues for the thirty-nine weeks ended September 30, 2000 totaled
$3,109,136,000 and represented a decrease of $343,360,000, or 9.9%, compared to
the comparable period last year. The decrease is attributable to lower
revenues in lumber and building materials ($187,258,000 or 17.1%), farm & garden
supplies ($53,420,000 or 9.7%) and hardware ($32,108,000 or 6.4%). The lumber
and building material sales were negatively impacted by industry wide trends
towards lower pricing and unit volumes.
Gross margins increased by $5,285,000, or 2.6%, and as a percentage of revenues,
increased to 6.8% from 6.0% for the comparable period last year. The increase in
gross margin percentage resulted from a decrease in revenues of lumber and
building materials, which are direct shipped to Members and have lower gross
margin percentages. In addition to the shift in sales mix, the gross margin was
positively impacted from the reduced transportation costs due to the
consolidation of the distribution network and a reduction in estimated
capitalizable inventory-related costs.
Logistics and manufacturing expenses as a percentage of revenues remained flat
at 2.2% compared to the prior year. Such expenses were down $7,599,000, or
10.0%, as the company benefited from prior year initiatives to consolidate the
distribution network.
Selling, general and administrative expenses as a percentage of revenues
increased to 2.8% from 2.5% compared to the prior year, primarily as a result of
the decrease in revenues. Expenses were down $1,530,000, or 1.7%, even after a
reduction of $17,946,000 in the capitalization of costs to inventory as a result
of reduced operating expenses subject to the capitalization calculation. These
reductions are due to the savings from the company's headcount reductions in
corporate staff functions and the full period benefit of prior year reductions
to consolidate staff functions. In addition, the company responded to weaker
sales through programs to further reduce headcount, defer hiring, reduce travel
expenses, and reduce spending on outside services.
Interest paid to Members decreased by $2,125,000, or 20.2%, primarily due to
lower outstanding principal balances. Other interest expense increased
$8,000,000, or 22.9%, due to higher interest rates.
Other income increased by $5,836,000 primarily attributable to the pension
settlement gain.
For the fiscal year ended December 31, 1999, the cumulative effect on prior
years of a change in accounting principle of $6,484,000 reflects the write-off
of start-up costs of converting the systems used by ServiStar Coast to Coast
Corporation's distribution centers prior to the merger to those systems
currently used by the Company. The write-off is in compliance with SOP 98-5,
"Reporting the Costs of Start-up Activities".
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Despite the decrease in revenues of 9.9%, the Company improved its overall
operating performance by increasing net margin before the cumulative effect of a
change in accounting principle by $6,378,000 as compared to the comparable
period last year. In addition to the operating performance improvement, the
elimination of the change in accounting principle increased net margin for the
thirty-nine weeks ended September 30, 2000 to $12,446,000 as compared to a net
loss of $416,000 for the comparable period last year.
THIRTY-NINE WEEKS ENDED SEPTEMBER 30, 2000 COMPARED WITH THE YEAR ENDED DECEMBER
31, 1999
LIQUIDITY AND CAPITAL RESOURCES:
Cash used in operations in the thirty-nine weeks ended September 30, 2000 was
$33,624,000. Inventories increased by $4,694,000 since December 31, 1999 as a
result of supporting orders for seasonal merchandise (Inventories decreased by
$74,491,000 as compared to October 2, 1999, which is a result of the continued
consolidation of the distribution network). Accounts and notes receivable
decreased by $21,672,000 since December 31, 1999 (decreased by $106,347,000 as
compared to October 2, 1999) as a result of the decrease in revenue. Accounts
payable decreased by $85,090,000 since December 31, 1999 as a result of the
seasonal terms obtained from vendors causing amounts to become due in the third
quarter of 2000.
At September 30, 2000, net working capital increased to $104,689,000 from
$79,240,000 at December 31, 1999 primarily as a result of decreased accounts
payable. The current ratio increased to 1.12 at September 30, 2000 compared to
1.09 at December 31, 1999.
At July 1, 1997, the Company had established a $300,000,000 five-year revolving
credit facility with a group of banks. These agreements were amended in April
2000. The amended debt agreement includes increased interest rates, new
financial ratios and covenants, and the collateralization of the Company's
assets. Borrowings outstanding under these agreements were $201,000,000 and
$135,000,000 at September 30, 2000 and December 31, 1999, respectively.
Under the senior notes and revolving credit facility, the Company is required to
meet certain financial ratios and covenants. As of September 30, 2000, the
Company was in compliance with the lenders' financial ratios and covenants
requirements.
The Company's capital is primarily comprised of Class A common stock and
retained earnings (accumulated deficit), together with promissory
(subordinated) notes and nonvoting Class B common stock issued in connection
with the Company's annual patronage dividend. The Company has initiated a
moratorium on the redemption of its stock, which the Board of Directors will
review from time to time in light of the financial circumstances of the
Company, but the Company believes the funds obtained from these capital
resources, as well as operations and the credit facilities noted above, will be
sufficient to satisfy future capital needs.
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Total capital expenditures, including those made under capital leases, have been
reduced significantly compared to the comparable period in 1999. For the
thirty-nine weeks ended September 30, 2000 and October 2, 1999, capital
expenditures were $10,053,000 and $39,754,000, respectively. Capital
expenditures relate primarily to additional equipment and technological
improvements at the regional distribution centers and at the corporate
headquarters.
In early October, the Company has announced plans to sell its Lumber and
Building Material division to Builder Marts of America, Inc. The Lumber and
Building Materials division generates over 30% of the Company's revenue;
however, the sale of the division will not materially impact net margin. This
transaction is expected to close in the fourth quarter of fiscal year 2000, with
net proceeds reducing total debt outstanding and strengthening the capital
structure of the company.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company's operations are subject to certain market risks, primarily interest
rate risk and credit risk. Interest rate risk pertains to the Company's variable
rate debt, which totals approximately $215 million at September 30, 2000. A 50
basis point movement in the interest rates would result in an approximate $1.075
million annualized change 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 the
Company's trade receivables. The Company extends credit to its members as part
of its day-to-day operations. The Company believes that as no specific
receivable or group of receivables comprises a significant percentage of total
trade receivables, its risk with respect to trade receivables is limited.
Additionally, the Company believes that its allowance for doubtful accounts is
adequate with respect to member credit risks.
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PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
NONE
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
NONE
Item 3. DEFAULTS UPON SENIOR SECURITIES
NONE
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
NONE
Item 5. OTHER INFORMATION.
NONE
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27.1 Financial Data Schedule
(b) Reports on Form 8-K
1) Current Reports on Form 8-K, filed July 6, 2000 and September 28,
2000.
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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: November 6, 2000 By /s/LEONARD G. KUHR
---------------- ------------------
Leonard G. Kuhr
Senior Vice President and
Chief Financial Officer
(Mr. Kuhr is the principal financial officer and has been duly authorized to
sign on behalf of the Registrant.)
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