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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 29, 2003 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
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TRUSERV CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 36-2099896
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
8600 West Bryn Mawr Avenue
Chicago, Illinois 60631-3505
----------------- ----------
(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 [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [_] No [X]
The number of shares outstanding of each of the issuer's classes of common
stock, as of April 26, 2003.
Class A Common Stock, $100 Par Value........................ 475,740 Shares
Class B Common Stock, $100 Par Value........................ 1,756,457 Shares
ITEM 1. FINANCIAL STATEMENTS
($ in thousands)
TRUSERV CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET
ASSETS
March 29,
2003 December 31,
(Unaudited) 2002
----------- ------------
Current assets:
Cash and cash equivalents $ 7,690 $ 9,001
Restricted cash 15,252 15,755
Accounts and notes receivable, net of allowance for doubtful
accounts of $8,252 and $8,553 246,880 207,709
Inventories (Note 5) 292,827 234,448
Other current assets 25,381 23,440
----------- ------------
Total current assets 588,030 490,353
Properties, net of accumulated depreciation of $280,961 and $274,519 85,721 91,116
Goodwill, net 91,474 91,474
Other assets 26,760 30,428
----------- ------------
Total assets $ 791,985 $ 703,371
=========== ============
LIABILITIES AND MEMBERS' CAPITALIZATION
Current liabilities:
Accounts payable $ 320,750 $ 199,566
Outstanding checks 31,969 28,884
Accrued expenses 85,924 84,082
Short-term borrowings 8,787 27,852
Current maturities of long-term debt, notes and capital lease
obligations 53,375 59,797
Patronage dividend payable in cash (Note 3) 114 6,121
----------- ------------
Total current liabilities 500,919 406,302
Long-term debt, including capital lease obligations, less current
maturities 123,962 125,021
Deferred gain on sale leaseback (Note 8) 52,147 52,786
Deferred credits 19,919 20,282
----------- ------------
Total long-term liabilities and deferred credits 196,028 198,089
Total liabilities and deferred credits 696,947 604,391
Commitments and contingencies - -
Members' capitalization:
Promissory (subordinated) and installment notes, net of current
portion 43,496 43,531
Members' equity:
Redeemable Class A voting common stock, $100 par value;
750,000 shares authorized; 475,740 and 474,360 shares
issued and fully paid; 34,320 and 35,700 shares issued (net
of subscriptions receivable of $872,000 and $886,000) 50,134 50,120
Redeemable Class B non-voting common stock and paid-in
capital, $100 par value; 4,000,000 shares authorized;
1,756,457 and 1,756,457 shares issued and fully paid 176,945 176,945
Loss allocation (Note 4) (75,971) (75,966)
Deferred patronage (25,606) (25,793)
Accumulated deficit (72,807) (68,704)
Accumulated other comprehensive loss (1,153) (1,153)
----------- ------------
Total members' equity 51,542 55,449
----------- ------------
Total members' capitalization 95,038 98,980
----------- ------------
Total liabilities and members' capitalization $ 791,985 $ 703,371
=========== ============
See Notes to Condensed Consolidated Financial Statements
2
TRUSERV CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
For the thirteen weeks ended
March 29, March 30,
2003 2002
----------- ------------
Net revenues $ 449,474 $ 548,429
Costs and expenses:
Cost of revenues 405,589 494,243
Logistics and manufacturing expenses 16,061 15,599
Selling, general and adminstrative expenses 23,012 19,373
Restructuring charges and other related expenses (Note 6) 17 -
Interest expense to members 1,385 1,666
Third party interest expense 7,824 13,886
Gain on sale of assets (40) (61)
Other income, net (541) (1,015)
----------- ------------
Net margin/(loss) before income taxes (3,833) 4,738
Income tax expense 84 90
----------- ------------
Net margin/(loss) $ (3,917) $ 4,648
=========== ============
See Notes to Condensed Consolidated Financial Statements.
3
TRUSERV CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
For the thirteen weeks ended
March 29, March 30,
2003 2002
----------- ------------
Operating activities:
Net margin/(loss) $ (3,917) $ 4,648
Adjustments to reconcile net margin/(loss) to cash
and cash equivalents provided by/(used for) operating
activities:
Depreciation and amortization 7,147 9,351
Provision for allowance for doubtful accounts (137) 1,010
Restructuring charges and other related expenses 17 -
Gain on sale of assets (40) (61)
Net change in working capital components 22,393 (33,277)
----------- ------------
Net cash and cash equivalents provided by/(used for)
operating activities 25,463 (18,329)
----------- ------------
Investing activities:
Additions to properties (745) (1,868)
Proceeds from sale of properties 43 108
Changes in restricted cash 503 1,187
Changes in other assets 2,624 1,113
----------- ------------
Net cash and cash equivalents provided by investing
activities 2,425 540
----------- ------------
Financing activities:
Payment of patronage dividend (5,721) -
Payment of notes, long-term debt and lease obligations (7,512) (2,539)
Increase/(decrease) in outstanding checks 3,085 (52,168)
(Payments of)/proceeds from short-term borrowings, net (19,065) 52
Proceeds from Class A common stock subscription
receivable 14 84
----------- ------------
Net cash and cash equivalents used for financing
activities (29,199) (54,571)
----------- ------------
Net decrease in cash and cash equivalents (1,311) (72,360)
Cash and cash equivalents at beginning of period 9,001 88,816
----------- ------------
Cash and cash equivalents at end of period $ 7,690 $ 16,456
=========== ============
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 March 29, 2003, the condensed
consolidated statement of operations for the thirteen weeks ended March 29, 2003
and March 30, 2002, and the condensed consolidated statement of cash flows for
the thirteen weeks ended March 29, 2003 and March 30, 2002 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, 2002 included in TruServ's 2002 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
(see Note 10). 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. There is no estimated
patronage dividend for the three-month period ended March 29, 2003; however, a
patronage dividend is forecasted for the year. The estimated patronage dividend
for the corresponding period for 2002 was $4,587. TruServ's By-Laws and Internal
Revenue Service regulations require the payment of at least 20% of patronage
dividends in cash. In the past, TruServ paid the remainder primarily through the
issuance of Class B common stock; and in certain cases, TruServ paid a small
portion of the dividend by means of Promissory (subordinated) notes. For fiscal
2003, if TruServ declares a patronage dividend, it intends to issue the non-cash
portion of the dividend in the form of Class B common stock, and, in the case of
those members who have loss allocation accounts, to apply the value of the Class
B common stock to reduce such account balances (see Note 4).
5
NOTE 4 - LOSS ALLOCATION TO MEMBERS
During the third quarter of fiscal 2000, TruServ management developed and the
board of directors approved a plan to equitably allocate to members the loss
incurred in 1999. This loss was previously recorded as a reduction of Retained
earnings. TruServ has allocated the 1999 loss among its members by establishing
a Loss allocation account as a contra-equity account in the consolidated balance
sheet with the offsetting credit recorded to the Accumulated deficit account.
The Loss allocation account reflects the sum of each member's proportionate
share of the 1999 loss, after being reduced by certain amounts that were not
allocated to members. The Loss allocation account will be satisfied, on a member
by member basis, by applying the portion of future non-cash patronage dividends
as a reduction to the Loss allocation account until fully satisfied. The Loss
allocation amount may also be satisfied, on a member by member basis, by
applying the par value of maturing member notes and related interest payments as
a reduction to the Loss allocation account until such account is 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 determined that TruServ would retain the fiscal 2001 loss
as part of the Accumulated deficit account. All or a portion of patronage income
and all non-patronage income, if any, may be retained in the future to reduce
the Accumulated deficit account. TruServ has determined for each member that was
a stockholder in 2001, its share of the fiscal 2001 loss that has been retained
in the Accumulated deficit account. This allocation was based upon a combination
of the member's proportionate Class A common stock and Class B common stock
investment, along with the member's purchases from the co-op in 2001. In the
event a member terminates its status as a stockholder of TruServ, any remaining
2001 loss in the Accumulated deficit account that is allocable to the
terminating member will be satisfied by reducing the redemption amount paid for
the member's stock investment in TruServ.
6
NOTE 5 - INVENTORIES
Inventories consisted of the following:
March 29, December 31,
2003 2002
----------- ------------
Manufacturing inventories:
Raw materials $ 2,835 $ 1,473
Work-in-process and finished goods 23,538 19,655
Manufacturing inventory reserves (1,449) (1,297)
----------- ------------
24,924 19,831
----------- ------------
Merchandise inventories:
Warehouse inventory 275,730 223,754
Merchandise inventory reserves (7,827) (9,137)
----------- ------------
267,903 214,617
----------- ------------
Total $ 292,827 $ 234,448
=========== ============
Inventories are stated at the lower of cost, determined on the first-in,
first-out basis, or market. The cost of inventory also includes indirect costs
incurred to bring inventory to its existing location for resale. The amount of
indirect costs included in ending inventory at March 29, 2003 and December 31,
2002 was $18,452 and $15,753, respectively.
NOTE 6 - RESTRUCTURING CHARGES AND OTHER RELATED EXPENSES
During the first quarter of 2003, TruServ incurred restructuring and other
related charges of $17, of which $81 related to restructuring costs and $64
represented a favorable income adjustment to post-employment expenses. The
restructuring charge of $81 was primarily due to changes in estimates related to
severance and exit costs at the Hagerstown, Maryland distribution center and
severance costs at TruServ's corporate headquarters. The post-employment
favorable adjustment of $64 resulted from changes in estimates to severance
charges for the Cary, Illinois facility. TruServ did not incur any restructuring
charges in the first quarter of 2002.
During the first quarter of 2003 and 2002, TruServ used previously established
restructuring reserves of $2,422 and $2,852, respectively, related to
distribution center closures and workforce reductions at TruServ's corporate
headquarters.
7
Restructuring reserve summary:
For the thirteen weeks ended
----------------------------
March 29, 2003 March 30, 2002
--------------------------------------------- --------------------------------------------
Severance & Total Severance & Total
Outplacement Facility Restructuring Outplacement Facility Restructuring
Costs Exit Costs Reserve Costs Exit Costs Reserve
--------------------------------------------- --------------------------------------------
Restructuring reserve,
beginning of quarter $ 4,241 $ 11,030 $ 15,271 $ 8,270 $ 17,979 $ 26,249
First quarter activity:
Restructuring charge 49 32 81 - - -
Use of reserves (1,110) (1,312) (2,422) (1,864) (988) (2,852)
--------------------------------------------- --------------------------------------------
Restructuring reserve,
end of quarter $ 3,180 $ 9,750 $ 12,930 $ 6,406 $ 16,991 $ 23,397
============================================= ============================================
NOTE 7 - SEGMENT INFORMATION
TruServ is principally engaged as a wholesaler of hardware and related products
and is a manufacturer of paint products. TruServ identifies segments based on
management responsibility and the nature of the business activities of each of
its components. TruServ measures segment earnings as operating earnings,
including an allocation for interest expense and income taxes. Information
regarding the identified segments and the related reconciliation to consolidated
information are as follows:
Thirteen weeks ended March 29, 2003
-----------------------------------------
Consolidated
Hardware Paint Totals
-----------------------------------------
Net sales to external customers $ 429,076 $ 20,398 $ 449,474
Interest expense 7,843 1,366 9,209
Depreciation and amortization 6,784 363 7,147
Segment net margin/(loss) (6,495) 2,578 (3,917)
Identifiable segment assets 736,849 55,136 791,985
Expenditures for long-lived assets 606 139 745
Thirteen weeks ended March 30, 2002
-----------------------------------------
Consolidated
Hardware Paint Totals
-----------------------------------------
Net sales to external customers $ 521,244 $ 27,185 $ 548,429
Interest expense 14,404 1,148 15,552
Depreciation and amortization 8,989 362 9,351
Segment net margin/(loss) 1,520 3,128 4,648
Identifiable segment assets 967,412 62,149 1,029,561
Expenditures for long-lived assets 1,790 78 1,868
8
NOTE 8 - SALE LEASEBACK
On December 31, 2002, TruServ sold seven of its distribution centers to
unrelated third parties for an aggregate purchase price of $125,753. The sale
resulted in net proceeds to TruServ of $121,438, which were used to pay its
revolving credit facility, senior notes and synthetic lease agreements (the
"Senior Debt"). The net reduction in Senior Debt was $108,743, as a result of
new make-whole notes of $12,695 issued due to the prepayment on the senior
notes. TruServ then entered into leases with each of the three purchasers to
lease the distribution centers for a period of 20 years. The transaction was
recorded as a real property sale and as operating leases in TruServ's financial
statements. The resulting gain on sale of $55,564, was recorded as Deferred gain
on sale leaseback in the December 31, 2002 consolidated balance sheet and is
being amortized to income on a straight line basis over the initial 20 year
lease term. The unamortized balance at March 29, 2003 is $54,927.
NOTE 9 - COMMITMENTS AND CONTINGENCIES
TruServ provides guarantees for certain member loans, but is not required to
provide a compensating balance for the guarantees. TruServ is required to pay
off a portion of the full amount of these loans under these guarantees, which
range from 15-50% of the member's outstanding balance. In the event that a
member defaults on its loan, the member will be liable to TruServ for the
guaranteed amount. The amount of the guaranteed portion of these member loans,
which are not recorded in TruServ's balance sheet, was approximately $1,854 and
$2,172 as of March 29, 2003 and December 31, 2002, respectively. The balance of
$1,854 as of March 29, 2003 includes approximately $469 that will mature in
fiscal 2003. The remaining guarantees will expire periodically through 2013.
TruServ carries a reserve of $185 relating to these guarantees.
Additionally, TruServ sold certain member note receivables to a third party in
2002 which it has fully guaranteed. TruServ is required to pay 100% of the
outstanding balance of these member notes under these guarantees in the event
that a member defaults on its notes, after which the member will be liable to
TruServ for the guaranteed amount. The balance of these member notes at March
29, 2003 and December 31, 2002 was $785 and $871, respectively, and is recorded
as a liability and related receivable in TruServ's consolidated balance sheet.
TruServ carries a $79 reserve relating to the guarantees on these notes. The
balance of $785 as of March 31, 2003 includes approximately $265 that will
mature in fiscal 2003. The remaining guarantees will expire periodically through
2007.
TruServ has a lifetime warranty or a customer satisfaction guarantee on the
majority of its TruTest paint products, which covers only replacement material.
TruServ has historically experienced minimal returns on these warranties and
guarantees and has determined any related liability to be immaterial.
9
NOTE 10 - NEW ACCOUNTING PRONOUNCEMENTS
In January 2003, TruServ adopted Statement of Financial Accounting Standards
("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. The adoption of this standard did not have a material impact on TruServ's
financial position or results of operations.
In January 2003, TruServ adopted 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) and the related amendment to SFAS No. 4, SFAS
No. 64, "Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements."
SFAS No. 145 also rescinds SFAS No. 44, "Accounting for Intangible Assets of
Motor Carriers", 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). The
adoption of SFAS No. 145 by TruServ did not have a material impact on TruServ's
financial position or results of operations.
In January 2003, TruServ adopted 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. This standard will be applied to any exit
or disposal activities undertaken after December 31, 2002.
10
In November 2002, the Financial Accounting Standards Board ("FASB") issued
Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others." FASB
Interpretation No. 45 requires the disclosure of certain guarantees existing at
December 31, 2002. In addition, FASB Interpretation No. 45 requires the
recognition of a liability for the fair value of the obligation of qualifying
guarantee activities that are initiated or modified after December 31, 2002.
Accordingly, TruServ has disclosed certain guarantees that existed at December
31, 2002 in Note 9 and updated the status of the guarantees at March 29, 2003.
In January 2003, TruServ adopted the recognition provisions of FASB
Interpretation No. 45 for guarantee activities initiated after December 31,
2002. See Note 9, "Commitments and Contingencies," for a further discussion of
guarantees. TruServ did not have any new guarantees in the first quarter of
2003.
In January 2003, TruServ adopted EITF Issue No. 02-16, " Accounting by a
Customer (Including a Reseller) for Certain Consideration Received from a
Vendor." EITF Issue No. 02-16 requires that vendor allowances received should be
treated as a reduction of Cost of revenues. TruServ previously had recorded
advertising allowances from vendors as revenue related to the advertising
service TruServ provides to its members. TruServ has reclassified from Net
revenues to Cost of revenues $3,655 and $4,799 for 2003 and 2002, respectively,
with the adoption of EITF Issue No. 02-16. These reclassifications did not have
any impact on Net margin.
NOTE 11 - SUBSEQUENT EVENT
Effective April 21, 2003, TruServ terminated its non-compete, cooperation, and
trademark and license agreements entered into with Builder Marts of America,
Inc. ("BMA") in connection with the sale of the lumber and building materials
business on December 29, 2000. TruServ has agreed to give up its equity option
and its position on the board of directors of BMA, in consideration for the
termination of these agreements. One of these agreements which was terminated
was a 10 year noncompetition agreement. TruServ can now offer building material
products to its members. These agreements had deferred credits related to them
that were being amortized to income over the lives of the underlying agreements,
which are generally 5-10 years. The termination of these agreements will result
in the recognition of the unamortized credits, which constitutes approximately
$7,100 of income in the second quarter of 2003.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
($ in thousands)
THIRTEEN WEEKS ENDED MARCH 29, 2003 COMPARED TO THIRTEEN WEEKS ENDED MARCH 30,
2002
11
RESULTS OF OPERATIONS:
Revenues and Gross Margin
A reconciliation of net revenues and gross margin for the 13 weeks ending March
29, 2003 and March 30, 2002 follows:
% of
March 30, Gross
Net 2002 Net Gross Margin %
Revenues Revenues Margin of revenue
------------------------------------------------------
Quarter ended March 30, 2002 results $ 548,429 100.0% $ 54,186 9.9%
Same store sales:
Product price decreases (2,165) (0.4) (942)
Warehouse and relay revenues (25,004) (4.6) (3,936)
Vendor direct revenues (43,715) (8.0) (338)
Terminated members
Warehouse and relay revenues (19,676) (3.6) (3,290)
Vendor direct revenues (11,513) (2.1) (89)
New members
Warehouse and relay revenues 3,547 0.7 628
Vendor direct revenues 2,576 0.5 20
Advertising, transportation, and other revenues (3,005) (0.5) (217)
Indirect cost of revenues - - (2,137)
--------------------------------------
Total change (98,955) (18.0) (10,301)
--------------------------------------
Quarter ended March 29, 2003 results $ 449,474 82.0% $ 43,885 9.8%
======================================
Net revenues for the 13 weeks ended March 29, 2003 totaled $449,474. This
represented a decrease in revenues of $98,955, or 18.0%, compared to the same
period last year. A key contributor to the decrease in revenue is the 7.3%
decline in the number of participating member retail outlets, representing a
5.7% revenue reduction. The other significant contributor to the revenue
reduction is in same store sales, representing a 13.0% revenue reduction. A
major factor in the same store sale reductions, in comparing the two periods, is
due to the timing of the spring market. The spring market generates orders for
merchandise that are shipped directly from the vendor immediately after the
market, along with warehouse and relay orders that are shipped during the next
several months after the market. The spring market was held in February in 2002
and in April in 2003. Also reducing same store sales was the impact of TruServ
members who have shifted some of their merchandise purchases to other sources
and the effect of a slow economy.
Gross margin for the 13 weeks ended March 29, 2003 decreased by $10,301, or
19.0%, over the prior year. The decrease in gross margin was due to the loss of
gross margin from terminated members and reduced
12
same store sales. Additionally, the indirect cost of revenues negatively
impacted the gross margin. TruServ experienced lower discounts and rebates from
vendors due to the lower volume of purchases the first quarter of 2003, as
compared to the first quarter of 2002. However, these reductions in gross margin
were partially offset by reduced direct inbound logistics and labor and related
overhead expenses, incurred to bring merchandise to the distribution centers,
which had been lowered as a result of the closure of distribution centers and
headcount reductions.
2003 2002 $ Expense Increase
---- ---- ------------------
Logistics and manufacturing $ 16,061 $ 15,599 $ 462
Logistics and manufacturing expenses increased by $462, or 3.0%, as compared to
the same period last year. TruServ's sale leaseback of seven facilities at
December 31, 2002 increased its rent expense, net of gain amortization by $2,849
(see Interest expense for related impact from the sale leaseback transaction).
This increase in expense was partially offset by lower depreciation expense
related to the facilities that were sold and in lower direct distribution center
expenses, which decreased primarily due to the closure of distribution centers
and headcount reductions that TruServ had implemented in response to a reduction
in the member base.
2003 2002 $ Expense Increase
---- ---- ------------------
Selling, general and administrative $ 23,012 $ 19,373 $3,639
Selling, general and administrative ("SG&A") expenses increased $3,639, or
18.8%, as compared to the same period last year. SG&A expenses were mainly
higher due to the timing of the spring market, which was held in April in 2003
versus in February in 2002. This resulted in a deferral of expense recoveries to
the second quarter of 2003 compared to the prior year. Partially offsetting this
increase in SG&A expense was lower spending and lower bad debt expense due to a
lower accounts receivable balance and favorable aging.
2003 2002 $ Expense Decrease
---- ---- ------------------
Interest expense:
Member $ 1,385 $ 1,666 $ 281
Third Party 7,824 13,886 6,062
Interest expense to members decreased by $281, or 16.9%, as compared to the same
period last year, due to a lower average principal balance of debt outstanding.
However, this decrease was partially offset by a higher average interest rate.
TruServ offered higher interest rates as an incentive to members to renew their
maturing subordinated debt for an additional 3 years. Third party interest
expense decreased $6,062, or 43.7%, as compared to the same period last year.
This decrease is due
13
to the lower average principal balance of senior debt outstanding as compared to
the same period last year. The lower average principal balance was achieved by
generating cash from operations and asset sales, which includes the sale
leaseback of seven facilities at December 31, 2002.
2003 2002 $ Net margin Decrease
---- ---- ---------------------
Net margin/(loss) $ (3,917) $ 4,648 $ (8,565)
The quarter resulted in a net loss of $3,917, down from a net margin of $4,648
from the same period a year ago. The timing of the spring market adversely
impacted net margin/(loss). TruServ experiences increases in sales at its
markets, and in 2003, merchandise shipped related to the market along with
favorable program recoveries generated from the market will be shifted to the
second quarter 2003, as compared to the first quarter of 2002.
LIQUIDITY AND CAPITAL RESOURCES:
In 2001, the Securities and Exchange Commission ("SEC") 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 Annual Report on Form 10-K for the year ended December
31, 2002, describes TruServ's debt, credit facilities, guarantees and future
commitments in order to facilitate a review of TruServ's liquidity.
TruServ generated cash from operating activities for the 13 weeks ended March
29, 2003 in the amount of $25,463, compared to cash used for operating
activities of $18,329 for the 13 weeks ended March 30, 2002. The main reason for
the change in cash related to operating activities, when comparing the two
periods, is the improvement in working capital accounts. Accounts payable
increased by $121,184 during the first quarter of 2003, compared to an increase
of $69,985 during the first quarter of 2002. TruServ has been able to generate
cash from working capital components in 2003, as inventory turnover has
increased by 0.7 turns and Days Payable Outstanding (DPO) has improved by
approximately 2.2 days.
TruServ generated cash from investing activities in the amount of $2,425 for the
13 weeks ended March 29, 2003, compared to $540 for the same period last year.
This is mainly due to additions to properties owned using cash of $745, which is
down $1,123 compared to the same period last year. These capital expenditures
are comprised of various building improvements and purchases of additional
equipment and technology at TruServ's distribution centers and at its corporate
headquarters.
In the 13 weeks ended March 29, 2003, TruServ had a net decrease in cash and
cash equivalents of $1,311 due to a reduction in float requirements. TruServ
used this reduction in float along with the cash generated
14
from operating and investing activities in its financing activities to reduce
its debt by $26,577 in the first quarter of 2003. In the 13 weeks ended March
30, 2002, TruServ had a net decrease in cash and cash equivalents of $72,360.
This decrease was primarily related to cash being used in TruServ's financing
activities, as it was able to cover its outstanding checks with excess cash
available at December 31, 2001.
At March 29, 2003, TruServ's working capital was $87,111, as compared to $84,051
at December 31, 2002. The current ratio was 1.17 at March 29, 2003, as compared
to 1.21 at December 31, 2002.
TruServ believes that its cash from operations and existing credit facilities
will provide sufficient liquidity to meet its working capital needs, planned
capital expenditures and debt obligations that are due to be repaid in fiscal
year 2003.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
($ in thousands)
TruServ's operations are subject to certain market risks, primarily interest
rate risk and credit risk. Interest rate risk pertains to TruServ's variable
rate debt with a borrowing ceiling of $143,200 at March 29, 2003; approximately
$8,787 was outstanding at March 29, 2003. A 50 basis point movement in interest
rates would result in an approximate $44 annualized increase or decrease in
interest expense and cash flows based on the outstanding balance at March 29,
2003. For the most part, TruServ manages interest rate risk through a
combination of variable and fixed-rate debt instruments with varying maturities.
Credit risk pertains primarily to TruServ's trade receivables. TruServ extends
credit to its members as part of its day-to-day operations. TruServ believes
that as no specific receivable or group of receivables comprises a significant
percentage of total trade accounts, its risk in respect to trade receivables is
limited. Additionally, TruServ believes that its allowance for doubtful accounts
is adequate with respect to member credit risks. TruServ has no investments in
derivative instruments and performs no speculative hedging activities. TruServ
does not have any special purpose entities ("SPE's") and all related party
transactions (i.e., transactions with members) are at arm's length.
ITEM 4. CONTROLS AND PROCEDURES
Based upon an evaluation within 90 days prior to the filing date of this
report, TruServ's Chief Executive Officer and Chief Financial Officer concluded
that TruServ's disclosure controls and procedures are effective. There have been
no significant changes in TruServ's internal controls or in other factors that
could significantly affect TruServ's internal controls subsequent to the date of
our most recent evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
15
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
($ in thousands)
The company is involved in various claims and lawsuits incidental to its
business. The following significant matters existed at March 29, 2003:
BESS ACTION
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. 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
judgment was entered on August 6, 2002. TruServ believes that the court's ruling
on Bess' counterclaim is not supported by either the facts or Delaware corporate
law. TruServ's motion for reconsideration and reversal of the August judgment on
Bess' counterclaim was denied on November 21, 2002. TruServ filed its notice of
appeal in the Second District of Illinois Appellate Court on December 2, 2002.
DERIVATIVE ACTION
In August 2000, an action was brought in Delaware Chancery Court (New Castle
County) by a former TruServ member ("Hudson City Properties") against certain
present and former directors and certain former officers of TruServ and against
TruServ. The complaint is brought derivatively on behalf of TruServ and alleges
that the individual defendants breached their fiduciary duties in connection
with the accounting adjustments made by TruServ in the fourth quarter of 1999.
Hudson City Properties also seeks to proceed on a class-action basis against
TruServ on behalf of all those affected by the moratorium on stock redemption
and the creation of the loss allocation accounts. Hudson City Properties alleges
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 the 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 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.
16
KENNEDY ACTION
In June 2000, various former members of TruServ filed an action against TruServ
in the Circuit Court of the 19th Judicial Circuit (McHenry County, Illinois)
(the "Kennedy action"). The plaintiffs in the Kennedy 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 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.
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.
Similar claims were filed against TruServ as counterclaims to various complaints
filed by TruServ in McHenry County to recover accounts receivable balances from
other former members. Those claims were consolidated with the Kennedy action. In
March 2001, the Kennedy complaint was amended to add additional plaintiffs. Also
in March 2001, another action was filed against TruServ on behalf of additional
former members, in the same court, by the same law firm (the "A-Z action"). The
A-Z complaint alleges substantially similar claims as those in the Kennedy
action, with the principal difference being that the claims relate to the
elimination of the ServiStar brand name. The Kennedy and A-Z actions have been
consolidated for purposes of discovery, which is ongoing. The plaintiffs seek
damages for stock repurchase payments, lost profits and goodwill, out of pocket
expenses, attorney fees and punitive damages. In July 2002, the plaintiffs in
these consolidated actions amended their complaints to name as defendants two
former officers of TruServ. To the extent that TruServ may have indemnification
obligations to these former officers, TruServ's directors and officers'
liability insurance policies may be available to cover such claims.
TruServ intends to vigorously defend all of these cases. However, a ruling in
favor of any or all of the plaintiffs in the Kennedy Action, the Derivative
Action or the Bess Action could have a material adverse effect on TruServ. The
courts could rule that TruServ violated its Agreement with members or its
By-Laws in establishing the loss allocation account; imposing the moratorium on
stock redemptions; or imposing minimum purchase commitments on members. In the
event of such a ruling, TruServ could be required to do one or more of the
following:
- - lift the moratorium on stock redemptions; and
- - redeem members' stock presented for redemption at its full stated value.
Such actions could constitute events of default under TruServ's Senior Debt.
Unless appropriate waivers were obtained from TruServ's lenders, the amounts due
under the Senior Debt could become immediately
17
due and payable or the Senior Debt agreements could have to be renegotiated.
However, there can be no assurances that TruServ would be able to obtain the
requisite waivers or successfully renegotiate its Senior Debt agreements. In the
event TruServ was unable to obtain the requisite waivers or successfully
renegotiate its Senior Debt agreements, a material adverse effect on TruServ's
liquidity and capital resources could result.
CLAIMS AGAINST ERNST & YOUNG LLP
TruServ is pursuing claims against its former outside auditors, Ernst & Young
LLP ("E&Y"), for professional malpractice, breach of contract, deceptive
business practices and fraud. TruServ contends that E&Y failed to properly
discharge its duties to TruServ and failed to identify, in a timely manner, and
indeed concealed, certain material weaknesses in TruServ's internal financial
and operational controls. As a result, TruServ was forced to make an
unanticipated accounting adjustment in the fourth quarter of 1999 in the total
amount of $121,333 (the "Fourth Quarter Charge"). As a result, TruServ reported
a net loss of $130,803 for the fiscal year ended December 31, 1999. It is
TruServ's belief that had E&Y properly discharged its duties, the scope and
breadth of the Fourth Quarter Charge, as well as the accounting and operational
control deficiencies that necessitated the charge, would have been substantially
lessened, if not eliminated in their entirety. As a result of E&Y's failures,
TruServ has suffered significant financial damages. The factual allegations that
form the basis for TruServ's claim against E&Y include, in part, the issues
identified in the Securities and Exchange Commission cease and desist order
described below. TruServ began discussion of its claims with E&Y early in the
fall of 2001. Pursuant to the dispute resolution procedures required by
TruServ's engagement letter with E&Y, TruServ and E&Y attempted to mediate this
dispute during the first six months of 2002. When those attempts proved
unsuccessful, and again pursuant to the dispute resolution procedures, TruServ
filed its claim with the American Arbitration Association on July 31, 2002. The
arbitration, which is subject to certain confidentiality requirements, is
currently pending.
TRUSERV ORDER
On March 4, 2003, the Commission entered an Order Instituting Cease-and-Desist
Proceedings, Making Findings and Imposing Cease-and-Desist Order Pursuant to
Section 21C of the Securities and Exchange Act of 1934 as to TruServ
Corporation, SEC File No. 3-11050 (the "Order"). TruServ consented to the entry
of the Order without admitting or denying the findings in the Order.
The Commission entered the Order following an investigation by the staff of the
Commission of the circumstances that led to significant financial adjustments
resulting in the 1999 loss of $131,000. The Order found that, from approximately
July 1997 through the end of 1999, TruServ's accounting systems and
18
internal controls related to inventory management were inadequate. The Order
also found that these deficiencies caused TruServ to understate expenses, which
resulted in overstatement of net income, during 1998 and 1999. According to the
Order, TruServ filed erroneous reports on Form 10-Q for the first, second and
third quarters of 1998 and 1999 and an erroneous report on Form 10-K for 1998.
In 1999, TruServ reported a loss, caused by weaknesses in the accounting
practices and internal controls at TruServ, of approximately $131,000.
The largest component of the 1999 loss of $131,000 represented adjustments to
inventory and merchandise payable. Specifically, the Commission found that
TruServ had in 1998 and the first three quarters of 1999 misstated accounts,
including unbilled merchandise, claims for returned merchandise from members,
and additional stock adjustments, consisting of lost and found merchandise,
damaged goods, and others.
The Order also found that TruServ and its senior management had notice of its
internal control problems as early as February 1997, through a report prepared
by its internal audit department. The report noted several specific, recurring
problems in data entry concerning inventory management that caused significant
discrepancies in TruServ's inventory records. According to the Order, no one
acted on the 1997 report, even though it concluded that TruServ did not have
adequate internal controls over its inventory systems.
TruServ investigated the causes of the inventory and merchandise payable
adjustments, and in order to prevent problems from occurring in the future, it
adopted several changes in procedure to correct accounting weaknesses. According
to the Order, as a result of these systemic flaws, TruServ is not able to
restate any of the erroneous filings made in 1998 and 1999. The Commission made
no allegations of fraud nor did it seek civil monetary penalties in connection
with entering the Order.
Pursuant to the Order, TruServ has agreed to continue to maintain the procedures
that it has adopted since the Spring of 2000 and otherwise to comply with the
accounting, record keeping and internal control provisions of the Securities and
Exchange Act of 1934 (the "Exchange Act"). In addition, TruServ will continue to
employ as a member of its management team, during the fiscal years ending 2002,
2003 and 2004, a Director of Internal Audit who will be responsible for
executing TruServ's internal audit plan and will continue to engage a public
accounting firm to assist the Director of Internal Audit in performing internal
audit procedures.
Also pursuant to the Order, within 90 days after the close of each fiscal year
ending 2002, 2003 and 2004, the Director of Internal Audit will prepare and
deliver to TruServ's board audit committee, with copies to the Commission,
TruServ's auditors and the public accounting firm assisting the Director of
Internal Audit, a report describing the scope of the audit plan during the
preceding year, confirmation that the audit plan
19
was carried out, an overview of significant control weaknesses identified that
require improvement and a review of the steps taken to improve the system of
internal controls. The fiscal year 2002 report was filed within 90 days after
the close of the fiscal year.
On March 4, 2003, the Commission also entered an Order Instituting
Cease-and-Desist Proceedings, Making Findings and Imposing Cease-and-Desist
Order Pursuant to Section 21C of the Securities and Exchange Act of 1934 as to
Kerry Kirby, File No. 3-11053 (the "Kirby Order"). The Kirby Order made
substantially all of the findings that were made in the Order. In addition, the
Kirby Order found that Kerry Kirby, the chief financial officer of TruServ from
July 1997 to May 1999, in part due to his failure to act on the internal audit
report that TruServ's accounting systems were flawed, was a cause of TruServ's
violations of securities laws requiring the accurate financial reporting,
accurate books and records and adequate internal controls.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
($ in thousands)
In March 2000, the board of directors of TruServ declared a moratorium on
redemptions 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 1999 loss were allocated to them and members who did
not request redemption were saddled with the losses of those members who
requested redemption. Moreover, the board of directors considered TruServ's debt
agreements and, in particular, the financial covenants thereunder, which
prohibit redemptions when TruServ, among other things, does not attain certain
profit margins.
At the time the board of directors declared the moratorium on redemptions,
TruServ's By-Laws did not impose limitations on the board's discretion to
initiate or to continue a moratorium on redemption. The By-Laws merely provided
that, upon termination of a member's agreement, TruServ was to redeem the
member's shares. Nevertheless, the board of directors concluded that its
fiduciary obligations to TruServ and its members would not permit it to effect
redemptions under the circumstances described above. After the board of
directors declared the moratorium, the board of directors amended the By-Laws to
provide that if TruServ's funds available for redemption are insufficient to pay
all or part of the redemption price of shares of capital stock presented for
redemption, the board of directors may, in its sole discretion, delay the
payment of all or part of the redemption price.
20
TruServ's amended debt agreements preclude the lifting of the stock moratorium
until June 30, 2004, except for certain hardship cases, not to exceed $2,000
annually. Given certain ongoing related litigation (see "Legal Proceedings"),
TruServ does not currently plan to engage in hardship redemptions of stock.
Subsequent to the expiration of the prohibition against stock redemptions under
the amended debt agreements, which could occur in the first half of 2004, and if
TruServ completes the refinancing of its amended debt agreements, the board of
directors will consider lifting the moratorium. In doing so, the board of
directors will consider the financial condition of TruServ, and will not lift
the moratorium unless it can conclude that effecting redemptions of TruServ's
capital stock will not "impair the capital" of TruServ, unfairly advantage some
members to the disadvantage of others, or violate the financial covenants under
its debt agreements. The board of directors is monitoring the financial
performance of TruServ quarterly.
As of March 29, 2003, the aggregate value of Class A common stock and Class B
common stock presented for redemption but deferred due to the moratorium was
approximately $43,278, after the offset of the aggregate loss allocations
related to the Class B common stock. Of the total number of $43,278, $16,579
represented the aggregate value of the Class A common stock (which has
historically been paid out at the time of redemption) and $51,530 represented
the aggregate value of the Class B common stock (which has historically been
paid out by means of a note payable in five equal annual installments), offset
by the aggregate value of the loss allocation accounts related to the Class B
common stock of $24,831.
The total number of $43,278 does not reflect the aggregate amount of
approximately $7,939 of accounts receivable owed by the former members to
TruServ that would be offset against their stock upon its redemption.
Historically, TruServ has offset amounts due by its members against amounts that
it pays to the members on redemption of their stock. In addition, the total
number of $43,278 does not reflect the deduction of the remaining amount of the
2001 loss, if any, that has been allocated, on a member by member basis, from
the accumulated deficit account and that would reduce the amount paid to a
member on the redemption of its stock.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
21
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) Reports on Form 8-K
(1) A Current Report on Form 8-K was filed on January 6, 2003
regarding November 2002 earnings.
(2) A Current Report on Form 8-K was filed on February 24, 2003
regarding fiscal year 2002 earnings.
(3) A Current Report on Form 8-K was filed on February 25, 2003
regarding the nomination of two storeowners as directors.
(4) A Current Report on Form 8-K was filed on March 6, 2003
regarding the Order Instituting Cease-and-Desist
Proceedings, Making Findings and Imposing Cease-and-Desist
Order Pursuant to Section 21C of the Securities and Exchange
Act of 1934 entered by the Securities and Exchange
Commission.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
TRUSERV CORPORATION
Date: May 13, 2003 By /s/ DAVID A. SHADDUCK
-----------------------------------
David A. Shadduck
Senior Vice President and
Chief Financial Officer
22
CERTIFICATION
I, Pamela Forbes Lieberman, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Truserv Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of
Truserv as of, and for, the periods presented in this quarterly report;
4. Truserv's other certifying officer and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in Exchange Act Rules
13a-14 and 15d-14) for Truserv and we have:
a. designed such disclosure controls and procedures to ensure that
material information relating to Truserv, including its consolidated
subsidiaries, is made known to us, particularly during the period in
which this quarterly report is being prepared;
b. evaluated the effectiveness of Truserv's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. Truserv's other certifying officer and I have disclosed, based on our most
recent evaluation, to Truserv's auditors and the audit committee of Truserv's
board of directors:
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect Truserv's ability to record,
process, summarize and report financial data and have identified for
Truserv's auditors any material weaknesses in internal controls; and
23
b. any fraud, whether or not material, that involves management or
other employees who have a significant role in Truserv's internal
controls; and
6. Truserv's other certifying officer and I have indicated in this quarterly
report whether or not there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
TRUSERV CORPORATION
Date: May 13, 2003
By /s/ PAMELA FORBES LIEBERMAN
---------------------------
Pamela Forbes Lieberman
Chief Executive Officer
24
CERTIFICATION
I, David A. Shadduck, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Truserv Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of
Truserv as of, and for, the periods presented in this quarterly report;
4. Truserv's other certifying officer and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in Exchange Act Rules
13a-14 and 15d-14) for Truserv and we have:
a. designed such disclosure controls and procedures to ensure that
material information relating to Truserv, including its consolidated
subsidiaries, is made known to us, particularly during the period in
which this quarterly report is being prepared;
b. evaluated the effectiveness of Truserv's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. Truserv's other certifying officer and I have disclosed, based on our most
recent evaluation, to Truserv's auditors and the audit committee of Truserv's
board of directors:
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect Truserv's ability to record,
process, summarize and report financial data and have identified for
Truserv's auditors any material weaknesses in internal controls; and
25
b. any fraud, whether or not material, that involves management or
other employees who have a significant role in Truserv's internal
controls; and
6. Truserv's other certifying officer and I have indicated in this quarterly
report whether or not there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
TRUSERV CORPORATION
Date: May 13, 2003
By /s/ DAVID A. SHADDUCK
---------------------
David A. Shadduck
Senior Vice President and
Chief Financial Officer
26