10-Q 1 c77053e10vq.txt QUARTERLY REPORT 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 -------------------------------------- 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