TRUSERV CORP - 10-K Annual Report

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

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FORM 10-K

(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002 OR

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)

FOR THE TRANSITION PERIOD FROM TO

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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)

Registrant's telephone number, including area code: (773) 695-5000

Securities registered pursuant to Section 12(b) of the Act: NONE

Securities registered pursuant to Section 12(g) of the Act: NONE

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 IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM
405 OF REGULATION S-K (SEC.229.405 OF THIS CHAPTER) IS NOT CONTAINED HEREIN, AND
WILL NOT BE CONTAINED, TO THE BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE
PROXY OR INFORMATION STATEMENTS INCORPORATED BY REFERENCE IN PART III OF THIS
FORM 10-K OR ANY AMENDMENT TO THIS FORM 10-K. [X]

INDICATE BY CHECK MARK WHETHER THE REGISTRANT IS AN ACCELERATED FILER (AS
DEFINED IN RULE 12B-2 OF THE ACT). YES __. NO X.

STATE THE AGGREGATE MARKET VALUE OF THE VOTING AND NON-VOTING COMMON EQUITY
HELD BY NON-AFFILIATES COMPUTED BY REFERENCE TO THE PRICE AT WHICH THE COMMON
EQUITY WAS LAST SOLD, OR THE AVERAGE BID AND ASKED PRICE OF SUCH COMMON EQUITY,
AS OF THE LAST BUSINESS DAY OF THE REGISTRANT'S MOST RECENTLY COMPLETED SECOND
FISCAL QUARTER.

There is no public market for Registrant's Class A and Class B common
stock. The Registrant's Class A common stock is offered by the Registrant in
units of 60 shares each, exclusively to retailers of hardware and related
merchandise, in connection with their becoming members of the Registrant. The
Class B common stock is issued as part of the patronage dividend to members of
the Registrant. The terms of the Class A and Class B common stock limit its
transferability. The Class B common has no voting rights.

INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE REGISTRANT'S
CLASSES OF COMMON STOCK, AS OF THE LATEST PRACTICABLE DATE.

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TABLE OF CONTENTS

PART I

THIS ANNUAL REPORT AND THE DOCUMENTS INCORPORATED HEREIN BY REFERENCE
CONTAIN FORWARD-LOOKING STATEMENTS THAT ARE BASED ON MANAGEMENT'S EXPECTATIONS,
ESTIMATES AND ASSUMPTIONS. THE FORWARD-LOOKING STATEMENTS ARE MADE PURSUANT TO
THE SAFE HARBOR PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995. THESE STATEMENTS ARE NOT GUARANTIES OF FUTURE PERFORMANCE AND INVOLVE
CERTAIN RISKS AND UNCERTAINTIES THAT ARE DIFFICULT TO PREDICT. THEREFORE, ACTUAL
FUTURE RESULTS AND TRENDS MAY DIFFER MATERIALLY FROM WHAT WE FORECAST DUE TO A
VARIETY OF FACTORS, INCLUDING WITHOUT LIMITATION, OUR ASSUMPTIONS ABOUT
FINANCING REQUIREMENTS AND TERMS, INTEREST RATE FUNCTIONS, CAPITAL REQUIREMENTS
OF TRUSERV AND TRENDS IN OUR INDUSTRY.

ITEM 1. BUSINESS.
($ IN THOUSANDS -- EXCEPT PER SHARE INFORMATION)

THE COMPANY

TruServ Corporation was organized as Cotter & Company, a Delaware
corporation, in 1953. Upon its organization, it succeeded to the business of
Cotter & Company, an Illinois corporation organized in 1948. On July 1, 1997,
Cotter & Company merged with ServiStar Coast to Coast Corporation ("SCC"). SCC
was a hardware wholesaler incorporated in 1935, under the name American Hardware
Supply Company, with a strong presence in retail lumber and building materials.
Following the merger, Cotter & Company was renamed TruServ Corporation.
TruServ's main executive offices are located at 8600 West Bryn Mawr Avenue,
Chicago, Illinois 60631-3505. Its main telephone number is (773) 695-5000. Its
web page address is www.truserv.com.

The merger united two similar organizations under the name of TruServ
Corporation, creating one of the largest hardware/home center cooperatives in
the United States. The goals were to: (i) lower pricing for the members by
increasing buying power, (ii) increase potential for rebates by combining vendor
purchases, and (iii) better leverage operating expenses by consolidating
distribution centers and reducing duplicate corporate overhead costs.

In fiscal year 2000, TruServ sold its lumber and building materials
business, consisting primarily of intangibles and inventory, to Builder Marts of
America, Inc. ("BMA"). TruServ concluded that BMA would be able to provide
lumber and building materials to TruServ members at lower cost. The lumber and
building materials business had been a low-margin business for TruServ. In
connection with the sale of the lumber and building materials business to BMA,
TruServ entered into non-compete, cooperation, trademark license and lease
agreements with BMA. The terms of these agreements range from two to ten years.

In fiscal year 2001, TruServ sold its ownership interest in TruServ Canada
Cooperative, Inc. along with the headquarters and warehouse building and other
parcels of real estate in Winnipeg, Manitoba to the current member group of the
cooperative. The proceeds received enabled TruServ to recover its capital
investment in the Canadian cooperative as well as the appraised value of the
real estate and to retire all indebtedness relating to Canadian activities. In
connection with the transaction, TruServ revised and extended a license
agreement with the Canadian cooperative to enable it and its members to continue
to do business under the principal TruServ trademarks. In addition, TruServ
continues to provide True Value paints and supplies to the Canadian cooperative.

On December 31, 2002, TruServ completed a sale leaseback transaction of
seven of its distribution centers. The sale generated net proceeds of $121,438,
which were used to pay down the revolving credit facility, senior notes and
synthetic lease obligation (the "Senior Debt"), all of whom are parties to the
intercreditor agreement. 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 senior
notes. The facilities are being leased back by TruServ under three 20-year lease
agreements that each contain, at TruServ's option, two extension periods on the
lease. See "Properties -- Sale Leaseback Transaction." The proceeds from the
sale will help TruServ reduce outstanding Senior Debt less make-whole notes to
below $270,000 at June 30, 2003. See "Business -- Financing Agreements" below.

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GENERAL DESCRIPTION OF THE BUSINESS

TruServ, organized as a cooperative, is one of the largest member-owned
wholesalers of hardware and related merchandise in the United States, serving
approximately 6,600 retail and industrial distribution outlets for its members
as of December 31, 2002. TruServ also manufactures and sells paint and paint
applicators.

TruServ sells its products to hardware retailers, industrial distributors
and rental retailers who have entered into retail member agreements with it.
TruServ serves its members by principally functioning as a low cost distributor
of goods and maximizing its volume purchasing abilities, primarily through
vendor rebates and discount programs, for the benefit of its members. These
benefits are passed along to its members in the form of lower prices and/or
patronage dividends. TruServ also provides to its members value-added services
such as marketing, advertising, merchandising, and store location and design
services.

Generally, members are entitled to use one of certain TruServ trademarks
and trade names, including the federally registered True Value(R), Grand Rental
Station(R), Taylor Rental(R), Party Central(R), Home & Garden Showplace(R) and
Induserve Supply(R) trademarks, service marks and collective membership marks.
See "Trademarks, Service Marks and Collective Membership Marks" below. Members
have access to certain TruServ private label products and when there are annual
profits they are entitled to receive annual patronage dividends based upon their
purchases from TruServ. In accordance with TruServ's By-Laws and the Retail
Member Agreements, the annual patronage dividend is paid to members out of the
gross margins from operations and other patronage source income, after deduction
for expenses, reserves and other provisions as may be authorized by the board of
directors. See "Distribution of Patronage Dividends" below.

As of December 31, 2002, TruServ serves approximately 6,600 retail and
industrial distribution outlets for its members throughout the United States and
in 51 other countries. Primary concentrations of members exist in New York
(approximately 9%), Pennsylvania (approximately 7%), California and Texas
(approximately 5% each), Illinois, Michigan and New Jersey (approximately 4%
each) and Massachusetts, Minnesota, Ohio, Washington and Wisconsin
(approximately 3% each).

SALES AND SUPPLIERS

TruServ provides each of its members with an illustrated price catalog
showing the products available from TruServ, which the members can access
through the member Internet site. Upon request, a member will also receive a
printed version of the catalog. These products, comprised of more than 62,000
stockkeeping units ("SKUs") maintained at TruServ's distribution centers, are
divided into seven categories of merchandise. In addition to purchasing products
which are maintained at the distribution centers, members can purchase
additional SKUs directly from TruServ approved vendors and have those purchases
drop shipped directly to them, but have the product billed through TruServ.
Collectively, these products represent the products sold by TruServ's two
operating segments in 2002 and three operating segments in 2001 and 2000. See
Note 11, "Segment Information" to the Consolidated Financial Statements
beginning at page F-1 for additional segment information.

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The seven product categories (eight product categories through early 2001)
are set forth in the following table, along with the corresponding dollars of
total revenues for each category during the last three fiscal years:

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(1) The lumber business was sold on December 29, 2000. The revenue and cost of
revenue from merchandise shipped and billed in fiscal year 2001, but
negotiated prior to December 29, 2000, was recorded in TruServ's results of
operations in fiscal year 2001.

(2) The Canadian business was sold on October 22, 2001. Total sales from
Canadian operations were $84,397 in 2001 and $109,009 in 2000 and such sales
are reflected in the above amounts for each of the eight categories.

TruServ's merchandise sales to its members are divided into three logistics
categories, as follows:

- warehouse shipment sales (approximately 65%, 63% and 41% of total sales
for fiscal 2002, 2001 and 2000, respectively);

- direct shipment sales (approximately 31%, 33% and 56% of total sales for
fiscal 2002, 2001 and 2000, respectively); and

- relay shipment sales (approximately 4%, 4%, and 3% of total sales for
fiscal 2002, 2001 and 2000, respectively).

The change in the mix between the three logistic categories is
predominately due to the lumber business that was sold on December 29, 2000. All
lumber business sales were generated through the direct shipment logistic
category. Excluding lumber business transactions in 2000, the mix of sales would
have been 60% warehouse shipment, 36% direct shipment and 4% relay shipment.

Warehouse shipment sales are sales of products that are purchased,
warehoused and resold by TruServ in response to orders from the members. Direct
shipment sales are sales of products that are purchased through TruServ by the
members but delivered directly to members from vendors and TruServ accepts the
credit risk. Relay sales are sales of products that are purchased through
TruServ in response to the requests of several members for a product that
typically is:

- to be included in future promotions,

- seasonal in nature,

- not normally held in inventory, and

- not conducive to direct shipment.

Generally, TruServ will give notice to all members of its intention to
purchase products for relay shipment and will then purchase only as many items
as the members order. When the product shipment arrives at TruServ, it is not
warehoused; rather, TruServ breaks up the shipment and "relays" the appropriate
quantities to the members who placed orders.
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TruServ has numerous individual agreements with or commitments from its
vendors, most of which are terminable by the vendors or TruServ without cause.
These termination provisions, either individually or in the aggregate, have not
had any material adverse effect on TruServ's ability to conduct its business.
The goods and services purchased by TruServ from these suppliers are generally
available from a wide variety of sources. TruServ is not dependent upon any one
supplier or group of suppliers.

TruServ also manufactures and sells paint and paint applicators. The
principal raw materials used by TruServ in its paint manufacturing activities
are chemicals. All raw materials are purchased from outside sources. In the
past, TruServ has been able to obtain adequate sources of raw materials and
other items used in production. TruServ does not currently anticipate shortages
of materials that would materially impact its paint manufacturing operations.

OTHER SERVICES

TruServ annually sponsors two "markets", funded in part by vendors through
booth fees, at which it features the products available for purchase by members,
including new merchandise and seasonal items. The markets permit members and
prospective members to keep better informed as to industry trends and the
availability of merchandise including new and seasonal products. In the year
2003, one of the markets will be held in Atlanta, Georgia, and the other will be
held in Las Vegas, Nevada. As the markets generate income and stimulate member
purchases, the timing of markets impact the timing of sales and income
recognition for TruServ. All members are invited to the markets and attending
members generally place substantial orders for delivery of merchandise during
the period between markets.

BACKLOG

As of February 22, 2003 and February 23, 2002, respectively, TruServ had a
backlog of firm orders (including relay orders) of approximately $10,764 and
$56,177. TruServ's backlog at any given time is made up of two principal
components:

- normal resupply orders; and

- market orders for future delivery.

Resupply orders are orders from members for merchandise to keep inventories
at normal levels. Generally, such orders are filled the day following receipt,
except that relay orders are for future delivery. Relay orders for future
delivery are not intended to be filled for several months. Market orders for
future delivery are member orders placed at one of TruServ's two markets for new
or seasonal merchandise, to be delivered during the subsequent period between
markets. Thus, TruServ generally has a relatively high backlog at the end of
each market, which decreases in subsequent months until the next market occurs.
The substantial decrease in backlog orders in 2003 relative to 2002 is due to
the timing of the markets held in those two periods. In 2002, the spring market
was held in early February but in 2003 it will not be held until late April.

COMPETITION

The retail hardware industry is characterized by intense competition.
Independent retail hardware businesses, including those served by TruServ, face
intense competition from chain stores, discount stores, home centers and
warehouse operations such as Wal-Mart, Home Depot, Menards, Sears and Lowe's.
Increased operating expenses for the retail stores, including increased costs
due to longer store hours and higher retail occupancy costs, have cut into
operating margins for members and brought pressure on TruServ to achieve lower
merchandise costs for its members. In response, TruServ works with its members
to drive profitability through operational improvement programs such as AIM
(advanced inventory management) which focuses on assortments of fast turning
products as well as retail programs which focus on areas such as pricing,
merchandising, store design and signage. In addition, TruServ has introduced
wholesale pricing strategies, Priced 2 Win(TM) and Connect 4 Profit(R), which
are designed to improve retail competitiveness. The trueAdvantage(R) program was
introduced in 1995 and was subsequently upgraded to promote higher retail

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standards in order to build consumer goodwill and create a positive image for
all member retail outlets. In 2002, TruServ changed the program to Store of
First Choice(R) to focus on incentivizing members to adopt retail best
practices.

Competitive conditions in the wholesale hardware industry are similarly
intense and increasing, particularly as a result of the intense pressure on
hardware retailers to obtain low-cost wholesale supply sources for merchandise
acquisition. TruServ competes with other member-owned and non-member-owned
wholesalers as a source of supply and merchandising support for independent
retailers. Competitive factors considered by independent retailers in choosing a
source of supply include pricing, servicing capabilities, promotional support
and merchandise selection, quality and patronage dividends. TruServ is
concentrating on its supply channel strategies and practices for gaining
sustainable competitive advantage. In several markets in the United States,
TruServ competes directly with other member-owned wholesalers such as Ace
Hardware Corporation and Do-it-Best Corporation.

TRADEMARKS, SERVICE MARKS AND COLLECTIVE MEMBERSHIP MARKS

TruServ's trademarks, service marks and collective membership marks are of
prime importance to TruServ. Many of the marks are highly recognized and
utilized in extensive advertising and marketing campaigns, and TruServ
vigorously defends its marks. As of December 31, 2002, TruServ's members have
approximately 6,600 retail and industrial distribution outlets that operate
predominately as retail hardware stores, rental facilities, horticulture outlets
as well as commercial and industrial distributors, throughout the United States
and in 51 countries, most of which sell merchandise and services under the
marks.

The marks include the True Value(R) marks, the ServiStar(R) mark, the Coast
to Coast(R) mark, the Induserve Supply(R) mark, the Party Central(R) mark, the
Grand Rental Station(R) mark, the Taylor Rental(R) mark, the Home & Garden
Showplace(R) mark and the Commercial Sales(R) mark. The marks also include E-Z
Kare(R), Weatherall(R), and Easy Color(R) for paint. All of the marks are
currently used in commerce and TruServ intends to use the marks in commerce in
the future. Each of the marks is renewable at TruServ's option and TruServ
intends to renew them upon expiration. Members have continued to conduct their
businesses under the same retail banners as before the merger of Cotter and SCC;
however, beginning in year 2000, many members with the retail banners of Coast
to Coast(R) and ServiStar(R) started to conduct their business under the single
retail banner of True Value(R). TruServ's marks also include Help is Just Around
the Corner(R), Christmas is Just Around the Corner(R) and Summer is Just Around
the Corner(R).

EMPLOYEES

As of December 31, 2002, TruServ employed approximately 3,200 persons in
the United States on a full-time basis. Due to the widespread geographical
distribution of TruServ's operations, employee relations are governed by the
practices prevailing in the particular area where the employees are located and
are generally implemented locally. Approximately 43% of TruServ's 2,400
hourly-wage employees are covered by collective bargaining agreements that are
generally effective for periods of three or four years. In general, TruServ
considers its relationship with its employees to be good.

FINANCING AGREEMENTS

On December 30, 2002, TruServ amended the Senior Debt agreements that had
previously been amended in April 2002 in order to allow for a sale leaseback
transaction that was completed on December 31, 2002 (the "December 2002
Amendments"). TruServ applied the net proceeds of the sale leaseback
transaction, $121,438, to pay down the Senior Debt, all of whom are parties to
the intercreditor agreement. 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 of senior
notes. The December 2002 Amendments mainly set preliminary financial covenants
to allow for the substantial reduction in debt and the corresponding increase in
rent payments resulting from the sale leaseback transaction. On March 13, 2003,
TruServ amended the Senior Debt agreements that had previously been amended on
December 30, 2002 (the "March 2003 Amendments"). The March 2003 Amendments
primarily finalized the financial covenants resulting from the sale leaseback
transaction and

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extended the maturity date of the Hagerstown facility's synthetic lease
obligation to the earlier of December 31, 2003 or a refinancing of the revolving
credit facility. See Note 5, "Lease Commitments" and Note 16, "Subsequent
Events" to the Consolidated Financial Statements beginning at page F-1.

The Senior Debt agreements were previously amended on April 11, 2002 when
TruServ entered into various amendments that eliminated the event of default
created when TruServ failed to comply with a covenant as of February 24, 2001
(the "April 2002 Amendments"). The April 2002 Amendments to the revolving credit
facility extended the term of the facility from June 2002 to June 2004. The
amount of the commitment at the time of amendment was $200,000. The commitment
under the revolving credit facility is permanently reduced by the amount of any
prepayments allocated to and paid on the revolving credit facility.

Borrowings under the revolving credit facility are subject to borrowing
base limitations that fluctuate in part with the seasonality of the business.
The borrowing base formula limits advances to the sum of 85% of eligible
accounts receivable, 50% of eligible inventory, 60% of the appraised value of
eligible real estate and 50% of the appraised value of eligible machinery and
equipment; availability is further increased by seasonal over-advances and
decreased by reserves against availability. The revolving credit facility has
certain minimum unusable commitment amounts, which vary based upon the projected
seasonal working capital needs of TruServ. The interest rate on the revolving
credit facility was increased to the prime rate plus 3.25% resulting in a rate
of 7.5% as of December 31, 2002. The unused commitment fee is 0.75% per annum.

Since the April 2002 Amendments, the revolving credit facility commitment
has been permanently reduced to $143,200 at December 31, 2002 due to prepayments
in 2002 from the proceeds of asset sales. TruServ had available, under the
revolving credit facility, approximately $115,300 at December 31, 2002.

The April 2002 Amendments to the various senior note agreements maintained
the existing debt amortization schedules of the various notes. Interest rates on
the notes are at the pre-default rates, which ranged at December 31, 2002 from
10.04% to 11.85%. The senior notes and revolving credit facility amendments also
require initial, quarterly and annual maintenance fees. All of the cash proceeds
from certain asset sales and certain notes receivable, and 80% of any excess
cash flow, as defined in the amended senior notes and revolving credit facility
agreements, are to be used to prepay all parties to these amendments in
accordance with an amended intercreditor agreement.

For 2002, cash proceeds from certain asset sales and notes receivable
totaling $157,312 were used to prepay all parties to the intercreditor
agreement. No additional payment as a result of excess cash flow is required to
be made at this time. The intercreditor agreement establishes how the assets of
TruServ, which are pledged as collateral, are shared and how certain debt
prepayments are allocated among the senior lenders. For the year ended December
31, 2002, the prepayments to senior note holders of $93,915 resulted in
make-whole liabilities of $18,710, which are recorded as additional debt with an
offsetting entry to a prepaid interest account. As previously described, the
$12,695 of make-whole notes from the sale leaseback transaction, is a component
of the $18,710. The prepaid interest account will be amortized to interest
expense over the remaining life of the original notes.

The terms of the senior note agreements, that comprise a portion of the
Senior Debt, have always provided that in the event of early termination or a
prepayment of all or a portion of the notes, make-whole liabilities are
triggered. The nature of the transaction giving rise to the prepayment, the
length of time to maturity of a particular note, the magnitude of the prepayment
relative to the remaining debt outstanding and prevailing market interest rates
relative to the interest rates on the senior notes are factors in determining
the amount of potential make-whole liabilities. In the event of full prepayment
of the senior notes, the entire prepaid interest amount will be immediately
charged to interest expense. Management currently intends to pursue a
refinancing of the existing Senior Debt in the first half of 2004. Management
anticipates significantly lower interest rates upon refinancing. However, based
upon current market interest rates, make-whole expense of a refinancing, before
considering the impact of any negotiations with the senior note holders, could
range up to approximately $27,000, in addition to fully expensing the remaining
prepaid balance of existing make-whole, which was $17,864 at December 31, 2002.
TruServ management negotiated a reduction of approximately 50% in the make-whole
notes when it made prepayments on the senior notes from the proceeds of the sale
leaseback transaction.
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The April 2002 Amendments all require TruServ to meet certain restrictive
covenants relating to minimum sales, minimum adjusted EBITDA (earnings before
interest, taxes, depreciation and amortization), minimum fixed charge coverage,
minimum interest coverage and maximum capital expenditures. The senior note
holders may accelerate the due date of their notes, if TruServ does not have a
revolving credit facility in place to fund its seasonal cash flows. As described
above, some of these covenants were adjusted in March 2003, as a result of the
sale leaseback transaction. TruServ was in compliance with all of these
covenants as of December 31, 2002 as shown in the chart below:

TruServ believes it will continue to remain in compliance with its debt
covenants. For fiscal 2003, TruServ believes operating results will be
sufficient to comply with the covenants established in the March 2003
Amendments.

The term of the revolving credit facility will accelerate to June 30, 2003
from June 30, 2004, if on that date, total Senior Debt outstanding less the
aggregate principal amount of the make-whole notes is in excess of $270,000, or
total Senior Debt outstanding less the aggregate principal amount of the
make-whole notes, plus the unused amount of the commitment under the revolving
credit facility, less $30,000, is in excess of $320,000. At December 31, 2002,
the total Senior Debt outstanding less the aggregate principal amount of the
make-whole notes was $167,965 and the related commitments outstanding less
$30,000 totaled $253,323. Although the revolver portion of total Senior Debt
outstanding can fluctuate with the seasonal cash flow requirements of the
business, TruServ believes it will maintain a sufficiently low level of Senior
Debt outstanding with cash from operating activities to meet the June 30, 2003
requirement.

The April 2002 Amendments limit the amount of the cash portion of patronage
dividends to the 20% minimum required to be paid under applicable IRS
regulations in order for TruServ to maintain its status as a cooperative, unless
TruServ's operating performance achieves certain EBITDA targets, in which case,
up to 30% of the patronage dividend may be paid in cash. TruServ exceeded the
EBITDA target for 2002 and, as such, the cash portion of the 2002 patronage
dividend paid in 2003 averaged 30%.

The April 2002 Amendments also require the continuation of the stock
redemption moratorium through June 30, 2004. Further, it is an event of default
under the April 2002 Amendments to exceed certain levels of subordinated note
payments. TruServ did not exceed the maximum payment level of $24,000 in 2002
and, accordingly, was in compliance. In addition, an event of default arises
under the April 2002 Amendments in the event that TruServ fails to comply with
its corporate governance policy requiring the retention by TruServ of at least
two outside directors prior to May 31, 2002, at least four outside directors
prior to September 1, 2002 and at least five outside directors prior to November
1, 2002. As of October 7, 2002, TruServ appointed its fifth outside director
and, as such, TruServ was in compliance with the corporate governance covenant
as of December 31, 2002.

The April 2002 Amendments also contain requirements for other customary
covenants, representations and warranties, funding conditions and events of
default. As of December 31, 2002, and as of the filing date of this Annual
Report on Form 10-K, TruServ was in compliance with all applicable covenants and
has not triggered any events of default.

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RETAIL MEMBER AGREEMENT

The TruServ Retail Member Agreement provides, among other things, that each
member:

(1) will be required to purchase 60 shares of Class A common stock at
a purchase price of $100 per share for each store owned by the member, up
to a maximum of 300 shares for five or more stores that are owned by a
member;

(2) will conduct its businesses subject to the terms of the Retail
Member Agreement;

(3) will conduct a retail hardware store, home or garden center, or a
full-service rental operation at a designated location;

(4) will comply with TruServ's By-Laws, as may be amended from time to
time;

(5) will accept patronage dividends in a form complying with the
requirements of the Internal Revenue Code for deduction from gross income
by TruServ;

(6) may receive different services or charges based upon the amount of
merchandise purchased by the member;

(7) agrees to have its Retail Member Agreement terminated in certain
circumstances by unilateral action by TruServ's board of directors;

(8) agrees to have its Retail Member Agreement automatically modified
upon notice from TruServ to the member of any relevant change in the
Certificate of Incorporation and/or By-Laws of TruServ, or by resolution of
the board of directors;

(9) agrees to utilize TruServ as its primary supplier for the types of
merchandise offered by TruServ;

(10) agrees to have its Retail Member Agreement governed by Illinois
law, enforced only in courts located in Cook County, Illinois or any
Illinois county contiguous to Cook County and only interpreted in
accordance with the substantive laws of Illinois without giving effect to
its conflict of laws principles; and

(11) may terminate the Retail Member Agreement upon 60 days written
notice mailed to any executive officer of TruServ at TruServ's principal
office.

CAPITAL STOCK

In general, members of TruServ own shares of Class A and Class B common
stock. Each of the two classes of stock has a par value of $100 per share. The
Class A common stock is sold in units of 60 shares. Each TruServ member is
required to purchase one unit of Class A common stock for each store owned;
however, no TruServ member is permitted to acquire more than five units of Class
A common stock. The Class B common stock is issued only to holders of the Class
A common stock in connection with the patronage dividend distributed to the
members for purchases in the year of the patronage dividend, as discussed below.
See "Distribution of Patronage Dividends" below.

Neither class of TruServ common stock accrues dividends and each has
limited transferability, by virtue of TruServ's right of first refusal to
repurchase at par value a member's stock before it can be transferred.
Historically, TruServ has always exercised this right. TruServ also retains an
automatic lien on both classes of stock for any indebtedness due to TruServ by a
member. There is no existing market for either class of TruServ common stock.

Participation in the earnings of a cooperative is based on member patronage
purchasing and reflected by the payment of patronage dividends. In general,
these patronage dividends are based on a member's purchasing volume and margins
applicable to merchandise or services purchased by the member, less any expenses
related to such business and less certain cooperative reserves. Patronage
dividends are determined on a yearly basis for purchasing activity conducted the
prior year, and are allocated no later than the 15th day of the ninth month
following the end of the calendar year. TruServ has been paying patronage
dividends in a

8

combination of cash and Class B common stock. As TruServ reported a net loss for
2001, there was no patronage dividend payable in 2002 related to 2001 results.
As TruServ reported a net margin for 2002, there was a patronage dividend paid
in 2003 related to 2002 results. Such dividend was a combination of cash, Class
B common stock and loss allocation account reduction (for members with such an
account). See "Allocation of Patronage Dividends against Loss Allocation
Account" below.

MORATORIUM ON REDEMPTIONS OF CAPITAL STOCK

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 was 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.

The 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"),
there are no plans for hardship redemption of stock. Subsequent to the
expiration of the prohibition against stock redemptions under the debt
agreements, which could be in the first half of 2004, if TruServ completes the
refinancing of its Senior Debt, 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 December 31, 2002, the amount of Class A common stock and Class B
common stock presented for redemption but deferred due to the moratorium is
approximately $39,614 after the offset of the loss allocation account. This
amount does not include an offset of approximately $7,343 of accounts receivable
owed by terminated members to the co-op. Historically, TruServ has offset such
amounts due by members to the co-op against amounts the co-op pays the members
on redemption of their stock. This amount does not include any remaining amount
of the 2001 loss that may be allocated, on a member by member basis, from the
accumulated deficit account and reduce the amount paid to a member on the
redemption of their stock. The $39,614 amount of stock presented for redemption,
but deferred due to the moratorium, includes approximately $15,475 related to
the Class A common stock (which was historically paid out at the time of
redemption) and $47,033 related to Class B common stock (which was historically
paid out in five equal annual installments), offset by the amount of the loss
allocation account related to the Class B common stock of $22,894.

9

DISTRIBUTION OF PATRONAGE DIVIDENDS

TruServ operates on a cooperative basis with respect to business transacted
with or for members. All members are entitled to receive patronage dividend
distributions from TruServ, calculated on the basis of gross margins of
merchandise and/or services purchased by each member. In accordance with
TruServ's By-Laws and Retail Member Agreement, the annual patronage dividend, as
authorized by the board of directors, is paid to members out of patronage source
income, less certain deductions, calculated as provided in the following
sentence. The total patronage dividend paid to members is based on pre-tax net
earnings calculated in accordance with accounting principles generally accepted
in the United States of America after reducing or increasing net earnings for
non-member income/(losses), reasonable reserves and deferred patronage
amortization. The total dividend is allocated to each purchase category, with
the main purchase categories being warehouse, relay, direct shipment and paint.
Once the patronage dividend is allocated to the purchase categories, it is
distributed to members based on the relative gross margin participation of the
member for each type of purchase category.

Patronage dividends are usually paid to members within 90 days after the
close of TruServ's fiscal year; however, the Internal Revenue Code (the "Code")
permits distribution of patronage dividends as late as the 15th day of the ninth
month after the close of TruServ's fiscal year, and TruServ may elect to
distribute the annual patronage dividend at a later time than usual in
accordance with the provisions of the Code.

TruServ's By-Laws provide for the payment of annual patronage dividends,
after payment of at least 20% of such patronage dividends in cash, in "qualified
written notices of allocation" including:

- Class B common stock based on its par value, up to a maximum of 2% of the
member's net purchases of merchandise from TruServ for the year (except
in unusual circumstances of individual hardship, in which case the board
of directors reserves the right to make payments in cash),

- promissory (subordinated) notes, or

- other property.

Promissory (subordinated) notes are for a five year term and bear interest
at a rate fixed from time to time by the board of directors. The notes are
subordinated to all other debt of TruServ. TruServ may also issue "nonqualified
written notices of allocation" to its members as part of its annual patronage
dividend. "Non-qualified written notices of allocation" are usually issued in
the form of Class B common stock. See "Payment of Patronage Dividends in
Accordance with the Internal Revenue Code" below.

In determining the form of the annual patronage dividend, a member's
required investment in Class B common stock of TruServ had historically been
limited by the board of directors to a certain amount, the cumulative value of
which would not exceed two percent (2%) of the member's net purchases of
merchandise and services from TruServ. Commencing in 1996, the board established
a minimum Class B common stock ownership requirement, which may be varied from
time to time. However, not all members have achieved the minimum target. This
minimum is calculated as the aggregate of a member's various types of annual
purchases multiplied by a specific percentage, which varies from 1% to 14%,
decreasing as total dollar purchases by category increase. The amount of the
required investment is determined by majority vote of the board of directors,
and may be increased or decreased from time to time. The necessity of an
increase or decrease is determined through an evaluation of the financial needs
of TruServ and the needs of its membership.

ALLOCATION OF PATRONAGE DIVIDENDS AGAINST LOSS ALLOCATION ACCOUNT

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

10

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
TruServ, 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. See related discussion in "Legal Proceedings."

The board of directors has determined that TruServ will 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, based upon the
member's proportionate Class A common stock and Class B common stock investment.
TruServ allocated the remainder of the fiscal 2001 loss based on 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.

PAYMENT OF PATRONAGE DIVIDENDS IN ACCORDANCE WITH THE INTERNAL REVENUE CODE

The Code specifically provides for the taxation of cooperatives (such as
TruServ) and their patrons (such as TruServ's members) so as to ensure that the
business earnings of a cooperative are currently taxable either to the
cooperative or to its patrons, but not both.

The shares of Class B common stock and other written notices distributed by
TruServ to its members, which disclose to the recipient the stated amount
allocated to the member by TruServ and the portion thereof that is a patronage
dividend, are "written notices of allocation" as that phrase is used in the
Code. For such written notices to be "qualified written notices of allocation"
within the meaning of the Code, it is necessary that TruServ pay 20% or more of
the annual patronage dividend in cash and that the members consent to having the
allocations (at their stated dollar amounts) treated as being constructively
received by them and includable in their gross income. Any written notices that
do not meet these requirements are "nonqualified written notices of allocation"
within the meaning of the Code.

TruServ deducts the sum of cash, the face value of qualified written
notices and the fair market value of any other property distributed to the
members (except nonqualified written notices of allocation) from its earnings in
determining its taxable income. Accordingly, all of these items, including such
qualified written notices of allocation, are includable in the gross income of
the members. Section 1385(a) of the Code provides, in substance, that the amount
of any patronage dividend which is paid in cash, qualified written notices of
allocation or other property (except nonqualified written notices of allocation)
shall be included in the gross income of the patron (member) for the taxable
year in which he or it receives such distribution. In general, for nonqualified
written notices of allocation, no amounts are either deductible by TruServ or
includable in a member's gross income until the notices are redeemed by TruServ.
TruServ itself therefore includes any earnings reflected in nonqualified written
notices of allocation in its own gross income and pays tax on them.

Thus, every year each member may receive, as part of the member's patronage
dividend, non-cash "qualified written notices of allocation," which may include
Class B common stock, the stated dollar amount of which must be recognized as
gross income by the member for the taxable year in which received. The portion
of the patronage dividend paid in cash (at least 20%) may be insufficient,
depending on a member's individual tax bracket, to pay income taxes due from the
member on its receipt of the full amount of the patronage dividend, including
cash and Class B common stock.

11

TruServ's By-Laws, reflecting the Code provision applicable to
cooperatives, usually treat shares of Class B common stock and such other
notices as the board of directors may determine, if distributed in payment of
patronage dividends, as "qualified written notices of allocation." The By-Laws
provide:

(1) for payment of patronage dividends in a combination of cash,
qualified written notices of allocation (including Class B common stock),
other property and nonqualified written notices of allocation; and

(2) that membership in the organization (i.e., the status of being a
member of TruServ) constitutes the member's consent to recognize the stated
amount of any qualified written notices of allocation or other property
distributed to it as includable in the member's gross income as provided in
Section 1385(a) of the Code.

Under the Code, any person who becomes or became a member of TruServ, or
who remains a member after adoption of the By-Laws, providing that membership in
TruServ constitutes consent to be taxed on receipt of qualified written notices
of allocation, is deemed to have consented to be taxed on receipt of patronage
dividends in cash and in qualified written notices of allocation, in accordance
with Section 1385(a) of the Code. Written notification of the adoption of the
By-Laws and its significance, and a copy of the By-Laws, were sent to each then
existing member and have been, and will continue to be, delivered to each person
prior to becoming a member. Such consent is then effective as to patronage
dividends. Such consent may be revoked by the member only by terminating its
membership in TruServ in the manner provided in his or its Retail Member
Agreement. See "Retail Member Agreement" above.

TruServ has historically paid its members approximately 30% of the
patronage dividend in cash (excluding nonqualified written notices of
allocation). However, TruServ is only obligated to distribute 20% of the annual
patronage dividend (excluding nonqualified written notices of allocation) in
cash, and it may distribute this lesser percentage in future years. TruServ's
amended debt agreements limit the cash portion of the patronage dividend to 20%
unless certain annual EBITDA targets are achieved, in which case, the cash
portion of the patronage dividend may be paid at a higher percent up to 30%. As
TruServ exceeded the EBITDA target in 2002. The cash portion of the 2002
patronage dividend paid in 2003 averaged 30%.

In order to avoid the administrative inconvenience and expense of issuing
separate certificates representing shares of Class B common stock to each
member, TruServ deposits a certificate, representing all the shares of Class B
common stock then being issued, with Harris Trust and Savings Bank, Chicago,
Illinois, for safekeeping for and on behalf of its members. TruServ keeps the
allocations of Class B common stock in book entry form. TruServ then sends a
written notice to each member of these deposits and the allocation thereof to
the member.

SET OFF RIGHTS OF TRUSERV

TruServ's Certificate of Incorporation and By-Laws specifically provide
that TruServ, but not the member, may set off its obligation to make any payment
to a member for such member's stock, notes, interest and declared and unpaid
dividends against any obligation owed by the member to TruServ. TruServ
exercised these set off rights in 2002 and 2001, when TruServ notes and interest
came due to former members with outstanding merchandise accounts receivable to
TruServ and current members with past due merchandise accounts receivable to
TruServ. TruServ also set off its obligation to former members against their
related loss allocation balance. The set off rights were exercised in an
aggregate amount of $16,526 during 2002 and $7,483 during 2001.

As TruServ maintains stock records for its members on a store-by-store
basis, members with multiple stores who elect to sell one or more, but not all,
of their stores can transfer the stock registered on TruServ's records with
respect to a store location that is terminating its relationship with TruServ,
to the store locations that are not being terminated, with proper evidence of
succession, assignment or authority to transfer. Otherwise, TruServ may exercise
its right to offset the par value of the stock recorded for the store location
to be closed against the loss allocation account balance.

12

ITEM 2. PROPERTIES.
($ IN THOUSANDS)

WAREHOUSING AND OFFICE FACILITIES

TruServ's worldwide headquarters is located in Chicago, Illinois.
Information with respect to TruServ's owned and leased warehousing and office
facilities at December 31, 2002 is set forth below:

- ---------------

(1) TruServ has subleases with third parties for approximately 72,000 of the
228,100 square feet of the Chicago, Illinois space.

(2) The East Butler, Pennsylvania facility is currently for sale.

(3) The Hagerstown, Maryland facility, which was vacated in December 2002, is
assigned as collateral under a synthetic lease obligation and is currently
for sale. Proceeds of a sale will be paid to the lessor as payment on the
outstanding synthetic lease obligation.

(4) TruServ has subleases with third parties for the Peachtree City, Georgia
facility, which is not currently used in operations.

(5) The lease term expires the earlier of December 31, 2003 or the termination
of the existing revolving credit facility.

(6) Facility is assigned as collateral under the senior debt agreements.

(7) Facility was part of the December 31, 2002 sale leaseback transaction. See
next section of Item 2.

(8) TruServ has subleases with third parties for approximately 80,700 of the
163,000 square feet of the Harvard, Illinois space which has a lease
expiration date of August 23, 2005.

SALE LEASEBACK TRANSACTION

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 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 senior notes.
TruServ then entered into leases with each of 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,

13

recorded as deferred gain in the balance sheet, and to be amortized to income on
a straight line basis over the initial 20 year lease term.

Each lease is a "triple-net" lease under which TruServ is obligated to pay
all operating expenses of the property, all taxes and other impositions related
to the property, to maintain and insure the property and, with minor exceptions,
to rebuild the improvements after a casualty or condemnation. TruServ also
indemnifies the landlord from any loss, cost, damage or liability arising out of
the use, ownership or operation of the property, including any liability related
to hazardous materials.

TruServ's obligation to pay rent under the leases is absolute, with no
right to offset or abatement. The three leases are cross-defaulted, such that a
default under one of the leases constitutes a default under each of the other
leases. Events of default under the leases relate to TruServ's "triple-net"
lease obligations, as described above, and do not include any financial
covenants. TruServ has no right to terminate any of the leases, with minor
exceptions as described in the leases.

TruServ sold the distribution facilities located in Corsicana, Texas and
Woodland, California to and now leases them from Wrench (DE) Limited
Partnership. TruServ sold the distribution facilities located in Kingman,
Arizona, Fogelsville, Pennsylvania and Springfield, Oregon to and now leases
them from Bolt (DE) Limited Partnership. TruServ sold the distribution
facilities located in Jonesboro, Georgia and Kansas City, Missouri to and now
leases them from Hammer (DE) Limited Partnership. The three limited partnerships
are affiliated with W.P. Carey Investments, an investment firm independent of
TruServ. TruServ pays rent under each lease quarterly in January, April, July
and October. The aggregate annual rent under all three leases for the first year
of the lease totals $12,007. Rent under the leases increases 2% each year during
the initial 20 year lease term.

TruServ has the right to extend each lease for two additional periods. The
first extension period under each lease is for a term of nine years and 11
months and the second is for a term of 10 years. TruServ may elect to renew a
lease or leases with respect to any one or more of the properties without
renewing the lease or leases with respect to all of the properties subject
thereto. TruServ has the right to assign the lease without the landlord's prior
written consent, but subject to certain conditions described in the leases.
Provided that TruServ assigns the rent thereunder to the landlord, TruServ may
sublet all or any part of any property without the landlord's consent.

TruServ continues to evaluate opportunities to capitalize on the increase
in market value over the historical book value of its owned real estate assets
through additional sale leaseback transactions, mortgages or other financing
methods. See "Manufacturing Facilities" section below with regard to a pending
sale leaseback transaction.

OTHER PROPERTY SALES

The Brookings, South Dakota regional distribution center was closed and
sold in 2002. In 2001, TruServ closed its Henderson, North Carolina distribution
center and the lease agreement on the facility expired on November 11, 2001. The
Indianapolis, Indiana distribution center was closed and sold in 2001. TruServ's
interest in TruServ Canada Cooperative, Inc. was sold in October of 2001, which
included the sale of the Winnipeg, Manitoba property. The Westfield,
Massachusetts distribution center was closed and sold in 2000. TruServ will exit
its operations in the East Butler, Pennsylvania facility during 2003 and that
facility is currently for sale. TruServ has been exiting and consolidating
distribution facilities since the merger with SCC in 1997 to both realize the
benefit of reduced operating costs of the merged cooperatives and to reflect a
level of contraction of its operations.

14

MANUFACTURING FACILITIES

Information with respect to TruServ's manufacturing facilities is set forth
below:

- ---------------

(1) Facility is assigned as collateral under the senior debt agreements.

In July 2001, TruServ announced its intention to explore a possible sale of
the paint manufacturing business in order to generate cash to pay down senior
debt. In July 2002, after receiving offers which were not commensurate with
management's estimate of the value of the business and as a result of TruServ's
ability to achieve senior debt reductions through operating cash flow, including
significant inventory reductions and certain other asset sales, TruServ
announced it would be retaining ownership of the paint manufacturing business.
TruServ is currently negotiating a sale and short-term leaseback of its Chicago,
Illinois oil based paint facility due to an increase in the value of the real
estate underlying the facility together with a decrease in industry demand for
oil based paint products.

TruServ's facilities are suitable for their respective uses and are, in
general, adequate for TruServ's present needs.

OTHER LEASES

TruServ owns and leases transportation equipment for use at its
distribution centers for the primary purpose of delivering merchandise from
TruServ's distribution centers to its members. Additional information concerning
these leases can be found in Note 5 "Lease Commitments" to the Consolidated
Financial Statements beginning at page F-1.

ITEM 3. LEGAL PROCEEDINGS.
($ IN THOUSANDS)

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

15

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 lawsuit, despite its vintage,
is in an early stage and the extent of the damages claimed has not yet been
determined. The parties have entered into settlement negotiations, but a final
settlement has not been reached at this time and no assurances can be given that
one will be entered into.

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 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.

16

PENTZ SETTLEMENT

In June 2002, TruServ reached a comprehensive and confidential settlement
with Paul Pentz, a former president of TruServ regarding his claims for bonus
and retirement compensation payments.

CLAIM 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 (the "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 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

17

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 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.

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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

None.

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

There is no existing market for the common stock of TruServ and there is no
expectation that any market will develop. TruServ's Class A common stock is
owned exclusively by retailers of hardware and related products, garden center
retailers and industrial distributors as well as rental retailers, each of whom
is a member or former member of TruServ and purchased at least 60 shares of
TruServ's Class A common stock (the only class of voting stock) upon becoming a
member. TruServ is organized as a Delaware stock corporation and operates as a
member-owned wholesaler cooperative corporation. The shares of TruServ's Class B
common stock now outstanding were issued to members in partial payment of the
annual patronage dividend that accrued as a result of patronage business
transacted by such members with TruServ. In accordance with TruServ's By-Laws,
the annual patronage dividend is paid to members out of the gross margins from
operations and other patronage source income, after deduction for expenses,
reserves and other provisions authorized by the board of directors.

The number of holders of record (as of February 22, 2003) of each class of
stock of TruServ is as follows:

18

Dividends (other than patronage dividends) on the Class A common stock and
Class B common stock, subject to the provisions of TruServ's Certificate of
Incorporation, may be declared out of gross margins of TruServ, other than gross
margins from operations with or for members and other patronage source income,
after deduction for expenses, reserves and provisions as may be authorized by
the board of directors. Dividends may be paid in cash, in property, or in shares
of the Class B common stock, subject to the provisions of the Certificate of
Incorporation and the By-Laws. Other than the payment of patronage dividends,
including the redemption of all nonqualified written notices of allocation,
TruServ has not paid dividends on its Class A common stock or Class B common
stock. In February 2003, the board of directors authorized the payment of a
patronage dividend related to 2002. Such amounts were paid in March 2003. The
board of directors does not plan to pay non-patronage dividends on either class
of stock in 2003 for the year ended December 31, 2002. See
"Business -- Distribution of Patronage Dividends", and "-- Allocation of
Patronage Dividends Against Loss Allocation Account."

ITEM 6. SELECTED FINANCIAL DATA.
($ IN THOUSANDS)

- ---------------

(1) The lumber and building materials business was sold on December 29, 2000.

(2) The net margin/(loss) of $(131,143) and $20,480 originally reported in 1999
and 1998, respectively, was restated to $(130,803) and $12,020,
respectively, in the Form 10-K(A) filed for the year ended December 31,
2000. The restatement related to expensing as incurred costs previously
accrued in connection with the merger of Cotter & Company and SCC.

(3) TruServ had for several years, from at least February 1997 through at least
the end of 1999, inadequate internal controls relating to, among other
things, various aspects of inventory management, accounts payable, cost of
goods sold and accounting for certain income and expense items. Principally
as a result of these deficiencies, TruServ reported a loss of $130,803 for
fiscal year 1999. Because the problems identified above were caused by
systematic flaws in internal controls, TruServ does not have information
available to confirm the accuracy of these results or that would cause it to
conclude that the fiscal 1999 and 1998 financial statements for the 1999 and
1998 fiscal years, respectively, can or should be modified.

On March 4, 2003, 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. Pursuant to
the Order, TruServ will be required to maintain books and records in
accordance with the

19

record keeping requirements of the Exchange Act and to perform certain other
undertakings. See "Legal Proceedings."

(4) No patronage dividends were issued in 2001 and 1999 due to the reported net
loss of $50,687 and $130,803, respectively.

(5) This is the non-current portion of promissory and installment notes payable
to members included in members' capitalization on the balance sheet.

(6) In Fiscal 2002, Class A common stock and Class B common stock include
approximately $15,475 and $47,033, respectively, of amounts not redeemed due
to the stock moratorium. In Fiscal 2001, Class A common stock and Class B
common stock include approximately $11,699 and $34,712, respectively of
amounts related to the stock moratorium. See "Business -- Moratorium on
Redemptions of Capital Stock."

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.

($ IN THOUSANDS)

FISCAL YEAR 2002 COMPARED TO FISCAL YEAR 2001

RESULTS OF OPERATIONS

REVENUES AND GROSS MARGIN

A reconciliation of revenue and gross margin between 2002 and 2001 follows:

- ---------------

(1) The lumber business was sold on December 29, 2000. The revenue and the cost
of revenue from merchandise shipped and billed in fiscal year 2001, but
negotiated prior to December 29, 2000, was recorded in TruServ's results of
operations in fiscal year 2001.

(2) This business was sold on October 22, 2001.

20

Revenues for 2002 totaled $2,175,451. This represented a decrease in
revenues of $443,983, or 16.9%, from 2001. The key contributors to the decrease
in revenue are the 12% decline in the number of participating member retail
outlets in 2002, representing an 8.8% revenue reduction, together with a 4.6%
decline in same store sales and the effect of the sale of the Canadian and
Lumber businesses, representing a 4.0% revenue reduction. TruServ increased
prices in September 2001. The impact of these price increases on 2002 member
purchases was $13,340. In October 2002, TruServ announced it would commence
lowering prices monthly in 2002 and continue price reductions into 2003. The
impact of the reduction in pricing on fourth quarter 2002 member purchases was
$1,100. TruServ has forecasted 2003 price reductions to members to aggregate
$8,000. TruServ has forecasted that a decline in retail outlets will recur in
2003, but the forecast is not as significant as the actual 2002 decline. A
favorable trend that is occurring is that as a result of certain marketing
programs and sales initiatives, together with the impact of a slow-down in the
national economy, members are buying more merchandise from the distribution
centers. This trend has favorably improved the sales mix toward more warehouse
sales from the less profitable direct sales and has minimally affected revenues
due to lower volume offset by higher prices, but has positively affected gross
margin.

Gross margin for 2002 totaled $239,831. This represented a decrease in
gross margin dollars of $24,203, or 9.2%, as compared to 2001. The sale of
TruServ Canada Cooperative, Inc. and the decline in the number of participating
member retail outlets are the key contributors to the negative variance relative
to the prior year. However, the gross margin as a percent of revenue increased
to 11.0% in 2002 from 10.1% for 2001. The shift in the sales mix to warehouse
sales from vendor direct orders and certain product price increases initiated in
September 2001 contributed to the increase in gross margin as a percent of
revenue. Price reductions commenced in October 2002. The indirect cost of
revenues favorably impacted the gross margin dollars as a result of distribution
center closures and headcount reduction, which reduced the direct inbound
logistics costs and labor and related overhead incurred to bring merchandise to
the distribution centers. Additional impact to gross margin was due to a
reduction in advertising support fees of $7,956, which was partially offset by a
reduction in gross advertising costs of $2,868. These reductions relate to lower
member participation in the distribution of direct mail circulars but cost was
partially offset by additional network advertising for the new power event
promotions.

Logistics (outbound to members' stores) and manufacturing (the paint
business) expenses decreased $19,046, or 23.8%, as compared to the prior year.
Approximately $11,223 of this decrease resulted from the exclusion of expenses
associated with TruServ Canada Cooperative, Inc., which was sold in October
2001. An additional $3,444 was due to the closure of several distribution
centers in late 2001 through 2002, in response to a reduction in the member
base. Also, a decrease of approximately $4,388 was caused by lower expense
spending related to the manufacturing operations, predominately related to lower
advertising. In 2003, as a result of the sale leaseback of seven facilities at
the end of 2002, rent expense will be increased by a net of $11,786, which
includes an increase in gross rent charges of $14,564 offset by the amortization
of the gain on the sale of these facilities of $2,778. Additionally,
depreciation expense will decrease by approximately $2,585 in 2003 as a result
of the sale leaseback of these facilities.

Selling, general and administrative expenses ("SG&A") decreased by $44,585,
or 32.4%, in 2002, as compared to the prior year. TruServ achieved significant
reductions in SG&A as a result of lower labor cost and reduced benefit expenses.
TruServ's restructuring initiatives in 2000 and 2001, which included headcount
reductions, generated a savings of $4,090 in labor costs. The $15,126 reduction
in benefit plan costs were generated from lower headcount, changes in the
benefits, a reduction in pension settlements with terminated employees, and the
elimination in 2002 of the requirement in 2001 to cover exposure of an insurance
carrier in liquidation. An additional reduction of $6,041 in SG&A expenses for
fiscal 2002, as compared to fiscal 2001, is the result of lower bad debt expense
due to TruServ's improved ability to collect receivables. Also in 2002,
21

TruServ adopted SFAS No. 142, "Goodwill and Other Intangible Assets", which
changed the accounting for goodwill from an amortization method to an impairment
only approach. Goodwill amortization for fiscal year 2001 was $2,577. Other
areas of reductions in SG&A include lower refinancing fees of $7,368, lower
software license fees of $2,483 relating to retail point of sale software and
lower non-restructuring related severance of $1,386.

In fiscal 2002, TruServ incurred restructuring and other related charges of
$6,284, of which $3,313 related to restructuring, and $2,971 related to other
post-employment and asset impairment charges. The restructuring charge of $3,313
in fiscal 2002 resulted from TruServ's continued workforce reductions initiated
in fiscal 2000 and 2001 and related to distribution center closures and
workforce reductions in the organization. This charge was comprised of $2,316
for severance and $2,296 for facility exit costs, offset by a $1,299 reduction
in asset impairment charges. The severance charges of $2,316 primarily consisted
of additional workforce reductions at the corporate headquarters in Chicago,
Illinois. The facility exit costs of $2,296 related to exiting the Hagerstown,
Maryland distribution center, which was completed prior to December 31, 2002.
The $1,299 reduction of asset impairment charges consisted of a $927 favorable
adjustment to the asset value for the closing of the of the Brookings, South
Dakota distribution center, based on actual proceeds received on the sale of
this facility in 2002. It also included a $372 favorable adjustment relating to
the transfer of certain Hagerstown, Maryland equipment to other facilities, the
value of which had been fully reserved in 2001. The other charges of $2,971
consisted of $1,769 for asset impairment and $1,202 for post-employment charges.
The asset impairment charge of $1,769 related to the write-down of the East
Butler, Pennsylvania facility. The post-employment charge of $1,202 was
comprised of $352 relating to severance charges for the Cary, Illinois facility,
and $850 relating to severance charges for the corporate headquarters in
Chicago, Illinois.

In fiscal 2001, TruServ recorded a charge to income of $38,522, of which
$10,722 was for severance, $18,901 was for facility exit costs for the
distribution centers, and $8,899 was for asset impairments. The largest
component of these exit costs related to the Hagerstown, Maryland distribution
center closure, which is subject to a synthetic lease. The difference of
approximately $14,800 between the lease obligation at December 31, 2001 of
$40,000 and management's estimate of the fair value of the building was the
major component of its facility exit costs in 2001. This obligation and the
original cost of the facility are not recorded on TruServ's balance sheet
because it does not meet the requirement for capital lease treatment under
Statement of Financial Accounting Standards ("SFAS") No. 13, "Accounting for
Leases." At December 31, 2002, the synthetic lease had a balance of $33,383,
which is due at the end of the amended lease term, which is the earlier of
December 31, 2003 or the termination of the existing revolving credit facility.

A summary of restructuring charges, related uses of reserves and ending
reserve balances is as follows:

As a result of the restructuring and other efforts, estimated annualized
cost saving of $28,957 were related to charges reserved through 2001, with
$4,350 of cost saving relating to additional reserve charges in 2002. Headcount
reductions of 909 were related to charges reserved through 2001, with additional
headcount

22

reductions of 80 related to charges reserved for in 2002. The following chart
highlights these saving and reductions by facility:

Interest paid on member debt decreased by $1,231, or 15.7%, as compared to
the prior year, due to a decrease in the average balance of debt outstanding of
approximately $26,628, which was partially offset by a higher average interest
rate (8.49% average in 2002 compared to 7.50% average in 2001). Third party
interest expense decreased by $147, or 0.3%, as compared to the prior year.
TruServ experienced an interest expense savings of $11,629, as a result of the
lower average balance of senior debt outstanding as compared to 2001. However,
this amount was substantially offset by higher financing fee amortization and
higher interest rates, which increased the effective interest rate by
approximately 2.9%, as compared to 2001 resulting in increased interest expense
of $11,482. TruServ achieved the lower average debt balances in 2002 by
generating cash from operations and asset sales. These amounts were offset in
part, however, by the fees resulting from TruServ amending its existing credit
facility and senior note agreements due to the debt covenant violation under
these agreements in 2001. As a result of various debt paydowns during 2002 from
cash received from asset sales, 2003 interest expense will be reduced by
$14,600, offset by additional make-whole and financing fee amortization of
$6,100, for a net reduction of $8,500. Of this $8,500 reduction, the paydown of
third party debt with cash received from the sale leaseback of seven regional
distribution centers in December, 2002 will reduce interest expense by $12,500,
offset by additional make-whole and financing fee amortization of $5,600, for a
net reduction of $6,900. The remaining reduction in interest expense of $1,600
is from the paydown of debt in 2002 with cash proceeds from other asset sales
and notes receivable in 2001 and 2002, which reduced interest expense by $2,100,
offset by additional make-whole and financing fee amortization of $500.

Loss/(gain) on sale of assets decreased $2,049, from a gain of $1,958 in
2001 to a loss of $91 in 2002. The variance was mainly due to the nonrecurrence
of fiscal 2001 gains of $1,588 and $472 recorded upon the sale of TruServ's
Canadian business and the Indianapolis distribution center, respectively.

The net margin in 2002 was $21,153 compared to a net loss of $50,687 in
2001, an increase in net margin/(loss) of $71,840. Net margin/(loss) was
favorably impacted by the closure of distribution centers and headcount
reductions that occurred from the restructuring activities in 2001, the
non-recurrence of the

23

significant 2001 restructuring charges and a better gross margin percentage.
These favorable impacts were partially offset by the loss of participating
member retail outlets.

FISCAL YEAR 2001 COMPARED TO FISCAL YEAR 2000

RESULTS OF OPERATIONS

REVENUES AND GROSS MARGINS

A reconciliation of revenue and gross margin between 2001 and 2000 follows:

- ---------------

(1) This business was sold on December 29, 2000.

(2) This business was sold on October 22, 2001.

A reconciliation of gross margin percentage between 2001 and 2000 follows:

Revenues for 2001 totaled $2,619,434. This represented a decrease in
revenues of $1,374,208 or 34.4% from 2000. The key contributors to the decrease
in revenue were the sale of the lumber and building materials business to BMA in
December 2000, the sale of TruServ Canada Cooperative, Inc. in October 2001, and
the 11% decline in the number of participating member retail outlets in 2001
resulting in a 4.6% sales decline. The remaining revenue reduction occurred in
same store sales, with 90% of this decrease in direct sales to members, which
generated approximately a 1% gross margin for TruServ before consideration of
vendor volume rebates on purchases. The reduction in direct sales was partially
due to a shift in member purchases to warehouse sales. Certain marketing
programs and sales initiatives, together with the impact of a slow down in the
national economy, had encouraged members to buy in the smaller quantities that
are available by purchasing merchandise from the distribution centers. This
trend favorably improved the sales mix toward more warehouse sales from the less
profitable direct sales.

24

Gross margin for 2001 totaled $264,034. This represented a decrease in
gross margin dollars of $13,363, or 4.8%, as compared to 2000. The sale of the
lumber and building materials business, the sale of TruServ Canada Cooperative,
Inc. and the decline in the number of participating member retail outlets were
the key contributors to the negative variance relative to the prior year.
However, the gross margin as a percent of revenue increased to 10.1% in 2001
from 6.9% in 2000. The shift in the sales mix to warehouse sales from vendor
direct orders, a reduction in member returns and allowances, and certain product
price increases contributed to the increase in gross margin as a percent of
revenue. The indirect cost of revenues favorably impacted the gross margin
dollars, as a result of the closure of distribution centers and headcount
reduction, which reduced the direct inbound logistics costs and labor and
related overhead incurred to bring merchandise to the distribution centers. The
reduction in member returns and allowances was principally due to a change in
processes resulting in fewer shipping errors. Additional favorable impact to
gross margin was due to a reduction in gross advertising costs of $23,400, which
was partially offset by a reduction in advertising support fees of $12,527.
These reductions relate to lower member participation in the distribution of
direct mail circulars and a reduction in network advertising.

Logistics (outbound to members' stores) and manufacturing expenses
decreased $3,306, or 4.0%, as compared to the prior year primarily due to the
closure of distribution centers, headcount reductions and a reduction in the
member base.

SG&A increased by a net $12,949, or 10.4%, in 2001, as compared to 2000.
Health and pension benefit costs increased $8,894 due to pension settlements
with terminated employees and a decline in the expected investment return on
plan assets. Software license fees related to retail point of sale software
increased $3,553. Financing and legal costs, including consulting and legal fees
related to the debt covenant violation under the senior debt agreements and
other legal matters, were $9,337. The aggregate of this increase, $21,784, was
partially offset principally by $7,146 of lower corporate staff expenses due to
headcount reductions that were part of the 2000 and 2001 restructuring
initiatives and $4,511 of lower headcount and operational expenses as a result
of the December 2000 sale of the lumber and building materials business.

In fiscal 2001, TruServ continued the workforce reductions initiated in
fiscal 1999 and 2000 related to regional distribution center closures and
workforce reductions at its corporate headquarters. TruServ recorded a charge to
income of $38,522 in fiscal 2001. The charge is comprised of $10,722 for
severance, $8,899 for asset impairments related to the regional distribution
centers based upon current estimates of the market values of the assets compared
to their book values and $18,901 of facility exit costs related to the regional
distribution center closures. The largest component of these exit costs relates
to the Hagerstown, Maryland distribution center closure, which is subject to a
synthetic lease. The synthetic lease had a principal balance of $40,000 at
December 31, 2001, which is due at the end of the lease term, which is the
earlier of December 31, 2003 or the termination of the existing credit facility.
This obligation and the original cost of the facility are not recorded on
TruServ's balance sheet because it does not meet the requirement for capital
lease treatment under Statement of Financial Accounting Standards ("SFAS") No.
13, "Accounting for Leases." The difference between the lease obligation and
management's estimate of the fair value of the building as of December 31, 2001
was approximately $14,800 and was the major component of its facility exit
costs.

In fiscal 2000, TruServ recorded a restructuring charge of $4,944,
approximately $2,000 of which was related to the closures of the Henderson,
North Carolina and the Indianapolis, Indiana distribution centers. The closures
of Henderson and Indianapolis were completed by the end of fiscal 2001. The
closures of the