TRUE VALUE CO - 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

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2004 OR

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM TO

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COMMISSION FILE NUMBER 2-20910

TRUE VALUE COMPANY
(PRIOR TO DECEMBER 31, 2004, KNOWN AS 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 stock 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, SALE GROWTH
ASSUMPTIONS, CAPITAL REQUIREMENTS OF TRUE VALUE AND TRENDS IN OUR INDUSTRY.

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

THE COMPANY

True Value Company ("True Value") 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. Effective December 31, 2004, TruServ Corporation changed its name
to True Value Company. True Value'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.truevaluecompany.com.

In 2000, True Value sold its lumber and building materials business (the
"Lumber Business"), consisting primarily of intangibles and inventory, to
Builder Marts of America, Inc. ("BMA"). True Value concluded that BMA would be
able to provide lumber and building materials to True Value members at lower
cost. Moreover, the Lumber Business had been a low-margin and working capital
intensive business for True Value. In connection with the sale of the Lumber
Business to BMA, True Value entered into non-compete, cooperation, trademark
license and lease agreements with BMA for various terms ranging from five to ten
years. True Value and BMA terminated these agreements in April 2003.

In 2001, True Value sold its ownership interest in TruServ Canada
Cooperative, Inc. (the "Canadian Business") and related real estate interests in
Winnipeg, Manitoba to the current member group of the cooperative. The proceeds
received enabled True Value to recover its capital investment in the Canadian
Business as well as the appraised value of the real estate and to retire all
indebtedness relating to Canadian activities. True Value has a licensing
agreement with the Canadian Business to enable it and its members to continue to
do business under the principal True Value trademarks. In addition, True Value
continues to provide True Value paints and supplies to the Canadian Business.

On December 31, 2002, True Value 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"), pursuant to an intercreditor
agreement between all parties of the Senior Debt. The facilities are being
leased back by True Value under 20-year lease agreements that contain extension
periods on the lease at True Value's option. See "Properties -- Sale Leaseback
Transaction."

GENERAL DESCRIPTION OF THE BUSINESS

True Value, organized as a cooperative, is one of the largest member-owned
wholesalers of hardware and related merchandise in the United States, serving
approximately 6,000 retail and industrial distribution outlets for its members
as of December 31, 2004. True Value also manufactures and sells paint and paint
applicators.

True Value sells its products to hardware retailers, industrial
distributors, garden centers and rental stores with whom it has entered into
Retail Member Agreements. True Value serves its members by principally

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functioning as a low cost distributor of goods, 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. True Value also provides to its
members value-added services such as marketing, advertising, merchandising, and
store location and design services.

Generally, members use one of the following True Value trademarks and trade
names: 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 private
label products. When True Value generates annual profits, members are entitled
to receive annual patronage dividends based upon their purchases from True
Value. In accordance with True Value'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, 2004, True Value serves approximately 6,000 retail and
industrial distribution outlets for its members throughout the United States and
in 59 other countries. Primary concentrations of members exist in New York
(approximately 9%), Pennsylvania (approximately 7%), California (approximately
6%), Texas (approximately 5%), Illinois, Michigan, Massachusetts, Minnesota and
Wisconsin (approximately 4% each) and New Jersey, Ohio, and Washington
(approximately 3% each).

SALES AND SUPPLIERS

True Value provides each of its members with an illustrated price catalog
showing the products available from True Value, which the members can access
through the member Internet site. Upon request, a member will also receive a
printed or CD version of the catalog. These products, comprised of more than
68,000 stockkeeping units ("SKUs") maintained at True Value'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 True Value approved vendors and have
those purchases drop shipped directly to them, but have the product billed
through True Value. Collectively, these products represent the products sold by
True Value's two operating segments. See Note 10, "Segment Information," to the
Consolidated Financial Statements beginning at page F-1 for additional segment
information.

The seven product categories are set forth in the following table, along
with the corresponding dollars of total revenue for each category during the
last three years:

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

Warehouse shipment sales are sales of products that are purchased,
warehoused and resold by True Value in response to orders from the members.
Direct shipment sales are sales of products that are purchased through True
Value by the members, but delivered directly to members from vendors and on
which True Value accepts the credit risk. Relay sales are sales of products that
are purchased through True Value 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, or

- not conducive to direct shipment.

Generally, True Value 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 True Value, it is not
warehoused; rather, True Value breaks up the shipment and "relays" the
appropriate quantities to the members who placed orders.

True Value has numerous individual agreements with or commitments from its
vendors, most of which are terminable by the vendors or True Value without
cause. These termination provisions, either individually or in the aggregate,
have not had any material adverse effect on True Value's ability to conduct its
business. The goods and services purchased by True Value from these suppliers
are generally available from a wide variety of sources. True Value is not
dependent upon any one supplier or group of suppliers.

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

OTHER SERVICES

True Value annually sponsors two principal "markets," a separate rental
market and an outdoor power equipment show all funded primarily by vendors
through booth fees, at which it features the products available for purchase by
members, including new merchandise and seasonal items. In addition, the markets
permit members and prospective members to keep better informed as to industry
trends, attend continuing education classes and network with other members. In
the year 2005, one of the principal markets will be held in Atlanta, Georgia in
March and the other principal market will be held in Denver, Colorado in
September. As the markets generate income and stimulate member purchases, the
timing of markets impacts the timing of sales and income recognition for True
Value. 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 January 29, 2005 and January 31, 2004, respectively, True Value had a
backlog of firm orders (including relay orders) of approximately $34,383 and
$18,149. True Value's backlog at any given time is made up of two principal
components:

- normal re-supply orders, and

- market orders for future delivery.

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Normal re-supply orders are orders from members for merchandise to keep
store inventories at normal levels. Generally, such orders are filled the day
following receipt, except that relay orders for future delivery are not intended
to be filled for several months. Market orders for future delivery are member
orders placed at True Value's markets for new or seasonal merchandise, to be
delivered during the subsequent period between markets. Thus, True Value
generally has a relatively high backlog at the end of each market, which
decreases in subsequent months until the next market occurs.

The increase in the 2004 backlog compared to 2003 is primarily related to
the timing of new assortment introductions. Many of the product lines recently
reviewed for assortment and pricing are being sourced from new vendors; orders
related to these new assortments will ship primarily during the first and second
quarters of 2005.

COMPETITION

The retail hardware industry is characterized by intense competition.
Independent retail hardware businesses, including those served by True Value,
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 True Value to achieve
lower merchandise costs for its members. In 2004, under new leadership in the
merchandising function, True Value initiated a multi-year process to perform
comprehensive vendor line reviews. The focus of these reviews is to improve
product assortments and enhance wholesale and retail pricing. In 2004, 35
categories were reviewed with most of the new or modified assortments planned to
roll out in the first half of 2005. In 2005, True Value expects to complete
reviews of an additional 50 categories. These reviews will continue to fund
wholesale price reductions to the membership. In addition, True Value is
expanding its import program to source more products from lower cost foreign
manufacturers in order to enhance wholesale and retail pricing. Also, True Value
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 that focus on
areas such as pricing, merchandising, store design and signage.

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. True Value competes with other member-owned and non-member-owned
wholesalers to be 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,
merchandise selection, quality and patronage dividends. True Value is
concentrating on its supply channel strategies and practices for gaining
sustainable competitive advantage. In many markets in the United States, True
Value competes directly with other member-owned wholesalers such as Ace Hardware
Corporation and Do-it-Best Corporation, as well as independently owned
wholesalers.

TRADEMARKS, SERVICE MARKS AND COLLECTIVE MEMBERSHIP MARKS

True Value's trademarks, service marks and collective membership marks are
of prime importance to True Value. Many of the marks are highly recognized and
utilized in extensive advertising and marketing campaigns, and True Value
vigorously defends its marks. As of December 31, 2004, True Value's members have
approximately 6,000 retail and industrial distribution outlets that operate
predominately as hardware retail stores, industrial distributors, garden centers
and rental stores throughout the United States and in 59 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 True Value intends to use the marks in commerce
in the future. Each of the marks is renewable at True Value's

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option and True Value 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). True Value'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, 2004, True Value employed approximately 2,800 persons in
the United States on a full-time basis. Due to the widespread geographical
distribution of True Value'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 36% of True Value's 2,100
hourly-wage employees are covered by collective bargaining agreements that are
generally effective for periods of three or four years. In general, True Value
considers its relationship with its employees to be good.

RETAIL MEMBER AGREEMENT

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

- 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;

- will conduct its businesses subject to the terms of the Retail Member
Agreement;

- will conduct a retail hardware store, home or garden center, a
commercial/industrial distribution business or a full-service rental
operation at a designated location;

- will comply with True Value's By-Laws, as may be amended from time to
time;

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

- may receive different services, charges or freight rates based upon
the amount of merchandise purchased by the member;

- agrees to have its Retail Member Agreement terminated unilaterally in
certain circumstances by the affirmative vote or two-thirds or more of
the directors of True Value;

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

- agrees to utilize True Value as its primary supplier for the types of
merchandise offered by True Value;

- agrees to pay, in full on the date due, all invoices to True Value and
to accept a service charge on past due balances;

- agrees that True Value has not granted any exclusive territorial or
geographical rights to the member;

- 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

- may terminate the Retail Member Agreement upon 60 days written notice
mailed to the Chief Executive Officer or Treasurer of True Value at
True Value's principal office.

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CAPITAL STOCK

Members of True Value 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 True Value member is required
to purchase one unit of Class A common stock for each store owned; however, no
True Value member is permitted to acquire more than five units of Class A common
stock. The Class B common stock is issued only to members in connection with the
patronage dividend distributed to them for purchases in the year of the
patronage dividend, as discussed below. See "Distribution of Patronage
Dividends" below.

Neither class of True Value common stock accrues dividends and each has
limited transferability. True Value has a right of first offer to repurchase at
par value a member's stock before the member can offer the stock to another
member. Historically, True Value has always exercised this right. In any event,
a member may not transfer stock to anyone without True Value's consent. True
Value also retains an automatic lien on both classes of stock for any
indebtedness due to True Value by a member. Therefore, there is no existing
market for either class of True Value common stock.

Participation in the earnings or losses 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 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 for
that year and are allocated no later than September 15th of the following year.
True Value pays patronage dividends in a combination of cash, Class B common
stock, and occasionally promissory (subordinated) notes. True Value paid
patronage dividends for the past two years and paid a dividend for 2004 results
in 2005. The 2004 dividend was issued in a combination of cash, Class B common
stock and promissory (subordinated) notes. The Class B common stock earned from
patronage dividends was used to reduce the loss allocation account (for members
who have such an account). See "Loss Allocation to Members and Accumulated
Deficit" below.

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

CAPITAL STOCK REDEMPTION

In accordance with True Value's By-Laws, True Value redeems former members'
equity investments in Class A common stock and Redeemable nonqualified Class B
common stock in cash at the time of redemption and equity investments of
Redeemable qualified Class B common stock are paid with a subordinated
installment note. The subordinated installment notes are payable in five equal
annual installments and pay interest annually at a fixed rate. The interest rate
on subordinated installment notes created during the year is determined annually
on the first business day of the year based on the five-year U.S. Treasury bill
rate plus 1.0%. For notes issued in 2004, the rate was 4.36% and for notes
issued in 2005, the rate is 4.64%. In accordance with True Value's By-Laws, True
Value first reduces its aggregate stock redemption obligation payable in both
cash or subordinated installment note by its right to legally offset any amounts
the former members may owe True Value, including accounts and notes receivable,
loss allocations and/or accumulated deficit.

Effective July 6, 2004, the board of directors rescinded True Value's
moratorium on stock redemptions that had been effective since March 2000. In
accordance with the Stipulation of Settlement related to the "Derivative Action"
(an action brought by a former True Value member against certain present and
former directors, certain former officers of True Value and against True Value),
upon rescinding the moratorium, True Value reduced loss allocation accounts of
the parties to the Stipulation of Settlement by approximately $5,000 on a
pro-rata basis. See "Loss Allocation to Members and Accumulated Deficit" below.
Since the
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rescinding of the moratorium, True Value satisfied $7,779 of stock redemption
liability in cash and $26,351 by issuing subordinated installment notes. The
first payment of principal of $5,241 on subordinated installment notes created
since the stock redemption moratorium was rescinded was paid on December 31,
2004. As of December 31, 2004, True Value had shareholders that discontinued
their purchasing activities with True Value and requested that their stock be
redeemed but had not completed the redemption procedures, resulting in a stock
redemption liability of $4,886. True Value classified this liability as $1,718
in Current maturities of long-term debt, notes and capital lease obligations,
$2,476 in Long-term debt including notes and capital lease obligations, less
current maturities, and $692 in Other long-term liabilities representing True
Value's redemption obligations to former members that management anticipates may
not complete the redemption procedures for over a year.

At December 31, 2003, True Value reported Deferred stock redemptions as a
liability comprised of the aggregate net equity investments for each shareholder
that had 1) discontinued its purchasing activities with True Value, 2) requested
its stock be redeemed, and 3) had such redemption deferred due to True Value's
March 2000 declaration of a moratorium on stock redemptions. These net equity
investments were the aggregate par value of Class A common stock, qualified
Class B common stock and nonqualified Class B common stock, reduced by the
aggregate amount that True Value may legally offset by the Loss allocation,
Accumulated deficit and Accounts and notes receivable accounts.

DISTRIBUTION OF PATRONAGE DIVIDENDS

True Value operates on a cooperative basis with respect to business
transacted with or for members. All members are entitled to receive patronage
dividend distributions from True Value, calculated on a pro-rata basis of gross
margins on merchandise purchased by each member. In accordance with True Value'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
margins calculated in accordance with accounting principles generally accepted
in the United States of America after reducing or increasing net margins for
non-member income/(losses), reasonable reserves and deferred patronage
amortization. Commencing with the 2004 patronage dividend that was paid in 2005,
the board of directors has authorized retaining 5% of net patronage source
income, as a reasonable reserve, to reduce the accumulated deficit account. 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 have historically been paid to members within 90 days
after the close of True Value's fiscal year; however, the Code permits
distribution of patronage dividends as late as the 15th day of the ninth month
after the close of True Value's fiscal year. True Value distributed the
patronage dividend for 2004 in February 2005.

True Value'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 True Value 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 customarily issued for up to a
five-year term and bear interest at a fixed rate until maturity. The rate and
term of the notes are determined at issuance. The notes are subordinated to all
other indebtedness of True Value. True Value may also issue "nonqualified
written notices of allocation" to its members as part of its annual patronage
dividend. "Nonqualified written notices of

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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 True Value, which may be varied
from time to time, is determined by the board of directors. Commencing in 1996,
the board established a minimum Class B common stock ownership requirement for
each type of retail member. This minimum is generally the greater of: (1)
$25,000, or (2) the aggregate of a member's various types of annual purchases,
each multiplied by a specific percentage, which varies from 1% to 14% and which
decreases as total dollar purchases by category increase. Not all members have
achieved this minimum target. The board of directors determined the amount of
the minimum required investment by majority vote, and the minimum may be
increased or decreased from time to time. True Value is reviewing its minimum
investment requirement based on an evaluation of its financial needs and the
needs of its membership.

LOSS ALLOCATION TO MEMBERS AND ACCUMULATED DEFICIT

During the third quarter of 2000, True Value 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. True Value has distributed the 1999 loss allocation among its members
by establishing a loss allocation account as a contra-equity account in the
Consolidated Balance Sheet with the offsetting credit recorded to the
accumulated deficit account. The loss allocation account reflects the sum of
each member's proportionate share of the 1999 loss, after being reduced by
certain amounts that were not allocated to members. The allocation was generally
based on a member's proportionate Class B stock investment relative to the total
Class B stock investments of all the members, and therefore a member could not
be allocated a loss in excess of its equity investment. 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 True Value, 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 True Value.

The board of directors determined that True Value would retain the 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. In the event a member terminates its
status as a stockholder of True Value, any remaining 2001 loss in the
accumulated deficit account that is allocable to the terminated member will be
distributed to the terminating member and satisfied by reducing the redemption
amount paid for the member's stock investment in True Value. True Value has
determined for each member that was both a stockholder and purchased from True
Value in 2001, its share of the 2001 loss that has been retained in the
accumulated deficit account. Stockholders that had ceased their membership in
True Value prior to 2001 and were solely stockholders due to the moratorium on
stock redemptions were excluded from the 2001 loss allocation. Approximately 18%
of the $50,687 2001 loss was allocated based upon the member's proportionate
equity investment, net of any 1999 loss allocation account, relative to the
total equity investments of all members that were both stockholders and
purchased from True Value in 2001. Approximately 82% of the total 2001 loss was
effectively allocated based on the member's purchases from True Value in 2001
using the same methodology as described above in "Distribution of Patronage
Dividends." No member was allocated a loss amount greater than its net equity
investments held as of year-end 2001.

A member's proportionate share of the 1999 and/or 2001 losses have been
limited to the extent of its equity investment in True Value. Any portion of a
loss allocation that exceeds a member's equity investment is retained by True
Value in the accumulated deficit account. Commencing with the 2004 patronage
dividend that was paid in 2005, the board of directors has authorized retaining
5% of net patronage source income, as a reasonable reserve, to reduce the
accumulated deficit account. Such reduction will be applied first against the

8

oldest components of the deficit and the annual retention of the 5% of patronage
source income will continue until the deficit no longer exists.

In 2003, True Value settled its Derivative Action. The Stipulation of
Settlement stated that, at the time the moratorium on stock redemptions was
lifted, the Loss allocation accounts for all current and former members who were
parties to the Stipulation of Settlement would be reduced by approximately
$5,000 on a pro-rata basis. The moratorium was lifted in July 2004 and such
reduction occurred.

PAYMENT OF PATRONAGE DIVIDENDS IN ACCORDANCE WITH THE INTERNAL REVENUE CODE

The Code specifically provides for the taxation of cooperatives (such as
True Value) and their patrons (such as True Value'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
True Value to its members, that disclose to the recipient the stated amount
allocated to the member by True Value 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 True Value 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.

True Value deducts all patronage dividends, including 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 total patronage dividend shall be included in the gross
income of the patron (member) for the taxable year in which the patron (member)
receives such distribution. This includes amounts paid in cash, in qualified
written notices of allocation and in other property (except nonqualified written
notices of allocation). In general, for nonqualified written notices of
allocation, no amounts are either deductible by True Value or includable in a
member's gross income until the notices are redeemed by True Value. True Value
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 (which is determined to be qualified for tax purposes) and
subordinated promissory notes, 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 as a result of the full amount of the patronage dividend, including
cash, notes and Class B common stock.

True Value has historically paid approximately 30% of the patronage
dividend to its members in cash (excluding nonqualified written notices of
allocation). However, True Value 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.

True Value'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

9

(2) that membership in the organization (i.e., the status of being a
member of True Value) 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 True Value, or
who remains a member after adoption of the By-Laws providing that membership in
True Value 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 True Value in the manner provided in his
or its Retail Member Agreement. See "Retail Member Agreement" above.

SET OFF RIGHTS OF TRUE VALUE

True Value's Certificate of Incorporation and By-Laws specifically provide
that True Value, 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 True Value. True
Value exercised its set off rights in 2004 when, upon rescinding its moratorium
on stock redemptions, it reduced the amounts paid to former members for their
equity investments at the time of redemption by:

- the amount of any outstanding merchandise accounts receivable to
True Value;

- the amount of any unpaid loans to or advances from True Value;

- any remaining balance in their 1999 loss allocation account; and

- their distribution of the 2001 loss allocation, if applicable.

True Value exercised its set off rights in 2004, 2003 and 2002 when True Value
notes and interest came due to former members with outstanding merchandise
accounts receivable to True Value and current members with past due merchandise
accounts receivable to True Value. True Value had also set off note and interest
obligations to former members against their related loss allocation balance. In
2004 and 2003, True Value set off the unpaid portions of cash dividends payable
against the outstanding merchandise accounts receivable balances of those
members that were past due. The set off rights were exercised in an aggregate
amount of $58,815 during 2004 and $8,329 during 2003.

As True Value 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 may transfer the stock registered on True Value's records with
respect to a store location that is terminating its relationship with True Value
to the store locations that are not being terminated, with proper evidence of
succession, assignment or authority to transfer and with True Value's express
consent. Otherwise, True Value may exercise its set off rights upon redemption
against the stock investment recorded for the store location to be closed,
including the set off rights for all loss allocation account balances.

10

ITEM 2. PROPERTIES.
($ IN THOUSANDS)

WAREHOUSING AND OFFICE FACILITIES

True Value's worldwide headquarters is located in Chicago, Illinois.
Information with respect to True Value's owned and leased warehousing and office
facilities at December 31, 2004 is set forth below:

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

(1) True Value has subleases with third parties for approximately 58,400 of the
228,100 square feet of the Chicago, Illinois space.

(2) Facility was part of the December 31, 2002 sale leaseback transaction. See
"Properties -- Sale Leaseback Transaction" below.

(3) True Value expects to extend the leases for the Denver, Colorado and
Harvard, Illinois facilities for an additional 3 and 5 years, respectively.

(4) Facility is assigned as collateral under the asset-based revolving credit
facility ("Bank Facility").

(5) On January 20, 2005, True Value signed a non-binding letter of intent for
the sale of the Butler facility for $6,188 with an anticipated close date of
March 31, 2005.

On October 25, 2004, True Value received a Lease Termination Notice with respect
to the remaining 386,000 sq. ft. of vacant facility space in Hagerstown,
Maryland that was effective November 1, 2004. The facility was originally leased
until July 2005 and was subject to landlord cancellation upon 10 days notice.

True Value has a 60,500 sq. ft. facility in Peachtree City, Georgia leased until
November 2005 that is sublet to third parties. True Value currently has no
intention of renewing this lease upon expiration.

SALE LEASEBACK TRANSACTION

On December 31, 2002, True Value sold seven of its distribution centers to
unrelated third parties generating net proceeds to True Value of $121,438. True
Value concurrently agreed 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 True Value's financial statements. The resulting gain on sale of
$55,564 was recorded as deferred gain in the Consolidated Balance Sheet and is
being amortized to income on a straight line basis over the initial 20 year
lease term.

11

True Value has the right but not the obligation to extend each lease for
two additional periods of approximately 10 years each and may exercise such
renewal rights on each property individually. Subject to certain conditions
described in the leases, True Value has the right to assign the lease or sublet
all or any part of any property without the landlord's prior written consent.

OTHER PROPERTY SALES

The Brookings, South Dakota regional distribution center was closed and
sold in 2002. True Value had 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.

True Value 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.

MANUFACTURING FACILITIES

True Value's facilities are suitable for their respective uses and are, in
general, adequate for True Value's present needs. Information with respect to
True Value's manufacturing facilities is set forth below:

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

(1) Assigned as collateral under the Bank Facility

(2) On February 25, 2005, True Value announced a plan to relocate its Chicago,
Illinois oil based paint manufacturing operations to Cary, Illinois.
Following the relocation, True Value's management anticipates selling the
Chicago, Illinois facility.

OTHER LEASES

True Value owns and leases transportation equipment for use at its
distribution centers for the primary purpose of delivering merchandise from True
Value'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)

ACTIVE LEGAL MATTERS:

FLEGLES ACTION

On February 12, 2003, a former True Value member, Flegles Inc. ("Flegles"),
filed suit against True Value in the Circuit Court of Carlisle County, Kentucky.
The complaint alleges that True Value is liable to Flegles for the role True
Value played with respect to Flegles' construction of a new retail store
facility in Bardwell, Kentucky that has allegedly incurred financial losses.
Flegles sought $2,400 in compensatory damages and also an award of punitive
damages. On July 30, 2004, a jury found True Value liable to Flegles for certain
losses incurred by Flegles and awarded Flegles $1,300 in compensatory damages.
The jury did not award any punitive damages. As True Value believes that the
verdict was rendered in error, it pursued post-trial motions before the Circuit
Court, including a request that the verdict be set aside or that True Value be
awarded a new trial. Such relief was denied by the Circuit Court and True Value
is now pursuing its appeal for

12

such relief in the Kentucky Appellate Court. True Value posted with the court a
bond in an amount necessary to prevent Flegles from enforcing its judgment
during the appeal. True Value intends to continue to vigorously defend this case
and does not believe that the ultimate resolution will have a material effect on
results from operations or financial position.

CLAIMS AGAINST ERNST & YOUNG LLP

True Value is pursuing claims against its former outside auditors, Ernst &
Young LLP ("E&Y"), for professional malpractice, breach of contract, deceptive
business practices and fraud. True Value contends that E&Y failed to properly
discharge its duties to True Value and failed to identify, in a timely manner,
and indeed concealed, certain material weaknesses in True Value's internal
financial and operational controls. As a result, True Value 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, True Value
reported a net loss of $130,803 for the fiscal year ended December 31, 1999. It
is True Value'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. As a result of E&Y's failures, True Value has suffered
significant financial damages. The factual allegations that form the basis for
True Value'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. True Value began discussion of its claims with E&Y early in the
fall of 2001. Pursuant to the dispute resolution procedures required by True
Value's engagement letter with E&Y, True Value 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, True Value
filed its claim with the American Arbitration Association on July 31, 2002. The
arbitration is subject to certain confidentiality requirements. Another effort
at non-binding mediation between the parties began in December 2004 and was
unsuccessful. Hearings before the arbitration panel occurred in early 2005 and a
decision is still pending. A portion of the recoveries under this matter, if
any, may be subrogated to the rights of True Value's insurer to the extent that
it has made payments to or on behalf of True Value associated with the 1999
loss.

COMPLETED LEGAL MATTERS:

KENNEDY ACTION

In June 2000, various former members of True Value filed an action against
True Value in the Circuit Court of the 19th Judicial Circuit (McHenry County,
Illinois) (the "Kennedy action"). The plaintiffs in the Kennedy action each
alleged that, based upon representations made to them by True Value 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
alleged that after the merger, the Coast to Coast brand name was eliminated and
that each plaintiff thereafter terminated or had its membership in True Value
terminated. The plaintiffs further claimed that True Value breached its
obligations by failing to redeem their stock and by creating loss allocation
accounts for the plaintiffs. The plaintiffs 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 True Value as counterclaims to various complaints filed by True Value 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 True Value on behalf of additional former
members, in the same court, by the same law firm (the "A-Z action"). The
complaint in the A-Z action alleged substantially similar claims as those in the
Kennedy action, with the principal difference being that the claims related to
the elimination of the ServiStar brand name. The Kennedy and A-Z actions were
consolidated for purposes of discovery. In July 2002, the plaintiffs in these
consolidated actions amended their complaints to name as defendants two former
officers of True Value. In December 2004, True Value entered into a settlement
on confidential terms with the plaintiffs under

13

the Kennedy and A-Z actions, which settled all claims under these actions and
pursuant to which the Kennedy and A-Z actions were dismissed.

A significant portion of the liability incurred by True Value under the
aforementioned confidential settlement was paid by an insurance company under
True Value's applicable insurance policy. The remaining amount payable by True
Value under the settlement did not materially affect its consolidated financial
position or results of operations.

TRUE VALUE 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
True Value Company, SEC File No. 3-11050 (the "Order"). True Value 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 $130,803. The Order found that, from
approximately July 1997 through the end of 1999, True Value's accounting systems
and internal controls related to inventory management were inadequate. The Order
also found that these deficiencies caused True Value to understate expenses,
which resulted in overstatement of net income, during 1998 and 1999. According
to the Order, True Value 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, True Value reported a loss, caused by weaknesses in the
accounting practices and internal controls at True Value, of approximately
$130,803.

Pursuant to the Order, True Value 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, True
Value 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 True Value'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 prepared and
delivered to True Value's board audit committee, with copies to the Commission,
True Value'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. The report for
year end 2004 was filed with the Commission on March 3, 2005. True Value
believes it has no further reporting obligations under the Order.

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

None.

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES.

There is no existing market for the common stock of True Value and there is
no expectation that any market will develop. True Value'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 True Value and purchased at least 60
shares of True Value's Class A common stock (the only class of voting stock)
upon becoming a member. True Value is organized as a Delaware stock corporation
and operates as a member-owned wholesaler cooperative corporation. The shares of
True Value's
14

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 True Value. In accordance with True Value'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 January 29, 2005 of each class of
stock of True Value was as follows:

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

(1) Does not include holders of record whose shares have been reclassified from
member's equity to liabilities resulting from the members' withdrawal from
True Value membership and for which stock redemption procedures have not
been completed.

Dividends (other than patronage dividends) on the Class A common stock and
Class B common stock, subject to the provisions of True Value's Certificate of
Incorporation, may be declared out of retained earnings of True Value, as may be
authorized by the board of directors. Dividends may be paid in cash, in
property, in promissory (subordinated) notes, 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, True Value has not paid
dividends on its Class A common stock or Class B common stock. The board of
directors does not plan to pay non-patronage dividends on either class of stock.

In February 2005, the board of directors authorized the payment of a
patronage dividend related to 2004. The patronage dividend was paid in February
2005. See Item 1, "Business -- Distribution of Patronage Dividends" and
"Business -- Loss Allocation to Members and Accumulated Deficit."

ISSUER PURCHASES OF EQUITY SECURITIES

The number of shares of True Value's Class A common stock redeemed and the
average price paid per share for each month in the fourth quarter of 2004 were
as follows:

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

(1) In March 2000, the board of directors of True Value declared a moratorium on
redemptions of the capital stock, which was rescinded by the board of
directors of True Value effective July 6, 2004. In accordance with True
Value's By-Laws, True Value offsets amounts due by its members against any
amounts that it pays to the members on redemption of either their stock or
their notes. This stock redemption liability is the aggregate value of the
former members' equity investments after the offset of the loss allocation
resulting from the 1999 loss, the 2001 loss and the accounts receivable owed
by the former members. The net investment value of Class A common stock,
after offset, is paid in cash at the time of redemption.

15

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

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

(1) The 2001 decrease in revenue compared to 2000 is primarily due to the sale
of the Lumber Business on December 29, 2000. The Lumber Business had revenue
in 2000 of $1,085,102.

(2) No patronage dividend was issued for 2001 due to a net loss of $50,687,
which was reported for that year.

(3) In 2004, True Value lifted the moratorium on stock redemptions and redeemed
shares for former shareholders who completed required stock redemption
procedures. Accordingly, no deferred stock redemptions remain as a result of
the moratorium. In 2003, Class A common stock and Class B common stock
excludes approximately $18,841 and $82,718, respectively, of amounts not
redeemed due to the stock moratorium. Class B common stock also excludes
$33,868 of nonqualified Class B common stock. These amounts are included in
Deferred stock redemptions and Redeemable nonqualified Class B common stock
and are offset by Loss allocation of $27,941, Accumulated deficit of $9,933
and an offset of accounts receivable of $6,821 pursuant to True Value's
agreements with its members. In 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 2001, Class A common
stock and Class B common stock include approximately $11,699 and $34,712,
respectively, of amounts not redeemed due to the stock moratorium. See Note
1, "Description of Business and Accounting Policies -- Capital Stock
Redemption," to the Consolidated Financial Statements beginning at page F-1.

16

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
($ IN THOUSANDS)

OVERVIEW

True Value has had three consecutive years of achieving key milestones in
the turnaround of its business. Operational, financial and internal control
breakdowns during the integration period following the merger of Cotter &
Company and ServiStar Coast to Coast Corporation on July 1, 1997 culminated in a
$130,803 loss in 1999. Since then, new management has returned True Value to
profitability by reducing costs significantly, restructuring operations,
improving operational performance, reducing and refinancing its debt, improving
internal accounting controls and changing its corporate culture. These
accomplishments, as well as other management actions, have slowed the rate of
net membership attrition in True Value, which increased after the 1999 loss.

In 2002, management restored True Value to profitability by reducing costs
and also completed a sale leaseback transaction. These two items produced cash
to significantly reduce True Value's debt.

In 2003, True Value entered into a new debt agreement that consolidated and
refinanced its third party senior notes and revolving credit facility, reducing
its weighted average interest rate to approximately 4% from the prior rate of
approximately 13% and resulting in negotiated cash savings of $21,291 in senior
lender obligations. Of this amount, $7,706 related to forgiveness of existing
indebtedness and $13,585 related to a negotiated reduction in refinancing
related make-whole obligations. (The $13,585 represents the difference between
the contractual amount of the make-whole obligation in accordance with the old
senior note agreements compared to the amounts negotiated with the old senior
note holders.) Additionally in 2003, True Value settled the Derivative Action
against it for the benefit of nearly all True Value members, reduced pricing to
members nearly $10,000, and continued implementing efficiency initiatives and
improving operational profitability.

In 2004, True Value stabilized revenue and more than doubled its 2003 net
margin. The higher 2004 net margin was primarily due to the 2003 debt
refinancing and was achieved after providing price reductions to members of
approximately $9,000. True Value also secured lower product acquisition costs
through a new multi-year comprehensive line review process implemented during
the second half of 2004. This line review process will fund incremental price
reductions to members in 2005 and beyond. In addition, True Value lifted the
moratorium on stock redemptions, funded related stock redemptions and reduced
year end debt by $21,981.

Management utilizes a variety of key performance measures to monitor the
health and progress of True Value's business. These measures are store count,
revenue, operational and interest expense reductions and debt reduction.

17

The following is a summary of the trends of the most significant key
performance measures identified above:

STORE COUNT:

(YEAR END STORE COUNT GRAPH)
YEAR END STORE COUNT

2001 7,196
2002 6,567
2003 6,178
2004 6,025

Management begins its analysis of the financial health of True Value by
measuring the number of stores and the level of patronage from True Value
members. Management considers that one of the critical elements of the
turnaround has been stabilizing the membership base. As demonstrated on the
preceding chart, the rate of True Value's net store count decline has tapered
off significantly in the last few years. Year end store count figures include
new store gains of 148, 212 and 202 in 2002, 2003 and 2004, respectively.
Management is projecting a modest 2% net decline in overall store count in 2005,
assuming stable economic and competitive conditions and the continued
improvement of the financial condition of True Value. Management considers this
a modest decline, as the number of industry-wide independent hardware stores is
projected to decline at about a 1.0% rate for the next several years. With the
improvement in the financial condition of True Value, management expects new
store revenue to be greater in 2005 than in 2004.

In regards to the level of patronage from True Value members in 2004,
approximately one quarter of the stores accounted for less than 5% of Net
revenue. This relationship has been fairly consistent over the last several
years. If True Value were to experience a significant decrease in this quartile
of current members, the financial impact would not be significant.

18

NET REVENUE:
(NET REVENUE GRAPH)

Following several years of declining Net revenue, driven primarily by
declining membership, True Value's Net revenue stabilized in 2004, as the member
attrition rate continued to taper off. A key metric utilized by management to
assess the strength of Net revenue is year-to-year same store sales. This metric
represents year-to-year sales performance for member stores with at least two
full fiscal years as members of True Value. For the first time in recent years,
same store sales increased by $38,005, or 1.9%, in 2004 after declining by
$40,076, or 1.8%, in 2003 and by $119,584, or 4.6%, in 2002. Management
estimates that in 2005 True Value will experience a modest increase in Net
revenue.

OPERATING AND INTEREST EXPENSES:
(OPERATING AND INTEREST EXPENSES GRAPH)

A key component of management's turnaround strategy has been to reduce the
cost structure of True Value. Management's actions, including restructuring
actions, have focused on reducing the following expenses: logistics and
manufacturing, selling, general and administrative, and interest paid to members
and third parties. In 2004, third party interest expense was significantly lower
due to a full year effect from the

19

August 29, 2003 refinancing. Member interest expense was slightly higher due to
additional debt created by lifting the moratorium. In 2003, third party interest
expense includes the cost of $26,927 incurred with the refinancing of the Senior
Debt, resulting from the write-off of the remaining unamortized balance of
prepaid bank fees and old and new senior note make-whole interest costs. In
2001, True Value incurred sizable restructuring charges mainly in connection
with distribution facility closures and corporate layoffs. These restructuring
actions and other corporate cost reductions have been key to the improved
profitability of True Value. Management estimates stable expenses and a modest
profit improvement in 2005.

DEBT:
(TOTAL YEAR-END DEBT INCLUDING MEMBER DEBT GRAPH)

Total debt, shown above, includes all third party debt and the current and
long-term portions of subordinated member debt. The primary contributors to True
Value's debt reduction over this period included: the sale leaseback of seven
distribution centers, the sale of idle or underutilized assets, improved working
capital management and lower operating expenses resulting from headcount and
other expense reductions. The combination of improved operating performance and
lower debt levels allowed True Value to refinance its third party senior notes
and revolving credit facility on August 29, 2003, which reduced the average
interest rate on these borrowings from approximately 13% to approximately 4%.
Overall debt reductions in 2004 were achieved despite the increase in debt
required to fund stock redemptions resulting from the lift of the stock
moratorium. In 2005, management anticipates a modest increase in debt due to
financing development of new member programs and information systems
enhancements.

True Value's primary source of revenue is derived from the sale of
hardware, paint and paint related products, and general merchandise to member
stores. These revenues result from shipments that originate from True Value's
distribution facilities, as well as from shipments that go direct from True
Value's vendors to member stores. In addition, True Value recognizes revenue for
services provided to members and vendors, including primarily advertising and
transportation fees.

Costs of revenue include acquisition cost of merchandise (net of discounts
and vendor incentives), warehousing and transportation costs, manufacturing
costs for paint and paint related products, transportation costs, and costs
related to other services provided to members.

Selling and general administrative costs include headquarter and field
personnel expenses, as well as advertising, marketing and information technology
costs.

True Value's cash flows are generated primarily from profits on sales of
merchandise and services, as discussed above, and are utilized primarily to
service debt and fund patronage dividends to members.

The success of True Value is dependent upon continued support from its
members in the form of purchases of merchandise and services for their retail
and/or industrial distribution outlets. Significant

20

declines in membership or in the levels at which members purchase from True
Value, or both; an increase in market share of the various entities that compete
in the hardware industry; and a decline in the general U.S. economy could have a
significant negative effect on True Value's profitability.

The following discussion and analysis provides information that management
believes to be relevant to understanding True Value's financial condition and
results of operations. This discussion should be read in conjunction with True
Value's consolidated financial statements and the related notes thereto included
in this report, beginning at page F-1.

RESULTS OF OPERATIONS FOR 2004 COMPARED TO 2003

In 2004, True Value's revenue stabilized and net margin more than doubled
from 2003. True Value also lifted the moratorium on stock redemptions, reduced
total debt and experienced a 2.5% net decline in member retail outlets, the
lowest level of decline in several years. True Value's success in slowing the
net decline in number of retail outlets was predominately due to its improved
financial position; True Value has reestablished itself as a financially stable
cooperative wholesaler for the independent hardware retailer and is having
success signing new members from its competitors.

NET REVENUE AND GROSS MARGIN

A reconciliation of Net revenue and gross margin between 2004 and 2003
follows:

Net revenue for the year ended December 31, 2004 totaled $2,023,887, which
was flat compared to the same period last year. The net revenue increase in the
same store sales category was offset by declines in the

21

participating member store sales and other revenue categories. True Value's same
store sales increased $38,005, or 1.9%. Same store sales were favorably impacted
by various True Value programs and initiatives to drive merchandise sales, as
well as an improved economy and renewed member confidence in True Value.
Partially offsetting the increase in same store sales was a 2.5% net decline in
the number of participating member retail outlets, resulting in revenue
reduction of $37,508, or 1.9%. The 2004 net decline in revenue resulting from
the change in participating member stores is an improvement relative to the net
decline experienced in 2003 of $94,013, or 4.3%. The remaining revenue reduction
in other revenue of $950 was primarily due to the impact of Emerging Issues Task
Force ("EITF") Issue No. 02-16 "Accounting by a Customer (including a Reseller)
for Certain Consideration Received from a Vendor" ("EITF 02-16"), on advertising
revenue (See Note 1, "Description of Business and Accounting
Policies -- Consideration Given by a Vendor," to the Consolidated Financial
Statements beginning at page F-1). In addition, Net revenue was favorably
impacted by two extra ship days in 2004 compared to 2003; this effect was
predominately offset by wholesale product price reductions (excluding commodity
items) that lowered revenue by an incremental $9,019, as compared to the prior
year.

Gross margin for the year ended December 31, 2004 increased by $1,641, or
0.7%, over the prior year. Same store sales gross margin increased $3,826 due to
volume increases discussed above, offset by lower paint margins due to raw
material price increases and costs of $2,377 incurred to implement the new
"Color Made Simple" paint program. Another contributing factor reducing gross
margin was the net decline in participating member stores, lowering gross margin
by $5,911. Although the net decline in participating member stores caused a
gross margin reduction, the trend shows improvement, as 2003 had a gross margin
loss of $13,374 from a net decline in participating member stores. The wholesale
product price reductions that lowered revenue did not unfavorably impact gross
margin, as lower product acquisition cost from suppliers more than offset the
wholesale product price reductions.

The other cost of revenue category, which consists mainly of advertising,
transportation, freight-in, vendor rebates, cash discounts and other costs
incurred to prepare goods for resale, increased by $3,726. The primary reason
for this increase was the net impact of EITF 02-16 related to the change in
recognition of vendor compensation and market related items (See Note 1,
"Description of Business and Accounting Policies -- Consideration Given by a
Vendor," to the Consolidated Financial Statements beginning at page F-1). Also
favorably impacting the other gross margin category was lower advertising cost
related to discontinuing in 2004 the sponsorship of "IROC" (International Race
of Champions). Partially offsetting this favorable variance were higher
inventory reserve requirements related to the increased levels of unproductive
inventory and higher costs incurred to prepare goods for resale.

Logistics and manufacturing expenses decreased by $660, or 1.0%, as
compared to the same period last year. This decrease in expense is primarily due
to 2003 expenses that did not re-occur in 2004, including asset impairment,
severance and facility exit costs of $2,495. Partially offsetting this decrease
were transportation administrative cost increases of $913 primarily related to
staffing in the vendor compliance and global sourcing departments. In addition,
manufacturing expenses increased $870 principally due to post-employment charges
and the write-off of licensing fees related to True Value's Trading Spaces(TM)
brand of paint products.

Selling, general and administrative ("SG&A") expenses increased by $5,602,
or 5.6%, as compared to 2003. The increase in SG&A expenses was primarily due to
the application of EITF 02-16 (See Note 1, "Description of Business and
Accounting Policies -- Consideration Given by a Vendor," to the Consolidated
Financial Statements beginning at page F-1). In 2003, amounts both earned and
expensed related to markets of $13,607 were recorded net in SG&A expenses; in
2004, these amounts were recorded in Net revenue and Cost of revenue as
applicable. Excluding the EITF 02-16 impact, SG&A expenses would have decreased
by

22

$8,617. Reductions in depreciation and amortization and bad debt expense were
offset by increases in labor and related items. Depreciation and amortization
expense was lower by $8,572 primarily due to capital investments incurred after
the 1997 merger becoming fully depreciated or amortized during 2003 and 2004.
Bad debt provisions generated a reduction in SG&A expense of $3,425 compared to
2003 primarily due to favorable collections experience on current and terminated
member accounts and notes receivables. Labor costs increased $2,295 due to
annual merit increases, post-employment charges due to departmental
reorganizations, group medical insurance costs, and modest increases in
additional headcount to facilitate True Value merchandise sales initiatives.
These increases were partially offset by lower bonus expense and 401(k)
contributions due to lower achievement of performance targets in 2004 versus
2003.

Third party interest expense decreased $44,345, or 85.7%, as compared to
the same period last year. The primary reasons for the decrease were related to
the August 29, 2003 refinancing. The lower interest rate achieved in the
refinancing resulted in lower interest costs in 2004 versus 2003 of $9,167. In
addition, costs related to the August 2003 refinancing and to prior debt
agreements did not re-occur in 2004. These costs included the write-off of
deferred fees related to the prior debt agreements of $26,927, amortization of
senior note make-whole interest cost related to prior year's senior note
prepayments of $4,579, and amortization of bank fees of $2,703. See "Other
income, net" for related debt forgiveness.

Other income, net decreased $19,092, or 87.2%, as compared to the same
period last year. This decrease in other income was primarily the result of
three 2003 gains that did not re-occur in 2004. In April 2003, True Value
recognized a gain of $7,133 of unamortized income related to terminated
agreements associated with the sale of the lumber business to BMA in December
2000. True Value also recognized a gain on debt forgiveness of $7,706 related to
the debt refinancing on August 29, 2003. Finally, litigation settlements in 2003
resulted in gains of $5,538.

The 2004 net margin of $43,213 increased from net margin of $21,221 for the
same period a year ago. The primary reason was the reduction in interest related
to the August 29, 2003 refinancing of True Value's third party debt and other
changes as discussed above.

RESULTS OF OPERATIONS FOR 2003 COMPARED TO 2002

True Value experienced a net decline of its total number of outlets of 5.9%
in 2003 and 8.7% in 2002. The decline was due to retailer competition and
members leaving True Value to find an alternate source of supply, principally
due to concerns about True Value's financial health. True Value's improved
financial stability served to slow the net decline in the number of retail
outlets and the reduction of market share of members' purchases. Further,
members bought more merchandise from the distribution centers resulting in a
favorable mix of higher margin warehouse sales and fewer low margin direct
sales. In addition, price reductions, which commenced in October 2002 and
continued through 2003, contributed to a net decline in revenue and gross margin
but were of benefit to the members.

During 2003, True Value was successful in completing a refinancing of the
existing senior credit facility and senior notes with a four-year revolving
credit facility. The new Bank Facility resulted in a reduction in interest
expense as a result of a lower interest rate from September 2003 through
December 2003.

23

REVENUE AND GROSS MARGIN

A reconciliation of revenue and gross margin between 2003 and 2002 follows:

Net revenue for the year ended December 31, 2003 totaled $2,024,340, a
decrease of $151,111, or 6.9%, as compared to the same period last year. The
overall decline in revenue was predominately due to a decline in the number of
participating member retail outlets. True Value experienced a 5.9% net decline
in the number of participating member outlets resulting in a revenue reduction
of $94,013, or 4.3%. Same store sales declined $40,076, or 1.8%, as compared to
the prior year due to True Value members shifting some of their merchandise
purchases to other sources and the effect of a slow economy through the first
three quarters. A contributing factor in the decline of revenue in same store
sales and change in participating members categories was a product price
reduction that lowered revenue by approximately $9,884 as compared to the prior
year. Other revenue, which consists of advertising, transportation and other
revenue declined $17,022, or 0.8%, primarily due to lower national advertising
program fees that are determined based on a percentage of each member's
purchases. In addition, the adoption of the accounting rule EITF Issue No. 02-16
(See Note 1, "Description of Business and Accounting Policies -- Consideration
Given by a Vendor," to the Consolidated Financial Statements beginning at page
F-1) had an impact of reducing revenue by $4,284. Further, reduced shipments to
members reduced freight revenue from members by $3,049.

Gross margin for the year ended December 31, 2003 decreased by $26,482, or
10.7%, over the prior year. The net decline in participating member outlets
contributed $13,374 of the reduction in gross margin. Gross margin from same
store sales declined by $1,384. A contributing factor in the decline of gross
margin in same store sales and change in participating members categories was a
product price reduction that lowered gross

24

margin by approximately $9,884 as compared to the prior year. The product price
reduction was partially offset by lower product acquisition costs from both
domestic and global suppliers.

Other cost of revenue, which is comprised of advertising, transportation,
freight-in, vendor rebates, cash discounts and other costs incurred to prepare
goods for resale, negatively impacted gross margin by $11,724 as compared to the
same period last year. This negative impact was due to an increase in freight
costs and lower discounts and rebates associated with global sourcing of product
and lower purchasing volume, offset by advertising costs being reduced by an
amount greater than the related revenue reduction.

Logistics and manufacturing expenses decreased by $7,483, or 10.5%, as
compared to the prior year. True Value experienced a decrease in expense due to
lower operating costs resulting from the closure of two distribution centers
during 2002, together with increased labor productivity resulting from ongoing
process changes. In 2001, True Value implemented a distribution center closure
plan in response to a reduction in the member base. These savings, which started
to be recognized in 2002, were partially offset in 2003 by increased rent
expense of $14,442, net of reduced depreciation expense of $1,814 and gain
amortization of $2,646 as a result of a sale leaseback transaction, which
occurred on December 31, 2002. See "Interest expense" below for a discussion of
the related impact from the sale leaseback transaction.

SG&A expenses increased $3,481, or 3.6%, as compared to the prior year. The
increase in SG&A expenses was due mainly to higher health care costs, which
reflect the upward trend in health care self insurance cost in the year compared
to last year. In addition, professional fees, which relate to higher litigation
costs as well as professional outside services work related to Sarbanes-Oxley
preparations, increased compared to the prior year.

Interest expense to members decreased by $812, or 12.3%, as compared to the
prior year due to a lower average principal balance of debt outstanding,
partially offset by a higher average interest rate. The 8.3% interest rate that
True Value offered to members to renew their maturing subordinated debt for an
additional three years was higher than the 7.9% average coupon rate of their
maturing debt.

Third party interest expense decreased $3,560, or 6.4%, as compared to the
same period last year. On August 29, 2003, True Value completed the refinancing
of the Senior Debt resulting in the write-off of the remaining unamortized
balance of prepaid bank fees and old and new senior note make-whole interest
costs totaling $26,927. See "Other income, net" below for related debt
forgiveness. In addition, the amortization of make-whole costs incurred by the
early pay down of debt from the asset sales that occurred in the second half of
2002 are included in interest expense. These write-offs and increased
amortization were offset by lower interest costs of approximately $30,486 as a
result of lower average principal balance of senior debt outstanding as compared
to the prior year, and lower interest rates on the new Bank Facility. True Value
achieved the lower average principal balance by generating cash from operations
and asset sales, which includes the sale leaseback of seven facilities at
December 31, 2002.

25

Other income, net increased by $18,250 as compared to the same period last
year. This increase in other income included $7,706 of debt forgiveness from the
refinancing of the Senior Debt. Additionally, True Value recognized $7,133 of
income from deferred credits related to the termination in April 2003 of the
non-compete, cooperation and trademark license agreements that were part of the
sale of the Lumber Business to BMA in 2000. These agreements with BMA had terms
ranging from five to ten years and the related amounts received for these
agreements were being amortized over those terms. Also, True Value recorded
income from litigation settlements of $5,538. The Derivative Action Settlement
required on the effective date of lifting the moratorium, which occurred July 6,
2004, that True Value reduce the loss allocation accounts for all current and
former members who are parties to the Stipulation of Settlement by approximately
$5,000. Other income of $3,000 relates to the receipt of insurance proceeds in
2003 to fund a portion of this adjustment between the loss allocation account
and retained deficit. The remaining $2,538 of income relates to settlement of a
dispute with vendors.

The net margin of $21,221 was up from a net margin of $21,153 for the same
period a year ago. True Value maintained its net margin in light of a $151,111
revenue reduction, which includes implementing $9,884 in wholesale price
reductions. The adverse effect of revenue reductions on gross margin were due to
lower volume and the wholesale price reductions and were partially offset by
expense reductions from logistic and manufacturing efficiencies and the net
effect of the sale leaseback transaction. Further, net margin was impacted by
the net cost of $11,531 from refinancing the Senior Debt. This amount, however,
was offset by the gain of $7,133 from the termination of the long-term BMA
agreements and gains from litigation settlements in the aggregate amount of
$5,538.

LIQUIDITY AND CAPITAL RESOURCES

The information provided below describing True Value's debt, credit
facilities, guarantees and future commitments is included in order to facilitate
a review of True Value's liquidity.

True Value generated cash from operating activities for 2004, 2003, and
2002 in the amounts of $66,344, $32,807 and $103,204, respectively. The increase
in cash generated from operating activities in 2004 compared to 2003 was due to
the improvement in Net margin of $21,992 in 2004 from 2003. This increase was
predominately due to the reduction in interest expense in 2004 from 2003 that
was generated from the refinancing of its Senior Debt on August 29, 2003. The
reduction in cash generated from operating activities in 2003 in comparison to
2002 was due principally to cash generated from the sale of inventory in 2002 of
$88,908. True Value generated this cash in 2002 through a focused effort to
liquidate excess inventory in 2002. In 2002, True Value initiated several
inventory reduction programs to keep inventory levels in line with a reduction
in membership and improve inventory turns. These initiatives included
eliminating excess and obsolete inventory and closing regional distribution
centers. While True Value also disposed of excess inventory during 2004 and
2003, it did so at a lower level than in 2002.

True Value's major working capital components individually move in the same
direction with the seasonality of the business. The spring and early fall are
the most active periods for True Value and require the highest levels of working
capital. The low point for accounts receivable, inventory and accounts payable
is at the end of the calendar year. The cash needed to meet the future payments
for accounts payable will be provided by the cash generated from collections of
accounts receivable and from the future sale of inventory.

In 2004, True Value's major working capital components did not
significantly impact cash from operations as Accounts receivable, Inventory and
Accounts payable remained flat compared to 2003. Even though True Value's 13
month average member receivable "DSO" (Days Sales Outstanding) declined to 38.5
compared to 39.6 in 2003, it did not generate additional cash flow, as the
lifting of the moratorium on common stock redemptions in July 2004 allowed True
Value to set off a substantial amount of the older accounts receivable against
the member's common stock investment.

26

In 2003, True Value's major working capital components did not
significantly impact cash from operations as Accounts receivable remained flat
compared to 2002. True Value's 13 month average member receivable DSO was also
flat at 39.6 for 2003 compared to 39.7 days for 2002. Additionally, Inventory
and Accounts payable in 2003 increased compared to 2002 by $50,880 and $38,614,
respectively, as a result of programs implemented to improve fill rates and
increase levels of imported product.

In 2002, True Value's major working capital components impacted cash from
operations as Accounts receivable, Inventory and Accounts payable decreased by
$32,926, $88,908 and $52,091, respectively, from 2001. The additional cash
generated from Accounts receivable was reflected in True Value's 13 month
average member receivable DSO, as it improved to 39.7 for 2002 compared to 43.9
days for 2001. The additional cash generated from the reduction in Inventory was
partially offset by the reduction in Accounts payable. These changes in
Inventory and Accounts payable were mainly due to the inventory reduction
programs described above.

True Value used cash for investing activities in 2004 in the amount of
$9,827. In 2003 and 2002, investing activities generated cash in the amount of
$13,065 and $146,851, respectively. Investing activities include capital
expenditures, proceeds from sales of properties, restricted cash activities and
changes in other assets. Total capital expenditures, excluding expenditures
under capital leases, were $11,874, $6,825 and $12,838 for the years 2004, 2003
and 2002, respectively. Capital expenditures are comprised of various building
improvements and purchases of additional equipment and technology at True
Value's distribution centers, manufacturing facilities and at its corporate
headquarters. True Value's management has forecasted that the capital
expenditure investment for 2005 will exceed $20,000, due primarily to increased
investment spending on information systems enhancements, transportation
equipment, and paint manufacturing facilities and equipment.

In 2002, the gross proceeds from the sale of properties were $127,941,
which principally related to the sale leaseback of seven properties (See Note 5,
"Lease Commitments," to the Consolidated Financial Statements beginning at page
F-1) and the sale of the Brookings, South Dakota distribution center. In 2002,
cash generated from other assets was provided by the early payment of the note
receivable from BMA. In addition, 2002 used restricted cash of $13,320 from
prior year asset sales to pay down debt and in 2003, the elimination of
restricted cash as a result of the debt refinancing provided cash of $15,755.

The excess cash generated from operating and investing activities in 2004,
2003