TRUSERV CORP - 10-K Annual Report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K

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

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001 OR

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

FOR THE TRANSITION PERIOD FROM TO
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COMMISSION FILE NUMBER 2-20910

TRUSERV CORPORATION
(Exact name of Registrant as specified in its charter)

DELAWARE 36-2099896
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

8600 WEST BRYN MAWR AVENUE, CHICAGO, ILLINOIS 60631-3505
(Address of principal executive offices) (Zip Code)

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

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

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

INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES X. NO__.

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

STATE THE AGGREGATE MARKET VALUE OF THE VOTING STOCK HELD BY NON-AFFILIATES
OF THE REGISTRANT.

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

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

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TABLE OF CONTENTS

PAGE

PART I
Item 1. Business.................................................... 1
Item 2. Properties.................................................. 10
Item 3. Legal Proceedings........................................... 11

PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters......................................... 12
Item 6. Selected Financial Data..................................... 13
Item 7. Management's Discussion and Analysis of Financial Condition
and
Results of Operations....................................... 14
Item 7A. Quantitative and Qualitative Disclosures About Market
Risk........................................................ 23
Item 8. Financial Statements and Supplementary Data................. 23
Item 9. Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure.................................... 23

PART III
Item 10. Directors and Executive Officers of the Registrant.......... 24
Item 11. Executive Compensation...................................... 27
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 31
Item 13. Certain Relationships and Related Transactions.............. 31

PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form
8-K......................................................... 31

PART I

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

ITEM 1. BUSINESS.

THE COMPANY

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

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

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

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

GENERAL DESCRIPTION OF THE BUSINESS

TruServ, organized as a cooperative, is one of the largest member-owned
wholesalers of hardware and related merchandise in the United States, serving
approximately 7,200 retail outlets for its members as of December 31, 2001.
TruServ also manufactures and sells paint and paint applicators.

TruServ sells its products to hardware retailers who have entered into
retail member agreements with it. TruServ serves its members by functioning as a
low cost distributor of goods and maximizing its volume purchasing abilities,
primarily through vendor rebates and discount programs, for the benefit of its
members. These benefits are passed along to its members in the form of lower
prices and/or patronage dividends.

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

As of December 31, 2001, TruServ serves approximately 7,200 retail outlets
for its members throughout the United States. Primary concentrations of members
exist in New York (approximately 8%), Pennsylvania (approximately 7%),
California and Texas (approximately 5% each) and Illinois and Michigan
(approximately 4% each).

SALES AND SUPPLIERS

TruServ provides each of its members with an illustrated price catalog
showing the products available from TruServ, which the members can access
through the internet site for members. Upon request, a member will also receive
a printed version of the catalog. These products, comprised of more than 55,000
stockkeeping units ("SKUs") maintained at TruServ's regional distribution
centers, are divided into seven classes of merchandise which represent the
products sold within TruServ's three operating segments. Those seven categories
are set forth in the table below, along with the corresponding dollars of total
revenues for each category during the last three fiscal years:

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* This business was sold on December 29, 2000.

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

- warehouse shipment sales (approximately 63% of total sales);

- direct shipment sales (approximately 33% of total sales); and

- relay sales (approximately 4% of total sales).

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

- to be included in future promotions,

- seasonal in nature,

- not normally held in inventory, and

- not conducive to direct shipment.

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Generally, TruServ will give notice to all members of its intention to
purchase products for relay shipment and will then purchase only as many items
as the members order. When the product shipment arrives at TruServ, it is not
warehoused; rather, TruServ breaks up the shipment and "relays" the appropriate
quantities to the members who placed orders.

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

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

OTHER SERVICES

TruServ annually sponsors two "markets" for its members in order to keep
them better informed as to industry trends and the availability of new and
seasonal merchandise. In the year 2002, both of these markets are in Dallas,
Texas. Members are invited to the markets and generally place substantial orders
for delivery during the period between markets. During such markets, new
merchandise and seasonal merchandise are displayed to attending members.

BACKLOG

As of February 23, 2002 and February 24, 2001, respectively, TruServ had a
backlog of firm orders (including relay orders) of approximately $56,177,000 and
$28,814,000. TruServ's backlog at any given time is made up of two principal
components:

- normal resupply orders; and

- market orders for future delivery.

Resupply orders are orders from members for merchandise to keep inventories
at normal levels. Generally, such orders are filled the day following receipt,
except that relay orders for future delivery (which are in the nature of
resupply orders) are not intended to be filled for several months. Market orders
for future delivery are member orders made at one of TruServ's two markets for
new or seasonal merchandise, to be delivered during the subsequent period
between markets. Thus, TruServ generally has a relatively high backlog at the
end of each market, which decreases in subsequent months until the next market
occurs. The increase in backlog orders in 2002 is due to the timing of the
market. In 2002, the spring market was held in February but was held in May in
2001.

COMPETITION

The retail hardware industry is characterized by intense competition.
Independent retail hardware businesses, including those served by TruServ, face
intense competition from chain stores, discount stores, home centers and
warehouse operations such as Wal-Mart, Home Depot, Menards, Sears and Lowe's.
Increased operating expenses for the retail stores, including increased costs
due to longer store hours and higher rental costs of retail space, have cut into
operating margins for members and brought pressure on TruServ to achieve lower
merchandise costs for its members. In response, TruServ has developed a retail-
oriented competitive pricing strategy on high-turnover, price-sensitive items.
The trueAdvantage(R) program was introduced in 1995 and upgraded in 1997 to
promote higher retail standards in order to build consumer goodwill and create a
positive image for all member retail outlets. In 2002, TruServ is introducing a
revised

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program to build upon the strong foundation of the trueAdvantage(R) program by
focusing on retail best practices.

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

TRADEMARKS, SERVICE MARKS AND COLLECTIVE MEMBERSHIP MARKS

TruServ's trademarks, service marks and collective membership marks are of
prime importance to TruServ. Many of the marks are highly recognized and
utilized in extensive advertising and marketing campaigns, and TruServ
vigorously defends its marks. As of December 31, 2001, TruServ's members have
approximately 7,200 retail outlets that operate predominately as retail hardware
stores, rental facilities, horticulture outlets and commercial and industrial
distributors, throughout the United States and in 60 countries, most of which
sell merchandise and services under the marks.

The marks include the True Value(R) collective membership mark, 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. All
of the marks are currently used in commerce and TruServ intends to use the marks
in commerce in the future. Each of the marks is renewable at TruServ's option
and TruServ intends to renew them upon expiration. Members have continued to
conduct their businesses under the same retail banners as before the merger of
Cotter and SCC; however, beginning in year 2000, many members with the retail
banners of Coast to Coast(R) and ServiStar(R) started to conduct their business
under the single retail banner of True Value(R).

EMPLOYEES

As of December 31, 2001, TruServ employed approximately 4,000 persons in
the United States on a full-time basis. Due to the widespread geographical
distribution of TruServ's operations, employee relations are governed by the
practices prevailing in the particular area where the employees are located and
are generally implemented locally. Approximately 36% of the TruServ's
hourly-wage employees are covered by collective bargaining agreements that are
generally effective for periods of three or four years. In general, TruServ
considers its relationship with its employees to be good.

FINANCING AGREEMENTS

On March 26, 2001, TruServ reported that, as of February 24, 2001, it
failed to comply with a covenant under the revolving credit facility and senior
note agreements that required it to achieve a minimum monthly borrowing base
ratio. This constituted an "event of default" under which the senior notes and
amounts outstanding under the credit facility would become callable as
immediately payable. Accordingly, these amounts were classified as current
liabilities as of December 31, 2000.

On April 11, 2002, TruServ entered into various amendments to its existing
revolving credit facility and other senior lending agreements. The amendment to
the revolving credit facility extends the terms of the facility from June 2002
to June 2004. The amount of the commitment remains at $200 million. There are,
however, borrowing base limitations that fluctuate in part with the seasonality
of the business. The borrowing base formula limits advances to the sum of 85% of
eligible accounts receivable, 50% of eligible inventory, 60% of the appraised
value of eligible real estate and 50% of the appraised value of eligible
machinery and equipment; availability is further increased by seasonal
over-advances and decreased by reserves against availability. The interest rate
on the revolving credit facility was increased to the prime rate plus 3.25%. The
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revolving credit facility has certain minimum unusable commitment amounts, which
vary based upon the projected working capital needs of TruServ. The unused
commitment fee is 0.75% per annum.

The amendments to the various senior notes maintain the existing debt
amortization schedules of the various notes. Interest rates on the notes are at
the previous non-default rates, which range from 9.98% to 11.85%. The senior
note and revolving credit facility amendments also require initial, quarterly
and annual maintenance fees. All of the proceeds from certain asset sales,
amortization of certain notes receivable and 80% of any excess cash flow, as
defined in the amended senior note and revolving credit facility agreements,
will be used to prepay all parties to these amendments in accordance with an
amended intercreditor agreement. The intercreditor agreement establishes how the
assets of TruServ, which are pledged as collateral, are shared and how certain
debt prepayments are allocated among the senior lenders. The commitment under
the revolving credit facility will be permanently reduced by the amount of the
prepayments allocated and paid on the revolving credit facility.

The amendments all require TruServ to meet certain restrictive covenants
relating to minimum sales, minimum adjusted EBITDA (earnings before interest,
taxes, depreciation and amortization), minimum fixed charge coverage, minimum
interest coverage and maximum capital expenditures. The term of the revolving
credit facility is accelerated to June 30, 2003, if on that date: total senior
debt outstanding is in excess of $270 million, or total senior debt outstanding,
plus the unused amount of the commitment under the revolving credit facility,
less $30 million, is in excess of $320 million. The senior lenders may
accelerate their notes if the company does not have a revolving credit facility
in place to fund its seasonal cash flows.

The amendments limit the amount of the cash portion of patronage dividends
to the 20% minimum required to be paid under applicable IRS regulations in order
for TruServ to maintain its status as a cooperative, unless TruServ's operating
performance achieves certain EBITDA targets, in which case, up to 30% of the
patronage dividend may be paid in cash. The amendments also require the
continuation of the stock redemption moratorium through the term of the amended
senior debt. It is an event of default under the amendments to exceed certain
levels of subordinated note payments. In addition, an event of default arises
under the amendments in the event that TruServ fails to comply with its
corporate governance policy requiring the retention by TruServ of at least two
outside directors prior to May 31, 2002, at least four outside directors prior
to September 1, 2002 and at least five outside directors prior to November 1,
2002. The amendments also contain requirements for other customary covenants,
representations and warranties, funding conditions and events of default.

These amendments eliminate the "event of default" discussed above and,
accordingly, the long-term portions of the senior notes are no longer recorded
as a component of current debt at December 31, 2001 or 2000.

RETAIL MEMBER AGREEMENT

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

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

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

(3) will conduct a retail hardware, home or garden center, rental or
industrial/commercial operation at a designated location;

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

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

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

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

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

(9) agrees to have its Retail Member Agreement governed by Illinois
law, enforced or interpreted 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

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

CAPITAL STOCK

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

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

Participation in the earnings of a cooperative is based on member patronage
purchasing and reflected by the payment of patronage dividends. In general,
these patronage dividends are based on a member's purchasing volume and margins
applicable to merchandise or services purchased by the member, less any expenses
related to such business and less certain cooperative reserves. Patronage
dividends are determined on a yearly basis for purchasing activity conducted the
prior year, and are allocated no later than the 15th day of the ninth month
following the end of the calendar year. TruServ has been paying patronage
dividends in a combination of cash and Class B common stock. As TruServ reported
a net loss for 2001, there is no patronage dividend payable in 2002 related to
2001 results.

MORATORIUM ON REDEMPTIONS OF CAPITAL STOCK

In March 2000, the board of directors of TruServ declared a moratorium on
redemptions of the capital stock. In reaching its decision to declare the
moratorium, the board of directors of TruServ reviewed the financial condition
of TruServ and considered its fiduciary obligations and corporate law principles
under Delaware law. The board of directors concluded that it should not redeem
any of the capital stock while its net asset value was substantially less than
par value, as that would likely violate legal prohibitions against "impairment
of capital." In addition, the board of directors concluded that it would be a
violation of its fiduciary duties to all members and that it would constitute a
fundamental unfairness to members if some members were allowed to have their
shares redeemed before the impact of the 1999 loss were allocated to them and
members who did not request redemption were saddled with the losses of those
members who requested redemption. Moreover, the board of directors considered
TruServ's debt agreements and, in particular, the financial covenants
thereunder, which prohibit redemptions when TruServ, among other things, does
not attain certain profit margins.

At the time the board of directors declared the moratorium on redemptions,
TruServ's By-Laws did not impose limitations on the board's discretion to
initiate or to continue a moratorium on redemption. The By-
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Laws merely provided that upon termination of a member's agreement, TruServ was
to redeem the member's shares. Nevertheless, the board of directors concluded
that their fiduciary obligations to TruServ and its members would not permit
them to effect redemptions under the circumstances described above. After the
board of directors declared the moratorium, the board of directors amended the
By-Laws to provide that if TruServ's funds available for redemption are
insufficient to pay all or part of the redemption price of shares of capital
stock presented for redemption, the board of directors may, in its sole
discretion, delay the payment of all or part of the redemption price.

The amended debt agreements preclude the lifting of the stock moratorium
until June 2004 except for certain hardship cases, not to exceed $2,000,000
annually. Subsequent to the expiration of the prohibition against stock
redemptions under the debt agreements, the board of directors will consider the
financial condition of TruServ, and will not lift the moratorium unless it can
conclude that effecting redemptions of TruServ's capital stock will not "impair
the capital" of TruServ, unfairly advantage some members to the disadvantage of
others, or violate the financial covenants under its debt agreements. The board
of directors is monitoring the financial performance of TruServ quarterly.

As of February 19, 2002, the amount of Class A common stock and Class B
common stock presented for redemption but deferred due to the moratorium is
approximately $27,569,000 after the offset of the loss allocation account. The
$27,569,000 includes approximately $11,699,000 related to the Class A common
stock historically paid out at time of redemption and $34,712,000 related to
Class B common stock historically paid out in five equal annual installments,
offset by the amount of the loss allocation accounts related to the Class B
common stock in an aggregate amount of $18,842,000.

DISTRIBUTION OF PATRONAGE DIVIDENDS

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

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

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

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

- promissory (subordinated) notes, or

- other property.

Promissory (subordinated) notes are for a five year term and bear interest
at a rate fixed from time to time by the board of directors. The notes are
subordinated to all other debt of TruServ. TruServ may also issue "nonqualified
written notices of allocation" to its members as part of its annual patronage
dividend. "Non-

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qualified written notices of allocation" are usually issued in the form of Class
B common stock. See "Payment of Patronage Dividends in Accordance with the
Internal Revenue Code" below.

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

ALLOCATION OF PATRONAGE DIVIDENDS AGAINST LOSS ACCOUNT

On August 28, 2000, the board of directors of TruServ decided to allocate a
substantial portion of its 1999 operating losses among the TruServ members, on a
pro rata basis, in proportion to each member's ownership of Class B common stock
as of December 31, 1999. A loss allocation account was established for each
member during the third quarter of 2000, reflecting that member's allocated loss
for the year ended December 31, 1999. The loss allocation accounts reflect each
member's proportionate share of the 1999 loss, reduced by certain non-patronage
amounts that are not allocable to members. The loss allocation accounts are not
accounts receivable from members and do not represent amounts currently due from
members. Rather, the loss allocation accounts are satisfied, on a member by
member basis, by withholding the portion of each member's patronage dividend
that would have been paid in Class B common stock, at par value, and applying
that amount to reduce the loss allocation account until it is reduced to zero.
The current levels of members' stock investments in TruServ are not affected.
However, in the event a member should cease to be a shareholder of TruServ, any
unsatisfied portion of that member's loss allocation account would be satisfied
by reducing the amount paid in redemption of the member's stock investment in
TruServ. Currently, TruServ has in effect a moratorium on stock redemptions. See
"Moratorium on Redemptions of Capital Stock" above.

TruServ has retained the fiscal 2001 loss as part of the accumulated
deficit account. A final determination of whether to retain or distribute the
fiscal 2001 loss to members will be made prior to filing the 2001 Federal tax
return. Nevertheless, members will be assigned a share in this loss based
generally on their patronage in the years to which the loss relates. TruServ has
the right to use 100% of future patronage income to offset the accumulated
deficit account as well as to set off the accumulated deficit account against
other amounts owed to members. In the event a member leaves TruServ, any
remaining portion of the member's share of the accumulated deficit account will
be offset against amounts due to the member upon redemption.

PAYMENT OF PATRONAGE DIVIDENDS IN ACCORDANCE WITH THE INTERNAL REVENUE CODE

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

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

TruServ deducts the sum of cash, the face value of qualified written
notices and the fair market value of any other property distributed to the
members (except nonqualified written notices of allocation) from its

8

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

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

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

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

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

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

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

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

SET OFF RIGHTS OF TRUSERV

TruServ's Certificate of Incorporation and By-Laws specifically provide
that TruServ may set off its obligation to make any payment to a member for such
member's stock, notes, interest and declared and
9

unpaid dividends against any obligation owed by the member to TruServ. TruServ
exercised these set off rights in 2001, when TruServ notes and interest came due
to former members with outstanding merchandise accounts receivable to TruServ
and current members with past due merchandise accounts receivable to TruServ.
TruServ also set off its obligation to former members against their related loss
allocation balance. The set off rights were exercised in an aggregate amount of
$7,483,000 during 2001.

Members with multiple stores who elect to sell one or more, but not all, of
their stores must notify TruServ, in writing, of their intention to transfer the
stock for the terminating store(s) to the remaining store(s). This is to avoid
TruServ exercising its right to offset the stock for the terminating store
against the loss allocation account balance.

ITEM 2. PROPERTIES.

TruServ's worldwide headquarters is located in Chicago, Illinois.
Information with respect to TruServ's owned and leased warehousing and office
facilities at December 31, 2001 is set forth below:

No location owned by TruServ is subject to individual mortgages. All owned
facilities are assigned as collateral under the senior debt obligations. The
Hagerstown, Maryland facility is assigned as collateral under a synthetic lease
obligation.

The Westfield, Massachusetts distribution center was closed and sold in
2000.

In 2001, TruServ closed its Henderson, North Carolina distribution center
and the lease agreement expired on November 11, 2001. The Indianapolis, Indiana
distribution center was closed and sold in 2001. TruServ's interest in TruServ
Canada Cooperative, Inc. was sold in October of 2001, which included the sale of
the Winnipeg, Manitoba property. Also in 2001, TruServ announced the closure of
its Brookings, South Dakota and Hagerstown, Maryland distribution centers; such
facilities are currently up for sale.

A sale/leaseback transaction is currently being pursued for the East
Butler, Pennsylvania facility.

10

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

TruServ announced in the third quarter of 2001 that it is considering the
possible sale of the paint manufacturing business which would include one or
both of these facilities; a possible sale transaction could include the sale of
a majority interest in the manufacturing business.

TruServ has subleases with third parties for the Ft. Smith, Arkansas and
Peachtree City, Georgia leased facilities, which are currently not being used in
operations. Also, TruServ has subleases for approximately 33,000 square feet in
the corporate headquarters facility located in Chicago, Illinois.

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

TruServ owns and leases transportation equipment for use at its regional
distribution centers for the primary purpose of delivering merchandise from
TruServ's regional distribution centers to its members. Additional information
concerning these leases can be found in Note 5 to the consolidated financial
statements included elsewhere herein.

ITEM 3. LEGAL PROCEEDINGS.

In June 2000 former members of TruServ filed an action against TruServ in
the Circuit Court of the 19th Judicial Circuit (McHenry County, Illinois). The
plaintiffs in the action each allege that, based upon representations made to
them by TruServ and its predecessors that the Coast to Coast brand name would be
maintained, they voted for the merger of Servistar Coast to Coast and Cotter &
Company. The plaintiffs allege, however, that after the merger the Coast to
Coast brand name was eliminated and that each plaintiff thereafter terminated or
had its membership in TruServ terminated. The plaintiffs further claim that
TruServ breached its obligations by failing to redeem their stock and by
creating loss allocation accounts for the plaintiffs. Based upon this alleged
conduct, the plaintiffs have each asserted claims for fraud/misrepresentation,
negligent misrepresentation, claims under the state securities laws applicable
to each plaintiff, claims under the state franchise/dealership laws applicable
to each plaintiff, breach of fiduciary duty, unjust enrichment, estoppel and
recoupment. The complaint states that each plaintiff is entitled to in excess of
$50,000 in damages; however, the damages being sought are not further specified.
Discovery has recently commenced in the action and it is too early to determine
the extent of the damages being claimed. In March 2001, a similar action was
brought on behalf of additional former members in the same court, by the same
law firm. The complaint alleges substantially similar claims as those made in
the June 2000 action, except that the March 2001 action relates to the ServiStar
brand name instead of the Coast to Coast brand name. The lawsuit is in an early
stage and the extent of damages being claimed has not yet been determined. In
total, approximately 40 former members have brought claims against TruServ based
on this type of allegation in the Circuit Court of the 19th Judicial Circuit
(McHenry County, Illinois).

In August 2000, an action was brought in Delaware Chancery Court (New
Castle County) by a former TruServ member against certain present and former
directors of TruServ and against TruServ. The plaintiff in the lawsuit seeks to
proceed on a class-action basis on behalf of all those affected by the
moratorium and the creation of the loss allocation accounts. The complaint
alleges that the named directors breached their fiduciary duties in connection
with the accounting adjustments made by TruServ in the fourth quarter of 1999
and that TruServ breached, and the named directors caused TruServ to breach,
agreements with members by suspending payment of the members' 1999 annual
patronage dividend, by declaring a moratorium on the redemption of members'
TruServ stock and by imposing minimum annual purchase requirements upon members.
The plaintiff seeks monetary and non-monetary relief in connection with the
various claims asserted

11

in the complaint. The lawsuit is in an early stage and the extent of the damages
being claimed has not yet been determined.

In October 1999, Paul Pentz, a former president of TruServ, filed a claim
in the Circuit Court of the 20th Judicial Circuit (Collier County, Florida)
against TruServ alleging he is due bonus and retirement compensation payments in
addition to amounts already paid to him. TruServ has filed a counterclaim
against Mr. Pentz alleging that he breached his fiduciary duties as president of
TruServ. Mr. Pentz's motion to dismiss the counterclaim was denied. Trial has
been scheduled for June 2002.

TruServ intends to vigorously defend all of these cases.

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

None.

PART II

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

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

The number of holders of record (as of February 23, 2002) of each class of
stock of TruServ is as follows:

Dividends (other than patronage dividends) on the Class A common stock and
Class B common stock, subject to the provisions of TruServ's Certificate of
Incorporation, may be declared out of gross margins of TruServ, other than gross
margins from operations with or for members and other patronage source income,
after deduction for expenses, reserves and provisions as may be authorized by
the board of directors. Dividends may be paid in cash, in property, or in shares
of the Class B common stock, subject to the provisions of the Certificate of
Incorporation and the By-Laws. Other than the payment of patronage dividends,
including the redemption of all nonqualified written notices of allocation,
TruServ has not paid dividends on its Class A common stock or Class B common
stock. The board of directors does not plan to pay dividends on either class of
stock in 2002 for the year ended December 31, 2001. See Item
1--"Business--Distribution of Patronage Dividends."

12

ITEM 6. SELECTED FINANCIAL DATA.

- ---------------
(a) No patronage dividends were issued in 2001 and 1999 due to the reported net
loss of $50,687,000 and $130,803,000, respectively.
(b) 1997 financial results are for Cotter & Company from January 1, 1997 through
June 30, 1997 and the merged company of TruServ for July 1, 1997 through
December 31, 1997.
(c) The lumber and building materials business was sold on December 29, 2000
and, as such, 2001 financial results do not include the activity of this
business.
(d) The noncurrent portion of promissory and installment notes payable to
members are classified in members' capitalization on the balance sheet.
(e) Class A common stock and Class B common stock include $11,699,000 and
$34,712,000, respectively, of amounts related to the stock moratorium. See
"Item 1. Business -- Moratorium on Redemptions of Capital Stock."

13

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

FISCAL YEAR 2001 COMPARED TO FISCAL YEAR 2000

RESULTS OF OPERATIONS

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

- ---------------
* This business was sold on December 29, 2000; therefore, for comparability
purposes, fiscal 2000 results for this business are being removed.

** This business was sold on October 22, 2001; therefore, for comparability
purposes, the results for the last 2 months of fiscal 2000 for this business
are being removed.

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

Revenues for 2001 totaled $2,619,434,000. This represented a decrease in
revenues of $1,374,208,000 or 34.4% from 2000. The key contributors to the
decrease in revenue are the sale of the lumber and building materials business
to Builder Marts of America, Inc. in December 2000, the sale of TruServ Canada
Cooperative, Inc. in October 2001, and the 11% decline in the number of
participating member retail outlets in 2001. While not as significant as in
2001, we anticipate a continued decline in retail outlets in 2002. The remaining
revenue reduction occurred in same store sales, with 90% of this decrease in
direct sales to members, which generate approximately 1% gross margin for
TruServ. The reduction in direct sales is partially due to a shift in member
purchases to warehouse sales. Certain marketing programs and sales initiatives,
together with the impact of a slow down in the national economy, have encouraged
members to buy in smaller quantities that are available by purchasing
merchandise from warehouse. This trend has favorably improved the sales mix
toward more warehouse sales from the less profitable direct sales.

Gross margin for 2001 totaled $264,034,000. This represented a decrease in
gross margin dollars of $13,362,000 or 4.8% compared to 2000. The sale of the
lumber and building materials business, the sale of TruServ Canada Cooperative,
Inc. and the decline in the number of participating member retail outlets are
the

14

key contributors to the negative variance relative to the prior year. The gross
margin as a percent of revenue increased to 10.1% in 2001 from 6.9% for 2000.
The shift in the sales mix to warehouse sales from vendor direct orders, a
reduction in member returns and allowances, and certain product price increases
contributed to the increase in gross margin as a percent of revenue. The
indirect cost of revenues favorably impacted the gross margin dollars as of
result of the closure of distribution centers and headcount reduction, which
reduced the direct inbound logistics costs and labor and related overhead
incurred to bring merchandise to the distribution centers. The reduction in
member returns and allowances is principally due to a change in processes
resulting in part in fewer shipping errors. Additional impact to gross margin
was due to a reduction in gross advertising costs of $23,400,000 partially
offset by a reduction in advertising support fees of $12,527,000.

Logistics (outbound to members' stores) and manufacturing expenses
decreased $1,524,000 or 1.8% as compared to the prior year, primarily due to the
closure of distribution centers, headcount reductions and a reduction in the
member base.

Selling, general and administrative expenses ("SG&A") increased by a net
$11,167,000 or 9.2% in 2001 compared to the prior year. Health and pension
benefit costs increased $8,894,000 due to pension settlements with terminated
employees and a decline in the expected investment return on plan assets.
Software license fees related to retail point of sale software increased
$3,553,000. Financing and legal costs, including consulting and legal fees
related to the debt covenant violation under the senior debt agreements and
other legal matters, were $9,337,000. The aggregate of this increase,
$21,784,000, was partially offset principally by $7,146,000 of lower corporate
staff expenses due to headcount reductions that were part of the 2000 and 2001
restructuring initiatives and $4,511,000 of lower headcount and operational
expenses as a result of the December 2000 sale of the lumber and building
materials business.

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

In fiscal 2000, TruServ recorded a restructuring charge of $4,944,000,
approximately $2,000,000 of which was related to the closures of the Henderson,
North Carolina and the Indianapolis, Indiana distribution centers. The closures
of the Brookings and Hagerstown regional distribution centers are expected to be
substantially completed by the end of fiscal 2002; the closures of Henderson and
Indianapolis were completed by the end of fiscal 2001.

A summary of restructuring charges, related uses of reserves and ending reserve
balances is as follows (dollar amounts in thousands):

15

Interest expense to members decreased by $3,289,000 or 29.5% as compared to
the prior year, primarily due to a lower average principal balance of debt
outstanding to members. Other interest expense decreased by

15.1

$1,144,000 or 2% as compared to prior year. The interest expense savings from
the lower average principal balance of senior debt outstanding, as compared to
the prior year, was offset by the interest rate increase of approximately 2%
imposed as a result of the debt covenant violation under the revolving credit
facility and the senior note agreements. As a result of this default interest
rate, TruServ incurred additional interest expense of $6,779,000 in fiscal 2001.

Gain on sale of assets decreased $28,379,000. The variance was due to the
nonrecurrence of the gain of $28,981,000 recorded upon the sale of TruServ's
lumber and building materials business in December 2000.

Other income decreased by $3,813,000, due principally to the nonrecurrence
of a gain of $4,999,000 recorded in fiscal 2000 from the settlement of certain
pension obligations to fully vested employees through the purchase of annuity
contracts.

The net loss in 2001 was $50,687,000 compared to a net margin of
$34,117,000 in 2000, a decrease in net margin of $84,804,000. Listed below are
the non-operational or unusual items recorded in fiscal 2001 and 2000 in a
reconciliation from total net margin, as reported, to an adjusted net
margin/(loss), showing what underlying operating results would have been without
the non-operational and unusual items.

The adjusted net margin increase of $2,929,000 was achieved though
comparable revenue was lower by $310,528,000.

FISCAL YEAR 2000 COMPARED TO FISCAL YEAR 1999

RESULTS OF OPERATIONS

Revenues for 2000 totaled $3,993,642,000. This represented a decrease in
revenues of $508,684,000 or 11.3% over 1999. This decrease was the result of
various factors. The primary contributing factor was lower revenues from
TruServ's sales of lumber and building material products, which declined
$272,331,000 or 20.1% over the prior year. Lower commodity pricing in the lumber
and building materials industry and a decrease in unit volume contributed to the
decrease in hardware sales. A second contributing factor was a decrease in
hardware sales, which declined $240,273,000 or 8.7% over the prior year. A
reduction in TruServ's member base contributed to this decline. The member base
erosion was partially due to management's decision to eliminate stores that were
not profitable to the co-op. Average hardware handled sales per store in 2000
were equivalent to 1999 at approximately $16,000 per month excluding
non-profitable members who did not meet minimum purchasing levels.

In 2000, TruServ experienced an increase in gross margins of $95,932,000 or
52.9% over the prior year. Gross margins as a percentage of revenue also
increased to 6.9% from 4.0% for 1999. TruServ's improvement of inventory
controls in 2000 and a significant reduction in member claims contributed to the
increase in gross margins. In addition, TruServ conducted a physical inventory
count in the fourth quarter of 2000, which resulted in a $22,200,000 adjustment
that positively impacted gross margins. TruServ recorded an inventory adjustment
in 1999 resulting in a charge of $74,000,000 related to the consolidation of the
distribution network, which was caused by larger than usual employee turnover,
less than adequate training procedures and
16

increased member claims. TruServ's implementation of one common ordering system
for all of its members and a reduction in employee turnover resulted in reduced
member claims. The reductions in member claims are also the result of TruServ
increasing training procedures for employees in the last year, particularly in
the handling of inventory.

Logistics and manufacturing expenses decreased $9,220,000 or 9.6% as
compared to the prior year. TruServ's initiatives in consolidating its
distribution network, developed with the merger plan from 1997, led to the
reduction in these expenses as the merger integration costs incurred in fiscal
1999 of $18,683,000 were no longer incurred by TruServ in fiscal 2000. The
merger integration costs TruServ had previously incurred related to:

- additional costs TruServ incurred implementing the merger plan from 1997
that related to former Cotter distribution center closings, severance pay
and the temporary incremental increase in warehousing costs to convert
the product assortment, and

- the integration of the three distribution networks by consolidating
operating systems, revising truck runs for overlapping distribution
centers and resizing and reconfiguring warehouse racking.

The decrease in logistics and manufacturing expenses was partially offset
by increased handling and packaging expenses and lower capitalization of
warehouse costs due to lower inventory levels.

As a result of the decreases in sales that TruServ experienced in early
2000, TruServ implemented significant cost cutting measures in 2000 that
resulted in a decrease in SG&A expenses. SG&A expenses decreased $16,823,000 or
12.2% over the prior year. SG&A expenses as a percentage of sales were 3.0%,
which is consistent with the prior year.

Restructuring charges and other related expenses decreased $2,569,000 as
TruServ had completed the workforce reduction of the merger plan related to the
former Cotter & Company operations.

As a result of a reduction in the aggregate principal balance of debt to
members of TruServ, the amount of interest expense to members decreased
$3,367,000 or 23.2% in comparison to the prior year. However, other interest
expense increased by $10,371,000, representing a 22.4% increase. This increase
was the result of higher interest rates under the various financing agreements,
which was partially offset by decreased borrowing amounts.

Gain on sale of assets increased $18,613,000. The gain was due primarily to
TruServ's sale of its lower gross margin lumber and building materials business.

Other income increased by $6,179,000, primarily due to a one-time gain
resulting from the settlement of certain pension obligations to fully vested
employees through the purchase of annuity contracts.

In 2000, income tax expense decreased by $16,104,000, primarily due to
TruServ recording in 1999 a full valuation allowance on deferred taxes of
$16,490,000 existing as of December 31, 1998. The valuation allowance was
required under FASB Statement No. 109, since TruServ had cumulative losses for
the three most recent fiscal years and consequently did not have sufficient
evidence to support the realization of this asset. In 2000, there was no change
in the valuation allowance.

TruServ's net margin in 2000 was $34,117,000 compared to a net loss of
$130,803,000 in 1999. TruServ attributes this result to the following:
improvement in its gross margins, a reduction in logistics and manufacturing
expenses, a decrease in SG&A expenses, the gain from the sale of the lumber and
building materials business and the settlement of certain pension obligations
through the purchase of annuity contracts.

LIQUIDITY AND CAPITAL RESOURCES

The Securities and Exchange Commission ("SEC") recently issued Financial
Reporting Release No. 61, which sets forth the views of the SEC regarding
certain disclosures relating to liquidity and capital resources. The information
provided below describing TruServ's debt, credit facilities, guarantees and
future commitments is included in order to facilitate a review of TruServ's
liquidity.

17

Cash provided by operating activities for the fiscal year 2001, 2000 and
1999 was $179,441,000, $83,573,000 and $181,607,000, respectively. The cash
generated from the decrease in inventory was $100,692,000 in fiscal 2001 as a
result of TruServ's initiatives to improve inventory turns and eliminate excess
and/or obsolete inventory, as well as a result of the effects of reducing the
number of regional distribution centers, which in turn reduced stock levels. In
addition, a reduction in membership contributed to this decrease in inventory
levels. In fiscal 2000 and 1999, cash generated from the decrease in inventory
was $38,752,000 and $112,703,000, respectively. This decrease was a result of
TruServ's consolidation of its distribution network to respond to the decline in
sales it had experienced, along with its efforts to commonize inventory
assortment and implement the distribution network strategic plan from the
merger. While not as significant, we anticipate continued decline in inventory
investments in 2002, as TruServ continues its initiative to improve inventory
turns and respond to the anticipated decline in revenue due to the decrease in
the number of participating member retail outlets.

The cash generated from the decrease in accounts and notes receivable for
the fiscal year 2001, 2000 and 1999 was $127,000,000, $52,187,000 and
$63,059,000, respectively. The decrease in fiscal 2001 is primarily due to the
sale of the lumber and building materials business, which accounts for
approximately $64,000,000. The remaining decrease in accounts and notes
receivable is mainly due to a decline in sales, change in sales mix from direct
sales to warehouse sales, and the implementation of improved collection efforts.
TruServ's DSO (Days Sales Outstanding) decreased to 39.3 days from 47.1 days, an
improvement of 7.8 days, which generated approximately $54,000,000 in cash. The
other significant impact in operating activities was in accounts payable. In
fiscal 2001 and 2000, cash used to fund the decrease in accounts payable was
$92,216,000 and $81,944,000, respectively. The decrease in fiscal 2001 is
partially due to the reduction of lumber vendors resulting from the sale of the
lumber and building materials business, which accounts for approximately
$39,000,000 of the decrease. The remaining decrease is a result of lower
inventory purchases. In fiscal 1999, the cash generated from the increase in
accounts payable was $56,087,000 due to improved terms with vendors.

Cash flows used for investing activities for the fiscal year 2001, 2000 and
1999 were $26,502,000, $1,954,000 and $10,532,000, respectively. Total capital
expenditures, including expenditures under capital leases, were $15,151,000 for
the fiscal year ended December 31, 2001, as compared to $12,526,000 and
$44,930,000 for the fiscal years ended December 31, 2000 and December 31, 1999,
respectively. In fiscal 1999, the majority of the capital expenditures were for
merger related projects. These projects were related to building expansions and
system upgrades. In fiscal 2001 and 2000, the capital expenditures are comprised
of various building improvements and purchases of additional equipment and
technology at TruServ's regional distribution centers and at its corporate
headquarters. TruServ anticipates the capital expenditure investment for fiscal
2002 will approximate fiscal 2001 spending. In fiscal 2001, the proceeds from
sale of properties were $10,511,000, which were generated from the sale of
TruServ Canada Cooperative, Inc. and the sale of its Indianapolis, Indiana
property. In fiscal 2000, the proceeds from the sale of properties were
$23,113,000. The principal amount of cash generated in 2000 was from the sale of
the lumber and building materials business on December 29, 2000 in the amount of
$13,948,000. Additionally, this same transaction generated cash in the amount of
$5,164,000 received for non-competition, cooperation, lease and other
agreements. In fiscal 1999, the proceeds from the sale of properties were
$39,714,000. These proceeds were predominantly generated from the sale of closed
distribution centers.

Restricted cash consisted of the following at December 31:

18

As a result of the debt covenant violation, TruServ's current lenders
require that it maintains a minimum cash management deposit in its lockbox
accounts, cash collateralize all letters of credit and hold the proceeds from
the sale of properties in a restricted cash account with the collateral agent to
be used for debt reduction.

TruServ's cash flows generated from operating activities were primarily
used for financing activities of $79,614,000, $67,943,000 and $170,910,000 for
fiscal year 2001, 2000 and 1999, respectively, predominantly relating to
reducing its long-term and short-term financing. In fiscal 2001, the short-term
borrowings in financing activities generated cash of $11,300,000 due to TruServ
maintaining the revolving credit facility borrowings at $140,000,000, which
included $57,000,000 of cash recorded in cash and cash equivalents that is
available to reduce outstanding borrowings to $83,000,000.

TruServ's total debt, including notes which are a component of Members'
capitalization, was $514,287,000 at December 31, 2001, and $554,210,000 at
December 31, 2000. TruServ achieved the debt reduction by making principal
payments on the senior notes and on maturity of subordinated notes.

TruServ's debt consisted of the following at December 31:

TruServ had borrowings under the revolving credit facility agreement of
$140,000,000 and $127,000,000 at December 31, 2001 and 2000, respectively. The
$140,000,000 outstanding as of December 31, 2001 includes $57,000,000 of cash
recorded in cash and cash equivalents that is available to reduce outstanding
borrowings to $83,000,000. The weighted average interest rate on these
borrowings was 9.9% and 8.9% for the years ended December 31, 2001 and 2000,
respectively. The 2001 average interest rate reflects the inclusion of the 2%
default premium.

TruServ's Hagerstown, Maryland distribution center is subject to a
synthetic lease. The synthetic lease has a principal balance of $40,000,000
which is due at the end of the lease term in April 2003. This obligation and the
original cost of the facility are not recorded in TruServ's balance sheet
because the synthetic lease does not meet the requirement for capital lease
treatment under SFAS No. 13, "Accounting for Leases." The difference between the
lease obligation and management's estimate of the fair value of the building is
approximately $14,800,000 and has been recorded in fiscal 2001 as part of
restructuring charges and other related expenses.

19

The principal payment schedule for long-term debt, promissory and installment
notes is as follows:

- -------------------------
(a) In addition to the scheduled principal payments, TruServ is obligated under
the terms of the amended debt agreements to use the net proceeds from the
sale of assets or other non-operating sources to pay to the senior note
holders as well as the revolving credit facility banks their prorata share
of the net proceeds. This will reduce principal amounts outstanding and the
revolver commitment level, respectively. Total senior debt can not exceed
$270,000,000 by June 30, 2003 under the terms of the amended debt agreements
(see footnote 4 of TruServ's consolidated financial statements). Management
believes it has adequate options to reduce senior debt to $270,000,000,
including the possible sale of a majority interest in TruServ's paint
manufacturing business or the sale/leaseback of several of its owned
regional distribution centers.

(b) Amounts shown as scheduled repayments are the stated note amounts; however,
it is an event of default in the amended debt agreements if payments of
subordinated notes exceed $24,000,000 and $14,000,000, in 2002 and 2003,
respectively. TruServ will seek members' consent to extend the note due
dates in exchange for an increase in the interest rate.

On March 26, 2001, TruServ reported that, as of February 24, 2001, it
failed to comply with a covenant under the revolving credit facility and senior
note agreements that required it to achieve a minimum monthly borrowing base
ratio. This constituted an "event of default" under which the senior notes and
amounts outstanding under the credit facility would become callable as
immediately payable. Accordingly, these amounts were classified as current
liabilities as of December 31, 2000.

On April 11, 2002, TruServ entered into various amendments to its existing
revolving credit facility and other senior lending agreements. The amendment to
the revolving credit facility extends the terms of the facility from June 2002
to June 2004. The amount of the commitment remains at $200 million. There are,
however, borrowing base limitations that fluctuate in part with the seasonality
of the business. The borrowing base formula limits advances to the sum of 85% of
eligible accounts receivable, 50% of eligible inventory, 60% of the appraised
value of eligible real estate and 50% of the appraised value of eligible
machinery and equipment; availability is further increased by seasonal
over-advances and decreased by reserves against availability. The interest rate
on the revolving credit facility was increased to the prime rate plus 3.25%. The
revolving credit facility has certain minimum unusable commitment amounts, which
vary based upon the projected working capital needs of TruServ. The unused
commitment fee is 0.75% per annum.

The amendments to the various senior notes maintain the existing debt
amortization schedules of the various notes. Interest rates on the notes are at
the previous non-default rates, which range from 9.98% to 11.85%. The senior
note and revolving credit facility amendments also require initial, quarterly
and annual maintenance fees. All of the proceeds from certain asset sales,
amortization of certain notes receivable and 80% of any excess cash flow, as
defined in the amended senior note and revolving credit facility agreements,
will be used to prepay all parties to these amendments in accordance with an
amended intercreditor agreement. The intercreditor agreement establishes how the
assets of TruServ, which are pledged as collateral, are shared and how certain
debt prepayments are allocated among the senior lenders. The commitment under
the revolving credit facility will be permanently reduced by the amount of the
prepayments allocated and paid on the revolving credit facility.

20

The amendments all require TruServ to meet certain restrictive covenants
relating to minimum sales, minimum adjusted EBITDA (earnings before interest,
taxes, depreciation and amortization), minimum fixed charge coverage, minimum
interest coverage and maximum capital expenditures. The term of the revolving
credit facility is accelerated to June 30, 2003, if on that date: total senior
debt outstanding is in excess of $270 million, or total senior debt outstanding,
plus the unused amount of the commitment under the revolving credit facility,
less $30 million, is in excess of $320 million. The senior lenders may
accelerate their notes if the company does not have a revolving credit facility
in place to fund its seasonal cash flows.

The amendments limit the amount of the cash portion of patronage dividends
to the 20% minimum required to be paid under applicable IRS regulations in order
for TruServ to maintain its status as a cooperative, unless TruServ's operating
performance achieves certain EBITDA targets, in which case, up to 30% of the
patronage dividend may be paid in cash. The amendments also require the
continuation of the stock redemption moratorium through the term of the amended
senior debt. It is an event of default under the amendments to exceed certain
levels of subordinated note payments. In addition, an event of default arises
under the amendments in the event that TruServ fails to comply with its
corporate governance policy requiring the retention by TruServ of at least two
outside directors prior to May 31, 2002, at least four outside directors prior
to September 1, 2002 and at least five outside directors prior to November 1,
2002. The amendments also contain other customary covenants, representations and
warranties, funding conditions and events of default.

These amendments eliminate the "event of default" discussed above and,
accordingly, the long-term portions of the senior notes are no longer recorded
as a component of current debt at December 31, 2001 or 2000.

TruServ provides guarantees for certain member loans, but is not required
to provide a compensating balance for the guarantees. The amount of member loans
guaranteed by TruServ was approximately $3,966,000 and $6,710,000 as of December
31, 2001 and 2000, respectively. The balance of $3,966,000 as of December 31,
2001 includes approximately $800,000 that will mature in fiscal 2002.

Cash and cash equivalents at December 31, 2001 and 2000 were $88,816,000
and $15,491,000, respectively. As of December 31, 2001 the revolving credit
facility borrowings were at $140,000,000, which included $57,000,000 of cash
recorded in cash and cash equivalents that is available to reduce outstanding
borrowings to $83,000,000. Also, the lockbox cash received from the members on
the last day of the year was approximately $11,000,000 higher in 2001 than in
2000.

At December 31, 2001, TruServ's working capital was $18,252,000, as
compared to $91,098,000 at December 31, 2000 and $85,789,000 at December 31,
1999. The current ratio was 1.03 at December 31, 2001, as compared to 1.12 at
December 31, 2000 and 1.10 at December 31, 1999.

TruServ believes that its cash from operations and existing credit
facilities will provide sufficient liquidity to meet its working capital needs,
planned capital expenditures and debt obligations that are due to be repaid in
fiscal year 2002.

CRITICAL ACCOUNTING POLICIES

Financial Reporting Release No. 60 recently released by the SEC recommends
that all registrants include a discussion of "critical" accounting policies or
methods used in the preparation of financial statements.

TruServ's significant accounting policies are contained in the accompanying
Notes to Consolidated Financial Statements. The financial statements have been
prepared in conformity with generally accepted accounting principles and,
accordingly, include amounts based on informed estimates and judgments of
management with due consideration given to materiality. Accordingly, actual
results could differ from those estimates. The following represents those
critical accounting policies where materially different amounts would be
reported under different conditions or using different assumptions.

- Receivables, net of valuation allowances -- At December 31, 2001,
accounts receivable, net of $9,402,000 in allowance for doubtful
accounts, were $243,275,000. The valuation allowance was determined based
upon TruServ's evaluation of known requirements, aging of receivables,
historical

21

experience, the current economic environment and the ability of TruServ
to set off against any unpaid receivable amounts due to members for
stock, notes, interest and declared and unpaid dividends. While TruServ
believes it has appropriately considered known or expected outcomes, its
members' ability to pay their obligations, including those to TruServ,
could be adversely affected by declining sales of hardware at retail
resulting from such factors as contraction in the economy, loss of
memberships or intense competition from chain stores, discount stores,
home centers and warehouse operations.

- Inventory valuation -- At December 31, 2001, inventories were
$333,976,000, and reflect the reductions from cost in order to state
inventories at the lower of cost or market. The lower of cost or market
valuation considers the estimated realizable value in the current
economic environment associated with disposing of surplus and/or
damaged/obsolete inventories. Should the current economic climate
significantly contract further resulting in retailers being unwilling to
accept deliveries of advance orders placed (or TruServ electing not to
ship inventories to those retailers where additional credit risk is not
deemed appropriate), unanticipated decline in retail outlets or a
significant contraction in TruServ's warehouse stock replenishment
business for selected product categories, additional downward valuation
adjustments could be required. The potential additional downward
valuation adjustments could result from unanticipated additional excess
quantities of finished goods and raw materials, and/or from lower
disposition values offered by the parties who normally purchase surplus
inventories.

- Deferred tax assets -- At December 31, 2001, the accompanying
Consolidated Balance Sheet reflects $113,042,000 of deferred tax assets,
principally related to tax operating loss carryforwards and the
nonqualified notices of allocation. These deferred tax assets, net of
deferred tax liabilities of $2,505,000, are offset by a full valuation
allowance at December 31, 2001. As described in the Notes to Consolidated
Financial Statements, the company had approximately $65,440,000 of tax
operating loss carryforwards available to offset future income taxes. In
general, such carryforwards must be utilized within 20 years of incurring
the net operating loss. At December 31, 2001, TruServ concluded that it
is more likely than not that there would not be sufficient future taxable
earnings to utilize the operating loss carryforwards, and a full tax
valuation allowance was required. The valuation allowance will not be
adjusted until TruServ has sufficient evidence to support the realization
of this asset.

- Accrued expenses -- At December 31, 2001, the accompanying Consolidated
Balance Sheet reflects $119,490,000 of accrued expenses, principally
related to restructuring, pension, health and other benefits. The company
utilized current real estate market values in writing down the value of
the Brookings, South Dakota regional distribution center, which is
scheduled to close, as well as in adjusting its obligation under a
synthetic lease related to the Hagerstown, Maryland regional distribution
center, which is also scheduled to close. Should real estate values
continue to decline, an additional provision may be required. The company
works with an actuarial firm in the valuation of benefit obligations.
TruServ selects certain actuarial assumptions on which to base the
calculation of the actuarial valuation of the obligation, such as the
discount rate (interest rate used to determine present value of
obligations payable in the future), medical trend rate, expected return
on assets and mortality tables to determine the expected future benefit
obligations. To the extent that the actual rates and mortality vary from
the assumptions used to determine the present actuarial valuation of
these benefits, additional provision for expense may be necessary.

NEW ACCOUNTING PRONOUNCEMENTS

In July 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 141, "Business Combinations," and SFAS No. 142 "Goodwill and Other
Intangible Assets." SFAS No. 141 requires that all business combinations
initiated after June 30, 2001 be accounted for using the purchase method of
accounting. SFAS No. 142 changes the accounting for goodwill and certain other
intangible assets from an amortization method to an impairment only approach.
Due to the adoption of SFAS No. 142, TruServ will not amortize goodwill
beginning in fiscal 2002. The goodwill amortization expense during fiscal 2001
was approximately $2,577,000. TruServ is in the process of finalizing its
initial impairment assessment as required by SFAS No. 142, but does not expect
the adoption of this standard as of January 1, 2002 to have a material impact on
the company's financial position or results of operations.
22

In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." SFAS No. 143 addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. SFAS No. 143 is effective
January 1, 2003 for TruServ. TruServ is currently evaluating the impact this
standard will have on its financial statements.

In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment of Long-Lived Assets," replacing SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" and
portions of Accounting Principles Board ("APB") Opinion No. 30, "Reporting the
Results of Operations." SFAS No. 144 provides a single accounting model for
long-lived assets to be disposed of and changes the criteria to be met to
classify an asset as held-for-sale. SFAS No. 144 retains the requirement of APB
Opinion No. 30 to report discontinued operations separately from continuing
operations and extends that reporting to a component of an entity that either
has been disposed of or is classified as held-for-sale. SFAS No. 144 is
effective January 1, 2002 for TruServ. TruServ is currently evaluating the
impact this standard will have on its financial statements.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

TruServ's operations are subject to certain market risks, primarily
interest rate risk and credit risk. Interest rate risk pertains to TruServ's
variable rate debt which totals approximately $141,755,000 at December 31, 2001.
A 50 basis point movement in interest rates would result in an approximate
$709,000 annualized increase or decrease in interest expense and cash flows. For
the most part, TruServ manages interest rate risk through a combination of
variable and fixed-rate debt instruments with varying maturities. Credit risk
pertains primarily to TruServ's trade receivables. TruServ extends credit to its
members as part of its day-to-day operations. TruServ believes that as no
specific receivable or group of receivables comprises a significant percentage
of total trade accounts, its risk in respect to trade receivables is limited.
Additionally, TruServ believes that its allowance for doubtful accounts is
adequate with respect to member credit risks. TruServ has no investments in
derivative instruments and performs no speculative hedging activities. TruServ
does not have any special purpose entities ("SPE's") and all related party
transactions are at arms length.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

TruServ's consolidated financial statements and report of independent
accountants are listed in the index on page F-1.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.

On June 20, 2000, TruServ dismissed Ernst & Young LLP as its independent
accountants, as recommended by its audit and finance committee and approved by
its board of directors. The report of Ernst & Young LLP on the financial
statements for 1999 contained no adverse opinion or disclaimer of opinion.
Additionally, their opinion was not qualified or modified as to uncertainty,
audit scope or accounting principles, except the opinion on the 1999 financial
statements was modified to reflect TruServ's change in accounting principle for
start-up costs. In connection with its audit for 1999, there were no
disagreements with Ernst & Young LLP on any matters of accounting principles or
practices, financial statement disclosure, or audit scope or procedure which, if
not resolved to the satisfaction of Ernst & Young LLP, would have caused Ernst &
Young LLP to make reference to the matter in their report. Ernst & Young LLP
notified TruServ and its audit and finance committee in a letter dated April 14,
2000 that internal controls necessary for the company to develop reliable
financials statements did not exist during the year ended December 31, 1999.

TruServ's audit and finance committee recommended, and the board of
directors approved, the appointment of PricewaterhouseCoopers LLP as its new
independent accountants on June 29, 2000.

23

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

The directors and senior executive officers of TruServ are:

- ---------------
During the past five years, the principal occupation of each director of
TruServ, other than Ms. Forbes Lieberman and Mr. Wachsman, has been the
operation of retail hardware stores or lumber/building materials stores.

ITEM 11. EXECUTIVE COMPENSATION.

COMPENSATION COMMITTEE

The Compensation Committee of the board of directors consists of four
non-employee directors. The committee assists the board of directors in
fulfilling its responsibilities for setting and administering the policies which
govern annual compensation and monitoring TruServ's pension and other benefit
plans. The committee, which meets regularly, calls upon outside consultants for
assistance in carrying out its obligations.

The philosophy of the committee is to maintain an executive compensation
program to help TruServ attract, retain and motivate the executive resources
needed to maintain industry leadership, provide high levels of service to
members and achieve the financial objectives determined by the board of
directors. The committee sets performance goals, assesses achievement relative
to the performance goals and recommends to the board salary, bonus or retention
incentives and long-term incentives for the senior executives of TruServ.

To achieve its goals, the committee has developed three executive
compensation policies for TruServ:

- Salaried compensation should be competitive with the median for
executives of companies of a comparable size within TruServ's industry;

- Annual incentive compensation should vary and reflect TruServ's
performance; and

- A long-term (multiple year) incentive program should be available to help
TruServ retain selected executives.

25

The combination of these three compensation policies is intended to provide
competitive earning opportunities when performance reaches desired levels. Both
the annual and long-term incentive plans may be terminated by the board of
directors at any time. The bonus and long-term components of the total
compensation package are computed in the year following the year in which they
are earned and are paid out to the individual with respect to the prior year.

TruServ provides salary levels that are intended to fall within the median
(between the 50th to 60th percentile) of the executive marketplace of comparable
size in TruServ's industry. The following types of organizations are considered
within TruServ's industry: member-owned organizations, wholesale distribution
firms, mass merchandising firms and general manufacturing organizations.
Competitiveness is measured using data from a number of sources, including
published information, proxy statements and surveys by consulting firms.

The 2001 compensation of Pamela Forbes Lieberman, TruServ's President and
Chief Executive Officer, was determined as follows: Ms. Forbes Lieberman began
her employment in March 2001 as a Senior Vice President. In May 2001 she became
Senior Vice President and Chief Financial Officer. In July 2001, she was
appointed Senior Vice President, Chief Financial Officer and Chief Operating
Officer. In November 2001, she was appointed President and Chief Executive
Officer. The base salary of the positions that Ms. Forbes Lieberman held for the
length of time stated above aggregate to $318,868, all of which was paid in
fiscal 2001. This amount is comparable to the aggregate of the three base
salaries for persons holding those positions at companies of comparable size
within TruServ's industry, prorated for the periods during which she held each
of the three positions. The incentive component of Ms. Forbes Lieberman's
compensation was set by the compensation committee to reflect the achievement of
company performance goals determined by the committee, including the attainment
of targets for product fill rates, net product sales, earnings before income
taxes, depreciation and amortization (EBITDA), as well as TruServ's obtaining of
permanent financing prior to the filing of the Form 10-K for 2001. The incentive
portion of the 2001 compensation will be paid to Ms. Forbes Lieberman after the
filing of the Form 10-K.

The 2001 compensation of Donald Hoye, TruServ's former President and Chief
Executive Officer, was determined as follows: The base salary of $500,000
prorated from the beginning of the year up to his termination date.

The 2001 compensation of Joe W. Blagg, Chairman of the Board, Director and
former acting Chief Executive Officer, was determined as follows: The salary
component of his position as Chairman of the Board was maintained at $100,000,
the same level as in 2000. Mr. Blagg held the position of acting Chief Executive
Officer from July 3, 2001 to November 16, 2001, in consideration of which he was
paid an additional $100,000 for undertaking the additional duties.

Harold A. Douthitt
Peter G. Kelly
Robert J. Ladner
John M. West
Joe W. Blagg (ex officio)
COMPENSATION COMMITTEE

26

EXECUTIVE COMPENSATION

The following table sets forth the total annual compensation paid to
individuals serving as TruServ's Chief Executive Officer and the four most
highly compensated executive officers of TruServ during fiscal year 2001 and the
total compensation paid to each such individual for TruServ's two previous
fiscal years:

SUMMARY COMPENSATION TABLE

- ---------------
(1) Annual bonus amounts are earned and accrued during the fiscal years
indicated, and paid subsequent to the end of each fiscal year. To
incentivize achievement of the business plan objectives necessary to obtain
new financing or amendment of existing agreements and necessary to turn the
company around, the board of directors approved effective, August 1, 2001, a
key associate special retention and restructuring incentive plan for
identified key associates and officers employed by TruServ on or after
August 1, 2001 who remain employed through the payment date of the plan
(subsequent to the filing of the Form 10-K). The new incentive plan had
targets related to fill rates, sales, EBITDA, and executive-specific goals
associated with one or more of TruServ's key initiatives established in
August 2001. In fiscal 2000, a bonus was earned and paid in fiscal 2001 as a
result of TruServ's improved service levels to members.

(2) Other compensation consists of TruServ's contributions to the TruServ
Corporation Employee's Savings and Compensation Deferral Plan (the "Savings
Plan"), life insurance plan, financial planning services and automobile
allowances. Under the Savings Plan, each participant may elect to make a
contribution in an amount of up to 15% of his annual compensation, not to
exceed $30,000 (including TruServ's contributions) per year, of which
$10,000 of the executive officer's salary in fiscal year 1999 may be
deferred. TruServ's contribution to the Savings Plan, from January 1 through
June 30 of 2000, was equal to 75% of the participant's contribution, but not
to exceed 4 1/2% of the participant's annual compensation. Effective July 1,
2000, the Savings Plan was amended to apply only a profit sharing match tied
to TruServ's net earnings. Robert Ostrov, William F. Godwin and Neil A.
Hastie did earn a profit sharing match for the second half of fiscal 2000
that was paid in March 2001. The officers did not earn a profit sharing
match for fiscal 2001.

27

The 2001 compensation of Joe W. Blagg, Chairman of the Board, Director and
former acting Chief Executive Officer, was determined as follows: The
salary component of his position as Chairman of the Board was maintained at
$100,000, the same level as in 2000. Mr. Blagg held the position of acting
Chief Executive Officer from July 3, 2001 to November 16, 2001 in
consideration of which he was paid an additional $100,000 for undertaking
the additional duties.

In 2001, other compensation for Mr. Hoye also included amounts related to
his termination agreement. These amounts include severance pay of
$1,300,000, insurance and annuity obligations of $150,000 and vacation pay
of $82,500.

In 1999, other compensation for Mr. Hoye also included a transition bonus
of $20,000. For Mr. Godwin the 1999 other compensation also included a
transition bonus of $10,000 and relocation payments of $2,500.

TruServ has a severance policy providing termination benefits based upon
annual compensation and years of service. Officers of TruServ are also offered
agreements providing for severance in the event of termination with the
imposition of certain restrictions regarding competition and confidentiality.

No loans were made by TruServ to its executive officers or to its directors
during the last three fiscal years.

BOARD COMPENSATION

In 2001, directors of TruServ (except the Chairman and Vice Chairman) were
each paid $2,000 per month. The Chairman of the Board was paid $100,000 in
consideration for his services as chairman and the Vice Chairman of the Board
was paid $54,000 in consideration for his services as vice chairman for 2001.

The Chairman of the Board held the position of acting Chief Executive
Officer from July 3, 2001 to November 16, 2001, in consideration of which he was
paid an additional $100,000 for undertaking those additional responsibilities.
The Vice Chairman of the Board was paid an additional $12,500 for undertaking
additional responsibilities during the same time frame.

The President and Chief Executive Officer does not receive additional
compensation for serving in the capacity of director.

DEFINED BENEFIT RETIREMENT PLANS

TruServ has a defined benefit pension plan, the TruServ Corporation Defined
Lump Sum Pension Plan, which is qualified under the Internal Revenue Code. The
plan was amended and restated effective January 1, 1998. The amount of TruServ's
annual contribution to the plan is determined for the total of all participants
covered by the plan, and the amount of payment with respect to a specified
person is not and cannot readily be separated or individually calculated by the
actuaries for the plan. The plan provides fully vested lump sum benefits to
eligible employees who have served a minimum of five years of service. Annuities
are also available and are the actuarial equivalent of the lump sum payment.
Each of the executive officers listed in the foregoing Summary Compensation
Table is a participant in the plan.

For each year of service, a participant receives a percentage of his or her
"average compensation" in the form of a lump sum. The percentages range from two
percent of average compensation for years of service performed prior to age 26
to twelve percent of average compensation for years of service performed at or
after age 61. Participants with average compensation in excess of two-thirds of
the Social Security Taxable Wage Base in the year of termination of employment
or retirement receive an additional benefit on this excess compensation equal to
half of the percentage applied to their full average compensation. For
participants who had attained age 50 and completed at least fifteen years of
service as of January 1, 1996, the sum of their annual pension credit percentage
is increased by 25 percentage points. The benefits under the plan cannot be less
than the benefits already earned by the participant under the plan as it existed
prior to its amendment.

The plan was amended effective January 2, 1998 to include former employees
of SCC. These employees received credit under the plan for all years for which
they received credit under the SERVISTAR/Coast to Coast Retirement Income Plan
(the "SERVISTAR Plan"). In addition, for any of these employees who had attained
age 50 and completed at least 15 years of service as of January 1, 1998, the sum
of their annual

28

pension credit percentage is increased by 25 percentage points. Also, the
benefits under this plan cannot be less than benefits already earned by the
participant under the SERVISTAR Plan as of December 31, 1997.

"Average compensation" means the average of the compensation paid to an
eligible employee during the three highest consecutive calendar years within the
ten calendar years immediately preceding the date of termination of employment.
Compensation considered in determining benefits includes salary, overtime pay,
commissions, bonuses, deferral contributions under the Savings Plan and pre-tax
medical premiums.

The estimated annual retirement benefits which may be payable pursuant to
the qualified plan to the officers named in the Summary Compensation Table is
currently limited under Section 401(a)(17) of the Internal Revenue Code, which
outlines the maximum earnings amounts which may be considered under the
qualified plan in determining retirement benefits. This limit was $170,000 for
2001. Section 415 of the Internal Revenue Code outlines the maximum annual
benefit which may be payable from the qualified plan during the year, the dollar
limit is $140,000 for 2001 for a participant retiring at age 65, with reduced
amounts at younger ages. The actuarial equivalent of the annual amount may be
payable as a lump sum.

No year of service will be credited to any participant for any period of
employment with Coast to Coast, Inc. occurring prior to July 1, 1996 or any
period of employment with Advocate Services, Inc. occurring prior to January 1,
1998.

TruServ amended and restated, effective July 24, 1998, a Supplemental
Retirement Plan for certain employees as designated by TruServ's President and
Chief Executive Officer. The supplemental plan was amended on July 1, 1997 to
include certain former SCC employees. For each year of service, participants
receive a percentage of their "average compensation" in the form of a lump sum.
The percentages are 33 percent of average compensation for years of service
performed prior to age 55 and 42 percent of average compensation for years of
service performed at or after age 55. Service is limited to 20 years and the
maximum aggregate percentage is 660%. This amount is reduced by any benefits
payable under the qualified plan. "Average Compensation" for the supplemental
plan is defined similarly to the qualified plan, as discussed above, although
the three highest years need not be consecutive and pay is not annualized in the
final year of employment.

The supplemental plan is not a qualified plan under the Internal Revenue
Code. Benefits payable under the supplemental plan are financed through
operations.

The following table reflects the combined estimated annual retirement
benefits which may be payable pursuant to the qualified plan and the
supplemental plan to the officers named in the Summary Compensation Table at
retirement under various assumed conditions, assuming retirement at age 65.

The present credited years of service for the officers listed in the above
table are as follows: Pamela Forbes Lieberman, 1 year; Robert Ostrov, 5 years;
Robert M. Liebgott, 5 years; William F. Godwin, 7 years; Neil A. Hastie, 4
years.

TruServ is amending and restating the pension plan and has amended and
restated the supplemental plan, both effective January 1, 2002. The significant
change to the pension plan is that credits for service beginning

29

January 1, 2002 will be reduced from a 2%-12% scale to a 1%-9% scale. The
significant changes to the supplemental plan include years of service that are
credited will be limited to years of service as an officer, "average
compensation" will exclude long-term incentive payments and years of service
will accrue at 33% per year with no increase at age 55.

PERFORMANCE GRAPH

There is no existing market for TruServ's common stock and there is no
expectation that any market will develop. There are no broad market or peer
group indices TruServ believes would render meaningful comparisons. Accordingly,
a performance graph of TruServ's cumulative total stockholder return for the
previous five years, with a performance indicator of the overall stock market
for TruServ's peer group, has not been prepared.

EMPLOYMENT AND SEPARATION AGREEMENTS

On November 15, 2001, TruServ entered into an employment agreement
effective November 16, 2001 with Pamela Forbes Lieberman, in connection with her
assuming the duties of President and Chief Executive Officer of TruServ. The
employment agreement specifies that Ms. Forbes Lieberman will serve in those
capacities at the will of the board of directors.

Pursuant to the employment agreement, Ms. Forbes Lieberman will receive an
annual base salary of $625,000. In addition, Ms. Forbes Lieberman will be
eligible for an annual bonus, if and when approved by the board of directors of
TruServ, in an amount of 60% of her base salary for year 2001 and 70% of her
base salary for calendar years thereafter. In addition, Ms. Forbes Lieberman
will be eligible to receive a long-term incentive bonus of 50% of her base
salary if TruServ meets a certain threshold financial performance level and 100%
of her base salary if TruServ attains a targeted financial performance level.
See "Summary Compensation Table" under the item "Executive Compensation" for the
amount of salary and bonus received by Ms. Forbes Lieberman in 2001. None of the
TruServ officers were eligible for long-term incentive compensation in 2001. Ms.
Forbes Lieberman is also eligible to participate in the other benefit plans
available from time to time to executives of TruServ.

In the event that TruServ terminates Ms. Forbes Lieberman's employment
without "cause," she is entitled to receive a severance payment, payable over 24
months, in an amount equal to two times her base salary, but only if she signs a
release of claims against TruServ and agrees to comply with certain obligations
upon her departure. "Cause" includes her inability or unwillingness to perform
the material duties of her position or her performance of any action injurious
to TruServ.

If within one year following a "change of control" of TruServ, Ms. Forbes
Lieberman terminates her employment with TruServ for "good reason," she may be
entitled to a severance payment equal to an amount up to two times her base
salary and, in certain cases, a percentage of bonuses received in prior years,
but only if she signs a release and agrees to comply with certain obligations
upon her departure. "Change of control" is defined as a business combination
through a merger, consolidation or share exchange in which TruServ or its
shareholders after the combination do not own 51% or more of the voting equity
of the entity. "Good reason" is defined to include a demotion or a substantial
reduction in benefits within a year after the change of control.

On July 3, 2001, Mr. Hoye resigned from the position of President and Chief
Executive Officer of TruServ. Pursuant to the terms of his separation agreement
with TruServ, Mr. Hoye is entitled to receive $1,300,000 as severance pay to be
paid over two years. In addition, TruServ will pay approximately $150,000 to
fund the insurance and annuity obligation included in the termination agreement.
In addition, TruServ will pay Mr. Hoye's retirement benefits within six months
of the effective date of the separation agreement. The separation agreement also
provides for certain medical insurance coverage and outplacement services of the
kind provided to other former senior executives of TruServ. Mr. Hoye in the
separation agreement, provides TruServ, among other things, with a general
release, a covenant not to sue, a confidentiality covenant, a non-solicitation
covenant, a cooperation covenant and an indemnification agreement.

30

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

As of March 31, 2002, each of the member directors of TruServ was the owner
of at least 60 shares of Class A common stock of TruServ (but no more than 300
shares), constituting in the aggregate less than 1% of the issued and
outstanding shares of Class A Common Stock. No non-member director or senior
officer owns any shares of Class A common stock.

The member directors own, in the aggregate, less than 1% of Class B common
stock as of March 31, 2002. No non-member director or senior officer owns any
shares of Class B common stock.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

None

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.

(A) 1. FINANCIAL STATEMENTS

The consolidated financial statements listed in the index on page
F-1 are filed as part of this annual report.

2. FINANCIAL STATEMENT SCHEDULES

The schedule listed in the index on page F-29 is filed as part of
this annual report.

3. EXHIBITS

The exhibits listed in the index on pages E-1, E-2 and E-3 are filed
as part of this annual report.

(B) REPORTS ON FORM 8-K

Filed January 8, 2002.

31

SIGNATURES

PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15 (D) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS ANNUAL REPORT TO BE
SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.

TRUSERV CORPORATION

By: /s/ DAVID A. SHADDUCK
-------------------------------------
David A. Shadduck
Senior Vice President and Chief
Financial Officer
DATED: April 15, 2002

PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
ANNUAL REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED.

33

ITEM 14(a)(1). INDEX TO CONSOLIDATED FINANCIAL STATEMENTS.

F-1

REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and
Members of TruServ Corporation

In our opinion, the consolidated financial statements of TruServ
Corporation as of and for the year ended December 31, 2001 and 2000 listed in
the index appearing under Item (14)(a)(1) on page F-1 present fairly, in all
material respects, the financial position of TruServ Corporation and its
subsidiaries at December 31, 2001 and 2000, and the results of their operations
and their cash flows for the years then ended in conformity with accounting
principles generally accepted in the United States of America. In addition, in
our opinion, the financial statement schedule as of December 31, 2001 and 2000
and for the years then ended listed in the index appearing under Item 14(a)(2)
on page F-29 presents fairly, in all material respects, the information set
forth therein when read in conjunction with the related consolidated financial
statements. These financial statements and financial statement schedule are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements and financial statement schedule based on
our audit. We conducted our audit of these statements in accordance with
auditing standards generally accepted in the United States of America, which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.

/s/ PricewaterhouseCoopers LLP
Chicago, Illinois
February 20, 2002, except as to Note 4
which is as of April 11, 2002

F-2

REPORT OF INDEPENDENT AUDITORS

To the Members and the Board of Directors
TruServ Corporation

We have audited the accompanying consolidated balance sheet of TruServ
Corporation as of December 31, 1999, and the related consolidated statements of
operations, cash flows, and members' equity for the year ended December 31,
1999. Our audit also included the financial statement schedule listed in the
index at Item 14(a)(2). These financial statements and schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and schedule based on our audit.

We conducted our audit in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provide a reasonable basis for
our opinion.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of TruServ
Corporation at December 31, 1999, and the consolidated results of its operations
and its cash flows for the year ended December 31, 1999, in conformity with
accounting principles generally accepted in the United States. Also, in our
opinion, the related financial statement schedule, when considered in relation
to the basic financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.

As discussed in Note 1 to the financial statements, in 1999 the Company
changed its method of accounting for start-up costs.

/s/ ERNST & YOUNG LLP

Chicago, Illinois
April 14, 2000

F-3

TRUSERV CORPORATION

CONSOLIDATED BALANCE SHEET

ASSETS

The accompanying notes are an integral part of the Consolidated Financial
Statements

F-4

TRUSERV CORPORATION

CONSOLIDATED STATEMENT OF OPERATIONS

The accompanying notes are an integral part of the Consolidated Financial
Statements

F-5

TRUSERV CORPORATION

CONSOLIDATED STATEMENT OF CASH FLOWS

See Note 9 for supplemental cash flow information.

The accompanying notes are an integral part of the Consolidated Financial
Statements

F-6

TRUSERV CORPORATION

CONSOLIDATED STATEMENT OF MEMBERS' EQUITY

Redeemable Class A common stock amounts are net of unpaid subscription amounts
of $1,110,000 relating to 54,840 issued shares at December 31, 2001; $1,922,000
relating to 98,880 issued shares at December 31, 2000; $3,874,000 relating to
106,380 issued shares at December 31, 1999 and $5,890,000 relating to 178,020
issued shares at December 31, 1998.

The accompanying notes are an integral part of the Consolidated Financial
Statements

F-7

TRUSERV CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. DESCRIPTION OF BUSINESS AND ACCOUNTING POLICIES

Principal business activity

TruServ Corporation ("TruServ" or the "company") is a member-owned
wholesaler of hardware and related merchandise. The company also manufactures
and sells paint and paint applicators. The company's goods and services are sold
predominantly within the United States, primarily to retailers of hardware,
lumber/building materials and related lines, each of whom has purchased 60
shares per store (up to a maximum of 5 stores (300 shares)) of the company's
Class A common stock upon becoming a member. The Class A stock is redeemable by
the company and has voting rights (the "Redeemable Class A voting common
stock"). The company operates as a member-owned wholesaler cooperative. All
members are entitled to receive patronage dividend distributions from the
company on the basis of gross margins of merchandise and/or services purchased
by each member. In accordance with the company's By-Laws the annual patronage
dividend is paid to members out of gross margins from operations and other
patronage source income, after deduction for expenses and provisions authorized
by the board of directors.

Business Combination

On July 1, 1997, pursuant to an Agreement and Plan of Merger dated December
9, 1996 between Cotter & Company ("Cotter"), a Delaware corporation, and
ServiStar Coast to Coast Corporation ("SCC"), SCC merged with and into Cotter
(the "Merger"), with Cotter being the surviving corporation. This transaction
was accounted for as a purchase and Cotter was renamed TruServ Corporation
effective with the Merger. Each outstanding share of SCC common stock and SCC
Series A stock (excluding those shares canceled pursuant to Article III of the
Merger Agreement) were converted into the right to receive one fully paid and
non-assessable share of TruServ Redeemable Class A voting common stock and each
two outstanding shares of SCC preferred stock were converted into the right to
receive one fully paid and non-assessable share of TruServ's Class B common
stock, which is redeemable by the company and has no voting rights (the
"Redeemable Class B common stock"). A total of 270,500 and 1,170,670 shares of
TruServ Redeemable Class A voting common stock and Redeemable Class B common
stock, respectively, were issued in connection with the Merger. Also, 231,000
additional shares of TruServ Redeemable Class A voting common stock were issued
in exchange for Redeemable Class B common stock to pre-Merger stockholders of
Cotter to satisfy the Redeemable Class A voting common stock ownership
requirement of 60 shares per store (up to a maximum of 5 stores) applicable to
such members as a result of the Merger.

In connection with the Merger, TruServ recorded a liability in Accrued
expenses for costs associated with the Merger plan on July 1, 1997. The schedule
below shows the remaining balance of the liability as of December 31, 1998 and
the utilization of the reserve in fiscal 1999 and 2000:

During fiscal year 1999, the company completed the following actions in its
plan: 1) The company sold its Parkesburg, Piedmont and Portland properties. The
company announced the closing of its Westfield, MA distribution center. 2) The
company consolidated all latex paint manufacturing at the Cary manufacturing
facility. 3) The merger plan specified the elimination of 1,500 SCC employees.
As of December 31, 1999

F-8

TRUSERV CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

approximately 99% of these employees had been terminated. 4) The company also
opened a new distribution center in May 1999.

F-8.1

TRUSERV CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The reserve utilization in fiscal 2000 was related to the closure of the
Parkesburg, Pennsylvania distribution center.

Consolidation

The consolidated financial statements include the accounts of the company
and all wholly owned subsidiaries. The consolidated statement of operations and
cash flows also include the activities of TruServ Canada Cooperative, Inc., a
Canadian member-owned wholesaler of hardware, through the date of sale of
October 22, 2001. The consolidated balance sheet at December 31, 2001 excludes
TruServ Canada Cooperative, Inc.

The company does not have any special purpose entities ("SPE's").

Reclassifications

Certain reclassifications have been made to the prior years' consolidated
financial statements to conform with the current year's presentation, including
the reclassification of merger integration costs into logistic and manufacturing
expenses and selling, general and administrative expenses, as well as the
reclassification of restructuring charges and other related expenses from
logistic and manufacturing expenses and selling, general and administrative
expenses. These reclassifications had no effect on Net margin/(loss) for any
period or on Total members' equity at the balance sheet dates.

Capitalization

The company's capital (Capitalization) is derived from Members' equity and
Promissory (subordinated) and installment notes. Members' equity is comprised of
Redeemable Class A voting common stock, Redeemable Class B common stock,
Accumulated deficit, Loss allocation, Deferred patronage and Accumulated other
comprehensive loss. Promissory (subordinated) notes and Redeemable Class B
common stock are issued in connection with the company's annual patronage
dividend. The By-Laws provide for partially meeting the company's capital
requirements by payment of the year-end patronage dividend.

Patronage dividend

No patronage dividends were declared for the fiscal year ended December 31,
2001. Patronage dividends in the amount of $34,705,000 were paid on March 31,
2001 related to the fiscal year ended December 31, 2000, approximately thirty
percent of which were paid in cash (TruServ By-Laws and the IRS require that the
payment of at least twenty percent of patronage dividends be in cash). The
remainder was paid through the issuance of the company's Redeemable Class B
common stock and, in certain cases, a small portion of the dividend was paid by
means of Promissory (Subordinated) Notes of the company. The Redeemable Class B
common stock issued for the December 31, 2000 patronage dividend has been
designated as qualified notices of allocation. No patronage dividends were
declared for the fiscal year ended December 31, 1999.

Membership may be terminated without cause by either the company or the
member upon sixty days' written notice. In the event membership is terminated,
the company undertakes to purchase, and the member is required to sell to the
company, all of the member's Redeemable Class A voting common stock and
Redeemable Class B common stock at par value. Payment for the Redeemable Class A
voting common stock will be in cash. Payment for the qualified Redeemable Class
B common stock will be in the form of a note payable in five equal annual
installments and with interest set at comparable treasury rates plus 2.0%.

TruServ has initiated a moratorium, effective March 17, 2000, on the
redemption of its stock. The amended debt agreements preclude the lifting of the
stock moratorium until June 2004 except for allowed hardship cases, not to
exceed $2,000,000 annually. Subsequent to the lenders' lifting of the
prohibition against stock redemptions, the board of directors will consider the
financial condition of TruServ, and will not lift the

F-9

TRUSERV CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

moratorium unless it can conclude that effecting redemptions of TruServ's
capital stock will not "impair the capital" of TruServ, unfairly advantage some
members to the disadvantage of others, or violate the financial covenants under
its debt agreements. As of February 19, 2002, the amount of Class A common stock
and Class B common stock presented for redemption but deferred due to the
moratorium is approximately $27,569,000 after the offset of the Loss allocation
account. The $27,569,000 includes approximately $11,699,000 related to the Class
A common stock historically paid out at time of redemption and $34,712,000
related to Class B common stock historically paid out in five equal annual
installments, offset by the amount of the Loss allocation accounts related to
the Class B common stock in an aggregate amount of $18,842,000.

Loss allocation to members and Accumulated deficit

During the third quarter of fiscal year 2000, company 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. The company has allocated the 1999 loss by establishing a
Loss allocation account as a contra-equity account in the consolidated balance
sheet with the offsetting credit recorded to Retained earnings/(deficit). The
Loss allocation account reflects the sum of each member's proportionate share of
the 1999 loss, after being reduced by certain amounts that are not allocable to
members. The Loss allocation account is not a receivable from members and does
not represent an amount currently due from members. Rather, the Loss allocation
account will be satisfied, on a member by member basis, by withholding the
portion of future patronage dividends that would have been paid in qualified
Redeemable Class B common stock, at par value, and applying such amount as a
reduction in the Loss allocation account until fully satisfied. The current
levels of members' stock investments in the company will not be affected.
However, in the event a member should terminate as a stockholder of the company,
any unsatisfied portion of that member's Loss allocation account will be
satisfied by reducing the redemption amount paid for the member's stock
investment in the company.

TruServ has retained the fiscal 2001 loss as part of the accumulated
deficit account. A final determination of whether to retain or distribute the
fiscal 2001 loss to members will be made prior to filing the 2001 Federal tax
return. Nevertheless, members will be assigned a share in this loss based
generally on their patronage in the years to which the loss relates. TruServ has
the right to use 100% of future patronage income to offset the Accumulated
deficit account as well as to set off the Accumulated deficit account against
other amounts owed to members. In the event a member leaves TruServ, any
remaining portion of the member's share of the Accumulated deficit account will
be offset against amounts due to the member upon redemption.

Cash equivalents

The company classifies all highly liquid investments with an original
maturity of three months or less as cash equivalents.

Inventories

Inventories are stated at the lower of cost, determined on the first-in,
first-out basis, or market. The cost of inventory also includes indirect costs
(such as logistics, manufacturing and support costs) incurred to bring inventory
to its existing location for resale. These indirect costs are treated as product
costs, classified in inventory and subsequently recorded as cost of revenues as
the product is sold (see Note 2).

Properties

Properties are recorded at cost. Depreciation and amortization are computed
by using the straight-line method over the following estimated useful lives:
buildings and improvements -- 10 to 40 years; machinery and warehouse, office
and computer equipment and software -- 5 to 10 years; transportation
equipment -- 3 to 7 years; and leasehold improvements -- the lesser of the life
of the lease, without regard to options for renewal, or the useful life of the
underlying property.
F-10

TRUSERV CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Goodwill

Goodwill represents the excess of cost over the fair value of net assets
acquired and is amortized using the straight-line method over 40 years.
Amortization of goodwill was approximately $2,577,000, $3,054,000 and $2,591,000
for fiscal year 2001, 2000 and 1999, respectively.

Conversion funds

In connection with the Merger, the company made available to the members
funds to assist their stores in defraying various conversion costs associated
with the Merger and costs associated with certain upgrades and expansions of
their store. The total amount of conversion funds distributed was $27,175,000
with an amortization period of 5 years. The annual amortization expense for
fiscal year 2001, 2000 and 1999 was $5,747,000, $4,385,000 and $3,466,000,
respectively. The unamortized balance at December 31, 2001 was approximately
$12,113,000. The members agree to refund to TruServ all or a portion of the
conversion funds in the event of default during the five fiscal years following
the date of the agreement. Any uncollectible amounts are written off to expense.

Asset impairment

For purposes of determining impairment, management reviews long-lived
assets based on a geographic region or revenue producing activity as
appropriate. Such impairment review includes, among other criteria, management's
estimate of future cash flows for the region or activity. If the estimated
future cash flows (undiscounted and without interest charges) are not sufficient
to recover the carrying value of the long-lived assets, including associated
goodwill, of the region or activity, such assets would be determined to be
impaired and would be written down to fair value. In fiscal 2001, TruServ
recorded asset impairment charges of $8,899,000 related to its Brookings, South
Dakota distribution center and certain equipment at its Hagerstown, Maryland
distribution center. There were no impairment charges recorded in fiscal 2000 or
1999.

Start-up costs

In April 1998, the AICPA issued Statement of Position ("SOP") 98-5,
"Reporting the Costs of Start-up Activities." The SOP was effective beginning on
January 1, 1999, and requires that start-up costs capitalized prior to January
1, 1999 be written-off and any future start-up costs be expensed as incurred.
The unamortized balance of start-up costs was written off as of January 1, 1999
as a cumulative effect of an accounting change and resulted in an increase in
the 1999 net loss of $6,484,000, net of tax.

Revenue recognition

The company's policy is to recognize revenues from product sales and
services when earned, as in accordance with SEC Staff Accounting Bulletin
("SAB") No. 101. Specifically, revenue is recognized when persuasive evidence of
an arrangement exists, delivery has occurred (or services have been rendered),
the price is fixed or determinable, and collectibility is reasonably assured.
Revenue is not recognized until title and risk of loss have transferred to the
customer, which is upon delivery of products. Provisions for discounts, rebates
to customers, and returns are provided for at the time the related sales are
recorded, and are reflected as a reduction of sales.

Advertising expenses

Advertising costs are expensed in the period the advertising takes place.
Such costs amounted to $59,275,000, $82,675,000 and $81,337,000 in fiscal year
2001, 2000 and 1999, respectively, and are included in Cost of revenues.

F-11

TRUSERV CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Amortization of bank financing fees

Amounts paid for bank fees incurred in connection with the company's
financing arrangements are capitalized and amortized to interest expense over
the lives of the underlying financing agreements. The costs incurred for the
attempted asset based lending refinancing were expensed as incurred.

Repairs and maintenance expense

Expenditures which extend the useful lives of the company's property and
equipment are capitalized and depreciated on a straight line basis over the
remaining useful lives of the underlying assets. Otherwise, repair and
maintenance expenditures are expensed as incurred.

Research and development costs

Research and development costs related to the company's manufacturing
operations are expensed as incurred. Such costs amounted to $1,003,000, $993,000
and $965,000 in fiscal year 2001, 2000 and 1999, respectively, and are included
in Logistic and manufacturing expenses.

Shipping and handling costs

Amounts billed to customers for shipping and handling costs are included in
Revenues. Amounts incurred for shipping and handling are included in Cost of
revenues.

Income taxes

Deferred tax assets and liabilities are determined based on the differences
between the financial statement and tax bases of assets and liabilities using
enacted tax rates in effect for the year in which the differences are expected
to reverse. At December 31, 2001, TruServ concluded that it is more likely than
not that there would not be sufficient future taxable earnings to utilize the
operating loss carryforwards and a full tax valuation allowance was required.
The valuation allowance will not be adjusted until TruServ provides sufficient
evidence to support the realization of this asset.

Per share information

There is no existing market for the common stock of the company and there
is no expectation that any market will develop. The company's Redeemable Class A
voting common stock is owned by members and former members whose stock has not
yet been redeemed as a result of the moratorium. The company's Redeemable Class
B non-voting common stock now outstanding was issued to members in partial
payment of the annual patronage dividend. Accordingly, no earnings per share
information is presented in the consolidated financial statements.

Retirement plans

The company sponsors two noncontributory defined benefit retirement plans
covering substantially all of its employees. Company contributions to
union-sponsored defined contribution plans are based on collectively bargained
rates multiplied by hours worked. The company's policy is to fund annually all
tax-qualified plans to the extent deductible for income tax purposes.

Fair value of financial instruments

The carrying amounts of the company's financial instruments, which were
comprised primarily of accounts and notes receivables, accounts payable,
short-term borrowings, long-term debt and promissory (subordinated) and
installment notes, approximate fair value. Fair value was estimated using
discounted cash

F-12

TRUSERV CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

flow analyses, based on the company's incremental borrowing rate for similar
borrowings. The carrying amount of debt and credit facilities approximate fair
value due to their stated interest rates approximating market rates and as a
result of such facilities having been renegotiated in fiscal 2002 (see Note 4).
These estimated fair value amounts have been determined using available market
information or other appropriate valuation methodologies.

Concentration of credit risk

Credit risk pertains primarily to the company's trade receivables. The
company extends credit to its members as part of its day-to-day operations. The
company believes that as no specific receivable or group of receivables
comprises a significant percentage of total trade accounts, its risk with
respect to trade receivables is limited. Additionally, the company believes that
its allowance for doubtful accounts is adequate with respect to member credit
risks. Also, TruServ's Certificate of Incorporation and By-Laws specifically
provide that TruServ may set off its obligation to make any payment to a member
for such member's stock, notes, interest and declared and unpaid dividends
against any obligation owed by the member to TruServ. TruServ has exercised
these set off rights when TruServ notes and interest came due to former members
with outstanding merchandise accounts receivable to TruServ and current members
with past due merchandise accounts receivable to TruServ.

Use of estimates

The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the amounts reported in
the financial statements and accompanying notes. Actual results could differ
from those estimates.

New accounting pronouncements

In July 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 141, "Business Combination," and SFAS No. 142 "Goodwill and Other Intangible
Assets." SFAS No. 141 requires that all business combination initialized after
June 30, 2001 be accounted for using the purchase method of accounting. SFAS No.
142 changes the accounting for goodwill and certain other intangible assets from
an amortization method to an impairment only approach. Due to the adoption of
SFAS No. 142, the company will not amortize goodwill beginning in fiscal 2002.
The goodwill amortization expense during fiscal 2001 was approximately
$2,577,000. TruServ is in the process of finalizing its initial impairment
assessment as required by SFAS No. 142, but does not expect the adoption of this
standard as of January 1, 2002 to have a material impact on the Company's
financial position or results of operations.

In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." SFAS No. 143 addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. SFAS No. 143 is effective
January 1, 2003 for TruServ. The company is currently evaluating the impact this
standard will have on its financial statements.

In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment of Long-Lived Assets," replacing SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long -Lived Assets to be Disposed Of"
and portions of Accounting Principles Board ("APB") Opinion No. 30, "Reporting
the Results of Operations." SFAS No. 144 provides a single accounting model for
long-lived assets to be disposed of and changes the criteria to be met to
classify an asset as held-for-sale. SFAS No. 144 retains the requirement of APB
Opinion No. 30 to report discontinued operations separately from continuing
operations and extends that reporting to a component of an entity that either
has been disposed of or is classified as held-for-sale. SFAS No. 144 is
effective January 1, 2002 for TruServ. The company is currently evaluating the
impact this standard will have on its financial statements.
F-13

TRUSERV CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

2. INVENTORIES

Inventories consisted of the following at December 31:

The amount of indirect costs included in ending inventory at December 31,
2001 and 2000 was $23,272,000 and $29,144,000, respectively. Indirect costs
incurred for fiscal year 2001 and 2000 were $115,162,000 and $133,907,000,
respectively.

In fiscal 2001, the Company recorded physical inventory adjustments
aggregating $4,800,000 (as an increase to Inventory and a reduction to Cost of
revenues) principally in the third and fourth quarters of the year. In fiscal
2000, the Company recorded physical inventory adjustments aggregating
$22,200,000 (as an increase to Inventory and a reduction to Cost of revenues)
principally in the fourth quarter of the year.

3. PROPERTIES

Properties consisted of the following at December 31:

Depreciation expense for fiscal year 2001, 2000 and 1999 was $33,195,000,
$35,594,000 and $35,074,000, respectively.

F-14

TRUSERV CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

4. LONG-TERM DEBT AND BORROWING ARRANGEMENTS

Long-term debt consisted of the following at December 31:

Principal payment schedule for long-term debt:

The company had outstanding borrowings under its revolving credit facility
agreement of $140,000,000 and $127,000,000 at December 31, 2001 and 2000,
respectively. The $140,000,000 outstanding as of December 31, 2001 includes
approximately $57,000,000 of cash recorded in cash and cash equivalents that is
available to reduce this amount to $83,000,000. The weighted average interest
rate on these borrowings was 9.9% and 8.9% for the years ended December 31, 2001
and 2000, respectively. The average 2001 interest rate reflects the inclusion of
a 2% default premium.

On March 26, 2001, TruServ reported that, as of February 24, 2001, it
failed to comply with a covenant under the revolving credit facility and senior
note agreements that required it to achieve a minimum monthly borrowing base
ratio. This constituted an "event of default" under which the senior notes and
amounts outstanding under the credit facility would become callable as
immediately payable. Accordingly, these amounts were classified as current
liabilities as of December 31, 2000.

On April 11, 2002, TruServ entered into various amendments to its existing
revolving credit facility and other senior lending agreements. The amendment to
the revolving credit facility extends the terms of the facility from June 2002
to June 2004. The amount of the commitment remains at $200 million. There are,

F-15

TRUSERV CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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

The amendments to the various senior notes maintain the existing debt
amortization schedules of the various notes. Interest rates on the notes are at
the previous non-default rates, which range from 9.98% to 11.85%. The senior
note and revolving credit facility amendments also require initial, quarterly
and annual maintenance fees. All of the proceeds from certain asset sales,
amortization of certain notes receivable and 80% of any excess cash flow, as
defined in the amended senior note and revolving credit facility agreements,
will be used to prepay all parties to these amendments in accordance with an
amended intercreditor agreement. The intercreditor agreement establishes how the
assets of TruServ, which are pledged as collateral, are shared and how certain
debt prepayments are allocated among the senior lenders. The commitment under
the revolving credit facility will be permanently reduced by the amount of the
prepayments allocated and paid on the revolving credit facility.

The amendments all require TruServ to meet certain restrictive covenants
relating to minimum sales, minimum adjusted EBITDA (earnings before interest,
taxes, depreciation and amortization), minimum fixed charge coverage, minimum
interest coverage and maximum capital expenditures. The term of the revolving
credit facility is accelerated to June 30, 2003, if on that date: total senior
debt outstanding is in excess of $270 million, or total senior debt outstanding,
plus the unused amount of the commitment under the revolving credit facility,
less $30 million, is in excess of $320 million. The senior lenders may
accelerate their notes if the company does not have a revolving credit facility
in place to fund its seasonal cash flows.

The amendments limit the amount of the cash portion of patronage dividends
to the 20% minimum required to be paid under applicable IRS regulations in order
for TruServ to maintain its status as a cooperative, unless TruServ's operating
performance achieves certain EBITDA targets, in which case, up to 30% of the
patronage dividend may be paid in cash. The amendments also require the
continuation of the stock redemption moratorium through the term of the amended
senior debt. It is an event of default under the amendments to exceed certain
levels of subordinated note payments. In addition, an event of default arises
under the amendments in the event that TruServ fails to comply with its
corporate governance policy requiring the retention by TruServ of at least two
outside directors prior to May 31, 2002, at least four outside directors prior
to September 1, 2002 and at least five outside directors prior to November 1,
2002. The amendments also contain other customary covenants, representations and
warranties, funding conditions and events of default.

These amendments eliminate the "event of default" discussed above and,
accordingly, the long-term portions of the senior notes are no longer recorded
as a component of current debt at December 31, 2001 or 2000.

The redeemable (subordinated) term notes have two to four year terms and
are issued in exchange for promissory (subordinated) notes that were held by
promissory note holders who do not own the company's Redeemable Class A voting
common stock. They are also available for purchase by investors that are
affiliated with the company.

The company's Canadian operations, TruServ Canada Cooperative Inc., had
short-term borrowings of $7,736,000 at December 31, 2000. TruServ Canada
Cooperative Inc. was sold on October 22, 2001. As such, the consolidated balance
sheet excludes the TruServ Canada Cooperative, Inc. as of December 31, 2001.

The company provides guarantees for certain member loans, but is not
required to provide a compensating balance for the guarantees. The amount of
member loans guaranteed by the company was approximately
F-16

TRUSERV CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

$3,966,000 and $6,710,000 as of December 31, 2001 and 2000, respectively. The
balance of $3,966,000 as of December 31, 2001 includes approximately $800,000
that will mature in fiscal 2002.

Restricted cash consisted of the following at December 31:

As a result of the debt covenant violation, TruServ's current lenders
require that it maintains a minimum cash management deposit in its lockbox
accounts, cash collateralize all letters of credit and hold the proceeds from
the sale of properties in a restricted cash account with the collateral agent to
be used for debt reduction.

5. LEASE COMMITMENTS

The company rents buildings and warehouses, and office, computer and
transportation equipment under operating and capital leases. The following is a
schedule of future minimum lease payments under capital and long-term
non-cancelable operating leases, together with the present value of the net
minimum lease payments, as of December 31, 2001:

Capitalized leases expire at various dates and generally provide for
purchase options but not renewals. Purchase options provide for purchase prices
at either fair market value or a stated value, which is related to the lessor's
book value at the expiration of the lease term.

The Hagerstown, Maryland distribution center is subject to a synthetic
lease with monthly payments that are recorded in Other interest expense. The
lease payment commitments are for three years with two one-year renewal options
and a principal payment due at the expiration of the lease agreement. All
obligations under this lease arrangement are guaranteed by the company. The
synthetic lease has a principal balance of $40 million which is due at the end
of the lease term. This debt and the original cost of the facility are not
recorded in the company's balance sheet because the synthetic lease does not
meet the requirement for capital lease treatment under SFAS No. 13, "Accounting
for Leases." The difference between the lease obligation

F-17

TRUSERV CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

and management's estimation of the fair value of the building is recorded in
accrued expenses at December 31, 2001 as a cost to exit the facility (see Note
14).

Rent expense under operating leases was $25,338,000, $29,942,000 and
$31,702,000 for the years ended December 31, 2001, 2000 and 1999, respectively.

6. COMMITMENTS AND CONTINGENCIES

The company is involved in various claims and lawsuits incidental to its
business. The following significant matters existed at December 31, 2001:

In June 2000 former members of TruServ filed an action against TruServ in
the Circuit Court of the 19th Judicial Circuit (McHenry County, Illinois). The
plaintiffs in the action each allege that, based upon representations made to
them by TruServ and its predecessors that the Coast to Coast brand name would be
maintained, they voted for the merger of ServiStar Coast to Coast and Cotter &
Company. The plaintiffs allege, however, that after the merger the Coast to
Coast brand name was eliminated and that each plaintiff thereafter terminated or
had its membership in TruServ terminated. The plaintiffs further claim that
TruServ breached its obligations by failing to redeem their stock and by
creating loss allocation accounts for the plaintiffs. Based upon this alleged
conduct, the plaintiffs have each asserted claims for fraud/misrepresentation,
negligent misrepresentation, claims under the state securities laws applicable
to each plaintiff, claims under the state franchise/dealership laws applicable
to each plaintiff, breach of fiduciary duty, unjust enrichment, estoppel and
recoupment. The complaint states that each plaintiff is entitled to in excess of
$50,000 in damages; however, the damages being sought are not further specified.
Discovery has recently commenced in the action and it is too early to determine
the extent of the damages being claimed. In March 2001, a similar action was
brought on behalf of additional former members in the same court, by the same
law firm. The complaint alleges substantially similar claims as those made in
the June 2000 action, except that the March 2001 action relates to the ServiStar
brand name instead of the Coast to Coast brand name. The lawsuit is in an early
stage and the extent of damages being claimed has not yet been determined. In
total, approximately 40 former members have brought claims against TruServ based
on this type of allegation in the Circuit Court of the 19th Judicial Circuit
(McHenry County, Illinois).

In August 2000, an action was brought in Delaware Chancery Court (New
Castle County) by a former TruServ member against certain present and former
directors of TruServ and against TruServ. The plaintiff in the lawsuit seeks to
proceed on a class-action basis on behalf of all those affected by the
moratorium and the creation of the loss allocation accounts. The complaint
alleges that the named directors breached their fiduciary duties in connection
with the accounting adjustments made by TruServ in the fourth quarter of 1999
and that TruServ breached, and the named directors caused TruServ to breach,
agreements with members by suspending payment of the members' 1999 annual
patronage dividend, by declaring a moratorium on the redemption of members'
TruServ stock and by imposing minimum annual purchase requirements upon members.
The plaintiff seeks monetary and non-monetary relief in connection with the
various claims asserted in the complaint. The lawsuit is in an early stage and
the extent of the damages being claimed has not yet been determined.

In October 1999, Paul Pentz, a former president of TruServ, filed a claim
in the Circuit Court of the 20th Judicial Circuit (Collier County, Florida)
against TruServ alleging he is due bonus and retirement compensation payments in
addition to amounts already paid to him. TruServ has filed a counterclaim
against Mr. Pentz alleging that he breached his fiduciary duties as president of
TruServ. Mr. Pentz's motion to dismiss the counterclaim was denied. Trial has
been scheduled for June 2002.

TruServ intends to vigorously defend all of these cases.

F-18

TRUSERV CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

7. PROMISSORY (SUBORDINATED) AND INSTALLMENT NOTES

Promissory (subordinated) and installment notes consisted of the following
at December 31:

Prior to 1997, promissory notes were issued for partial payment of the
annual patronage dividend. Promissory notes are subordinated to indebtedness to
banking institutions, trade creditors and other indebtedness of TruServ as
specified by its board of directors. Prior experience indicates that the
maturities of a significant portion of the notes due within one year are
extended, for a three-year period, at interest rates substantially equivalent to
competitive market rates of comparable instruments. The company anticipates that
this practice of extending notes will continue and, accordingly, these notes are
classified as a component of capitalization.

Total maturities of promissory and installment notes for fiscal years 2002,
2003, 2004 and 2005 are $39,633,000, $21,658,000, $20,011,000 and $1,304,000
respectively.

Amounts shown as scheduled repayments in 2002 are the stated note amounts;
however, it is an event of default in the amended debt agreements if payments of
subordinated notes exceed $24,000,000 and $14,000,000 in 2002 and 2003,
respectively. TruServ will seek members' consent to extend the note due dates in
exchange for an increase in the interest rate.

Term notes were issued in connection with the redemption of excess
Redeemable Class B common stock. Term notes are subordinated to indebtedness to
banking institutions, trade creditors and other indebtedness of TruServ as
specified by its board of directors.

F-19

TRUSERV CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

8. INCOME TAXES

Income tax expense/(benefit) consisted of the following for the years ended
December 31:

The company operates as a nonexempt cooperative and is allowed a deduction
in determining its taxable income for amounts paid as qualified patronage
dividends based on margins from business done with or on behalf of members and
for the redemption of nonqualified notices of allocation. The reconciliation of
income tax expense to income tax computed at the U.S. federal statutory tax rate
of 35% was as follows for the years ended December 31:

Deferred income taxes reflect the net tax effects of net operating loss
carryforwards, which expire in years through 2021; alternative minimum tax
credit carryforwards and nonqualified notices of allocations, which do not
expire; and temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts used for income tax
purposes. To the extent tax benefits are subsequently recognized in excess of
the net deferred tax assets, approximately $28,800,000 of the reduction in the
valuation allowance for deferred tax assets will result in a reduction of
goodwill.

In 2001, the increase in the valuation allowance was due to the increase in
net operating loss carryforwards and other deferred tax assets that, along with
all other previously recorded deferred tax assets, have a full valuation
allowance because the company has concluded that it is more likely than not that
there would not be sufficient future taxable earnings to utilize these assets.

F-20

TRUSERV CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The significant components of the company's deferred tax assets and
liabilities were as follows for the years ended December 31:

9. SUPPLEMENTAL CASH FLOW INFORMATION

The patronage dividend and promissory (subordinated) and redeemable
(subordinated) term note renewals relating to non-cash operating and financing
activities were as follows for the years ended December 31:

F-21

TRUSERV CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

TruServ may set off its obligation to make any payment to a member for such
member's stock, notes, interest and declared and unpaid dividends against any
obligation owed by the member to TruServ. TruServ exercised its set off rights
in 2001, when TruServ notes and interest came due to former members with
outstanding accounts receivable to TruServ and current members with past due
accounts receivable to TruServ. TruServ also set off its obligation to former
members against their related loss allocation balance. The set off rights were
exercised in an aggregate amount of $7,483,000, which decreased the loss
allocation account by $2,488,000 and accounts receivable by $4,995,000 during
2001. $976,000 of the offset to accounts receivable was generated from the
payment of the fiscal 2000 patronage dividend in 2001, which reduced the cash
payment from $10,459,000 to $9,483,000.

The company's non-cash financing and investing activities in fiscal year
2001 include $1,300,000 related to a note received for the sale of its
Indianapolis, Indiana property. In fiscal year 2000, the company's non-cash
financing and investing activities are due to an asset sale and related
agreements with Builder Marts of America, Inc. that included a note receivable
of $19,500,000 and debit memos of $4,000,000. The company's non-cash financing
and investing activities in fiscal year 1999 include $305,000 related to the
acquisition of transportation equipment by entering into capital leases.

Cash paid for interest during fiscal years 2001, 2000 and 1999 totaled
$59,048,000, $60,059,000 and $58,730,000, respectively. Cash paid for income
taxes during fiscal years 2001, 2000 and 1999 totaled $133,000, $777,000 and
$848,000, respectively.

10. BENEFIT PLANS

The change in the projected benefit obligation and in the plan assets for
the company administered pension plans were as follows for the years ended
December 31:

F-22

TRUSERV CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The company has a prepaid pension expense of $4,334,000 and $10,822,000 at
December 31, 2001 and 2000, respectively. The full prepaid pension expense at
December 31, 2001 is classified in "Other current assets." The prepaid pension
expense at December 31, 2000 consists of a short term portion of $4,280,000
classified in "Other current assets" and a long term portion of $6,542,000
classified in "Other assets."

One of TruServ's pension plans is the supplemental executive retirement
plan ("SERP"), which is an unfunded unqualified defined benefit plan. The funded
status in the table above is net of a prepaid pension asset of $1,636,000 and
accrued pension liability of $1,279,000 related to the SERP at December 31, 2001
and 2000, respectively, due to the early separation of former executives in
2001.

The components of net periodic pension cost for the company administered
pension plans were as follows for the years ended December 31:

In the third quarter of fiscal year 2000, the company purchased from an
insurance company non-participating annuity contracts to satisfy pension
obligations related to certain former employees who were fully vested in their
pension benefits. As a result of this transaction, the company recognized a
pre-tax gain of approximately $5 million in fiscal year 2000 related to the
settlement of these pension obligations. Such gain has been recorded as Other
income, net. This gain was offset in the fourth quarter by approximately $3
million due to market value decreases on assets and settlement losses on vested
employees leaving the plan.

TruServ is amending and restating the pension plan and has amended and
restated the SERP, both effective January 1, 2002. The significant change to the
pension plan is that credits for service beginning January 1, 2002 will be
reduced from a 2%-12% scale to a 1%-9% scale. The significant changes to the
supplemental plan include years of service that are credited will be limited to
years of service as an officer, "average compensation" will exclude long-term
incentive payments and years of service will accrue at 33% per year with no
increase at age 55.

The company also participates in union-sponsored defined contribution
plans. Costs related to these plans were $30,000, $169,000 and $315,000 for
fiscal year 2001, 2000 and 1999, respectively.

Plan assets consist primarily of publicly traded common stocks and
corporate debt instruments.

F-23

TRUSERV CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The assumptions used to determine TruServ's pension obligations for all
plans were as follows for the years ended December 31:

TruServ also maintains a defined benefit retirement medical plan for former
SCC employees who met certain age and service criteria that was frozen at the
time of the Merger. The company contributes $105 per month per person for such
employees who elect coverage for themselves and their dependents. The company
also maintains similar benefits for some former SCC executives who were also
contractually eligible for such coverage.

The change in the benefit obligation and in the plan's assets for the
company's post-retirement plan, as well as the components of net periodic
post-retirement benefit cost, was as follows for the years ended December 31:

The effect of a one percentage point increase in the medical trend rate
would increase the service and interest cost components by $11,000 and the
post-retirement benefit obligation by $151,000. The effect of a one percentage
point decrease in the medical trend rate would decrease the service and interest
cost components by $9,000 and the post-retirement benefit obligation by
$126,000.

F-24

TRUSERV CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The assumptions used to determine TruServ's health benefit obligations were
as follows for the years ended December 31:

11. SEGMENT INFORMATION

The company is principally engaged as a wholesaler of hardware and related
products and is a manufacturer of paint products. The company identifies
segments based on management responsibility and the nature of the business
activities of each component of the company. The company measures segment
earnings as operating earnings including an allocation for interest expense and
income taxes. Information regarding the identified segments and the related
reconciliation to consolidated information are as follows:

F-25

TRUSERV CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The company does not have a significant concentration of members in any
geographic region of the United States or in any foreign countries.

12. ASSET SALES

Effective December 29, 2000, the company sold the assets, primarily
inventory, of the lumber and building materials ("LBM") business, comprising
fiscal year 2000 sales of approximately $1.1 billion, to Builder Marts of
America, Inc. ("BMA"). In connection with this sale, the company received
consideration of $20.2 million in cash (of which $1.0 million was held in escrow
until December 31, 2001 to satisfy any contingencies or disputes between the
parties and which, accordingly, is classified as Restricted cash), a $19.5
million note receivable (payable in annual installments through December 31,
2007 and carrying an interest rate of 7.75% per annum) and $4.0 million in debit
memos to be used as an offset against amounts payable to BMA existing at the
date of the sale. Additionally, the company recorded deferred credits totaling
$9.5 million related to certain non-compete, cooperation, trademark and license,
and lease agreements entered into with BMA; such amount will be amortized to
income over the lives of the underlying agreements, generally 5-10 years. The
company also relieved $4.6 million of goodwill (net) and $0.7 million of
inventory related to the LBM business at the time of the sale. As a result of
the above, the company recognized a gain of $28.9 million in the fourth quarter
of 2000, which is recorded in Gain on sale of assets.

Effective October 22, 2001, TruServ sold its ownership interest in TruServ
Canada Cooperative, Inc. along with the headquarters and warehouse building and
other parcels of real estate to the current management group of the cooperative.
Net proceeds from the transaction were $9,654,000. The company recorded a net
gain of $1,550,000 which is recorded in Gain on sale of assets.

13. QUARTERLY FINANCIAL SUMMARY

Selected quarterly financial information for each of the four quarters in
fiscal 2001 and 2000 is as follows (000's omitted):

F-26

TRUSERV CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

- ---------------
(1) In the fourth quarter of fiscal 2000, the company recorded an inventory
adjustment of approximately $22.2 million (as an increase to Inventory and a
reduction to Cost of revenues) resulting from physical inventory counts
taken at certain of its distribution centers.

14. RESTRUCTURING CHARGES AND OTHER RELATED EXPENSES

In fiscal 2001, TruServ continued the workforce reductions initiated in
fiscal 1999 and 2000 related to regional distribution center closures and
workforce reductions at the company's corporate headquarters. TruServ recorded a
pre-tax charge to income from continuing operations of $38,522,000 in fiscal
2001. The charge is comprised of $10,722,000 for severance, $18,901,000 of
facility exit costs for the regional distribution centers and $8,899,000 for
asset impairments. The Hagerstown, Maryland distribution center is subject to a
synthetic lease. The synthetic lease has a principal balance of $40,000,000
which is due at the end of the lease term. This obligation and the original cost
of the facility are not recorded on the company's balance sheet because the
synthetic lease does not meet the requirement for capital lease treatment under
SFAS No. 13, "Accounting for Leases." The difference between the lease
obligation and management's estimate of the fair value of the building is
approximately $14,800,000 and is a component of the facility exit cost amount
shown above. In fiscal 2000, TruServ recorded a restructuring charge of
$4,944,000, of which approximately $2,000,000 was related to the closures of
Henderson, North Carolina and Indianapolis, Indiana distribution centers.

F-27

TRUSERV CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Restructuring initiatives summary (dollar amounts in thousands):

F-28

ITEM 14(a)(2). INDEX TO FINANCIAL STATEMENT SCHEDULES.

F-29

TRUSERV CORPORATION

SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
FOR FISCAL YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999

- ---------------
(1) Notes and accounts written off as uncollectible, net of recoveries of
accounts previously written off as uncollectible

F-30

ITEM 14(a)(3). INDEX TO EXHIBITS

E-1

E-2

E-2.1

SUPPLEMENTAL
INFORMATION
------------

Supplemental Information to be Furnished with Reports Filed Pursuant to
Section 15(d) of the Act by Registrants which have not Registered Securities
Pursuant to Section 12 of the Act.

As of the date of the foregoing Report, no annual report for the
Registrant's year ended December 31, 2001 has been sent to security holders.
Copies of such Annual Report and proxy soliciting materials will subsequently be
furnished to the Securities and Exchange Commission.

E-3